Documenti di Didattica
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com
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TYPE OPPFUNDS <GO>
6 BLOOMBERG MARKETS November 2013
November
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SPECI AL REPORT: CLI MATE CHANGE
F EATURES
26 Counting the Costs
As the planet gets hotter, a billionaire hedge-fund manager aims
to put a price tag on the consequences of carbon pollution.
by EDWARD ROBINSON
38 The Alaska Paradox
The Arctic is feeling the impact harder than anyplace else on Earth.
Thats creating risksand opportunities.
by JOHN LIPPERT
50 The Geography of Risk
by EDWARD ROBINSON
56 Abbys Road
Abigail Johnson, Fidelity Investments president, must contend
with falling profits and a decline in mutual-fund fees.
by CHRISTOPHER CONDON
68 Fleeced by Fees
Investors in the $337 billion managed-futures market, expecting
returns that will defy stock market slumps, instead find most of
their gains gobbled up by commissions.
by DAVID EVANS
84 Bitcoin Believers
Silicon Valley investors once wrote off the virtual currency
as a joke. Now, some see it as part of the next revolution.
by STEPHANIE BAKER
94 Amways Harvard Guanxi
The U.S. direct-sales company teamed up with Americas most
prestigious university to help make China its biggest market.
by DUNE LAWRENCE and LIZA LIN
F OCUS: BRAZI L
106 Making Sao Paulo Work
Fernando Haddad, a rookie mayor, pledges to curtail corruption,
quicken mass transit and improve schools in Latin Americas
biggest city.
by GABRIELLE COPPOLA
106
26
84
56
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COMMENTARY AGENDA
November
c o n t i n u e d
WEALTH
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8 BLOOMBERG MARKETS November 2013
STRATEGI ES STRATEGI ES
14 Rajan to the Rescue?
16 Europhoria
18 Biotech on the Side
18 Olympic Gaming
20 Hello Kitty Billionaire
116 Rides
Spirited Away
by JASON H. HARPER
118 Drinks
Curating Wine
by ELIN McCOY
10 Editors View
The Business of Climate
12 Letters
22 Bloomberg View
Stalked by Fees
122 Profile
Wally Weitz
by CHARLES STEIN
126 Equities
Dissecting a Trade
by VLAD RASHKOVICH
128 Cheat Sheet
Foreign Exchange
129 News
Most Influential
130 Foreign Exchange
Tracking Seasonality
by AMIR TAL
132 Equities
Tapping Into Telecoms
by PAULA COOK DINAN
and VINCENT TONG
134 Riskless Return
Fixer-Upper Opportunity
by CHRIS BURRITT
136 Whats New
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116
122
Uncertainty, regulation and consolidation around
the world, many industries are still operating in a
challenging environment.
But the best businesses find ways to create value,
not only surviving but even thriving in the harshest
of conditions.
At HSBC, we work to connect clients to real growth
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(USA) Inc., member of NYSE, FINRA and SIPC, and HSBC Bank USA, NA. Issued by HSBC Holdings plc. AC22967
In the future, growth will emerge
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We need to
get rid of
this idea that
going with
the status quo
is a smart
thing to do, says
Tom Steyer.
The Business
of Climate
Climate change is coming to be seenat least by some business
leadersas the defining issue of our time. Look at the economic
havoc caused in recent years by superstorms, floods and
droughts. Although skeptics may question the causes of climate
change and others may bemoan the cost of some of the solutions
proposed to address it, theres no debate anymore that it is hap-
pening: The planet is getting hotter, the seas are rising, and the
weather is becoming more volatile.
Even in the face of all this evidence, politicians havent been
able to agree on a plan of action, and the business community
which has a huge vested interest in the effects of climate
changehas been largely absent from the discussion.
Billionaire hedge-fund manager Tom Steyer says its time for
people to pay attention to the risks, as Edward Robinson writes
in the first part of our special report (COUNTING THE COSTS,
page 26). Steyer and his partners are
funding a project to tally up how much
the world economy is being hurt by cli-
mate change. He wants to assess the
cost of doing nothing to limit carbon
emissions. We need to get rid of this
idea that going the way we are, with
the status quo, is a smart economic
thing to do, Steyer says.
When it comes to gauging the risks presented by climate
change, Alaska is on the front lines, John Lippert reports (THE
ALASKA PARADOX, page 38). The states economy depends on
royalties from pumping oil, the very fuel thats causing its ice to
meltand that, in turn, is making it possible to drill for even
more crude. Alaskans, National Weather Service analyst Rick
Thoman says, are living through climate change in ways people
have not experienced in many thousands of years.
EDITOR
10 BLOOMBERG MARKETS November 2013
EDITOR
Ronald Henkoff
MANAGING EDITOR
Laura Colby
CREATIVE DIRECTOR
Siung Tjia
ASSISTANT MANAGING EDITOR
Michael S. Serrill
DIRECTOR OF PHOTOGRAPHY
Brenda Milis
SENIOR EDITORS
Vince Bielski
Robert S. Dieterich
William Hawley
Stryker McGuire (London)
Jonathan Neumann
Gail Connor Roche
Joel Weber
EDITOR-AT-LARGE
Robert Friedman
RANKINGS EDITOR
Laurie Meisler
SENIOR WRITERS
Stephanie Baker (London)
Anthony Effinger
(Portland, Oregon)
David Evans (Los Angeles)
Jeremy Kahn (London)
Yoolim Lee (Singapore)
John Lippert (Chicago)
William Mellor (Sydney)
Edward Robinson
(London)
Michael Smith (Santiago)
DESIGN
Lou Vega (Senior Art Director)
John Genzo
(Managing Art Director)
Lily Chow (Senior Designer)
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PHOTOGRAPHY
Lauren Winfield
(Deputy Photo Editor, London)
Manuela Oprea
(Associate Photo Editor)
COPY EDITORS
Nicole Dekle Collins
Joyce L. Kehl
EDITORIAL ADMINISTRATOR
Missy Levy
STRATEGIES SECTION
Jon Asmundsson
(Strategies Editor)
STRATEGIES CONTRIBUTORS
Chris Burritt, Paula Cook Dinan,
Arne Olsen, Vlad Rashkovich,
Charles Stein, Amir Tal,
Vincent Tong
WEALTH COLUMNIST
Elin McCoy (Drinks)
EDITOR-IN-CHIEF, BLOOMBERG NEWS
Matthew Winkler
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Letters
CHAIRMAN
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12 BLOOMBERG MARKETS November 2013
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Doctor Dreams
Great article. This
is coming from one
who has taught on
and off at these
bogus medical
schools since
2002. I was repelled by behavior which
evinced that the main thing was not med-
ical education but money.
LOUIS WILTSHIRE, M.D.
Sanford, Florida
This article contains many mischaracter-
izations, but perhaps the most egregious is
an omission of a critical academic outcome:
the 96 percent first-time pass rate achieved
by students at the American University of
the Caribbean School of Medicine and Ross
University School of Medicine on Step 1 of
the U.S. Medical Licensing Examination in
2012. This is the same rate posted by U.S.
schools.
The article implies that students at our
schools are a high financial risk, but the
numbers say otherwise. The three-year
school default rates in fiscal 2009 are 1.8 per-
cent at AUC and 0.8 percent at Ross, showing
that graduates are securing employment and
paying down loans. The U.S. Department of
Educations National Committee on Foreign
Medical Education and Accreditation has
OCTOBER 2013
reviewed the standards set by our schools
accreditors and deemed them comparable
to those used to accredit U.S. schools.
Ross and AUC graduates are practicing in
every state. With growing U.S. health-care
needs, international schools like AUC and
Ross will be critical to the success of our
medical system.
DANIEL HAMBURGER
Chief executive officer, DeVry Inc.
Downers Grove, Illinois
C o r r e c t i o n
In 50 Most Influential
(October 2013), we published
an incorrect photo for Hamed
bin Zayed Al Nahyan, managing director
of the Abu Dhabi Investment Authority.
This is the correct photo.
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14 BLOOMBERG MARKETS November 2013
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PEOPLE, COMPANI ES AND I DEAS THAT MOVE MARKETS
FROM THE DAY Prime Min-
ister Manmohan Singh named Ra-
ghuram Rajan to run the Reserve Bank
of India until he took office a month
later, on Sept. 4, the rupee slid more
than 10 percent. Global investors were
punishing the currency because the
countrys growth is the slowest in a de-
cade and its consumer inflation is the
worst among large emerging economies.
Rajan was being greeted with a crisis.
In his first briefing as gover-
nor, Rajan, 50, said he would sustain
Rajan to the
Rescue?
THE NEW HEAD OF INDIAS CENTRAL BANK
IS STRIVING TO RESTORE CONFIDENCE
IN AN ECONOMY SUFFERING FROM RISING
INFLATION AND SLOWING GROWTH.
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November 2013 BLOOMBERG MARKETS 15
confidence in the currency
with a new commitment to
keep inflation low and stable.
He also announced steps to
increase the supply of dollars
as India seeks to boost its re-
serves. Remarkably, it helped.
The rupee had its biggest five-
day rally in at least 40 years.
There is a hope now that
things will turn around,
says Samiran Chakraborty,
head of research for South
Asia at Standard Chartered
Plc in Mumbai. The gover-
nor has indicated a clear path
of embracing more market-
oriented reforms, a more-
targeted approach toward
monetary policy and, in a
broad sense, a novel way for
central banking in India.
The slide in the rupee began in May,
when the U.S. Federal Reserve indicated it
might soon begin withdrawing some of its
extraordinary stimulus measures. Inves-
tors are betting that a rebound in growth
in emerging markets such as India, Brazil
and China will become less likely as the
inexpensive credit fostered by Fed policy
dries up. Global funds sold a net of almost
$13 billion of stocks and bonds in the
third quarter, according to data from the
Securities and Exchange Board of India.
By Aug. 28, the rupee weakened to
68.845 to the dollar, a record low. The
year-to-date 20 percent drop was the
worst since 1991, when depletion of
foreign-exchange reserves pushed India
to the brink of default. In that episode,
India took an International Monetary
Fund loan and pledged its gold reserves
which were airlifted to London.
Although a weaker currency can
sometimes benefit a struggling econ-
omy by making its exports cheaper for
foreign buyers, this effect is muted in
India. Manufacturers rely on imported
energy and raw materials. Their costs
jump when the rupee falls, exacerbat-
ing the countrys inflation.
So the reversal of the currencys
trend once Rajan took his post was a
welcome development. The rupee ral-
lied on his arrival and on signs the Fed
was in no rush to taper its bond buy-
ing. India was in a currency crisis, but
a big part of that was also a confidence
crisis, and the message sent by the RBI
governor has managed to restore some
confidence, says Benoit Anne, head of
emerging-markets strategy at Societe
Generale SA in London.
On Sept. 20, Rajan raised the central
banks repurchase rate a quarter point
a surprise move no analyst had predicted.
Rajan was born in Bhopal, India, but
he has spent much of his career outside
the country. He served as the IMFs
chief economist from 2003 to 2006
and is currently on leave from the Uni-
versity of Chicago. His reputation was
made at a gathering of central bank-
ers in 2005, where he made the unpop-
ularand prescientargument that
changes in the financial system were
increasing the possibility of a harmful
disruption.
Anne points out that Rajan cant con-
trol fiscal policy, which is in the hands
of Prime Minister Singh. Lets not for-
get politics plays a big role for the me-
dium-term outlook, Anne says.
In late August, the Indian parlia-
ment approved Singhs food and nutri-
tion plan, which will subsidize grain for
two-thirds of the countrys 1.2 billion
citizens at an annual cost of $19 billion.
While the program may hinder a goal of
narrowing the budget deficit, it fulfills
a promise made to votersand elections
are due by May. On Sept. 3, Standard &
Poors reiterated that it might cut Indias
sovereign debt rating to junk status.
Indias government needs to do its
part if any optimism spurred by Rajans
arrival is to be maintained, Standard
Chartereds Chakraborty says. Fiscal
policy needs to follow through to con-
vert the hope into confidence, he says.
JEANETTE RODRIGUES
VICIOUS
CIRCLE
Sources: India Central Statistical Office, Bloomberg
Prime Minister Manmohan Singh is
seeking to spur economic growth, which has
dropped to the slowest pace in a decade.
SOVEREI GN CREDI T RATI NG:
BBB
(WI TH A NEGATI VE OUTLOOK
FROM STANDARD & POORS)
GROWTH RATE:
4.4%
(QUARTER ENDED I N JUNE)
BENCHMARK WHOLESALE
I NFLATI ON I NDEX:
6.1%
(AUGUST)
CURRENT ACCOUNT DEFI CI T:
4.8%
OF GDP
(12 MONTHS ENDED
I N MARCH)
The decline in the
currency makes inflation
worse in India and hurts
efforts to narrow the
current account deficit.
INDIAS CURRENCY HIT AN ALL-TIME LOW
DAYS BEFORE RAJAN TOOK UP HIS POST.
8/28/13 Rupee weakens
to 68.845 to the dollar.
1/1/13 9/18/13
DOLLAR-RUPEE EXCHANGE RATE
16 BLOOMBERG MARKETS November 2013
AGENDA
ECONOMICS
After 2015 21% Not confident 13%
WHEN WI LL THE FED BE COMPLETELY DONE WI TH BOND PURCHASES? WI LL OBAMA AND CONGRESS REACH AGREEMENT ON THE DEBT
CEI LI NG I N TI ME TO AVOI D DEFAULT?
Late 2014
33%
Mid-2014 16%
No idea 7%
2015 23%
Fairly confident
35%
Very confident 27%
No idea 2%
Somewhat confident 23%
WHAT I S YOUR VI EW OF THE ECONOMY I N THE EURO ZONE?
Deteriorating Stable Improving No Idea
Bloomberg
Global Poll
The sentiment of global poll respondents toward Europe
has completely turned around this year.
78%
SEPTEMBER
2013
21% 1% 40% 38%
38%
MAY
2013
29% 1% 9% 61%
79% 13% 1% 7%
20%
SEPTEMBER
2012
88% 9% 3%
SEPTEMBER
2011
Europhoria
GLOBAL INVESTORS HAVE WARMED TO THE IDEA THAT EUROPE
IS RECOVERING AND ITS TIME TO INVEST.
THE WORLDS developed econ-
omies are finding favor among the
investors, bankers and traders
surveyed in the Bloomberg Global
Poll. Theyve been bullish on the
U.S. economy all year, and now theyre getting
comfortable with the idea that the euro zone is
coming out of its longest recession.
