Moody's reaches USD864M settlement over subprime ratings

WASHINGTON - Ratings agency Moody's has agreed to pay nearly $864 million in a settlement with the US authorities over its inflated ratings of risky mortgage securities that contributed to prompting the 2008 global financial crisis, the Justice Department said Friday.

The agreement was signed between Moody's Investors Services, Moody's Analytics and parent company Moody's Corporation on one hand, and 21 states and the Justice Department on the other.

The authorities accused the credit rating agency of overvaluing the ratings of securities backed by subprime mortgages or at-risk loans at the center of the country's worst financial crisis since the Great Depression.

Standard and Poor's, a competing agency, agreed to pay a $1.37 billion fine in 2015 for deceiving investors about the quality of subprime mortgages.

The agreement follows an investigation lasting several years.

"Today’s settlement contains not only a significant penalty and factual admissions of its conduct, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward," Principal Deputy Associate Attorney General Bill Baer said in a statement.

The Financial Crisis Inquiry Commission concluded in 2011 that "this crisis could not have happened without the rating agencies," which allowed the ongoing trading of bad debt.

Moody's is the second-largest rating agency after Standard and Poor's. Together with the third major agency, Fitch, the three ratings firms dominate the bond-rating market with a more than 96 percent share, compared to 98.8 percent in 2007 before the crisis, Bloomberg News reported.

source: news.abs-cbn.com

Big problem for fund managers: liking Apple too much

NEW YORK - At more than 15 percent of his fund's assets, John Burnham, manager of the $136 million Burnham Fund, has a larger stake in Apple Inc than any other diversified fund.

"I think they are doing everything right and it's still a cheap stock based on earnings and revenue," he says.

Yet that devotion for Apple is a problem for Burnham and some other managers of so-called diversified funds like his - they want more Apple than they can buy under self-imposed risk-reducing guidelines that typically have them holding no more than 5 percent of their assets in any one company.

Burnham and the 174 fund managers like him who hold large stakes of their diversified portfolios in Apple are pulled in two directions: hoping to prevent an unforeseen drop in Apple shares from upending their portfolios, while also benefiting from a company whose shares are up 12 percent this year so far.

"Your positioning in Apple may hold a big sway in how your fund does overall, particularly in categories like large blend where every basis point counts," said Laura Lutton, who oversees equity fund research at fund tracker Morningstar.

In 2014, for instance, funds that underweighed Apple compared to broad market indexes were the most likely to underperform their peers, she said.

RISKS

Holding a concentrated position in one company is one way for stockpickers to stand out as investors move money to passive index funds. Yet it is unusual for diversified funds like Burnham's to hold more than 10 percent of their portfolios in one company, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

"Investors may not realize that their fund manager is taking on a higher amount of risk," he said.

Most fund managers are inclined to take profits when a stock hits 7 percent of a portfolio, yet there are few set mandates set down by fund firms, Rosenbluth said. He said that he can’t think of any fund families that have to sell if holdings exceed guidelines as a result of appreciation.

Diversified mutual funds are allowed by law to add shares of a company as long as its total weight is below 24.9 percent of their portfolios overall, but do not have to sell shares if they appreciate above that level, said Jay Baris, an attorney at Morrison & Foerster in New York.

BIG BETS
Burham didn't set out to have such a big stake in Apple, he said. He began buying shares in 2005 when they traded at a split-adjusted level of less than $7 each. Those shares have now appreciated over 2,000 percent.

"It's the world's greatest company. I just don't see any reason to sell it," Burnham said, adding that he thinks that the stock should trade above $200 a share. Shares of the company closed at $123.59 on Friday.

His big weighting in the company is also helping his performance, which may in turn bring in more investor dollars. Burnham's fund, which also has significant positions in Chipotle Mexican Grill and Williams Companies Inc, is up 4.8 percent for the year to date, according to Lipper, a return about 4 percentage points better than the S&P 500.

Over the last 5 years, the fund has returned an average of 14.3 percent a year, a performance slightly better than average large cap fund. The fund costs $1.36 per $100 invested, a rate slightly above average.

Other fund managers with large stakes in Apple who aren't selling say that they didn't set out to have an oversized position in the company.

