Black People In Business – World Wide

By KIRSTEN GRIND

Bill Gross, the co-chief investment officer and founder of Pacific Investment Management Co., recently pulled off an unusual feat: He beat his own performance.

Mr. Gross’s new actively managed exchange-traded fund, the Pimco Total Return ETF, returned 2.52% from its Feb. 29 launch through April 12, according to investment-research firm Morningstar

.

Not only did that beat its benchmark, the Barclays Capital Aggregate Bond Index, by 2.48 percentage points—it also trounced the mutual fund whose strategy it is supposed to track. The Pimco Total Return fund, the world’s largest bond fund, with $252 billion in assets, returned just 0.74% during the period.

Pimco, based in Newport Beach, Calif., is a unit of Allianz SE.

In a recent interview with The Wall Street Journal, Mr. Gross said the ETF has “certainly exceeded our expectations.”

But the gap between the two performances underscores both the promise and the risk of investing in actively managed ETFs.

An exchange-traded fund is like a mutual fund, except that it is traded on an exchange like a stock. Most ETFs track stock or bond indexes. There are only 43 actively managed ETFs in the U.S., compared with 1,422 ETFs overall, according to ETF researcher IndexUniverse.

Investors Take Notice

When Pimco announced that Mr. Gross, known to some as the Bond King, would introduce an ETF, investors took notice. “This is the biggest launch of an actively managed ETF ever,” says Timothy Strauts, Morningstar’s ETF analyst.

The Pimco ETF has assets of about $402.5 million thus far, already ranking the portfolio fourth-largest among all actively managed ETFs, according to Morningstar. It trades on the New York Stock Exchange under the symbol “BOND.”

But why has the performance of the ETF been so much better than that of the mutual fund that is supposed to follow the same strategy?

The chief difference is that the two funds can’t invest in the same way, Mr. Strauts says. The Total Return Fund is so big that, in order to take a sizable position in a certain section of the market—say, corporate bonds— Pimco often must use derivatives to gain access. By contrast, the ETF can easily move into and out of bond positions without causing big market dislocations.

“There are going to be differences in holdings,” Mr. Strauts says.

The advantage of managing the smaller ETF is that it offers Mr. Gross and his team much more flexibility in investment decisions, says Dave Nadig, director of research at IndexUniverse. Because the ETF can buy and sell bonds quickly, it is able to move more nimbly with market fluctuations. It also is able to buy into single bonds, which it isn’t able to do in the Total Return Fund.

For example, Mr. Gross has increased the ETF’s exposure to high-yield financial corporate debt from 4.3% at the fund’s inception to more than 12% on March 31, according to IndexUniverse. He has done that in part by increasing exposure to a single Citigroup

bond, as well as increasing holdings in the debt of American International Group

.

Those concentrated positions would be impossible to replicate in the larger bond fund, Mr. Nadig says.

A spokesman for Pimco says some divergence between the two funds is to be expected, particularly because regulatory requirements prevent the company from using futures, options or swaps.

“Even if he did want to make that kind of increase in financial corporate debt, he wouldn’t be able to do it that quickly, without moving the market,” Mr. Nadig says. He likened the Pimco Total Return fund to a giant ocean liner and the ETF to a speedboat.

Dangers

But while speedboats move faster, they also can be more dangerous. Holdings in ETFs are reported on a daily basis—unlike mutual funds—so it is easy for investors to track a fund manager’s performance almost in real time.

That transparency comes at a cost. Because the products are traded on exchanges, the high-frequency trading that dominates the stock markets could whipsaw the ETF. During the May 6, 2010 “flash crash,” several ETFs briefly plunged in value before snapping back—locking in big losses for investors who had electronic “sell” orders set at certain prices.

Another concern: The ETF doesn’t have a long track record. Keith Beverly, a principal at financial advisory firm New Paradigm Advisory Group in Durham, N.C., is still trying to decide whether to recommend it for his clients.

On the other hand, the fees are attractive. The ETF has an expense ratio of 0.55%, versus 0.90% for Class A shares of the Total Return Fund, according to Morningstar.