In a sign the regions sovereign debt crisis has
finally begun to recede, 73 percent of respon-
dents have a favorable view of European Cen-
tral Bank President Mario Draghi. Thats the
best hes done since he took the job two years
ago and just 2 points shy of Fed Chairman Ben S.
Bernankes 75 percent favorable rating.
Developed economies are turning into global
growth engines as some emerging-markets
countries decelerate, according to a report the
International Monetary Fund prepared for the
leaders of the Group of 20 in September. The
poll reflects this, with financial professionals
for the first time choosing the BRICsBrazil,
Russia, India and Chinaas likely to offer inves-
tors the worst opportunities in the coming year.
The Bloomberg Global Poll was conducted Sept. 10 by Selzer & Co.
of Des Moines, Iowa. Sample size: 900 Bloomberg customers.
Margin of error: plus or minus 3.3 percentage points.
12%
Our j ob i s to make sure that i t
i s not a fal se dawn.
Bank of England Governor MARK CARNEY on recent improvement
in the U.K. economy and his commitment to keep rates low
L
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TYPE BBAI <GO>
18 BLOOMBERG MARKETS November 2013
AGENDA
a unit of U.S.-based Invesco Ltd.
Less well-known is that Woodford
also oversees one of the largest pools of
money devoted to U.K. biotechnology
and health-care startups. He makes
investments that range from a few mil-
lion to 100 million pounds, according
to executives who have sought financ-
ing from him. These stakes are held
alongside the blue chips in his mutual
funds. Invesco Perpetual wont provide
a breakdown of the biotechnology
startups held. Woodford declined
a request for an interview.
Other sources of funding for
health-care startups have dried up in
recent years. Total financing for the
U.K. biotechnology sector fell 84
percent from 2007 to 2012, according
to data compiled by Ernst & Young.
Woodford has been something of a
lifeline for small startups in this field.
If it wasnt for him, itd be quite grim,
says analyst Navid Malik of Cenkos
Securities in London, who tracks drug
and biotechnology companies.
ANDREA GERLIN
THE VAST MAJORITY of the more
than 32 billion pounds ($51 bil-
lion) that Neil Woodford manages
is in shares of large companies such
as British American Tobacco Plc and
GlaxoSmithKline Plc. His two biggest
funds have had average annual returns
above 12 percent for the past decade,
making a star of Woodford, who is head
of U.K. equities at Invesco Perpetual,
Biotech on the Side
NEIL WOODFORD OVERSEES LARGE-CAP EQUITIES
FOR INVESCOAND IS ONE OF THE BIGGEST INVESTORS
IN U.K. HEALTH-CARE STARTUPS.
OLYMPIC
GAMING
THE SELECTION OF
TOKYO TO HOST IN 2020
LOOKS LIKE A WIN FOR
THE CASINO INDUSTRY.
THE BET IS that Japan will
now move forward with
legislation to allow casinos.
The development of gambling
resorts would add hotel rooms
and entertainment venues as
Tokyo prepares for a boost in
tourism. The worlds third-
largest economy is the biggest
potential gambling market
that has, to date, remained
of-limits to casino operators.
JACOB ADELMAN AND
YUKI YAMAGUCHI
Share gains in the week
after the Sept. 7 decision of
the International Olympic
Committee:
Las Vegas Sands
The U.S. company
is scouting sites for
casinos in Japan.
Sega Sammy Holdings
The maker of pachinko
machines and arcade
games is developing a
casino in South Korea.
Konami
The company makes
gambling machines
and pachinko games.
E-THERAPEUTICS
Develops treatments
for cancer and nervous
system diseases
MARKET CAP: 90 MILLION
I NVESCO STAKE: 49.8%
VECTURA GROUP
Develops inhaled
therapies for
respiratory diseases
MARKET CAP: 380 MILLION
I NVESCO STAKE: 8.6%
REVOLYMER
Makes polymers for
nicotine gum
MARKET CAP: 31 MILLION
I NVESCO STAKE: 29.8%
BTG
Develops drugs for
treating snake bites
and cancer
MARKET CAP: 1.35 BILLION
I NVESCO STAKE: 26.6%
RETROSCREEN VIROLOGY
GROUP
Provides services to
help develop antiviral
drugs and vaccines
MARKET CAP: 171 MILLION
I NVESCO STAKE: 25.4%
CIRCLE HOLDINGS
Funds a health-care
service provider
system
MARKET CAP: 41 MILLION
I NVESCO STAKE: 23.2%
+7.3%
+13%
+17%
Source: Center for Responsive Politics
Amount spent by Native
American tribes and associations
on casino- and gambling-related
lobbying in 2012
M
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INVESTING
The world changes every
day. Our job is to understand
the global, political and
economic implications 12
to 18 months out.
Our Ideas Stand Up To
Scrutiny Every Morning.
I VY FUNDS Accountability & Collaboration
At Ivy Funds, each day begins with the Morning Meeting:
a roundtable where portfolio managers and analysts review
news from every corner of the global economy. A process
we started decades ago, it stresses group collaboration
to create our best thinkingand accountability for those
tasked with implementing it.
Through bull and bear markets, weve followed a
time-tested investment process, marked by rigorous debate,
hands-on research and a proven cross-disciplinary
approach. Because we never forget its our clients money
were managing. MI KE AVERY President
SM
I VYFUNDS.COM
FACEBOOK.COM/ I VYFUNDS
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and it is possible
to lose money by investing.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus
containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com.
Please read the prospectus or summary prospectus carefully before investing. I VY FUNDS DI STRI BUTOR, I NC. 18689 (11/ 13)
20 BLOOMBERG MARKETS November 2013
AGENDA
INVESTING
licensing its intellectual
property to companies
that make things based
on its characters rather
than focusing solely on
its own product line. This
strategy has helped double
operating profit margins
to 27 percent during the
past four years. The shares
were up 106 percent year to
date as of mid-September,
compared with a 38 percent
gain for the Topix index.
Almost all of Tsujis $1.2
billion fortune is in Sanrio
stock, according to the
Bloomberg Billionaires
Index. He owns 1.8 million
shares directly and 18.1
million more through his
son, Kunihiko, 61, whos
chief operating officer of
the company, and trusts
Hello Money
SHARES OF SANRIO, WHICH LICENSES THE ICONIC KITTY IMAGE, DOUBLED THIS YEAR,
MAKING COMPANY FOUNDER SHINTARO TSUJI A BILLIONAIRE.
LOYAL FANS OF a white
cartoon cat with a red
bow and no mouth have
made 85-year-old Shintaro
Tsuji very wealthy. Tsuji
began his career as an entre-
preneur in 1960, selling silk
goods and rubber beach
sandals, and marketed the
first Hello Kitty product,
a coin purse, in 1975. The
cartoon kitten boomed for
a time before fading. In the
1990s, the character had a
resurgence thats still going
strong. Today, Hello Kitty
can be found on everything
from commercial aircraft
to vibrators.
It must be way up there
in terms of the most-
recognized franchises in
the world, says Ted Bestor,
director of the Reischauer
Institute of Japanese Stud-
ies at Harvard University.
Tokyo-based Sanrio
Co., where Tsuji still
serves as chief executive
officer, has shifted toward
held by his wife. Tsuji has
never before appeared on
an international wealth
ranking. GILLIAN WEE
BLOOMBERG BI LLI ONAI RES I NDEX
NET WORTH: $1. 2 BI LLI ON
AGE: 85
CI TI ZENSHI P: JAPAN
RESI DENCE: TOKYO
PRI MARY ASSET: SANRI O
I NDUSTRY: RETAI L
HI DDEN
BI LLI ONAI RES
UBIQUITOUS KITTY
SANRIO HAS FOCUSED ON THE LICENSING OF ITS
CHARACTERS RATHER THAN ITS OWN PRODUCT LINE.
Deutsche Banks estimate of the
value of a share of EIKE BATISTAs
OGX Petroleo & Gas Participacoes,
which traded above 18 REAIS
(1,800 centavos) last year
EVA AI R PASSENGER JET
ROLLER
SKATES
SMART CAR
DOLLS OF THE
BAND KI SS
FRUI T BEER
1
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DELTA.COM
MORE LAPTOP OR
JUST MORE LAP?
MORE WORKSPACE WITH
ECONOMY COMFORT.
C
+1.1
C
+6.4
C
PRESENT
FORECAST
FOR 2100
1870
+0. 2 M
+0.4 M
+1.4
METERS
MAY 2013
FORECAST
FOR 2100
400 PPM
317 PPM
500 PPM
950 PPM
I NCREASE I N AVERAGE
GLOBAL TEMPERATURE
RI SE I N SEA
LEVEL
CO2 LEVEL
I N ATMOSPHERE
HIGHEST
CONCENTRATION
IN 3 MILLION
YEARS
Lipper. And Morningstar? And Barrons?
Were going to need a bigger shelf.
1
In calculating the awards, Lipper considered funds registered for sale in the United States with at least 36 months of performance as of the end of
the calendar year of the respective evaluation year. Fund groups with at least fve equity, fve bond or three mixed-asset portfolios were eligible for an
overall group award. The award is given to the group with the lowest average decile ranking of three years Consistent Return measure of the eligible
funds over the three-year period ended 11/30/12. TIAA-CREF was ranked against 35 fund companies.
2
As of June 30, 2013, 42% have 3 stars, 41%
4 stars and 14% have 5 stars. Morningstar is an independent service that rates mutual funds and variable annuities. The top 10% of accounts in an
investment category receive fve stars, the next 22.5% receive four stars and the next 35% receive three stars. Morningstar proprietary ratings refect
historical risk-adjusted performance and can change every month. They are calculated from the accounts three-, fve- and ten-year average annual
returns in excess of 90- day Treasury bill returns with appropriate fee adjustments, and a risk factor that refects mutual fund/subaccount performance
below 90-day T- bill returns. The overall star ratings are Morningstars published ratings, which are weighted averages of its three-, fve- and ten-year
ratings for periods ended June 30, 2013.
3
The Barrons/Lipper Fund Family survey uses an asset-weighted ranking system. Each funds return was
measured against those in its Lipper category, and the resulting percentile ranking was then weighted by asset size relative to the fund familys other
assets in its general category. The familys overall ranking was then determined by weighting the fve fund categories in proportion to their overall
importance within Lippers fund universe. In 2012, TIAA-CREF is ranked 10th of 62 for the one-year, 29th of 53 for the fve-year and does not qualify
for the 10-year ranking. Consider the investment objectives, risks, charges and expenses carefully before investing.
Visit tiaa- cref.org for product and fund prospectuses that contain this and other information. Read the
prospectuses carefully before investing. TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services,
Inc., members FINRA, distribute securities products. Annuity contracts and certifcates are issued by Teachers Insurance and Annuity Association
(TIAA) and College Retirement Equities Fund (CREF), New York, NY. 2013 Teachers Insurance and Annuity Association-College Retirement Equities
Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017. C10238
Learn more about our breadth of award-winning
mutual funds, available to your clients, at
tiaa-cref.org/fundawards or call 800 719-1193.
TYPE TIAA <GO>
PHOTOGRAPH BY ROBYN TWOMEY 32 BLOOMBERG MARKETS November 2013
who worked under President George
W. Bush through the height of the fi-
nancial crisis, is a reserved Republican.
He returned to his family farm in Illi-
nois after leaving government. Steyer
is a gregarious Democratic Party fund-
raiser who used to live with his fam-
ily in San Franciscos Haight-Ashbury
neighborhood, the cradle of the coun-
terculture in the 1960s.
They have two things in common.
One is Goldman Sachs. Steyer began
his career at the investment bank in
the early 1980s on the risk arbitrage
desk run by Rubin, who went on to be-
come the firms co-chairman, from
1990 to 1992. The other is a conviction
that Americans will get serious about
climate change if they understand how
much its going to cost.
In June 2009, a bill that would
have regulated carbon pollution
and set up a national cap-and-
trade system passed the House
of Representatives and went to
the Senate. After the American
Petroleum Institute and coal
industry lobbyists argued that
such legislation would raise
energy costs and spur unem-
ployment, the Senates Demo-
cratic leadership failed to bring
the bill to a vote. The big boys
made this about jobs versus the
environment, and the environ-
ment loses that argument every
time, Steyer says. We need to
get rid of this idea that going the
way we are, with the status quo,
is a smart economic thing to do.
Thats Steyers goal in funding a
detailed risk analysis. The next
time lobbyists go from Senate of-
fice to Senate office saying this is
how many jobs youre going to
lose in your state, well have an
intellectual response: Bulls---.
Thats bulls---, he says.
The Risky Business project
will be directed by a 10-member
interdisciplinary team of econo-
mists and climatologists. It will
divide the U.S. into eight regions
3-degree to 5-degree increase, which
would cause major changes in rivers, a
collapse of the monsoon cycle in Asia,
and trigger deep conflicts, says Stern,
whose institute is supported by fund
manager Jeremy Grantham. This is a
staggering creation of risk, and an anal-
ysis of this risk is fundamental.
Stern, a former chief economist at
the World Bank, led a review for the
U.K. government in 2006 that con-
cluded a 5-degree rise in temperature
by the end of the century could totally
choke off global economic growth.
Paulson and Steyer each consulted
Stern separately last spring as they for-
mulated their thinking on the issue.
Paulson and Steyer make an odd
couple. The former cabinet official,
Americans for Prosperity, a Washing-
ton advocacy group that opposes reg-
ulating greenhouse gas emissions, says
that while laying out the costs of global
warming may be a fresh approach, the
effort may be outdated as industries
and governments focus their resources
on adaptation rather than mitigation.
Theyll have to prove that its more
economical to fix climate change than
to live with it, says Valvo, whose group
is financed by Charles and David Koch,
the billionaire brothers who head Koch
Industries Inc., the commodities con-
glomerate based in Wichita, Kansas.
The plan to measure economic im-
pacts only in the U.S. is flawed, Valvo
says, because climate change is caused
by global emissions and affects ev-
ery country on the planet. De-
mand for coal, the dirtiest power
source, will jump about 17 per-
cent worldwide over the next
four years, according to the In-
ternational Energy Agency, as
China and India burn more of
the fuel. Climate change is the
most complicated issue there is
because of the extraterritorial
impacts, Valvo says. Its not like
dealing with acid rain or smog.
The U.S. Environmental Protec-
tion Agency and state agencies
were able to address those two
air-quality problems by regulat-
ing local pollution sources.
