Friday, June 8, 2012

The "sad" fate of the large investor

Because the crooks and speculators have done such a thorough job of trashing the real economy over the past 35 years, the folks who want old-fashioned, steady investments are mostly out of places to invest.  I would have some sympathy for them but the truth is, when the hot-shots were coming up with all those crazy speculative financial instruments, they said NOTHING.  When folks like me were trying to tell everyone that "poor poor people make for poor rich people", we were told that prudent investors could easily expect 14% rates of return and we shouldn't worry our heads about those people falling off the prosperity wagon because they were just losers anyway.

So when I see articles like the one below, I must really work to suppress the urge to shout, "I tried to tell you!"  And seriously, there is nothing I can do to suppress my schadenfreude.

Crisis Pushes Down Returns

Big Investors Don't Know Where to Put Their Cash

By Sven Böll and Martin Hesse   06/05/2012

As the debt crisis makes government and bank bonds look increasingly unattractive, institutional investors are finding themselves with plenty of cash but nowhere to put it. Pension funds and insurance companies are desperately looking for safe havens which promise even modest returns. But some argue that the crisis creates opportunities for those with an appetite for risk.

The man who controls more than €450 billion ($558 billion) is wearing purple, pink and red striped socks and a polka-dot tie, and his bald head looks as if it has been polished. In other ways, too, Yngve Slyngstad is a relaxed Norwegian type. He laughs a lot and has a tendency to inject nuggets of irony into his responses.

So what's it like to be one of the world's most powerful investors in 2012? "In the past, we searched for risk-free returns." He pauses for effect. "Today we know that what we mainly have are investments with return-free risk."

It's a common experience for the 49-year-old investor these days. His constant challenge is to find ways to invest a lot of new money and reinvest old money.

As head of the Norwegian sovereign-wealth fund, Slyngstad collects his country's oil revenues, which currently total more than €100 million -- per day. The fund is supposed to use these revenues to provide the country with prosperity for the long term. It's no easy task, because the government expects Slyngstad and his staff of more than 300 people to generate a 4 percent return on investment.

In the past, investment professionals would have dismissed this requirement as uninspiring. But times have changed. Between 1999 and 2007, the Norwegian sovereign-wealth fund achieved an average annual return of almost 6 percent, but during the last four years it has only been about 1 percent on average. "The situation in the financial markets has become extremely difficult," says Slyngstad. Interest rates are plunging worldwide, and Germany, more than any other country, is benefiting from the fear that the euro zone could break apart.

Now that a Greek exit from the monetary union has become a realistic option, Spain is desperately fighting to retain its financial independence and the citizens of Southern Europe have started emptying their bank accounts, the flight to Germany -- perceived as Europe's safest haven -- has intensified once again.

In the week before last, the German finance minister borrowed money for two years, without having to pay a single cent in interest. Even investors lending the German treasury money for a decade are currently satisfied with a premium of only 1.2 percent per year. The yields on US Treasury bonds and Japanese debt securities are at similarly low levels.

But what is helpful to many a finance ministry is frustrating for investors. When today's very low bond yields are adjusted for inflation, many investors end up with negative returns. Investing money is becoming tantamount to the destruction of assets, because there are few investments that actually produce any returns.

Professional investors around the globe currently manage more than €60 trillion, more than twice as much as they did 10 years ago. There is talk of an "investment emergency" in the international financial markets, and the most disconcerting thing about it is that the problem is not affecting billionaires or greedy corporate raiders as much as the biggest players in the financial market: sovereign-wealth funds like Norway's, Japanese insurance companies and US and German pension funds.

Most of these players are managing the money of small investors, billions in assets with which they do not want to gamble. Instead, their objective is to invest the money so that they can eventually pay out a sizeable pension or the proceeds of a life-insurance policy to their customers. However, this usually works only if the money is invested safely, while at the same time generating yields of a few percentage points.

But in many cases, such yields are no longer realistic, now that Greece's creditors have had to write off a large portion of their claims. As a result, a basic tenet of investing has been destroyed. The bonds of major industrialized countries were considered risk-free investments for decades. But now it's become apparent that bond investors can also lose their money. No one knows what a safe investment is anymore. more

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