Black People In Business – World Wide

By BEN LEVISOHN

Many investors, looking for better returns and a little safety, are loading up on corporate bonds, which have been far steadier than stocks during the market storms of the past few years.

But corporate bonds are getting less safe by the day.

A change in the way corporate bonds are traded is resulting in murkier prices, more volatility and less differentiation among individual bonds. The result: Experts say investors should expect more risk and potentially less return from such bonds in the future, and rethink how they assemble their entire bond portfolios.

The good news? Once investors understand how the corporate-bond market is changing, they can make educated decisions about which kinds of investments—mutual funds, exchange-traded funds or individual bonds—make the most sense, given their investing goals.

“The changes will ultimately hurt the small investor,” says Howard Simons, strategist at Bianco Research. “The only thing you can do is be aware of how risk has shifted and act accordingly.”

It is easy to be complacent about an investment when it is surging. A broad rally in Treasury securities is pushing up prices of all manner of other bonds. After a strong 2011, relatively safe corporate bonds rated “investment grade” by the bond-rating firms have returned 1.9% this year—their best annual start since 2001. Riskier high-yield, or “junk,” bonds have returned 4.1%. This, after three decades of steadily rising bond prices—among the longest bull markets for bonds in history.

Since the Federal Reserve’s announcement late last month that it expects to keep interest rates low through 2014, investors have stepped up their buying even more. During the week ended Feb. 1, investors poured $7.5 billion into bond mutual funds, the most since data firm EPFR Global began tracking such investments in 2002.

Most advisers recommend that investors hold a broad mix of Treasurys and corporate bonds. But while the Treasury market continues to be the biggest and deepest investment market in the world, corporate bonds are becoming less predictable, even for the pros.

Banks Step Back

At the heart of the shift is the declining role of banks, which historically have been big corporate bond dealers, keeping vast reserves of bonds on their books and matching buyers and sellers. Experts say new regulations, including the Dodd-Frank Act, the so-called Volcker rule, which bans banks from trading for their own account, and Basel III, which governs banks internationally, have forced banks to be more selective about what they hold.

All told, banks hold about $45 billion in corporate bonds with maturities over one year, versus about $215 billion at the beginning of 2008, according to Barclays Capital.

Mutual funds, exchange-traded funds and other investors are filling the void. Investment-grade and high-yield corporate-bond funds have doubled in size since the beginning of 2008, to $1.2 trillion and almost $250 billion, respectively, according to Barclays. In the $1 trillion high-yield bond market, ETFs now account for about 3% of the market, up from virtually nothing four years ago.

As the steadying influence of banks wanes, the bond market is more vulnerable to swings in investor sentiment, experts say.

Prices today are being driven more by the whims of investors buying and selling funds and ETFs and less by the fundamentals of the bonds themselves, says Mr. Simons of Bianco Research. Investment-grade bonds have seen their volatility nearly triple during the past three years, compared with the three years before the financial crisis, according to Barclays Capital. High-yield bonds are more than twice as volatile.

The result is bigger opportunities for gains when the market goes up—but a bigger chance of losses when the market tanks, says David Sherman, principal at Cohanzick Management and portfolio manager of the RiverPark Short-Term High-Yield fund.

Murkier Prices

Making matters trickier for investors, bond prices are artificially high because of the Fed’s recent rounds of Treasury purchases, which have pushed up the prices of most other bonds as investors seek higher yields. That makes traditional investment gauges less useful.

Consider the debate about whether junk bonds are a good investment now. One way managers value bonds is to look at the difference between their yields and those of Treasurys. When the gap is wider than the historical average, many managers say corporate bonds represent a good value. That seems to be the case now: The “spread” between high-yield corporate bonds and Treasurys is about 6.4 percentage points, above the 15-year average of 6.

Not so fast, others say. Because Treasury rates are artificially low, it is better to use the actual yield of the high-yield bond index, which currently is 7.3%, far below the 15-year average of 10%.