Nicholas Stern, chair of the
Grantham Research Institute
on Climate Change and the
Environment at the London
School of Economics and Politi-
cal Science, counters that mak-
ing a fiscal case for regulating
carbon may be the best way to
break through the resistance on
the issue. Thats imperative, he
says, with scientists predicting
the atmosphere may warm an-
other 5 degrees by 2100. We are
already seeing what can happen
with a 0.8-degree increase in
temperature, and we are look-
ing at a high probability of a
THIS CANNOT BE A
LIBERAL NARRATIVE
ABOUT AN APOCALYPTIC
FUTURE. KATE GORDON, NEXT GENERATION
2013 Southern Company
We make electricity.
We make it from American sources
in a balanced way.
We invest billions in research and in 21st
century coal, natural gas and new nuclear.
We make it from water, wind, the sun
and things that grow.
We make it reliably, affordably, cleanly.
We make it to make progress.
To make jobs. To make our world smarter.
Brighter. Better.
We are the people of Southern Company.
We make electricity.
TYPE SOCO <GO>
PHOTOGRAPH BY JENN ACERKMAN AND TIM GRUBER 34 BLOOMBERG MARKETS November 2013
and present findings for each part of the
country as a range of probabilities, simi-
lar to an insurers actuarial table. Rather
than prescribing solutions, the research-
ers aim to provide state and municipal
policy makers, business leaders and in-
vestors with a data-rich framework they
can use to understand the climate risks
they face. This cannot be a liberal nar-
rative about an apocalyptic future, says
Kate Gordon, director of the energy
and climate program at Next Genera-
tion, a nonprofit Steyer co-founded in
San Francisco. People have to feel they
can do something about climate change
thats grounded in what they know and
where they live, says Gordon, whos
helping to direct the study.
The Risky Business analysis will
draw on climate models used by the
IPCC and the National Climate As-
sessment, a U.S. government effort
that combines information from 13
agencies to create region-by-region
predictions of the effects of global
warming. The Great Plains, stretch-
ing from Montana to Texas, likely
will experience more heat waves and
more-extreme swings in precipita-
tion, for example, and droughts will
put pressure on diminishing water
supplies, according to the assessment.
The U.S. Department of Agriculture
forecasts that over the next few de-
cades, these changes will reduce har-
vests and may force cattle producers
to set up air-conditioned shelters for
their herds, meaning the cost of sta-
ples such as meat and milk will prob-
ably go up.
The kind of volatile weather antici-
pated in the National Climate Assess-
ment is already being seen in the corn
belt, agronomist Hatfield says. In 2010,
Iowa endured its wettest summer on
record and its warmest nighttime tem-
peratures, he says. Corn went from pol-
lination to maturity in 35 days instead
of 50, which was bad news for farmers
as stressed-out crops yielded a poor
harvest. In 2012, Iowa was gripped by
the worst drought since 1934 only to
experience river flooding in March,
topped off with a sudden dry spell.
This is outside our normal thinking in
terms of what our climate looks like,
says Hatfield, the laboratory director
of the National Laboratory for Agri-
culture and the Environment in Ames,
Iowa, which is part of the USDA.
Hatfield is developing ways for farm-
ers to adapt. An upbeat man with salt-
and-pepper hair, he notes that in the
broader discussion of climate, soil is of-
ten forgotten. But its one element we
can actually manage, he says. Were
never going to make it rain, but what
we can do is capture every drop of wa-
ter and make it available to the plant.
Hatfield has urged farmers to stop
plowing before they plant and in-
stead blanket the soil with corn husks,
leaves and other leftovers from last
years harvest. Microbes feed on this
organic matter and enrich the crops
with nutrients. Soil cultivated in this
manner loses less moisture through
evaporation. Hatfield has found corn
plants can send roots 2.2 meters (7.2
feet) into the earth instead of 1.2 me-
ters, tapping deeper groundwater.
For every 2 to 3 percent increase of
organic matter in the soil, its capac-
ity to hold water jumps 25 percent,
Hatfield says, and that boosts yields,
even in dry years. About 20 percent
of the growers in Iowa have adopted
Hatfields water-conscious method of
tillage.
THIS IS OUTSIDE OUR NORMAL THINKING
IN TERMS OF WHAT OUR CLIMATE LOOKS
LIKE. JERRY HATFIELD, U.S. DEPARTMENT OF AGRICULTURE
TYPE BTAIR <GO>
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36 BLOOMBERG MARKETS November 2013
WHEN FARMER DO KIM THU AND
her family planted an orchard of mango,
apple and litchi trees 20 years ago, she
says, the ocean was 100 meters away
from her home in southern Vietnam. Be-
ginning in 2000, she watched the sea-
water creep ever closer, damaging the
stand of mangroves that protected her
land. Finally, in 2006, the ocean sub-
merged her orchard and wiped out her
familys income. Standing on the porch
of her house, Thu, 55, points to the berm
that now holds back the Gulf of Thai-
land. I hope we will have a good year
and a better future, says Thu, who has
started raising sh. But the sea is here
now, and it will only get closer.
Southeast Asia, a region of 593 mil-
lion people shaped by the 4,800-
kilometer (3,000-mile) Mekong River,
has emerged as one of the places
most under threat from global warm-
ing, according to the World Bank. The
monsoon weather pattern, with its pre-
dictable wet and dry seasons, is show-
ing signs of breaking down. And in
Kien Giang, the rice-growing province
where Thu lives, more than 1 million
acres (405,000 hectares) of cropland
will be ooded under a meter or more
of seawater for several months each
year by 2050, according to forecasts
by the U.S. Agency for International
Development. This is land that used to
rarely ood, says Brad Philips, a senior
climate change policy adviser with US-
AID in Bangkok.
Farmers in the Mekong delta are al-
ready scrambling to adapt by planting
new saltwater-tolerant varieties of rice.
Many are turning to the cultivation of
shrimp for export. Vietnams aquaculture
industry soared 10-fold in the past six
years to become 5 percent of the coun-
trys $141 billion economy, according to
the World Bank.
Yet turbulent weather is threaten-
ing shrimp farmers now. Five years ago,
farmer Tran Van Chien doubled his fam-
ilys income by cultivating the crusta-
ceans in brackish water left over after
his rice harvest. As the wet and dry sea-
sons have started to blur, Chiens shrimp
are struggling to survive sudden uctua-
tions in salinity levels in their ponds. This
spring, when it was supposed to be dry,
it rained for 10 days straight, rapidly di-
luting the salt in the water. Then a heat
wave hit. The salinity surged as water
evaporated, and more than half of his
shrimp died. The weather was very pre-
dictable when I was a boy, Chien, 46,
says. You knew exactly when it would
be dry and when it would rain. Not any-
more, he says.
K. OANH HA AND DIEP NGOC PHAM
VIETNAMS FARMING REGIONS SHOW THEIR VULNERABILITY AS THE
OCEAN RISES AND THE MONSOON GROWS UNPREDICTABLE.
Forecasting exactly how much of an
impact the warming will have on the
$300 billiona-year U.S. agriculture
industry is a challenging exercise, says
John Reilly, an economics professor at
the Massachusetts Institute of Tech-
nology. The problem is that most cli-
mate models are too generalized to
predict how changes in rainfall will af-
fect particular crops in specific areas or
how rising temperatures will affect the
spread of pest insects. Everyone is try-
ing to put together a quantification of
what this all means, but our tools lack
the precision we need, Reilly says. All
the modeling we do tends to smooth
out the fact that theres a high proba-
bility that were going to be surprised.
Thats the problem the Risky Busi-
ness study will have to solve if its to be
at all effective. Yet Paulson says he has
a far bigger worry. The biggest prob-
lem were dealing with is a sense of
hopelessness, he says. But Im say-
ing were the first generation with the
knowledge and the ability to do some-
thing: We dont need new science, and
we have great technology. We need the
will to act now so we dont leave our
children and grandchildren with a cat-
astrophic burden.
Along with Steyer and Bloomberg,
Paulson is betting that as climate
change, once a distant possibility, be-
comes altogether real, our economic
self-interest will be the thing that fi-
nally provokes a popular call for ac-
tion. That will almost certainly have
to be making carbon dioxide emissions
expensive by either taxing or regulat-
ing the gas on a global basis, Steyer says.
Yet its striking that 53 years after the
U.S. governments station on the island
of Hawaii first recorded an increase
of carbon dioxide in the earths atmo-
sphere, were still trying to figure out
how to think about climate change, let
alone solve it.
EDWARD ROBINSON IS A SENIOR WRITER
AT BLOOMBERG MARKETS IN LONDON.
EDROBINSON@BLOOMBERG.NET WITH
ASSISTANCE FROM JOHN LIPPERT IN
AMES, IOWA, MARLEY DELDUCHETTO KAYDEN
IN CHICAGO AND ALEX MORALES IN LONDON.
Commodities Currencies Equities Fixed Income
Scan the code or visit iPathETN.com to learn more about IMLP.
iPath
F
10
5
0
HEAT WAVE
ALASKA TEMPERATURES ARE CLI MBI NG ENOUGH TO
MELT SUMMER SEA I CE, FACI LI TATI NG I NCREASED
SHI PPI NG BUT DI SRUPTI NG WI LDLI FE HABI TATS.
1949 2012
VALDEZ
200 MI LES
Kivalina, a barrier island that storms
have eroded to a quarter-mile wide, is
home to 400 Alaskans.
Strength in Energy.
Meet the new company thats been around for decades. Were WPX.
Uur pcrLfcllc lncludes Lrllllcn cublc feeL cf prcved reserves ?cull nd us ln mo|cr
oil and gas basins producing enough energy for 6 million homes per day. Were on Wall
Street, too, where were a part of the S&P 500.
we Loke on lnncvoLlve elclencydrlven opprcoch Lc drllllng ond develcpmenL LhoL
mokes us o porL cf Lhe lcngLerm energy plcLure Thats WPX.
NYSE:WPX | wpxenergy.com
2013 WPX Energy, Inc.
TYPE WPXE <GO>
46 BLOOMBERG MARKETS November 2013
canceled drilling for 2013 and has made
no announcement about 2014. With its
Alaskan drilling on hold, Shell in April
added its name to a parade of compa-
nies eyeing the Arctic Ocean north of
Russia. It agreed to study joining OAO
Gazprom, already the worlds biggest
natural gas producer, in an offshore
drilling program for oil.
In Nome, on Alaskas western coast,
Mayor Denise Michels is looking to cap-
italize on shipping now that melting ice
has opened the sea for longer summers.
Dockings in Nome harbor grew to 430
in 2012 from 30 in 1988, forcing vessels
to tie up three abreast. Some 200,000
cruise ships planned to visit the Arc-
tic this year, and retirees may rush to
Alaska as temperatures rise and water
dwindles in such parched U.S. cities as
Phoenix, says Fran Ulmer, chairman of
the U.S. Arctic Research Commission.
Commercial shipping to Europe is
growing in the Bering Strait via the
Northern Sea Route along Russias coast.
Permits for sailing in the area skyrock-
eted to 516 this year from four in 2010.
Michels recognizes the impacts of
the shipping bonanza. She says Nome
would be overwhelmed by a maritime
disaster. In 2010, 128 passengers were
stranded for two days when cruise ship
MV Clipper Adventurer struck an un-
charted rock in the Canadian Arctic.
Michels expects more noise and says
routine discharges of bilge water may
contain pollutants and invasive spe-
cies. You have to adapt, she says of
climate change. You plan for more
storms, more often. You watch roads
and buildings sink into the permafrost
as it melts. You watch as new species
arriveinsects, fish, crabs, vegeta-
tionand watch the impact they have
on animals that have been here forever
and on which we depend.
The 400 residents of Kivalina, a bar-
rier island about 300 miles north of
Nome, are nervously preparing for the
winter as rising seas erode their coast-
line. Storms are more violent on land
because theres less sea ice to slow
them. Stan Hawley, the tribal council
administrator, says bad weather has
washed human excrement from the
islands landfill into a lagoon used for
Te PIMCO
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PIMCO.com/StocksPLUS
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95
O
THE U.S. DIRECT-SALES COMPANY
TEAMED UP WITH AMERICAS MOST
PRESTIGIOUS UNIVERSITY TO HELP
MAKE CHINA ITS BIGGEST MARKET.
BY DUNE LAWRENCE
AND LIZA LIN
N A SWELTERING JULY EVENING IN
the inland Chinese city of Hefei, 1,000
people whistle and clap as Cao Yuchao
tells them about Amway Corp., the
household-products giant named after
the American Way.
Against a rainbow backdrop and
the Chinese characters for glory and
dreams, Cao, Amways local chief,
paints a glowing portrait: China has
been the companys top market for
nine years, with booming sales of Art-
istry cosmetics and Nutrilite dietary
supplements.
Amway also was a sponsor of Chi-
nas team at the 2012 Olympics. I cant
say for sure that these champions were
successful because of Nutrilite prod-
ucts, but I can say for certain that every
medalist has taken a Nutrilite product
before walking up to the winners po-
dium, says Cao, whos dressed in a gray
suit and tie.
Amway offers great rewards, Cao
tells the salespeople and potential re-
cruits gathered before him: The com-
pany has paid 57 billion yuan ($9.3
billion) in commissions and royalties
to Chinese distributors. Its taken the
best salespeople on free trips to Paris
and Rome. And it gives each of its
300,000 Chinese representatives the
chance to be his or her own boss.
Cao introduces dozens of successful
representatives, who tell the audience,
Believe in yourself and nothing is im-
possible. Gao Hanping, who left a job
with the railway ministry for Amway,
starts with a video showing his luxury
car, a home with a garden and photos of
his vacation in Las Vegas. People say
working for Amway is tough; they dont
want to do it, Gao says. Hard work is
the key to success.
Since its founding in small-town
Michigan in 1959, Amway has pitched
its direct-sales systema corpora-
tized version of peddlers going door
to dooras a path to wealth and hap-
piness. Now, its American Way de-
pends increasingly on China, which
accounted for almost 40 percent of
parent company Alticor Inc.s $11.3 bil-
lion in global revenue last year. Thats
a remarkable turnaround, consider-
ing that China banned direct selling
96
entirely 15 years ago, endangering Am-
ways growth.
