MFS Chief Chooses Credit and Tech for 2012

(January 12, 2012) — Corporate high yield bonds and technology stocks will be the outperforming securities in 2012, according to MFS Chief Investment Strategist James Swanson.

The head strategist at $250 billion dollar MFS Investment Management outlined his picks for the coming year in London yesterday, amid continued turbulence in European markets.

Swanson said that since Christmas he had increased his holding of high yield debt, some of the riskiest credit bets available, as the market was pricing in an upcoming recession in the United States that he did not foresee.

He said the spread over US Treasuries – the yields of which were being forced lower by actions by the Federal Reserve and a perceived ‘safe haven’ status by investors – was attractive.

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Technology companies would also play a part in creating outperformance, according to Swanson, as he said they were cheap and likely to grow in the immediate future and offer dividends to investors.

Swanson said: “In terms of valuation – private equity firms are paying up to 40 times book value to own a piece of these firms. On the public market they are trading at around 11 times. It’s remarkable mispricing.”

He added that companies were holding huge levels of cash on their balance sheet and the average age of technology equipment was reaching record highs. This indicated there might soon be a flurry of spending in this sector, he said.

Despite sitting at historical low valuation, Swanson said he was not tempted to start buying bank stocks.

He said: “When the Fed raises reserve rates again – and it has said this will not be until 2013 – they will become interesting, but at the moment, they are not earning through issuing loans so there is no excitement for an investor.”

The ever-changing economic conditions have also forced Swanson to change his investment style and change the securities in his portfolio more quickly.

He said: “Due to the market conditions, which at the moment change very rapidly, I have become nimbler with stock turnover. From rotating stocks four or five times year, I am now moving them six times a year – that’s an increase of 50%.”

At the end of December 2011, MFS managed $253 billion in institutional and retail global client assets.

<p>To contact the <em>aiCIO</em> editor of this story: Elizabeth Pfeuti at <a href='mailto:epfeuti@assetinternational.com'>epfeuti@assetinternational.com</a></p>

(January 11, 2012) — After months of controversy surrounding issues over foreign exchange transactions, BNY Mellon, the world’s largest custody bank, is continuing to work toward a settlement as part of a lawsuit filed by federal prosecutors.

The suit against the bank alleges that it fraudulently overcharged clients for currency trades, with the lawsuit aiming to resolve the way BNY Mellon discloses the pricing of those transactions. Following a request for a one-week extension in the federal case that was granted on January 9, judge told the US attorney and the bank in a note obtained by aiCIO that “parties should not expect another extension from the court.”

As part of the suit, Manhattan US Attorney Preet Bharara, who filed the suit in October, is seeking damages of hundreds of millions of dollars. If a settlement is reached, sources say the suit may eventually offer a roadmap to better resolve other lawsuits over currency transactions.

The bank is embattled with an array of state-government suits around the United States seeking more than $2 billion in damages in regards to its currency trading on behalf of clients. While state and public pension funds continue to accuse the bank of cheating them on currency transactions, the custody bank has repeatedly denied wrongdoing and has vowed to fight the suits.

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Last month, BNY Mellon asked a court to dismiss New York’s currency-trading suit.

The custodial bank revealed in a court filing that it accurately reported the exchange rates it applied to preauthorized foreign currency transactions. “A party that knows exactly what it is getting, and at what price, cannot, as a matter of law, have been defrauded,” the company said in papers filed in New York State Supreme Court in Manhattan.

According to the court documents, if BNY Mellon omitted its profit margin on its trades along with how it came to specified exchange rates, the bank “had no duty to disclose it,” Reuters initially reported.

Also last month, confidential documents obtained by the Wall Street Journal (WSJ) provided a peek inside a chaotic BNY Mellon after allegations surfaced that it was defrauding clients on foreign exchange transactions. “It’s over, it’s all over,” Susan Pfister—a Pittsburgh-based currency-trading veteran—allegedly told what turned out to be a whistle-blowing employee, Grant Wilson, after she was informed that the bank was the subject of investigations relating to its FX trading. The documents also asserted that after BNY Mellon rival State Street was brought under scrutiny for similar practices in 2009, BNY Mellon altered its website, removing the words “free of charge” regarding FX practices. The document cache obtained by the paper shows that at least one other employee—a corporate foreign exchange salesperson—has offered to provide information to prosecutors regarding BNY Mellon’s FX business.

The case against BNY Mellon is just one example of heightened scrutiny into custodial banks, as states and federal authorities increasingly allege that such banks cheated pension funds and private clients.

Read “Your Largest Unmanaged Exposure” in aiCIO‘s Summer Issue, in which Cynthia Steer, previously at Russell Investments and now Head of Manager Research & Investment Solutions at BNY Mellon, speaks on how she considers currency exposure the number one issue that plan sponsors have to deal with.