On that basis, the skeptics say, the bond yields aren’t enough to compensate investors for the risks they are taking.

If you aren’t sure you can value a bond, “you don’t want to get involved,” says Stephen Antczak, head of U.S. credit strategy at Citigroup.

Trouble for Funds

The changes in the market are forcing mutual-fund managers to rethink their strategies in ways that could dent returns and increase risk for investors.

Funds are required to allow shareholders to buy new shares or withdraw all of their cash every trading day. But the increased volatility is forcing managers to be more careful with their portfolios.

“Investors pulling out a lot of money in a hurry can upend an investment strategy and force you to sell things you don’t necessarily want to sell,” says Eric Jacobson, director of fixed-income research at Morningstar.

Many managers are choosing to hold more “liquid” bonds, which can be sold at a moment’s notice. Bob Brown, president of the bond group at Fidelity Investments, says the firm now looks only for highly liquid securities. Eaton Vance has reduced the amount of hard-to-sell securities it owns in its portfolios.

The problem is that liquid bonds typically are more volatile than illiquid ones because they trade more frequently. The Barclays Very Liquid High Yield Bond Index is 25% more volatile than the Barclays High-Yield Bond index, which contains a mixture of liquid and less-liquid securities.

The price for liquidity, in other words, is more violent swings.

Some managers are boosting their cash holdings, which can reduce returns, so that they will have enough money on hand to meet redemptions quickly if the market drops and investors start selling. The Eaton Vance Income Fund of Boston, for example, now holds about 5% to 6% of its portfolio in cash, versus 2% before the financial crisis.

“Do you hold more cash, more liquid bonds or some balance of those two?” asks Jeff Meli, a strategist at Barclays Capital.

Playing the Market

So what is an individual investor to do?

Experts say people who can afford to do so should stick with individual bonds. Typically corporate bonds have a face value of $1,000, but investors should plan on buying blocks of at least $20,000 to avoid getting hit hard by commissions. Advisers generally recommend investors buy bonds from at least 20 different issuers, for diversification.

Since most investors buy bonds for income and plan to hold them to maturity, they don’t have to worry as much about the market’s volatility or increased correlation. They also can buy cheaper illiquid bonds that fund managers avoid.

There are downsides, however. Institutions tend to get better prices for big blocks of bonds than small investors can get for smaller blocks. Investors should check the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine website, known as Trace, to find recent prices. And these days, getting your hands on bonds with decent yields isn’t easy, because investors are holding on to them rather than selling them for profit, says Marilyn Cohen, president of Envision Capital Management in Los Angeles.

Experts suggest investors look for companies with good cash flows and improving profitability. Ms. Cohen recommends three that she says fit the bill: a high-yield bond issued by auto-parts maker American Axle that matures in 2017 and has a 6.33% yield. She also likes a high-yield issue by energy-company Chesapeake Energy maturing in 2020 with a 6.38% yield, and an investment-grade bond from auto-parts maker BorgWarner that matures in 2020 and yields 3.51%. (Investment-grade bonds carry ratings of triple-B or higher from Standard & Poor’s and Fitch Ratings and Baa or higher from Moody’s; high-yield bonds have lower ratings.)

Fund Choices

Many investors can’t afford individual bonds or don’t have access to them in 401(k) accounts. For them, funds and ETFs are the only alternative.

They, like professional fund managers, must decide whether to look for more liquidity or less, and more cash or less.

Such investors should think about what they are trying to achieve with their bond holdings. For instance, an investor who wants exposure to the entire asset class should choose a fund or ETF with a low expense ratio and little cash, says Warren Ward of financial-advisory firm Warren Ward Associates.

“We choose from the lowest-cost funds available,” he says. “And we prefer to make the cash decision ourselves.”

Michael Gibney, an adviser at Highland Financial Advisors in Riverdale, N.J., recommends holding a large fund like the $16.2 billion Vanguard Intermediate-Term Investment Grade fund, a portfolio of 1,218 bonds that carries an expense ratio of 0.22%.