Amway won back its place in China by
changing its business model and open-
ing stores for the first time. It also im-
proved its reputation by teaming up
with Americas most prestigious school:
Harvard University. In a program bank-
rolled by Amway at a cost of about $1 mil-
lion a year, Harvards John F. Kennedy
School of Government has been train-
ing Communist apparatchiks known as
Amway Fellows. Since it started in 2002,
the program has brought more than 500
Chinese officials to Cambridge, Massa-
chusetts, to study public management
for a few weeks. Every group also visits
Amways headquarters in Ada, Michi-
gan, near Grand Rapids.
In a country where nothing is more
valuable than guanxi, the term for the
connections considered crucial to doing
business, Amway has supersized its net-
work thanks to the Harvard program.
Though there are no public lists of partic-
ipants, BLOOMBERG MARKETS identified
50 alumni through references in resumes
in official publications and on websites.
The Amway Fellows include current
leaders of Henan, Ningxia and Shaanxi
provinces, with a combined population
of about 138 million; the party secre-
taries of cities Nanjing and Wuxi; and
the national vice ministers of civil af-
fairs and industry and information
technology. Also on the list are two of-
ficials who became heads of provin-
cial branches of whats now the China
Food and Drug Administration, which
approves the sale of nutritional prod-
ucts and cosmetics, Amway staples.
Another alumnus is a former official in
the government agency that polices di-
rect selling.
Since the program began, Amways
sales in China have surged more than
fourfold. The turnaround is all the
more striking because Amwaya com-
pany dogged around the world by accu-
sations that its a pyramid schemewon
over Chinese officials in part by paint-
ing itself as a crusader against such
abuses. Pyramid schemes lure individu-
als to join a business that grows mainly
by recruiting other people rather than
by selling products to consumers.
Harvard has benefited from its asso-
ciation with Amway. The program has
raised the profile in Asia of the Ken-
nedy School, whose mission is to train
enlightened public leaders and which
was less well known there than the
universitys vaunted business school.
The Kennedy School has started sev-
eral similar programs for officials
from Asiaa lead its elite peers have
followed.
The Amway Fellows get to put the
prestigious imprimaturs of Harvard
and its partners in Chinaa policy re-
search arm of Chinas State Council and
Tsinghua Universityon their resumes.
(Of the 20 fellows that Bloomberg con-
tacted, three declined to comment
and the rest didnt respond to faxed or
e-mailed interview requests.)
Scott Balfour, vice president and lead
regional counsel for Amway in Asia, says
the Harvard program is just one of many
that the company is involved in to help
local communities. Wed have the same
success without this program, he says.
I dont think this is a linchpin of our suc-
cess, but we certainly are very proud of it.
Audie Wong,
a former English
teacher, heads
Amways China
unit.
PHOTOGRAPH BY JASPER JAMES
AMWAY S HARVARD GUANXI
98 PHOTOGRAPH BY GREG RUFFING
A
A
President Doug DeVos wrote
an article for the Harvard
Business Review about
Amways experiences in China.
Amways guanxi with officials is
impressive, says Corey Lindley, who
helped Provo, Utahbased Nu Skin En-
terprises Inc. establish its skin-care di-
rect-selling business in Asia and spent
four years in China for the company.
You have to build relationships with
the government, and Amway has been
a master of that, he says.
NHUI, THE PROVINCE IN WHICH CAO
presided over the July rally, shows
how strong Amways ties to local of-
ficials can be. Hefei, some 400 kilo-
meters (250 miles) west of Shanghai,
in July announced the winners of its
Amway Cup, which solicited cartoons
and poetry illustrating illegal pyra-
mid schemes. The competition was
sponsored by the city government, in-
cluding the local Administration for In-
dustry and Commerce, which polices
direct selling.
In 2011, the province staged Anhui
Sword, a campaign to combat pyramid
sales schemes. In one city, Amway co-
organized the program, and an Amway
press release shows a company worker
and local AIC officers staffing the same
booth and handing out information. In
four months, the province shut down
1,302 pyramid schemes involving about
7,200 people, provincial officials an-
nounced that December.
The top official at a press conference
announcing the campaign was Anhuis
vice governor, Tang Chengpei, according
to another press release. Tang, who has
since been promoted to provincial party
secretary, was a 2002 Amway Fellow.
MWAY, WHICH WAS FOUNDED IN 1959
by Richard DeVos and his friend Jay
Van Andel to sell a liquid household
cleaner, has become a global giant.
Today, it employs more than 21,000
people in about 100 countries and ter-
ritories and sells some 450 different
products through a network of more
than 3 million independent busi-
ness owners, the companys term for
its nonemployee sales force. DeVos,
87, had a net worth of $8.3 billion as of
Sept. 15, making him the 144th-richest
person in the world, according to the
Bloomberg Billionaires Index. In ad-
dition to a 50 percent interest in Al-
ticor, hes the principal owner of the
Orlando Magic basketball franchise
and funds Christian organizations and
free-enterprise groups such as the Her-
itage Foundation, a think tank. His son
Doug, 49, is president of Amway. Van
Andel, who died in 2004, was also a bil-
lionaire. His son Steve, 58, is now Am-
ways chairman.
Traditionally, direct sellers ply their
wares to consumers face to face rather
than through stores, says Bill Keep,
dean of the business school at The Col-
lege of New Jersey in Ewing. Many such
companies employ something called
multilevel marketing: Their salespeo-
ple earn money not only by selling
products; they also get rewarded for
recruiting more salespeople beneath
themqualifying for bonuses or other
compensation based on purchases
made by those that they en-
list, Keep says. The burden
of recruiting and training is
now on the salespeople, and
it actually lowers fixed costs
for the parent firm, he says.
But that recruitment aspect
of it carries the risk of pyra-
mid-scheme behavior.
Therein lies a gray area,
Keep says. In legitimate mar-
keting, the main purpose
is to make sales to the con-
sumer. In a pyramid scheme,
salespeople are primarily re-
warded for recruiting others,
he says. Telling the differ-
ence between the two re-
quires transparency about
how much of salespeoples
earnings ultimately come
from selling to consumers
versus to recruits, he says.
Amway says it doesnt break down
sales in that way. The traditional plan,
which operates in most of the world,
cant be deemed a pyramid, because
no one earns a thing based on the act
of recruitment, says Michael Mohr,
Amways general counsel and secre-
tary. Benefit is only accrued based
on the sale of product. That has been
misunderstood.
In China, Zheng Yimei, a petite
23-year-old in a white blouse, black
skirt and heels, first heard about Am-
way from someone she met at a bus
stop five years ago. Since then, shes at-
tended meetings regularly at Amway
stores in Hefei. Zheng says she wanted
the opportunity to work for herself af-
ter dropping out of school at 14 and
toiling as a garment worker, in a bak-
ery and at a supermarket weighing
produce, where she earned 700 yuan
a month. She says she has bigger ambi-
tions now.
Two salespeople in China told
AMWAY S HARVARD GUANXI
MMXIII Sothebys International Realty Afliates, Inc. All Rights Reserved. Te Yellow House, used with permission. Sothebys International Realty is a licensed trademark to Sothebys International Realty
Afliates, Inc. An Equal Opportunity Company. Equal Housing Opportunity . Each ofce is Independently Owned and Operated except ofces Operated by Sothebys International Realty, Inc.
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Located in the heart of Greenwich Village, 61 Fifth Ave is a new
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This gorgeous English manor, in Country Club of the South, is the
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100
BLOOMBERG MARKETS how Am-
ways compensation system works:
The more products you sell, the
higher the commission you get.
One of the salespeople showed
BLOOMBERG MARKETS a document
on the Internet with detailed illus-
trations of the system. In the fiscal
year ended on Aug. 31, 2,500 yuan
in net sales earned a commission
of 9 percent, sales of 7,500 yuan
earned 12 percent and on up to the
top rate of 27 percent on net sales
of 125,000 yuan or more. The sales-
people said they would also earn a
bonus on the sales of each person
they brought into the organiza-
tion. If the salesperson made 8,000
yuan in net sales and enlisted four
people, who each also made 8,000
yuan in sales, he would get a 3,360 yuan
bonus (18 percent of the total 40,000
yuan in revenue minus the 12 percent,
or 960 yuan, that would go to each of
his four recruits).
Its not correct to say a salesperson
would get a bonus for sales made by
recruits, Amways Balfour says. The
online document isnt an Amway doc-
ument and isnt accurate, he says. The
company has two categories of distrib-
utors in China: sales representatives,
who earn commissions solely on their
own personal sales, and authorized
agents, individuals who formally regis-
ter with the government as businesses.
Sales representatives are true direct
sellers in that theyre going out and sell-
ing the product to family and friends,
Balfour says. Authorized agents ac-
tually have a fixed location. The sales
from agents shops are counted as per-
sonal volume, he says.
Under Chinese law, Balfour adds,
networks and groups are not allowed,
so Amway structures its business dif-
ferently than in the rest of the world.
Chinas 2005 Regulations on Direct
Selling Administration stipulate that
the remuneration paid by the direct-
selling enterprise to its direct sales-
man shall be calculated only based on
the income of the products sold to the
consumers.
In Beijing, framed photos of Amway
executives with Chinese leaders going
back to Jiang Zemin plaster the wall
at Amways office, a command center
that takes up the 11th floor of a build-
ing across the street from the Ministry
of Commerce. Golden hammer-and-
sickle symbols on red fields adorn the
cubicles of Communist Party members
on staff.
We have a fabulous government re-
lations team, and the origin of that is
that we were really born out of
a crisis, says Audie Wong, pres-
ident of Amways business in
China. We had to solve crises
over and over again. Wong, 61,
joined Amway in Hong Kong in
1981 after spending three years
as an English teacher at a Cath-
olic school there.
The crisis Wong is referring
to came in 1998. Amway meetings like
the one in Hefei made the Chinese au-
thorities nervous because they feared
the gatherings might be a cover for reli-
gious or other rallies, says Herbert Ho,
a former Amway China executive and
the author of a 2004 U.S.-China Busi-
ness Council report about regulation
of direct selling in China. Unscrupu-
lous entrepreneurs with fraudulent
sales schemes also brought scrutiny,
Hos report says. In one notorious case
in a town in Guangdong province, a Tai-
wanese company convinced farmers to
buy a foot massager for 3,900 yuan
about eight times the regular price
and pay 800 yuan to join its sales
force, the report says. Participants ri-
oted when they realized theyd been
scammed. Similar incidents of social
unrest triggered an official backlash,
according to the report.
China banned direct selling in April
1998. The timing was lucky, Wong
says, because China had begun ne-
gotiations to enter the World Trade
Organization and didnt want to be
perceived as shutting down U.S. com-
panies. Amway and other direct sell-
ers lobbied U.S. politicians and policy
makers to raise the ban in the WTO
talks, Wong says. Later that year, China
agreed to let Amway and several other
WE HAVE A FABULOUS
GOVERNMENT RELATIONS
TEAM, AMWAYS WONG
SAYS. WE WERE REALLY
BORN OUT OF A CRISIS.
AMWAY S HARVARD GUANXI
MUTUAL
BENEFITS
Amway, Harvards
Kennedy School
and Chinese
officials each gain
from their unusual
relationship.
FUNDING
Amway pays about
$1 million per year
to sponsor the
program
Harvards
Kennedy
School
Chinese Officials
ELEVATED PROFILE
Harvards Kennedy
School gets name
recognition in China.
TRAINING AND
PRESTIGE
Amway Fellows learn
about governance
and get to put the
name Harvard on
their resumes.
Amway
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a network of
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ernment con-
nections for
Amway.
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102
international companies continue op-
erating, with modifications, includ-
ing opening stores. Amway, which had
never before had retail outlets in any
country, now has close to 300 in China.
It also began manufacturing in China
and advertising there. We needed to
demonstrate that Amway would be a
long-term honorable corporate citizen
in China, Doug DeVos, Amways pres-
ident, wrote in an article chronicling
the companys China experiences that
was published in the April issue of the
Harvard Business Review. The article
doesnt mention Amways connection
to the Kennedy School.
China isnt the only place Amway has
had crises. In the U.S., the Federal Trade
Commission investigated the company
in the 1970s for price fixing and mis-
representation of the potential prof-
its salespeople could make. The FTC in
1979 found that Amway was not a pyr-
amid scheme but ordered the company
to stop making misleading earnings
claims and fixing prices and to disclose
information on the average income for
its salespeople. Active U.S. salespeople
earn an average of $202 a month, ac-
cording to the most recent company
figures. Balfour says Amway doesnt
publish such information for China.
In 2010, Amway agreed to settle a
class-action lawsuit filed by former
distributors in California, alleging
that it was a pyramid scheme. Amway
agreed to pay $55 million in cash and
free products and overhaul some
business practices at a cost of
$100 million, without admitting
wrongdoing.
The U.K. government sought to
have Amway shut down there in
2007. A court dismissed the case
the next year on the condition
that the company make changes
including disclosing average
earnings data for its salespeople.
When we realized how the Am-
way business was being perceived,
we made changes, Mohr says.
Amway also has critics in China.
An instant-messaging chat group called
Oppose Amway on Tencent Holdings
Ltd.s QQ service has more than 500
members who gripe that the companys
selling tactics are a pyramid scheme,
that products are overpriced and that it
nurtures cultlike devotees.
Any large company faces critics,
Balfour says. Many of these sites or
groups are operated by former distrib-
utors that were sanctioned by the com-
pany, he says.
Mao Shoulong, a professor of pub-
lic policy at Renmin University in Bei-
jing, argues that Amways funding of
the Harvard program is inappropriate.
Of course this influences Amways po-
sition in China; theyve got provincial
governors and department heads vis-
iting their headquarters each year, he
says. Government officials shouldnt be
taking money from a company to travel
to the U.S. or visit sites around the coun-
try, especially when one of those stops
includes the companys headquarters.
Balfour says the company doesnt
have any say in which officials are cho-
sen to attend the program. I dont
think our success is in any way depen-
dent on this program, he says. Any
educational program just helps the
business environment generally.
Corporate backing isnt unheard of
at the Kennedy School. Out of 1,049
sponsored awards from July 2000
through June, 39 were from for-profit
companies such as Amway, according
to school records.
The school began a push to focus
more on Asia in the late 1990s and hired
Anthony Saich, who had run the Ford
Foundation in Beijing for five years, to
make it happen. In 1998, the school be-
gan training about 20 Chinese officials
a year through a fellowship funded by
New World Development Co., a Hong
Kongbased real estate company. Lu
Mai, a policy researcher for Chinas
State Council who had attended the
Kennedy School in the 1990s, sought
Saich out to propose a more ambitious
initiative to train local officials.