Ultimately, a bet on the ETF is a bet on Mr. Gross. While the Total Return Fund is up 2.88% through March, putting it near the top 10% of its peers, it returned only 4.16% in 2011—its worst performance in five years, according to Morningstar.

Analysts and even Mr. Gross don’t believe the ETF can stay this hot over the long-term.

“We can’t do 2% better than the market every month,” Mr. Gross says.

Write to Kirsten Grind at kirsten.grind@wsj.com

A version of this article appeared April 14, 2012, on page B8 in the U.S. edition of The Wall Street Journal, with the headline: Bill Gross’s Shiny New Toy.

Tax planning is seldom simple, but lately it has been next to impossible. At year’s end, a host of temporary provisions expire, and lawmakers have put forth radically different proposals for what to do next. Throw in an election year, and predictions become all the more difficult.

For the confused, here is what is clear (not much) and unclear (a great deal) about tax rates in 2013, plus expert guesses about what will actually happen.

Rates on “ordinary” income, such as wages and interest. The current regime expires at year-end. The top rate of 35% will rise to 39.6%, and millions of poor and middle-income taxpayers removed from the tax rolls by the “Bush tax cuts” of 2001-3 will again owe income taxes.

A limit on itemized deductions adding up to 1.2 percentage points to the tax rate will return as well.

Next year also brings a new 0.9% Medicare tax on wages for most joint filers with adjusted gross income above $250,000 ($200,000 for single filers). The tax will apply to the income above the threshold, not below.

President Obama’s budget, proposed Monday, seeks to retain current tax rates for people in lower brackets and let them expire for most joint filers with adjusted gross incomes of more than $250,000 ($200,000 single). It also would cap the value of itemized deductions for people in higher brackets.

Mr. Obama’s budget also calls for replacing the alternative minimum tax, which imposes extra tax on people with big deductions, with a different levy. Known as the “Buffett rule,” because billionaire Warren Buffett has famously noted that his tax rate is lower than that of his secretary, the proposal would subject people making more than $l million to an average tax rate of no less than 30%.

The president’s budget offered no projections on how much the new tax would collect or details on how it would work.

Lawmakers in the House and Senate each have their own version of a tax based on the Buffett rule, called the “Pay a Fair Share Act,” with the same 30% and $1 million thresholds.

According to Roberton Williams of the nonpartisan Tax Policy Center, Congress’s version would raise $20 billion in 2015 from 116,000 taxpayers—assuming no one changed behavior, which many would. By contrast, the AMT has been raising some $40 billion a year from 4 million taxpayers.

Rates on investment income. The current investment-tax regime also expires at the end of this year. The top 15% rate on long-term capital gains (those held over a year) will rise to 20%, and the current zero rate for those in the bottom two tax brackets will rise to 10%.

Qualified dividends will again be taxed as ordinary income, with a top rate of 39.6%.

In 2013 a new 3.8% tax on investment income debuts for most joint filers with adjusted gross income above $250,000 ($200,000, single).

It covers capital gains, dividends, rents and royalties, among other things. It doesn’t apply to gains from home sales unless the gains exceed the cap of $250,000 (for single filers) or $500,000 (joint filers).

Mr. Obama favors letting the top 15% rate on capital gains rise to 20%. New this year is a proposal to tax dividends like ordinary income for those with adjusted gross income above $250,000 ($200,000 for single filers).

In addition, both he and the lawmakers sponsoring the Buffett-rule proposal would like to see investment income taxed at an average rate of 30% for people earning more than $1 million.

Estate and gift taxes. The current regime expires at year-end. The $5 million-per-individual estate-tax exemption will drop to $1 million, and the top estate-tax rate will rise from 35% to 55% for most and 60% for some. The gift-tax exemption will fall to $1 million and the rate will rise to 55%.

Mr. Obama wants to return these taxes to 2009 levels. That would mean an estate-tax exemption of $3.5 million and a gift-tax exemption of $1 million. The top rate for both would be 45%.

The bottom line. It is an election year and much depends on what happens Nov. 6. Most tax experts believe Congress won’t address tax rates before the election—although legislation is notoriously unpredictable. All the proposals mentioned above, plus others, are in play.