Sarah Bush, a senior fund analyst at Morningstar, suggests the $15.6 billion Vanguard High-Yield Corporate fund, which has an expense ratio of 0.25% and has just 1.6% in cash.

Other options include the $18.7 billion iBoxx Investment-Grade Corporate Bond ETF, which has an expense ratio of 0.15%, and the $13.4 billion iShares iBoxx High-Yield Corporate Bond ETF, which charges 0.5% in fees.

Sam Katzman, chief investment officer at Constellation Wealth Advisors in New York, prefers “go-anywhere” funds that have wider latitude in the types of bonds they buy and the amount of cash they hold. Such funds are for investors who prefer their manager make decisions about whether they think the bond market looks rich or cheap and act accordingly.

Mr. Katzman likes the $60 billion Templeton Global Bond fund, which owns international bonds and currencies as well as U.S. corporate bonds, and has an expense ratio of 0.88%.

Not everyone thinks cash is bad. Gregory Lavine, an adviser at Altfest Personal Wealth Management in New York, says he isn’t concerned by managers holding some when better opportunities are unavailable. One of his choices: the Loomis Sayles Bond fund, which has about 11% in cash and an expense ratio of 0.63%.

Cash doesn’t have to subtract too much from performance. The ING Pimco High-Yield Portfolio has an 8.7% cash stake, well above the category average of 5.9%, yet has been in the top 25% of high yield funds during the past one and three years, according to Morningstar.

Says Mr. Lavine: “It’s better to hold cash than invest poorly.”

By RACHEL LOUISE ENSIGN

Sunday Journal contributor Sandra Ward is giving the contest a go with her picks:

TiVo (TIVO, $8.97): Its superior digital video-recording technology is making a comeback with cable operators, the company is winning new subscribers and it has been successful defending its patents.

Marvell Technology (MRVL, $13.85): Earnings growth is estimated at 15% this year, and the semiconductor maker is expected to implement its first dividend.

Staples (SPLS, $13.89): An improving economic picture will help lift the fortunes of this beaten-down office-products giant. It also has a dividend yield of close to 3%.

Corning (GLW, $12.98): The leading specialty glass maker will benefit as inventories of glass panels for liquid-crystal displays are worked down.

Starwood Hotels & Resorts (HOT, $47.97): Higher occupancy rates and strong demand for high-end hotel rooms in fast-growing China and other emerging markets will help this hotel manager.

Invesco (IVZ, $20.09): This global money-management firm with heavy exposure to exchange-traded funds and alternative strategies increased assets during the toughest times and should benefit as global economies rebound.

Internet giants may be cruising for a privacy bruising.

The disclosure that Google has been exploiting a loophole in the Safari Web browser—allowing it to track Mac and iPhone users’ browsing activity—is more evidence that the online ad industry is falling short when it comes to policing itself on privacy.

That risks more than users’ trust. It raises the chance that a regulatory hammer one day comes down on their multibillion-dollar profit party.

That could be somewhat similar to what happened to banks. Light-touch regulation led them to get carried away, and they now face much tighter controls. Such an outcome also could threaten the likes of Google and Facebook if they push the limits on privacy too far.

Just last month, the search giant said it plans to combine nearly all the information it has on its users across its properties like Google search, Gmail and YouTube. That will make it harder for users to remain anonymous and easier for Google to target ads at them.

Facebook recently agreed to a pact with the Federal Trade Commission over changes the social network had made so that users’ profile information was public by default. It has since given users more control over what is displayed.

For an idea of what might befall the Internet industry if it isn’t careful, look at privacy regulations being proposed in Europe. The European Commission wants to prevent companies from sharing users’ information unless users explicitly allow them to. Such a rule could hamstring the online ad industry if it were rolled out in the U.S. Today, users typically have to “opt out” of being tracked via online “cookies” rather than “opt in.”