Amway opened stores in China
like the ones on this page, its first
anywhere in the world.
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Saich liked the idea. He drew in
Tsinghua as a Chinese partner, along-
side the State Councils Development
Research Center. Tsinghua had created
a school of public policy in 2000, and
Saich says he was eager to promote ties
with it, as well as to have a partner on
curriculum and training development.
Money quickly became a sticking
point. Sending 50 senior officials to
America was not approved of by some
people in China, says Saich, 60, a na-
tive of the U.K. who has written or ed-
ited more than 20 books on China.
There were a lot of fears about what
the program would teach, would it be
worthwhile. So Saich began looking
for a company that would be willing
to pay for the program in exchange for
a chance to improve its relations with
the Chinese government.
Edward Cunningham, then a 24-year-
old program officer who worked with
Saich, suggested Amway. Cunningham
was well versed in Amways travails in
China: Hed written a paper about its
corporate strategy there for a class at
the Massachusetts Institute of Tech-
nology, where he later earned a Ph.D. in
political science. And he had a connec-
tion to Amway: His uncle had managed
the design and procurement of luxury
yachts for the DeVos family. I at least
had an idea of what Amway had gone
through, says Cunningham, whos now
an assistant professor at Boston Uni-
versity and director of the Asia Energy
and Sustainability Initiative at the Ken-
nedy School.
Cunningham sent a letter to Doug De-
Vos that ended up on Wongs desk in Bei-
jing. Wong saw a great opportunity. It
has this combination of the best brands,
Wong says, laughing. You have Harvard,
you have Tsinghua, and you have the
State Council. Amway signed up.
In the hallway outside Saichs office
near the Charles River in Cambridge,
a newspaper cartoon hangs on the wall.
In the first frame, an official in a Mao
suit has jumped up, raising his fist be-
fore a Chinese flag to say, I staunchly
oppose Americas hegemony! In the
second frame, hes grinning ear to ear
as a seated official says: You are very
patriotic. Well send you to Harvard for
training next year!
Amway Fellows, who are selected by
the Communist Party, prepare for two
weeks at Tsinghua before studying
government functions from budget-
ing to crisis management at Harvard.
Classes and lectures taught by well-
known Harvard facultyJoseph Nye,
famous for his study of political power
and influence, for instanceare trans-
lated into Chinese. The group takes
trips to local institutions such as the
Boston Redevelopment Authority
PHOTOGRAPHS BY ADAM AMENGUAL 104
and then travels for a fifth week of
site visits, including a stop at Amways
headquarters.
An Amway employee from China
travels with the officials to Harvard
to monitor their health and happi-
ness, Saich says. And the company has
suggested adding China-specific case
studies, he says.
Saich says the sponsorship lets Am-
way show its interested in more than
profits in China. It gives them some-
thing to talk about with senior gov-
ernment officials, he says. Secondly,
it probably gives them a local network
base that they can interact with. They
have people from the program in every
single province around China.
Wong says there has never been
any direct commercial gain to Amway
China from the program. Still, he adds,
its importance has become more and
more noticeable.
Amway has been able to accom-
plish things other foreign enterprises
havent. It was the first and remains
the only foreign company allowed to
register a charitable foundation with
the Ministry of Civil Affairs, Wong says.
Jiang Li, one of the vice ministers of
civil affairs, is a former Amway Fellow.
The company also makes donations
and organizes volunteers to contribute
to government charity efforts.
The Kennedy Schools Ash Cen-
ter for Democratic Governance and
Innovation, which Saich heads, now
trains city staff from Shanghai and In-
donesian and Vietnamese officials.
State-owned China Southern Power
Grid Co. and Thai investment firm
Charoen Pokphand Group Co. have
sponsored training programs at the
Kennedy School, whose recent grad-
uates include Bo Guagua, son of Bo
Xilai, the disgraced former member of
Chinas ruling Politburo.
The Amway-funded program has
provoked online criticism by Chinese
citizens who question the need and ex-
pense of sending public officials over-
seas, Saich says, adding that many
Chinese dont know how the program
is funded.
This years program was shortened
to 12 class days at Harvard from four
weeks in previous years. Julian Chang,
executive director of the Ash Cen-
ter, says the Chinese government has
been cutting back on perceived ex-
cesses, including overseas training.
The students also spent two days in
Michigan.
Meanwhile, in China, Amways net-
work continues to grow. Zheng, the
saleswoman in Hefei, is now devoting
herself full time to selling Amway
products, though she has yet to make
any money. Amway is my China
dream, she says. If you speak about
education, I dont have much. If you
focus on relevant work experience, I
havent got much either. Its my ticket
to a better life.
DUNE LAWRENCE IS A PROJECTS AND
INVESTIGATIONS REPORTER AT BLOOMBERG
NEWS IN NEW YORK.
DLAWRENCE6@BLOOMBERG.NET LIZA LIN
COVERS CONSUMER PRODUCTS COMPANIES
IN SHANGHAI. LLIN15@BLOOMBERG.NET WITH
ASSISTANCE FROM WENXIN FAN IN SHANGHAI
AND MICHAEL FORSYTHE AND BENJAMIN HAAS
IN HONG KONG.
Anthony Saich has helped the
Kennedy School increase its
prominence in Asia. A cartoon
about Chinese-U.S. relations
hangs on a wall outside his office.
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106 BLOOMBERG MARKETS November 2013
FOCUS
BRAZIL
MAKI NG
SAO PAULO
FERNANDO HADDAD, A ROOKIE MAYOR,
PLEDGES TO CURTAIL CORRUPTION,
QUICKEN MASS TRANSIT AND IMPROVE
SCHOOLS IN LATIN AMERICAS BIGGEST CITY.
WORK
BY
GABRIELLE
COPPOLA
PHOTOGRAPH BY TUCA VIEIRA
Residents of Paraisopolis,
a low-income neighborhood,
pushed Sao Paulo to finish
this road.
108 BLOOMBERG MARKETS November 2013 PHOTOGRAPH BY ANDRE VIEIRA
Sao Paulo Mayor
Fernando Haddad
steps out of a black
sedan in Paraisopolis,
a neighborhood of
small brick homes,
cramped storefronts
and narrow streets,
in mid-July. He is
meeting with
residents weeks
after about a
million Brazilian
protesters took to
the streets across the nation, railing
against corruption, shoddy education
and inadequate public transportation.
On this sunny morning, a throng of peo-
ple surround Haddad at the site of a
partially constructed road. As the mayor
takes questions for 30 minutes, he in-
dicates to residents that hes heard the
cries of protesters and is responding.
Gilson Rodrigues, president of a com-
munity group, points to mounds of con-
struction debris from people who built
their own homes. He wants it hauled
away. OK, so we need to set up a regu-
lar system of collection, says Haddad,
dressed in casual pants and a blazer.
A man in a green-checked shirt asks
about security: Theres a stoplight
where carjackers trap five or six cars
at a time and rob them. Weve already
asked to put a police station there.
Haddad cant offer much help. The
city doesnt control the military po-
lice, the mayor says. Have you tried
speaking to the security secretary?
Before Haddad, a native of Sao Paulo
and former minister of education,
leaves the site, he delivers a promise.
bus lanes in a city famous for traffic
jamshas helped restore some stabil-
ity in the streets and markets. You can
already see that Haddad is doing things,
particularly with transportation, says
Leonardo Kestelman, a Sao Paulo
based managing director at Dinosaur
Securities LLC, an investment firm that
oversees $800 million in assets. A calm
Sao Paulo is good for markets.
Brazils President Dilma Rousseff has
made Sao Paulo, Latin Americas big-
gest city, with a population of 11 mil-
lion, a focal point of her response to
the protests. The demonstrations that
In 60 to 90 days, this road project will
be completed, he says.
Haddad, 50, has issued a flurry of
pledges to improve everything from
mass transit to government transpar-
ency after the sometimes violent dem-
onstrations in June helped fuel a sell-off
of stocks and bonds. Brazils Ibovespa
benchmark equity index plunged 11.3
percent in June, the worst rout in more
than a year, before rising 15 percent
from July 1 to Sept. 9. Sao Paulo, Bra-
zils financial hub, contributes almost
12 percent of gross domestic product to
a national economy thats sputtering.
Investors say Haddads response to the
demands of protestershes installing
220 kilometers (137 miles) of exclusive
Mayor Fernando Haddad is
making government more
transparent.
FOCUS
BRAZIL
TYPE CEMIG <GO>
110 BLOOMBERG MARKETS November 2013
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Sao Paulos traffic
jams, like this one on
May 23 Avenue, are
world famous.
swept the nation began in Sao Paulo af-
ter Haddad raised bus fares by 20 cen-
tavos (9 cents). In July, Rousseff joined
Haddad at city hall to announce that the
government was giving Sao Paulo 8 bil-
lion reais ($3.5 billion) to help pay for
the mayors transportation and housing
initiatives. With a presidential election
in 2014, Rousseff is counting on Had-
dad, a fellow Workers Party leader, to
improve public services and help her
regain the confidence of voters, says
Joao Augusto de Castro Neves, a Latin
America senior analyst in Washington
at political risk firm Eurasia Group. (On
Sept. 17, Rousseff canceled her state visit
to Washington over allegations that the
U.S. National Security Agency had mon-
itored her e-mail and telephone com-
munications with top aides.)
As long as local government responds
to the protesters specific demands, that
will keep things where they are now and
wont undermine Rousseffs election
chances, says Castro Neves, a Brazilian.
Everything that happens in Sao Paulo
has national repercussions.
Haddad, who hadnt held elective of-
fice before his term started in January,
said the city would build 55,000 afford-
able-housing units, three hospitals and 43
health clinics by 2016. In August, Haddad,
a former professor of political theory at
the University of Sao Paulo, proposed im-
provements to public education in a city
where 38 percent of fourth graders have
trouble reading and writing. He wants
additional university training for teach-
ers, more homework and testing, and
367 new schools. And Haddad has hired
the citys first comptroller and installed
a whistle-blower program to curtail cor-
ruption that can sabotage proposals from
a mayor.
My dream is to transform Sao Paulo
into a city capable of promoting devel-
opment, says Haddad, whose full head
of tousled dark-brown hair adds to his
youthful appeal, at his office in April.
There are federal resources, but we
lack the capacity to execute.
Haddads goal is made harder by a
national economy that may expand
only 2.35 percent in 2013, accord-
ing to a central bank survey of econo-
mists in September. And Rousseff, who
succeeded Luiz Inacio Lula da Silva
in 2010, has stoked price increases by
pressuring banks to boost lending. In-
flation, which stood at 6.09 percent in
August, has twice broken the upper
limit of the central banks target this
year, squeezing consumers and help-
ing spur the demonstrationsthe larg-
est in Brazil in two decades.
In 2005, Lula appointed Haddad
as his minister of education amid the
biggest corruption scandal since the
countrys dictatorship ended in 1985.
Haddad, who has a masters degree in
economics and a doctorate in philoso-
phy from USP, was a political unknown
serving as executive secretary in the
ministry. Haddad replaced a minister
who had left his post to run Lulas Work-
ers Party after its president became
ensnared in a bribes-for-votes scheme.
The Supreme Court convicted 25 party
officials, congressmen and executives,
including Lulas former cabinet chief,
in connection with bribing lawmakers
to win votes. On Sept. 18, the Supreme
Court allowed 12 of the defendants to
appeal their sentences.
As minister of education, Haddad
made the school systems more trans-
parent and accountablethemes hes
carried over to city hall. Haddad is
someone who likes to get his hands
dirty in policy, says Ricardo Musse,
a USP professor who now works as
Sao Paulos coordinator of cultural
programs. Over more than six years,
Haddad created a program to track
ministry projects online and demanded
that city and state education officials
document their results after receiving
grants. He also expanded the number
of university campuses to accommo-
date 300,000 students a year, triple
the amount when he started, although
some new schools lack full-time faculty
and libraries. You have to train people,
change laws, make your acts transpar-
ent, create internal control systems to
SIZING UP
THE CITY
Sources: Ibope, Mayors Office, Sao Paulo Traffic
Engineering, Security Department of the State of Sao
Paulo
SAO PAULO POPULATION: 11 million
SIZE: 1,530 square kilometers
(590 square miles), twice New York Citys size
TRAFFIC JAMS: 300 kilometers,
the record total on July 26
MURDER RATE: 12.02 per 100,000 in 2012,
a 34% annual jump
ILLITERACY: 38% of 10-year-olds in 2011
QUALITY OF LIFE: 59% said its great or good
in 2012, down from 67% in 2007
FOCUS
BRAZIL
People who understand
business choose Brazil.
People who understand Brazil
choose the countrys
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From Brazil to the world.
From the world to Brazil.
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TYPE BDOB <GO>
112 BLOOMBERG MARKETS November 2013
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catch misuse of money, Haddad says.
You have to create a culture of execu-
tion, and thats not a simple task.
The Workers Party brass picked
Haddad to run for mayor based on
his record as minister and because he
was one of the few prominent officials
left untainted by the bribery scandal,
Musse says. He says Haddad won Lulas
trust while serving as his minister and
the former president was a close ad-
viser to the mayor during his campaign.
The party wants to renew its leaders,
and Haddad is one of the new genera-
tion, more technocratic, less ideologi-
cal, analyst Castro Neves says.
As mayor, Haddad is trying to rein
in developers and relocate businesses
after decades of chaotic construction
have left the city a tangled mess. Sao
Paulos postindustrial north and east
sections are marred by little-used rail-
road tracks, empty warehouses and
large pockets of poverty. These areas
reaped few of the economic benefits
of Brazils boom starting a decade ago,
which spurred the building of high-rise
luxury condos now selling for $3.9 mil-
lion and offices towers mostly in the fi-
nancial districts in the south and west.
The lopsided development has wors-
ened the citys gridlock as workers in
the north and east are forced to com-
mute long distances across town. The
combined length of all of Sao Paulos
traffic jams on July 26 stretched to a
record 300 kilometers, according to
the citys traffic engineering company.
A city has to have a design, says
Haddad, whose father immigrated to
Brazil from Lebanon and owned a tex-
tile store in Sao Paulo. If you cant see
the design, you cant see the city. That is
what is happening now.
The mayor has proposed changes
to the citys master plan to reconfigure
where Paulistanos live, work and drive.
Hes calling for the elimination of property
taxes for businesses that move to the east
side, bringing jobs to commuters door-
steps. Hes pushing for incentives for de-
velopers to create affordable housing in
the job-rich city center and tax hikes on
builders who want to put up taller struc-
tures outside areas favored by the city.