After Nov. 6, the current Congress might pass another temporary extension, as happened in late 2010, says Clint Stretch, a principal at Deloitte Tax in Washington: “A straight extension of the current system will be the path of least resistance, especially if it comes with a promise of tax reform in 2013.”

On the other hand, says Michael Graetz, a former top Treasury official now teaching at Columbia University’s Law School, the election results could mean that “for ‘millionaires and billionaires’ with more than $250,000 of income, there may be a substantial tax increase.”

—Email: taxreport@wsj.com

A version of this article appeared February 18, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: More Uncertainty for 2013.

Investors are focusing on Facebook‘s

offering price as the company prepares to go public as soon as next week.

Bloomberg News

Facebook founder Mark Zuckerberg: taking advantage of trusts.

Tax specialists are paying attention to something else: how half a dozen of the firm’s luminaries, including founder Mark Zuckerberg, appear to be using a perfectly legal maneuver called a grantor-retained annuity trust, or GRAT, to avoid at least $200 million of estate and gift taxes on their own Facebook shares.

“I’m not surprised the Facebook insiders have chosen to use GRATs,” says John Bergner, a gift-and-estate tax expert at the Winstead law firm in Dallas. He calls the strategy “an excellent way to shift wealth to others at little or no tax cost and with minimal legal and economic risk.”

Facebook’s prospectus cites eight separate “annuity trusts” set up by insiders Dustin Moskovitz, Sean Parker, Sheryl Sandberg, Reid Hoffman, Michelle Yee (Mr. Hoffman’s wife) and Mr. Zuckerberg over the past four years. All told, these trusts hold about 22 million shares that will be worth more than $690 million if Facebook goes public at $31.50 a share, the middle of its projected range.

Spokesmen or representatives for the six shareholders declined to comment on these trusts, or were unavailable. But Mr. Bergner and others—including Howard Zaritsky, a lawyer and estate expert in Rapidan, Va.—say they feel safe assuming the “annuity trusts” are GRATs, based on their knowledge of the territory and the language in Facebook’s prospectus.

“GRATs offer a perfect vehicle for wealthy investors who put money in start-ups, while other trusts don’t,” Mr. Zaritsky says.

And Facebook offers a good vehicle for explaining GRATs, one of several legal but arcane techniques the truly wealthy can use to sidestep estate and gift taxes.

In essence, these trusts transfer asset appreciation from one taxpayer to others, virtually tax-free.

The benefit can be huge. If the Facebook insiders didn’t use GRATs for those shares, but held them until they died or gave them away to friends or relatives after the offering, then the gift or estate tax owed on the shares would be more than $200 million. (This calculation assumes a $31.50 share price and the current top gift- and estate-tax rate of 35%; rates are scheduled to rise to 55% next year.)

A successful GRAT requires several ingredients: a person worth millions—or potential millions—who wants to avoid gift or estate tax and is willing to part with assets to do so; an asset that will rise in value while in the trust; and, if possible, low interest rates.

With these elements in place, the taxpayer sets up a GRAT with a set term of two years or longer and gives the asset to it before its value surges. Set-up costs include appraisal and legal fees.

Over the life of the trust, the person who set it up gets annual payments adding up to the asset’s original value plus a return based on a fixed interest rate determined by the Internal Revenue Service. That is currently 1.6%, near a record low.

Meanwhile, ideally, the asset soars in value, and that growth is outside of the grantor’s estate. When the GRAT’s term ends, the asset goes to the beneficiaries—usually into another trust set up for their benefit.

The result: no gift or estate tax on the appreciation, even though it has been transferred.

Here is an example, using figures from the Facebook offering document: Messrs. Zuckerberg and Moskovitz each disclosed “annuity trusts” holding 3.4 million and 14.4 million Facebook shares, respectively. The value of each share when the trusts were set up was less than $1.85, according to the prospectus.

After contributing their stock to the GRATs, the two founders would, over time, take payments equal to the original value of the gift plus a small return, Mr. Bergner says. Without knowing information that’s unavailable—such has how long the trusts will run or exactly how they are structured—it’s impossible to say what payments have already been or will be made.

But it is possible make an educated guess as to the appreciation that’s being shifted from the two founders’ estates. Mr. Bergner says that given a $31.50 share price, a conservative estimate of it is $29 per share, or about $100 million for Mr. Zuckerberg and more than $415 million for Mr. Moskovitz.