Already there have been calls for more regulation in the U.S. The FTC has called for a “do not track” system to protect users’ browser activity from outside snooping. The Obama administration wants a “Privacy Bill of Rights.” Lawmakers introduced more than a dozen privacy bills in Congress last year.

More self-discipline would be a good start. Issues that arise are often from Web developers being cavalier on privacy concerns when building their websites or apps. Recently, a mobile app developer was found to be accessing the address-book information of iPhone users. Apple responded this past week, saying it will require that apps seek user permission before accessing such data.

At least one app on Facebook has in the past collected not just the information of users that give them permission, but the information of “friends” that haven’t. This helps those apps build an audience, but it can cost Facebook the trust of users.

With few rules, the Internet still operates somewhat like the Wild West when it comes to privacy. And many companies continue to treat the issue as peripheral. If few are closing their Gmail accounts, or taking down their Facebook profiles, then protests about privacy from a minority of users can be safely overlooked.

If Internet companies don’t get it together to police themselves, the risk is that a Wyatt Earp shows up to lay down the law in a heavy-handed fashion.

—Rolfe Winkler

Write to Rolfe Winkler at rolfe.winkler@wsj.com

By ELEANOR LAISE

Wally Bowman, a part-time security guard in Miamisburg, Ohio, had roughly $15,000 in credit-card debt when he signed up with a “debt settlement” firm last year. The company said it could resolve his debts for far less than the amount he owed and advised the 63-year-old to stop making payments to his creditors, according to Mr. Bowman.

Mr. Bowman paid hundreds of dollars in up-front fees and made regular monthly payments of $249 to Hess Kennedy, but the Coral Springs, Fla., firm never settled any of his debts, he says. By the time he dropped out of the program this summer, Mr. Bowman says, his debt had ballooned to about $20,000, due to interest and late fees, and creditors were threatening to garnish his wages. Finally, he filed for bankruptcy last month.

“I wish I had done that to begin with,” Mr. Bowman says. “I’d have been much better off.”

As the economy weakens, a growing number of consumers are paying big money for services from debt-settlement companies that purport to help them settle their debts for a fraction of what they owe. But as Mr. Bowman’s experience shows, customers can end up wishing they hadn’t sought such help.

At financial-services Web site Credit.com, the number of complaints about debt-settlement companies received so far this year is already double the number received in all of 2007, says John Ulzheimer, the site’s president of consumer education. The Federal Trade Commission, which has also seen an increase in consumer complaints, was concerned enough about the issue that it held a workshop late last month to examine debt-settlement business practices.

The Florida attorney general’s office has received more than 1,400 complaints about debt-settlement and other debt-relief companies this year through early October, compared with fewer than 890 for all of last year, and Attorney General Bill McCollum plans a push for licensing requirements and to strengthen other rules governing the industry.

Some major creditors, including American Express Co., say they won’t even work with debt-settlement companies, though the companies dispute this. “There’s no service or benefit that a debt-settlement company can offer our card members that they don’t receive from working with us directly,” says Lisa Gonzalez, a spokeswoman for American Express.

Regulators, consumer advocates and industry groups are taking a closer look at debt-settlement firms. But even some nonprofit organizations that offer alternatives, such as credit counseling and education, have come under scrutiny, with the Internal Revenue Service examining their ties to for-profit outfits.

Hess Kennedy, the firm hired by Mr. Bowman, was sued by the Florida attorney general earlier this year for allegedly violating the state’s laws on unfair and deceptive trade practices. The firm was placed in receivership in July, and on Monday, a Florida Circuit Court judge entered an order to wind down the firm and approved a process for consumers to apply to get their money back. The firm referred questions to an attorney, who didn’t respond to requests for comment.

Hefty Up-Front Fees

Debt-settlement companies generally advise clients to make monthly payments into a special account instead of paying creditors. The firm promises to use the accumulated cash to settle debts for pennies on the dollar. They often charge hefty up-front fees, and their tactics can trash customers’ credit scores, boost their tax bills and leave them in greater debt than when they started.