New housing located near train and bus
stops must be denser, with more units
that are smaller, to encourage the use
of mass transportation. And to discour-
age car ownership, each unit can have no
more than one parking spot.
Real estate developers are bristling
at some of the proposed restrictions. Ra-
fael Rossi, a partner at Huma Desenvolvi-
mento Imobiliario, a Sao Paulobased
builder, says the tax increases could make
new developments in certain areas nonvi-
able and shrink the housing supply. This
will freeze the real estate market, Rossi
says. Apartment prices will go up a lot.
With the number of cars registered
Haddad, at far left, with
President Dilma Rousseff;
above, the mayor visits with
schoolchildren.
FOCUS
BRAZIL
Source: Bloomberg
ECONOMIC
HURDLES
Brazils President Dilma
Rousseff has spurred high
inflation by encouraging
banks to boost lending to
revive growth.
QUARTERLY GDP GROWTH ( 6/ 30/ 2005 TO 6/ 30/ 2013) MONTHLY I NFLATI ON RATE ( 8/ 30/ 2005 TO 8/ 30/ 2013)
3
2
1
0
1
2
3
4
8%
7
6
5
4
3
2
2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013
%
GROWTH WITH PROFITABILITY, SOLID BALANCE
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114 BLOOMBERG MARKETS November 2013
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by public officials. It receives hundreds
of complaints each week. Working with
the comptroller, police have arrested
five public employees this year for so-
liciting bribes.
Haddads ability to improve city ser-
vices ultimately depends on federal
funding. Hes asked the government for
an additional 14 billion reaisa request
that federal officials have yet to approve.
In July, in a show of fiscal restraint, Rous-
seffs finance minister said 10 billion
reais would be cut from the budget. Had-
dad is also trying to free up money for im-
proving services by negotiating a lower
rate on the 54 billion reais of city debt
owed to the federal government from a
1997 bailout.
The people of Paraisopolis, one of the
favelas, or low-income neighborhoods,
in Sao Paulo, have reason to approve of
their mayor. Paraisopolis began decades
ago as a squatter settlement and over
the years added better housing, schools,
clinics and retail chains. By mid-Sep-
tember, city crews had built 85 percent
of the 1.5-kilometer paved road that
should be finished by November, a few
weeks later than the mayor had prom-
ised. The six-lane thoroughfare will con-
nect two sections of Paraisopolis and
ease travel to surrounding areas for its
100,000 residents. The completion of
the road will be a small victory for the
rookie mayor who hopes to leave his im-
print on Sao Paulo and the nations pres-
idential elections in 2014.
GABRIELLE COPPOLA COVERS BRAZILIAN CREDIT
MARKETS AT BLOOMBERG NEWS IN SAO PAULO.
GCOPPOLA@BLOOMBERG.NET
with Our Sao Paulo Network, a collec-
tion of 700 civic groups.
Corrupt government officials, who
work for bribes rather than the pub-
lic interest, are a threat to any mayors
agenda, says Jose Carlos Blat, a prose-
cutor for the state of Sao Paulo. Blat says
bribery and extortion infect city govern-
ment: Developers overcharge on pub-
lic works as part of kickback schemes,
and regulators extort bribes from busi-
ness- and homeowners in
exchange for permits. Cor-
ruption is barely a hindrance
to elected office. Although
former Sao Paulo Mayor
Paulo Maluf was charged by
federal prosecutors in 2004
for getting kickbacks on a
road project, he was elected
as a federal deputy from Sao
Paulo state in 2006. In 2007,
the New York district at-
torney indicted him for al-
legedly hiding stolen funds
from the road project off-
shore. Maluf, who was re-elected in
2010, has denied the charges in the two
cases. His spokesman says the city au-
ditor approved all of the costs related to
the road project.
Corruption in Brazil is like a can-
cer that has spread out of control, Blat
says. But even with a terminal patient,
there is always a little hope.
Soon after taking office, Haddad hired
a comptroller, Mario Vinicius Claussen
Spinelli, to guard against the misuse of
funds. In July, the mayor established a
Web page for people to report abuses
in Sao Paulo rising 32 percent to 7.4 mil-
lion during the past decade, a commute
within the city can take several hours.
On a May afternoon, Dulce Bernardo, a
60-year-old housekeeper, boarded an ac-
cordionlike bus for a 14-mile trip home
to the citys southwestern fringe. She
was lucky to get a seat while other
passengers stood packed in the aisle. The
bus crept to a halt for 10 minutes several
times on the clogged highway during the
two-hour journey. Some days, Bernardo
says, the trip takes four hoursand six
when it rains. There are times when
you cant see anything. People keep get-
ting on. They sit on top of the ones who
are seated, Bernardo says. No one de-
serves to have to travel like this.
In June, Haddad began a shake-up of
the public transit bureaucracy, cancel-
ing an auction to renew contracts with
private bus companies worth 46 billion
reais. The Mayors Office plans to hire an
international auditor to examine the con-
tracts for signs of abuse and inefficiency.
And Haddad set up a council on public
transportation, made up of commuters,
bus company executives and union rep-
resentatives, who were given access to the
contracts and will see the auditors report
in 2014 to help them make recommenda-
tions for service improvements.
Haddad is doing a lot around public
participation, says Americo Sampaio,
a government transparency advocate
TRACKING BRAZILS
RISKS
Bloomberg Tps
FOCUS
BRAZIL
Mario Vinicius Claussen
Spinelli is Sao Paulos
first comptroller.
When Brazilian force meets
German energy expertise, a new star
is born in the energy sector. ENEVA.
Mix the entrepreneurial vision and growth of Brazil with the
advanced technology of a global energy specialist, and the
result is a new brand, driven by the energy of its team.
Add a valuable portfolio of assets, and you have ENEVA.
Creating energy for a new era.
More than 1,780 MW
in operation in Cear and in
Maranho, providing reliable energy
and development for Brazil.
Some stars
already
shine when
theyre born.
EARN, I NVEST, SPEND
116 BLOOMBERG MARKETS November 2013
Return to the 1950s
with a reproduction
of Porsches iconic
550 Spyder, which
was made famous
by James Dean.
BY JASON H. HARPER
Spirited
Away
plans to produce about two per year.
The project began with scans of an
unrestored original, which led to a
3-D model and four years of reverse-
engineering the entire car. While this
$320,000 prototype has a push-rod
engine from a 1969 Porsche 912, in the
future, the company plans on using the
iconic Type 547, four-cam, air-cooled
the 550s body is handhammered out of
aluminum by Fort Lauderdale, Florida
based Alloycars Inc. andoutfitted with
period-correct Porsche engines and
parts by technicians from Speedsport
Tuning, in Danbury, Connecticut.
When I say this is an exact reproduc-
tion, I mean exact, says Spyder Cre-
ations co-owner Rob Edwards, who
IM BEHIND THE WHEEL OF ONE OF
the rarest and most desired Porsches
ever made, the 550 Spyder. The sen-
suous curves of the tiny, two-seat con-
vertible are unmistakable as the model
driven by actor James Dean when he
died on a California highway in 1955.
Only this Spyder is a fakeor, more
precisely, a facsimile. Only 90 of the
original midengine 550 Spyders were
built in the 1950s, and last year, one net-
ted $3.69 million at auction. So unless
you can snag one of those rare beau-
ties, this kit-car reproductionwhich is
made by Prospect, Connecticutbased
Spyder Creations and not affiliated with
Porsche AGis the only alternative.
Whereas most replicas have fiber-
glass bodies and Volkswagen engines,
R I D E S
PHOTOGRAPHS BY JAMIE CHUNG
The Spyder Creations
550 features a
130-horsepower,
1.7-liter, push-rod,
flat-four engine that
reaches 60 miles
per hour in about
8 seconds. Buckles
secure the rear deck,
near left.
550spyderforsale.com
November 2013 BLOOMBERG MARKETS 117
JASON H. HARPER WRITES ABOUT AUTOS
FOR BLOOMBERG NEWS IN NEW YORK.
JASON@JASONHHARPER.COM AND ON
TWITTER AT @JASONHARPERSPIN
engine, found on late-model 550s. That
version will likely start from $470,000.
The 550 prototype certainly looks
the part of a vintage Porsche. Its star-
tlingly small, with doll-sized doors, a
tight cockpit and a half windshield.
The interior has period-correct vinyl
upholstery, an oversize steering wheel
and a four-speed manual transmission.
The rear deck is hinged and secured
by buckles; inside, youll find the en-
gine compartment and a spare tire tied
down with leather straps. One word of
caution: Youll have to seek out ethanol-
free fuel or risk motor problems.
As I push the Spyder to 6,000 revolu-
tions per minute in third gear, the car
is alive, floating over crests in the road
and razoring around curves. The breeze
blows into my face over the half wind-
shield, and my sunglasses prove more
necessity than fashion statement.
Im sure James Dean would approve.
118 BLOOMBERG MARKETS November 2013
D R I N K S
These importers discover
worthy bottles from
unsung producers.
BY ELIN McCOY
Curating
Wine
IN SEPTEMBER, JOSE PASTOR WAS
working the harvest and tasting the lat-
est vintage on sunny La Palma, one of
the Canary Islands. The 32-year-old
Spaniard, who lives in California, fell in
love with the islands earthy wines six
years ago, when he met and tasted with
vintners. A year later, the Valencia native
began bringing his discoveries from this
little-known Spanish region to the U.S.
Pastor ( josepastorselections.com) is
one of dozens of small, independent
importers, mostly from the U.S. and the
U.K., who are tracking down exciting
wines around the globe. Think of them
as scouts and curators whose picks re-
flect their wine philosophies and what
they personally like to drink.
The new players are following in the
footsteps of pioneering importers who
introduced a generation of drinkers to
wines from unsung regions. In the U.S.,
Kermit Lynch popularized French la-
bels from the then-obscure Rhone,
while Terry Theise celebrated grower
Champagnes. Their U.K. counterpart
was Robin Yapp, of Yapp Brothers, who
hunted down Sancerres and Condrieus.
One of those names on a bottles back
label tells you the wine will be both inter-
esting and worth trying. The same can be
said for the new wave of indie importers,
who also focus on family-owned do-
maines that tread lightly on the land.
Like his colleagues, Pastor spends sev-
eral months a year visiting wineries rec-
ommended by friends or whose bottlings
impressed him at a local restaurant.
David Weitzenhoffer, co-founder
of A.I. (Acid Inc.) Selections (aiselec-
tions.com), looks for wines with the
bright acidity that makes them good
with foodnot surprising considering
hes the former wine director at Italian
restaurant Felidia in New York.
Friends he made during his years as
head buyer at Scarsdale, New York
based retailer Zachys Wine & Liquor
helped Ned Benedict sign on traditional
producers such as Cascina Fontana for
his Grand Cru Selections, which he co-
founded in 2010.
Austrian-born Stephan Schindler,
a former film producer who established
Winemonger (winemonger.com) with
his wife, Emily, first imported wines
from only his native country. Theyve
since expanded to other countries and
also sell their finds online.
See the box for other importers who
are sleuthing out fascinating wines.
PHOTOGRAPH BY TOM SCHIERLITZ
ELIN McCOY IS THE DRINKS COLUMNIST FOR
BLOOMBERG MARKETS. ELINMCCOY@GMAIL.COM
AUSTRALIA
The Spanish Acquisition
Spanish and Portuguese
producers, such as Luis Pato
from Portugals Beiras
thespanishacquisition.com
U.K.
Indigo Wine Ltd. Mostly
ofbeat wines from France
and Spain, such as Sao del
Coster from Priorat
indigowine.com
Las Bodegas Ltd. All
Argentine wines, with stars
such as Susana Balbo
lasbodegas.co.uk
New Generation Wines Up-
and-comers from 10 coun-
tries, including Kalleske from
Australias Barossa Valley
newgenerationwines.com
The Winemakers Club
Largely eco-conscious
producers in Australia and
Italy, such as Brezza
thewinemakersclub.co.uk
U.S.
Jon David Headrick
Selections Mostly wineries
from the Loire Valley, such
as Domaine des Huards
jondavidwine.com E.Mc.
LABELS TO
LOOK FOR
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WALLY WEITZ LIKES TO INVEST WITH BIL-
lionaires hes known a long time. Hes been a
shareholder for more than 35 years in Berk-
shire Hathaway Inc., which is run by his Omaha,
Nebraska, neighbor Warren Buffett, and he has
held stakes in companies run by media mogul
John Malone for more than two decades.
The investments helped Weitzs Partners III
Opportunity Fund return 16.4 percent annually
on average during the five years ended on Sept. 9.
That gain topped 98 percent of similar U.S. value
funds, according to data compiled by Bloomberg.
For the 12 months ended on Sept. 9, Weitzs fund
returned 27 percent, beating 82 percent of peers.
For three years, it returned 20.8 percent a year on
average, better than 96 percent of similar funds.
In addition, the $901 million fund had one-year
volatility of 9.3 percent compared with an aver-
age of 11.4 percent for peer funds.
WEITZ HAS ALWAYS LOOKED FOR COMPANIES
whose stocks are cheap compared with the cash
flow he expects them to generate, a common met-
ric for value investors. Over time, hes come to be-
lieve that finding management teams that know
how to redeploy any excess cash intelligently is
critical to investment success. Warren Buffett and
John Malone could not be more different, but both
of them know how to create more than a dollar of
Betting on Billionaires
Wally Weitzs Partners III Opportunity Fund topped 98 percent of peers
during the past five years, in part by investing in Warren Buffetts
and John Malones companies. BY CHARLES STEIN
PROFILE
STRATEGIES
value for every dollar they reinvest, Weitz, 64, says.
The Opportunity fund has the most flexibil-
ity of his firms five equity funds because it reg-
ularly shorts, or bets against, stocks.
Unlike many short sellers, Weitz typ-
ically doesnt bet against individual
stocks. He wagers against baskets of
equities using index options and ex-
change-traded funds, a technique that
allows him to put more money into his
favorite stocks while hedging market
risk, tempering volatility. Options are
contracts that grant the right to buy or
sell a stock at a set strike price before
expiration.
Weitzs fund operated as a private partner-
ship from June 1983 until December 2005, when
it became a mutual fund. Over its three decades,
the fund has returned 14 percent a year on aver-
age, compared with 11 percent for the Standard
& Poors 500 Index, according to Weitzs website.