At current top rates of 35%, that means estate-and gift-tax savings of about $35 million for Mr. Zuckerberg and $150 million for Mr. Moskovitz. Other Facebook insiders and investors appear to be saving $20 million or more with their GRATs.

What if by some chance Facebook stock tanks? The stock would then be returned to the original owner.

“The person who sets up the GRAT is not really worse off, because he paid little or no tax in the first place,” Mr. Zaritsky says. “Either he wins or it’s a tie—except for the lawyer’s fees.” The principal risk with a GRAT is that the owner will die before the term is up, which isn’t likely in this case.

That, in a nutshell, is why the Facebook insiders would find it useful to put some of their shares in grantor-retained annuity trusts.

One question remains: Neither Mr. Zuckerberg nor Mr. Moskovitz appears to have children. So who are these trusts’ beneficiaries? Mr. Bergner says it is possible to name unborn children—as well as future spouses and current friends or relatives—as beneficiaries of a GRAT.

“There’s a window of opportunity here,” Mr. Bergner says, “and it’s good to use it.”

—Email: taxreport@wsj.com

A version of this article appeared May 12, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: How Facebook’s Elite Skirt Estate Tax.

March Hedge Funds: Best, Worst, Biggest

Will John Paulson rent a billboard on I-95 promoting his $14 billion hedge fund? Is there a George Soros World Cup in the offing? Probably not. But there are a lot of people in the hedge-fund industry who are excited about the fact that hedge funds can now advertise, sponsor sporting events, and generally reach a wider audience of potential investors.

But, as with everything regulatory, it’s not quite that simple.

The industry’s ability to advertise came about when, earlier this month, President Obama signed the Jumpstart Our Business Startups Act, better known as the JOBS Act. Its main goal was to make it easier for small businesses to raise money, with which they would hopefully create more jobs. Tucked into the act was the lifting of a ban on general advertising and solicitation that hedge funds, with varying degrees of fidelity, had adhered to.

Before you assess how meaningful the new law is, you need to understand a few basics. Hedge funds by rights should be regulated by the Investment Company Act of 1940, which oversees mutual funds and most exchange-traded funds. But in order to avoid the restrictions on redemptions, leverage, and incentive compensation laid out in the 40 Act (as it’s known), hedge funds generally use one of two loopholes known as 3(c)(1) and 3(c)(7). Both exempt hedge funds from most 40 Act requirements but limit their investor audience.

Those considered 3(c)(1) funds allow up to 99 “accredited investors,” defined as someone with a net worth (not counting a home) of at least $1 million or an annual salary of $200,000. Section 3(c)(7) funds are permitted more investors, so long as they’re all “qualified purchasers,” having $5 million in investable assets. (There are many other nuances to these definitions, but this will do for now.) One of the two changes the JOBS Act made was to allow an increase in the maximum number of investors in 3(c)(7) funds to 1,999 from 499. If a hedge fund wants more than 99 accredited investors or 1,999 qualified purchasers, it will have to register with the Securities and Exchange Commission.

THE SECOND, AND MORE provocative, change is the lifting of the advertising ban. Because of the restrictions on whom they can take money from, hedge funds generally were only allowed to let people with whom they had a preexisting, substantive relationship invest; they were prevented from advertising to or soliciting the general public. Some funds took this more seriously than others, requiring passwords to access their Websites and never uttering a word about performance, while others interpreted the rules a bit more loosely. “It’s always been a gray area,” says Mike Seery, a director at financial advisory firm Kinetic Partners.

The ability to reach a wider audience will have a much bigger impact on smaller funds, particularly those with less than $250 million in assets that allow accredited investors. (Most household-name hedge funds permit only qualified purchasers.) Because they’re still appealing to a fairly wealthy crowd, though, advertising likely won’t be too mass-market. Some have speculated we’ll see golf or tennis tournaments sponsored by hedge funds, and an increase in advertising in, ahem, publications that speak to a more sophisticated and wealthy audience.