Rules governing these firms vary by state, but a number of states have recently passed laws allowing for-profit credit-counseling and debt-settlement firms to do business within their borders. Membership in the Association of Settlement Companies, a debt-settlement industry trade group, has roughly doubled in the past year, to more than 150.

Because the industry has so many new people, “there’s a lot of misunderstanding about how a company should be run, what are good standards and business practices,” says Wesley Young, an executive board member at the trade group. In recent months the association has begun monitoring its members’ sales practices and Web sites to be sure they meet the group’s standards, he says. It hasn’t yet taken any action.

Regulators are concerned about misleading debt-settlement sales practices. In a string of recent cases against such companies, the FTC alleged that firms misled consumers about what services they could deliver, how long it would take and how much it would cost, says Alice Hrdy, an assistant director of the FTC’s division of financial practices. And though many debt-settlement companies are set up to look like legal services, “usually it’s a sham,” says Norman Googel, an assistant attorney general in West Virginia. Consumers often don’t receive any legitimate legal services, “and the lawyer is like the Wizard of Oz back there behind the curtain,” Mr. Googel says.

The high fees charged by debt-settlement firms can prolong the process of paying off debts. The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount “saved” for clients in a settlement.

Credit-Card Lawsuits

Meanwhile, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and clients get a steady stream of calls from creditors and collection agencies. They may even be sued and have their wages garnished. Lawsuits against credit-card holders are becoming more common as card issuers increasingly sell delinquent accounts to debt purchasers, regulators say.

Debt-settlement companies often refuse refund requests, says West Virginia’s Mr. Googel. And though regulators may try to get money returned to customers, these companies are generally not well-capitalized, “and often the consumer harm vastly outstrips whatever assets the company would have,” says the FTC’s Ms. Hrdy.

Consumers in debt-settlement plans often see their credit scores tank. While they’re not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also “a serious negative on your credit score” and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score. Debt settlement can also boost consumers’ tax bills, since they generally must pay income tax on the amount of debt forgiven in a settlement.

Even when companies deliver, many customers drop out of the programs early. David Gillson of Sherwood, Ark., a 38-year-old quality-control manager at a construction firm, signed up with debt-settlement firm Elite Financial Solutions of Fort Lauderdale, Fla., in 2006. He owed more than $71,000 in seven different credit-card accounts. Elite helped him reach two settlements within the first year or so.

‘Just Horrendous’

But the collection-agency calls were “just horrendous,” Mr. Gillson says, and his credit score was plummeting, two creditors sued him, and his wages were garnished. Given his reduced wages, he couldn’t afford to put anything in the debt-settlement account, and he dropped out of the program in June.

Elite’s contracts “clearly explain all the negatives, such as garnishment, that interest rates will accrue and that late fees will apply,” says a supervisor at the firm.

Consumers who can’t work out debt problems on their own do have alternatives. Many nonprofit credit-counseling organizations offer “debt-management plans,” in which consumers steadily pay the full balance owed but often get concessions from creditors such as lower interest charges and waived fees. Such nonprofit programs come with some consumer protections. For example, they must provide services tailored to the needs of individual clients and charge reasonable fees.

But even here, consumers must tread carefully. The IRS began examining nonprofit credit-counseling organizations several years ago and found that many were funneling fees to for-profit companies, or doing little or nothing to educate consumers. In its initial examination, the IRS looked at 63 organizations, and in 49 of those cases either the IRS issued proposed or final revocations of nonprofit status, or the organization went out of business or became a for-profit firm on its own.

Write to Eleanor Laise at eleanor.laise@wsj.com

Printed in The Wall Street Journal, page D1

Goliath hasn’t been hit hard yet, but David is getting new slingshots.