Like many value investors, who pick assets that
they deem cheap relative to peers, Weitz isnt too
concerned with producing steady results. An in-
vestor must ride out the inevitable periods when
his style isnt in favor, he says. We agree with
Warren on this one, Weitz says, referring to Buf-
fett. We would rather have a lumpy 14 percent
annual return than a smooth 10 percent.
PHOTOGRAPH BY JENN ACKERMAN AND TIM GRUBER
122 BLOOMBERG MARKETS November 2013
Wally Weitz
PORTFOLIO MANAGER,
PARTNERS III OPPORTUNITY
FUND
Seeks managers who
can effectively deploy cash.
Looks for stocks cheap
relative to cash flow.
Shorts baskets of equities.
June 2012 BLOOMBERG MARKETS 123
STRATEGIES
RATES & CREDIT
Weitz calls Malone a master at dream-
ing up ways to separate out valuable busi-
nesses from less valuable ones. Two of
his firms, Englewood, Coloradobased
Liberty Interactive Corp. and London-
based Liberty Global Plc, were among the
biggest contributors to the funds perfor-
mance in the past five years, according
to data compiled by Bloomberg. Liberty Interac-
tive gained 99 percent in that span; Liberty Global
more than doubled.
One of Weitzs largest positions, El Segundo,
Californiabased DirecTV, counts both Malone
and Berkshire Hathaway among its five biggest
shareholders.
WEITZS FUND ISNT IMMUNE TO SLUMPS. IT
fell 13 percent in 2007, worse than 99 percent of
peers, dragged down by financial stocks such as
New Yorkbased insurer American International
Group Inc., which had to be rescued by the U.S.
government in 2008 amid losses. The crisis of
2007 to 2009 convinced Weitz that financial
firms were taking risks he never appreciated. I
would characterize our mostly happy, 30-year
experience investing in financials as a bad idea we
got away with, Weitz says.
Weitz, whos in the process of selling his firm
to his employees, says he has no intention of leav-
ing any time soon. He says hes confident that his
approach still works. Human nature has not
changed, he wrote to shareholders in a 2009 let-
ter. People acting out of fear and greed cause
assets to be mispriced from time to time. Our
business is to take advantage of this mispricing.
CHARLES STEIN COVERS MUTUAL-FUND COMPANIES AT
BLOOMBERG NEWS IN BOSTON. CSTEIN4@BLOOMBERG.NET
Weitz, who manages about $5.3 billion
in funds and separate accounts, has run
his Omaha-based firm, Weitz Investment
Management, since 1983. He has invested
in Buffetts Berkshire Hathaway for clients since
1976. His office and Buffetts are about 5 miles
(8 kilometers) apart.
Weitz, who has a bachelors degree in econom-
ics from Carleton College in Northfield, Minne-
sota, recalls going to a Berkshire annual meeting
in the 1970s in the lunchroom of a local insur-
ance company, where he was among
only a handful of investors pres-
ent. Today, the meetings draw tens
of thousands. We see each other
periodically, were friendly, but he
doesnt call and give me secrets,
Weitz says about his relationship
with Buffett.
Weitzs value style of investing is similar to Buf-
fetts, says Bradley Alford, founder of Alpha Capital
Management LLC in Atlanta, who owns shares in
the Opportunity fund. Hes Buffett with a lot less
zeros, Alford says.
Weitz first met Malone at a media conference
in the late 1980s, when the executive was running
Denver-based Tele-Communications Inc., and was
struck by his grasp of the cable industry. Today,
Malones assorted publicly traded companies hold
stakes in businesses from satellite radio company
Sirius XM Radio Inc. to home-shopping network
QVC Inc. Malone was worth $6.5 billion as of Sept.
9, according to the Bloomberg Billionaires Index.
PROFILE
SCREENING FOR VALUE
You can use the Equity Screening (EQS) function to identify stocks whose
price is low relative to their free cash ow. Type EQS <Go>. To limit the search
to companies in the Russell 3000 Index, tab in to the eld, enter RAY and
click on the top match in the list that appears. Tab in to the eld again, enter
PRICE TO FREE CASH FLOW and click on the matching item. In the menu that
appears, select % Percentile. Then select Sequential. Click on the arrow to
the right of Higher Value Is Better and select Lower Value Is Better. In the eld
to the right of Top, enter 5 to limit the search to the top 5 percent and press
<Go>. Then click on the Results button. JON ASMUNDSSON
INVESTING IN
FINANCIALS WAS
A BAD IDEA WE
GOT AWAY WITH,
WEITZ SAYS.
124 BLOOMBERG MARKETS November 2013
TIP BOX
Type FSRC
<Go> to
search for
funds that
match your
criteria.
2013 Bloomberg L.P. All rights reserved. Type SITE <GO>
Currency hedging often provides some major benets for investments, but nding the right strategy in this
space can sometimes prove elusive. Even the most sophisticated of investors have been burned by forward
contract risk costs. Couple this with higher interest rates in Emerging Markets, many investors are questioning
whether traditional hedging strategies will meet their needs in the future.
In this Bloomberg Markets LiveINSIGHTS, a panel of noted experts will discuss the latest trends in hedging
Emerging Markets currencies and will uncover which hedging strategies and products yield the best results.
REGISTER TODAY SITE <GO> www.bloombergmarkets.com/insite
THE BEST OPTIONS AND STRATEGIES
Wednesday, 23 October 2013
1:00 pm BST/8:00 am EDT
SPONSORED BY
SPEAKERS:
Head of Quantitative Solutions Group
Commerzbank
Portfolio Manager, CFA
CalPERS
Senior Vice President
Paulson & Co
Professor Emeritus & Managing Director
Cambridge University & Cambridge
Systems Associates
Senior Editor
Bloomberg Markets
Dissecting a Trade
of volume could result in a lower average price.
Maneuvering tracks the gain or loss from front-
or backloading the trade or otherwise varying the
participation rate to try to take advantage of price
fluctuations.
Liquidity sourcing refers to the incremental gain
or loss from the actual execution. That difference
may come from capturing the spreadpatiently
waiting on your side of the bid-ask spread for your
order to be filled. It could also derive from finding
natural blocks of liquidity.
THERE ARE A NUMBER OF WAYS TO ACCESS
the Trading Performance Attribution tool within
EMSX, Bloombergs multi-asset-class trading
platform. In the EMSX blotter, for example, se-
lect a parent or child order, click on the Actions
button on the red tool bar, select Analytics and
then click on Performance Attribution.
Lets look at some real-life examples of the
types of situations traders face and how the trade
performance attribution tool would assess them.
Bloombergs new approach to analyzing execution
uncovers the components of trading performance.
BY VLAD RASHKOVICH
PORTFOLIO MANAGERS USE ATTRIBUTION TO
see whether their returns come from asset alloca-
tion, stock selection or other factors. In a similar
vein, Bloomberg now introduces a new approach
for analyzing the sources of a traders or algorithms
performance. Called Trade Performance Attribu-
tion, the novel methodology aims to streamline
work flows and align the goals of traders and port-
folio managers, potentially adding to returns.
Bloombergs approach presents total trading
performance as the sum of three factors: average
speed, maneuvering and liquidity sourcing.
Average speed represents the gain or loss at-
tributable to the difference between the actual
participation ratethe executed shares com-
pared with total market volume for the security
during the measured periodand the target par-
ticipation rate. For a stock thats rising, for exam-
ple, a trader may pick up a relative gain by buying
shares faster than his target rate. If his target par-
ticipation rate is, say, 20 percent, then actually
acquiring shares at a higher rate of 30 percent
TIP BOX
For a Journal
of Trading
article on the
underlying
methodology,
type BPS
L#2115913
<Go>.
Before the market opened on May 22, a trader in
New York received an order to buy 2.1 million shares
of Facebook Inc. The participation rate, agreed on with
the portfolio manager, was 20 percent of volume. The
trader expected the market to go down. He thus de-
cided to slow down to capture favorable momentum.
The Trading Performance screen shows what hap-
pened. Reading from left to right, the analysis starts
with the target participation-weighted price, which
is denoted PWP Target. Thats the volume-weighted
EXAMPLE 1: SPEED
INTERVAL VWAP
This data point
shows the average
market price over
the life of the trade.
STRATEGIES
EQUITIES
126 BLOOMBERG MARKETS November 2013
ADVERTI SEMENT
Nationally Recognized Law Firm
Thrives Amid Legal Industrys Downturn
McElroy, Deutsch, Mulvaney & Carpenter, LLP
1300 Mount Kemble Ave., P.O. Box 2075 | Morristown, NJ 07962-2075 | (973) 993-8100 | info@mdmc-law.com | www.mdmc-law.com
2013 Chambers USA
Guide to Americas
Leading Lawyers for
Business (NJ)
#1 Employment
#1 Healthcare
#2 Litigation: Insurance
#2 Litigation:
White-Collar Crime
& Government
Investigations
#3 Litigation: General
Commercial Practice
#4 Bankruptcy/
Restructuring
2013 Chambers USA
Guide to Americas
Leading Lawyers for
Business (PA)
#4 Bankruptcy/
Restructuring
National Law Journal`s
Top 350 Law Firms
#147 Ranking of
Top 350 Law Firms
2014 Best Lawyers in
America
28 MDM&C attorneys
recognized
New Jersey Law
Journal`s 2012 Legal
Almanac
#1 Largest Law Firm
W
hile the fnancial crisis continues to force thousands
of layofs within the legal services sector, it is creating
an environment for growth at one innovative law
frm. Rather than seeing the glass as half empty, we are excited
about responding to new opportunities created in a very fuid
marketplace, says Ed Deutsch, Managing Partner of McElroy,
Deutsch, Mulvaney & Carpenter, LLP (MDM&C).
Celebrating its 30th anniversary in 2013, MDM&C is one of
the largest law frms in the Northeast. The full-service practice
has a national reputation for excellence and is consistently ranked
among the best by Chambers USA, U.S.News & World Report,
The American Lawyer, National Law Journal and others. Over
three decades, MDM&C has grown steadily and strategically from
two founding partners to almost 300 lawyers with 10 ofces in
New Jersey, New York, Pennsylvania, Connecticut, Massachusetts,
Delaware and Colorado.
The same economic headwinds pummeling Big Law
are being captured by MDM&C to propel the frm into even
stronger growth. Rather than scheduling layofs in 2013, the frm
continued recruiting summer associates, enlarged its ranks with
talented new attorneys, and attracted legal luminaries including
former Connecticut Supreme Court Justice C. Ian McLachlan.
MDM&C is able to adapt because of a sound philosophy
established in 1983. The philosophy is defned by excellent
legal representation for clients, fscal discipline, a dynamic
entrepreneurial spirit, and a
commitment to maintaining
workplaces in which everyone is
always treated with respect, whether
working in the mail room or the
managing partners ofce.
Weve been selective about
cases, never chasing every dollar or
headline-making transaction, and we
dont take unnecessary chances with debt, explains Deutsch.
We also consciously avoid a pressure-cooker environment and
operate under a no jerk rule to encourage a workplace where a
sense of loyalty pervades.
By adhering to its philosophy, MDM&C retains the needed
fexibility to make creative changes that contribute to more
efcient and efective client service. For example, it has
established attractive fee arrangements, including fxed fees
and other alternative arrangements for counseling and litigation
matters. And MDM&C enjoys the luxury of proactively fnding
emerging opportunities and outstanding talent in felds where the
demand for legal expertise is growing.
We look at change as a good thing, adds Deutsch. We keep
moving forward, providing top-fight representation to a growing
network of clients at fee terms which, we believe, competitive
frms cannot match.
From left: Joseph P. LaSala, Edward B. Deutsch and James M. Mulvaney
On May 8, a trader in London was selling a big chunk
of Lloyds Banking Group Plc stockand it had to be
done before the U.S. market opened. She correctly
On Sept. 3, a trader in Tokyo was given a percentage-
of-volume trade: sell 809,300 shares of Sharp Corp.
at a participation rate of 20 percent of volume. He
had no discretion to vary speed or execution strategy.
Yet by using a good VWAP algorithm, which sends
automated orders that seek to match the stocks
volume-weighted average price, the trader was able to
outperform by 12 basis points while holding average
speed and maneuvering at zero, as requested.
VLAD RASHKOVICH IS A GLOBAL BUSINESS MANAGER FOR
TRADE ANALYTICS AT BLOOMBERG IN NEW YORK.
VRASHKOVICH1@BLOOMBERG.NET
average price for the time from the start of the trade
that it would have taken to buy 2.1 million shares of
the Menlo Park, California, social-networking site
based on a participation rate of 20 percent.
In this case, the traders reading of momentum was
correct. By slowing down and executing at a speed of
11 percent, he was able to buy shares at a lower price.
The volume-weighted average price over the actual
trade was better than the target. Thanks to his man-
agement of momentum, he picked up 26 basis points
of return, which is represented by the Average Speed
bar. (A basis point is 0.01 percentage point.)
The next data point, EWP, is execution-weighted
price, a Bloomberg proprietary measure of the efect
of varying the participation rate during the trade. Here,
the efect was negative. The variations over the course
of the trade, which are represented by the Maneuver-
ing bar, reduced return by 14 basis points.
The nal data point is the actual average execution
price. The trader bought, on average, slightly below
the midpoint of the spread, resulting in a small gain of
3 basis points from Liquidity Sourcing.
The sum of the three factors is shown by the Total
Performance bar: a 15-basis-point gain. Most of the
outperformance came from capturing momentum.
Some of that performance was given away by unsuc-
cessful maneuvering.
anticipated favorable momentum. She couldnt slow
down though. In order to sell 10 million shares and still
nish the trade as required, she needed to participate
at 20 percent of volume. So to try to capture momen-
tum, the trader decided to backload the trade.
As a result, the average speed component of trade
performance was zero: The trader went with the
target speed of 20 percent during the whole interval
of the trade. The backloading worked well: Maneu-
vering brought a gain of 19 basis points. Because
she had to trade aggressively toward the end of the
interval, the trader had to cross the spreadselling
at the bidand ended up paying 11 basis points for
liquidity sourcing. Overall, the strategy resulted in
an 8-basis-point gain.
AVERAGE
EXECUTION PRICE
This data point
reflects the price the
trader actually got.
EXECUTION-
WEIGHTED PRICE
The EWP measures
the effect of varying the
participation rate over
the course of the trade.
EXAMPLE 2: MANEUVERING
EXAMPLE 3: LIQUIDITY
STRATEGIES
EQUITIES
128 BLOOMBERG MARKETS November 2013
STRATEGIES
CHEAT SHEET
T
E
A
R
O
U
T
A
N
D
S
A
V
E
.