“A fair number of smaller to mid-sized firms are eager to see less onerous restrictions in marketing to investors,” says Ken Heinz, president of Hedge Fund Research, which compiles and analyzes data on hedge funds. “I don’t expect this to have a meaningful impact on larger funds, especially those with more than $5 billion in assets.”

THERE ARE STILL A fair number of kinks to work out, warns Kevin Scanlan, a partner at the law firm Dechert. Funds generally can accept up to 35 nonaccredited investors, but funds that avail themselves of the relaxed advertising and soliciting rules won’t be allowed any nonaccredited investors. “My take is that at the end of the day, the investor base for these funds won’t be any different,” Scanlan says. “Smaller funds are hungrier for new investors, but at the same time have smaller budgets to spend on advertising.” Also, he points out, most funds haven’t contemplated advertising costs in their fund documents. That means they could end up a manager expense rather than a cost that can be passed on to investors.

Then there’s the issue of the additional rules the SEC needs to write. Now, if hedge funds advertise, they’ll need to prove they took “reasonable steps” to verify any new investors are accredited, says Don Babbitt, a consultant at Kinetic Partners and former SEC attorney.

And the SEC isn’t likely to rush its opinion as to what those reasonable steps are. “Congress said the SEC had 90 days,” Scanlan says. “But given all they have on their plate, I think we’re looking at the end of the year.”

Nothing To See Here

Money funds saw shrinking outflows, with a four-week average of $7.6 billion through Wednesday, according to Lipper. Taxable-bond fund inflows averaged $7.4 billion, and muni funds took in $526 million. Equity funds also saw outflows, averaging $1.8 billion. In March, stock funds’ outflows hit $9.6 billion, up sharply from February’s $1.4 billion, says the Investment Company Institute. Cash was at 3.3% of assets in March.

E-mail:
beverly.goodman@barrons.com

By JONATHAN BUCK

Warren Buffett famously owns large stakes in U.S. blue-chip stocks such as American Express and Coca-Cola, and has held them for years.

If Mr. Buffett were to assemble a basket of European stocks with similarly attractive characteristics, what would he pick?

Pankaj Patel, head of global quantitative research at Credit Suisse, has assessed the investment strategy of
Berkshire Hathaway‘s

(BRKA) admired boss, and applied Buffett-like criteria to designing just such a portfolio of large-capitalization European equities.

Mr. Patel screened for companies with a consistently strong return on equity, low debt load and improving profit margins in the past two years. He eliminated companies with pension-funding problems and those that issued too many stock options.

The screening process identified just 16 Buffett-like stocks in the developed markets of Western Europe. Five are listed in the U.K. Four are listed in Denmark. Five are listed in euro-zone countries, but none is listed in Germany—the strongest market in Europe. Five of the stocks are in the health-care sector.

Companies that made the grade include Swiss watch company Swatch Group

(SWGAY), British luxury-apparel maker Burberry


(BRBY.U.K.) and drug producer Shire

(SHPGY), based in Ireland.

Finnish tire maker Nokian Renkaat

(NRE1V.Finland) is also on the list, along with enzyme producer Novozymes (NVZMY) and Coloplast

(COLOB.Denmark), a medical-equipment manufacturer.

U.K-listed BHP Billiton

(BHP) made the cut, too, and looks like a good bet. The mining giant’s earnings fell recently, due to rising costs and falling commodity prices. But demand for its products is expected to remain strong. BHP’s shares are down 22% this year. Analysts at brokerage firm Jeffries rate the stock a buy.

Pharmaceutical firm AstraZeneca

(AZN) likewise looks like a good candidate for a hypothetical Buffett portfolio, even though revenue could fall as patents expire on more of the U.K. company’s prescription drugs. Nor is AstraZeneca’s pipeline of new drugs robust. The company’s shares have slipped about 3% since the start of the year, but its 6.4% dividend yield offers some comfort and support.

Mr. Patel back-tested the European picks that were selected on the basis of Mr. Buffett’s principles. He reports that they would have outperformed their benchmark, the MSCI Europe index, in eight of the past nine years.

That would probably make even Mr. Buffett happy.

Write to Jonathan Buck at Jonathan.Buck@dowjones.com

—Jonathan Buck is foreign editor, Europe, for Barron’s. For more stories, see barrons.com.