The unending struggle between the managers who control America’s corporations and the investors who own them is about to become more interesting. It might even become a fairer fight.

Last fall, the Securities and Exchange Commission clarified the rules under which investors can nominate candidates to serve on boards of directors.

In the waning weeks of 2011, just in time to meet the 120-day advance notice typically required to get onto the proxy ballot ahead of springtime annual meetings, investors in 16 major companies—including Goldman Sachs, Hewlett-Packard and Wells Fargo—filed petitions to amend corporate bylaws to open up the nominating process under the revised SEC rule.

Christophe Vorlet for The Wall Street Journal

Meanwhile, networks are springing up online to rally investors large and small. These websites could enable investors—anyone from a dogcatcher in Dubuque with 100 shares to giant pension funds holding tens of millions of shares—to mingle online and pool their dispersed power as never before.

“Mechanisms like these,” says James McRitchie, who runs CorpGov.net, a shareholder-activism site, “will eventually lead to the revolution in corporate governance that people have been talking about for many years.”

Make that “dreaming about.” In theory, whenever corporate managers and directors are overpaid and underperforming, investors should exercise their rights and throw the bums out.

In practice, most investors have long responded to bad management either by sitting on their hands or by voting with their feet. Breaking decades of inertia won’t be easy.

If change does come, it might be led by people like Kenneth Steiner and Argus Cunningham.

Mr. Steiner, 45 years old, is a private investor from New York’s Long Island who filed petitions at five companies late last year under the new SEC rule. Over the past decade or so, Mr. Steiner estimates, he has formally made several hundred proposals to improve how companies are run—including simplifying the election of directors, giving more say over how top executives are paid and eliminating “poison pills” that can entrench management.

“It’s up to the small shareholders to get these things on the agenda,” Mr. Steiner says. “Institutional investors have been horribly negligent in what I consider their fiduciary duty to the people who invest with them and to the country in general. They don’t want to ruffle feathers, and they’re cowards.”

After all, professional investors want to manage—or to keep managing—the pension and 401(k) plans at the very companies whose stocks they invest in. These folks aren’t going to throw bombs at board members.

Using a form he downloaded from proxyexchange.org, Mr. Steiner late last year requested that the boards at Bank of America, Textron, Ferro, Sprint Nextel and MEMC Electronic Materials amend their companies’ bylaws to permit any group of 100 or more shareholders who have held at least $2,000 in stock for at least one year—or any holder of 1% or more for at least two years—to nominate directors.

In recent years, many of Mr. Steiner’s proposals have been approved by a majority of investors at companies’ annual meetings. “It’s sort of a David and Goliath situation,” he says, “but sometimes David wins.”

Mr. Cunningham, 36, is a former Navy pilot whose portfolio crash-landed in 2008. “Losing a lot of money will cause you to re-evaluate your role,” he says. “You feel disempowered and disconnected even though you are the owner of your companies, and I started thinking about what I didn’t like about the system.”

Frustrated by how hard it is to find other investors willing to shake up moribund companies, Mr. Cunningham founded Sharegate. Likely to launch later this year, the website will join others that seek to rally shareholders, including United States Proxy Exchange, ProxyDemocracy.org and Moxy Vote.

If you think the directors at XYZ Corp. should be fired, you will be able to circulate a throw-the-bums-out proposal on Sharegate with the click of a mouse. Every other XYZ shareholder on the site will see it immediately; you will promptly be able to tell whether they agree with you.

Contrast that with the status quo, in which you can’t know what actions other investors are prepared to take until your annual proxy statement arrives—assuming that any grievances haven’t already been quashed by the company.

“The system has been broken for 100 years,” says Glyn Holton of the United States Proxy Exchange, “but that’s no reason to keep it broken.”

The great investor Benjamin Graham wrote in 1949 that “the only way to inspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him.”

If enough firecrackers start going off, the bang just might get big enough to make a difference.

—
intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

Write to Jason Zweig at intelligentinvestor@wsj.com