Foreign Exchange
PULL OUT AND SAVE. // NOVEMBER 2013 // PRESS <HELP> TWICE TO SEND A QUESTION TO THE BLOOMBERG ANALYTICS HELP DESK.
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BDXY <Go>
lets you monitor the
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FXGO <Go>
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STNI FXCHART-
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NI BFWFX <Go>
displays headlines of
Bloomberg First Word
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NI FXKEY <Go>
displays headlines
of important global
FX news stories.
NI FXHOT <Go>
displays headlines
of hot and breaking
stories in currency
markets, as selected
by Bloomberg News
editors.
ADXY <Go>
lets you monitor the
BloombergJP Morgan
Asia Dollar Index.
STNI <Go>
lets you set lters to
monitor news related
to currencies.
DRVD <Go>
provides access to
documentation such
as white papers and
user guides related
to derivatives
valuation and
pricing.
FXFC <Go>
enables you to access
FX rate forecasts.
LDXY <Go>
lets you monitor the
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COMPILED BY ARNE OLSEN
AOLSEN6@BLOOMBERG.NET
displays synopses of potentially market-
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asset classes from the Bloomberg First
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FIRST <Go>
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COMPILED BY JON ASMUNDSSON JASMUNDSSON@BLOOMBERG.NET
Trading patterns in early September suggested the
worst may be over for the Australian dollar after it
had plunged 9.5 percent in the previous six months.
Among the positive developments were signs that
the Reserve Bank of Australia was nearing the end
of its interest-rate-cutting cycle and that Chinas
economy was recovering. The Aussie, the worlds
fifth-most-traded currency, reached a three-year
low of 88.48 U.S. cents on Aug. 5.
Technical indicators in September signaled that
the Aussie had bottomed out. Type AUDUSD
<Crncy> GOC <Go> on the Bloomberg Professional
service for an Ichimoku chart of the currency. The
Aussie rose above the lower end of the Ichimoku
cloud on Sept. 4 for the first time since May. Its
conversion line, which plots the sum of the highest
high and lowest low for the prior nine data points,
climbed above the base line, which uses the same
calculation for the previous 26 points. Both are
bullish signals, says Junichi Ishikawa, a Tokyo-based
analyst at IG Markets Securities Ltd.
The cloud refers to the area between the first and
second span lines on the chart and is used to show
an area where trading orders may be clustered. For
the original story, type NSN MSWDVD6TTDT1 <Go>.
Aussie Signals Gain
Deal Talk Boosts
Sterling Financial
Shares of Sterling Financial Corp. rose as much as
11 percent after Bloomberg News reported on
Sept. 9 that Umpqua Holdings Corp. was in ad-
vanced talks to buy the lender. The stock of Port-
land-based Umpqua, Oregons largest bank, gained
as much as 7.2 percent after the report. A $2 bil-
lion deal with Spokane, Washingtonbased Sterling,
which is backed by private-equity investors Warburg
Pincus LLC and Thomas H. Lee Partners LP, was an-
nounced two days later, on Sept. 11. For the original
story, type NSN MSVKRQ6TTDSY <Go>.
INTO THE CLOUD
The Aussie rose
above the first span
line in September.
TIP BOX
Type NI
INFLUENTIAL
<Go> for daily
roundups of
exclusive
market-moving
stories.
You can use the Twitter Filter Builder (TWTR)
function to create a search for the 140-
character social-media messages that are most
relevant to you. Type TWTR <Go>. Click on Com-
panies, for example. In the Companies Selec-
tions window, click on Portfolio and then on the
name of a portfolio. Click on Save and then on
Open in Launchpad. For more information on
using TWTR, type BPS L#2081373 <Go>.
FILTERING TWITTER CONTENT
Most Influential
Exclusive Bloomberg News stories that moved markets
November 2013 BLOOMBERG MARKETS 129
STRATEGIES
NEWS
Tracking Seasonality
You can use the heat map in SEAG to spot patterns in the way certain
currencies tend to strengthen or weaken during particular months.
BY AMIR TAL
Type SEAG
<Go> and click
on Heat Map to
chart a selected
currency.
THE BLOOMBERG U.S. DOLLAR INDEX FELL
by more than 1 percent in July. The drop fol-
lowed a rally that started in mid-June on specu-
lation that the Federal Reserve was nearing the
end of its cycle of accommodative policy and
would begin to taper quantitative easing.
The Seasonality Chart (SEAG) function shows
the dollars decline in July wasnt uncommon: The
greenback weakened in July in four of the past
five years.
To track the seasonality of the Bloomberg U.S.
Dollar Index, type BBDXY <Index> SEAG <Go> and
click on the Heat Map button. By default, the heat
map displays data for five calendar years, includ-
ing the current one. You can display up to 10 years
of data. To display data starting in 2005, for ex-
ample, click four times on the plus sign to the
left of Years in the upper-left corner of the
screen and press <Go>. From 2005 to 2013, the
dollar was mostly up in May. It fell in six of the
past nine Julys.
EXAMINING OTHER CURRENCIES REVEALS
stronger seasonal patterns. The South
African rand, for example, strength-
ened against the U.S. dollar only once in
the month of August in the past 10 years.
To chart the rand, tab in to the field in
the upper-left corner of
the screen, enter USDZAR
<Crncy> and click on the
top match. (The numbers
on each box represent the
percentage change of the
currency pairin this case,
dollar-rand.)
Similar patterns for the
month of August can be
found for the Turkish lira
versus the dollar (in nine of
10 years, the lira declined)
and the South Korean won
against the greenback (eight
out of 10).
The Indonesian rupiah declined against the
dollar every August for the past 10 years. Among
the so-called expanded-majors basket of most-
traded currencies, the rupiah is the only one
with that unbroken streak.
AMIR TAL IS A FOREIGN-EXCHANGE AND ECONOMICS
APPLICATION SPECIALIST AT BLOOMBERG IN NEW YORK.
ATAL4@BLOOMBERG.NET
PATTERNS
The rupiah declined
against the dollar during
the past 10 Augusts.
STRATEGIES
FOREIGN EXCHANGE
130 BLOOMBERG MARKETS November 2013
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STRATEGIES
132 BLOOMBERG MARKETS Dec ember 201 0 132 BLOOMBERG MARKETS November 2013
An FA chart shows how telecommunications companies cash flow has climbed.
COMPANIES THAT GENERATE CASH TYPI-
cally face a choice: reinvest it to grow or pay it out
to investors. Telecommunications companies
have been doing both in recent yearsindicating
that the sector has been particularly flush.
To track the cash flow generated by companies
in the Standard & Poors 500 Telecommunication
Services Index, type S5TELS <Index> FA CF <Go>
for the Cash Flow section of the Financial Analysis
function. Click on the graph icon to the left of Free
Cash Flow. Using annual periods, you can see that
the sectors free cash flow has generally climbed
since 2001, rising to $15.3 billion in 2013 through
Sept. 9. To chart spending on investments and div-
idend payouts, click on the box to the left of Capital
Expenditures so that a check mark appears. Then
click on the box to the left of Dividend Yield.
Among the 10 sectors of the S&P 500 Index,
communications has the highest average indi-
cated dividend yieldcalculated by annualizing
Tapping Into Telecoms
the most-recent payout and dividing by price. You
can use the Equity Screening (EQS) function to
rank and compare the payout ratios of compa-
nies and sectors. For a ready-made search that
ranks S&P 500 companies by dividend yield,
type EQS /SAMPLE 10652469 /RESULTS <Go>.
To analyze whether telecom companies high
payouts are likely to continue, tab in to the ADD
COLUMN field, enter BDVD PROJECTED
12-MONTH DIVIDEND YIELD, click on the top
match and press <Go>. Next, enter BDVD NEXT
PROJECTED ACTION, click on the match and
press <Go>. The two data columns, which display
data from the Bloomberg Dividend Forecasting
team, show that as of early September, the pro-
jected yield for the next 12 months was expected
to remain consistent.
IN ADDITION TO PAYING DIVIDENDS, TELE-
communications companies have been using cash
in mergers and acquisitions. This year through
Sept. 9, acquirers announced 669 pending or com-
pleted deals involving telecoms. Altogether, those
deals were valued at $268 billion, making telecom-
munications the most active industry this year.
The largestand the third-biggest deal everwas
Newbury, Englandbased Vodafone Group Plcs
$130 billion sale of its 45 percent stake in Verizon
Wireless to its joint-venture partner, New York
based Verizon Communications Inc.
To track telecommunications deals, type MA SU
<Go> for the Mergers & Acquisitions Advanced
Search function. First, in the Search Criteria panel
on the left side of the screen, click on Date Range.
In the window that appears, click on the arrow to
the right of Date Range and select Year-to-Date.
Phone companies are awash with cash. Here are some tools you can use to dig
into how theyre deploying money: paying dividends and doing deals.
BY PAULA COOK DINAN AND VINCENT TONG
TIP BOX
Type BDVS
<Go> for
information
about
Bloomberg
Dividend
Forecasting.
EQUITIES
November 2013 BLOOMBERG MARKETS 133
The Summary tab
in the enhanced
M&A Transaction
Details screen
displays a
snapshot of a
selected deal.
The deal screen was recently reorganized and
enhanced with more than 40 new data points cov-
ering deal structure, multiples analysis and mar-
ket sentiment. To view the new screen if you
havent yet opted in, click on the green Show New
Screen button and then on the Opt-in button.
THE SUMMARY PAGE GIVES A SNAPSHOT OF
the transactiona brief synopsis, terms, equity
and transaction valuations, and key dates. Click on
Timeline to get a more comprehensive view of the
life cycle of the deal, letting you track share price,
amendments and regulatory approvals. Click on
Parties to display key financial information on
each of the parties involved in the deal. Click on
Structure to view data on the legal aspects of the
deal, contingency or special payments (including
dividends), termination fees and post-transaction
synergies. To view individual dealmakers involved
in the transaction, click on Advisers.
PAULA COOK DINAN AND VINCENT TONG ARE ANALYSTS IN
THE GLOBAL DATA DEPARTMENT AT BLOOMBERG IN LONDON.
PCOOKDINAN1@BLOOMBERG.NET, VTONG7@BLOOMBERG.NET
Click on the box to the left of Announced Date so a
check mark appears and then click on Update.
Next, click on Deal Status. Click on the boxes to the
left of Pending and Completed and then on Up-
date. Click on Sector/Industry. Click on the plus
sign to the left of Communications to expand the
list. Click on Telecommunications and then on
Update. Click on the Results button.
For a list of M&A transactions in the industry
this year, click on the Deal List tab. Lets look at
London-based Liberty Global Plcs $18.4 billion
acquisition of Virgin Media Inc. Click on the deal.
HOME IMPROVEMENTS
1 HOME DEPOT 6.9% 20.5 141.5%
2 LOWES 5.9 26.5 156.0
3 GAP 5.6 29.6 166.8
4 TJX 5.4 20.9 113.0
5 ROSS STORES 3.8 23.8 90.3
RISK-
ADJUSTED
RETURN VOLATILITY
TOTAL
RETURN
Figures are for the period from Sept. 10, 2011, to Sept. 9, 2013. The risk-adjusted return, which isnt
annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a
measure of income per unit of risk. A lower volatility means the price of an asset doesnt swing as
dramatically during a specified period, reducing the potential for unexpected losses. Source: Bloomberg
Fixer-Upper Opportunity
HOME DEPOT INC. PRODUCED THE HIGHEST
risk-adjusted return among peers over the past
two years after store improvements preceding
the housing rebound sparked stronger sales.
Home Depot, the worlds largest home-
improvement chain, gained 6.9 percent adjusted
for volatility during the two years ended on
Sept. 9. That was the best track record among the
32 retail stocks in the Standard & Poors 500 In-
dex, the Bloomberg Riskless Return ranking
shows. Home Depot had the fourth-highest abso-
lute return combined with the fourth-lowest price
swings, outpacing rival Lowes Cos., Gap Inc. and
discounters TJX Cos. and Ross Stores Inc.
Chief Executive Officer Frank Blake, 64, who
took charge in 2007, slowed Home Depot store
openings and cut 7,000 jobs in closing the Expo
Design Center unit and trimming costs at support
centers two years later. Spending shifted to distri-
bution, stocking of merchandise and employee
training, spurring three straight years of revenue
gains. Analysts forecast sales will rise 5.1 percent
in 2013 as the housing recovery gains momentum.
Home Depot was already well on its way to be-
coming lean and mean when everybody else woke
up to the housing downturn, says Bill Smead, who
oversees $622 million, including 233,000 Home
Depot shares, as CEO of Smead Capital Manage-
ment Inc. in Seattle. Its maybe three or four
years into a great 10-year era.
HOME DEPOT, BASED IN ATLANTA, IS EXPECTED
to generate sales of $78.6 billion for the fiscal
year ending on Feb. 2, according to the average
estimate of 22 analysts in a Bloomberg survey, an
increase of 16 percent from fiscal 2011. During
the same three years, analysts expect Lowes, the
second-biggest home-improvement retailer, to
boost sales 8.6 percent.
On a risk-adjusted basis, Mooresville, North
Carolinabased Lowes returned 5.9 percent dur-
ing the two years ended on Sept. 9, pairing the
third-highest total return with roughly average
volatility to rank second among the S&P 500 re-
tailers, according to Bloomberg data.
Home Depot returned 141.5 percent to share-
holders in the two years through Sept. 9, com-
pared with 51.4 percent for the S&P 500 Index,
and its volatility was 20.5. Lowes gained 156 per-
cent, with volatility of 26.5. Home Depot traded at
$73.58 on Sept. 9. People who own this stock feel
very comfortable owning it, David Strasser, an
analyst at Janney Montgomery Scott LLC in New
York, says of Home Depot. If you are a mutual
fund and you own the stock and it comes down,
the feeling is that theyre operating so well
theyre not going to underperform.
CHRIS BURRITT COVERS RETAILERS AT BLOOMBERG NEWS IN
GREENSBORO. CBURRITT@BLOOMBERG.NET
Building-supplies chain Home Depot leads retailers after making some
improvements itself and tapping into the housing rebound.
BY CHRIS BURRITT
TIP BOX
Type XLTP
RISKLESS
<Go> to
download the
Riskless
Return
spreadsheet.
STRATEGIES
134 BLOOMBERG MARKETS November 2013
RISKLESS RETURN
At MFS