David Chiueh, the manager of the Upright Growth fund, has 13.4 percent in Apple, the second-largest among diversified funds tracked by Lipper, mostly because shares he bought in 2008 have appreciated, he said. The BlackRock Science and Technology Opportunities Portfolio, the third-largest Apple holder, has an underweight position according to the fund's chosen benchmark, the MSCI World Information Technology index, a company spokeswoman said.

Other large holders of Apple have started to trim their positions. Mark Mulholland, whose Matthew 25 fund is classified as a non-diversified fund, has 15.3 percent of his portfolio's assets in Apple.

He expects to trim the position down to 10 percent of his portfolio, in part because the company's shares do not look as attractive on a valuation basis, he said.

"It's not a company under duress by any means, but it's not trading at as big as a discount as it was before," Mulholland said.

source: www.abs-cbnnews.com

S&P raises Philippine credit rating to a notch below investment-grade

After weeks of talking up the country's stellar first-quarter economic performance, the Aquino government got what it wished for: a credit rating upgrade from one of three major international debt watchers.

In a statement, Standard & Poor's Ratings Services on Wednesday said it lifted the Philippines' long-term foreign currency rating to 'BB+' from 'BB.' The agency also affirmed its 'BB+' long-term local currency rating on the Philippines. Both ratings were assigned a stable outlook.

S&P's action lifts the country's credit score to a notch below investment-grade, putting it at par with the score affirmed last week by another major agency, Fitch Ratings.

This leaves Moody's Investors Service as the only other key rater that has yet to raise its score on the Philippines to the same level.

A higher rating allows the Philippines to borrow abroad at a cheaper rate, thus enabling the government to set aside more money for addressing infrastructure bottlenecks and helping the poor.

"The foreign currency rating upgrade reflects our assessment of gradually easing fiscal vulnerability, as the government's fiscal consolidation improves its debt profile and lowers its interest burden," said Agost Benard, S&P credit analyst.

"A high, albeit declining, interest burden constitutes an additional rating constraint. The interest burden of 13 percent of general government revenues is high, largely because revenues remain low relative to the size of the economy," Benard said, citing the need to widen the tax base and improve compliance.

"Notably, the government's foreign-currency debt stands at a relatively high 42 percent of total, rendering debt service costs and fiscal outturns susceptible to adverse exchange rate movements," he added.

Data the Bureau of Treasury released on Wednesday showed that debt servicing last May rose nearly eight percent from a year ago, but the year-to-date figure had fallen by 12.4 percent.

The Philippines' key debt ratios have been on a downtrend, hitting decade lows in 2011. In the first quarter of this year, the country's external debt ratio - foreign debt as a percentage of the country's gross domestic product - eased to 27.4 percent from a year ago's 29.5 percent. This ratio is a measure of solvency, and so indicates the Philippines' capacity to pay down debt in the long run.

The country's external debt service ratio likewise fell to eight percent this year from 8.2 percent in 2011, and is way below the 20 to 25 percent international benchmark. This ratio measures the sufficiency of foreign exchange to meet maturing debt.

The Philippines has enjoyed ample foreign exchange inflows so far this year, causing the peso to hit a four-year high on Tuesday. Part of that liquidity helped fuel a stock market rally that saw the Philippine Stock Exchange index hitting a new record close of 5,365.7 also on Tuesday.

Despite the global uncertainty caused by the euro zone debt crisis and the slowdown in the US and China, the Bangko Sentral ng Pilipinas still expects the country to register a $2.7 billion balance of payment surplus this year.

Current account surplus forecast at 2% of GDP

"The rating action also reflects the country's strengthening external position, with remittances and an expanding service export sector continuing to drive current account surpluses," Benard said.

"We project ongoing current account surpluses of about two percent of GDP, based on remittance inflows from a large and well-diversified expatriate labor force, and a fast-expanding business process outsourcing industry," he added.

Communications Secretary Ramon Carandang said the upgrade to BB+ "is an affirmation of the fiscal management of the Aquino administration."

"At a time when countries around the world are debating austerity versus stimulus, we have had the fiscal space to provide stimulus without weakening our fiscal position. The President and the economic team have worked hard to win ratings upgrades and we're now another step closer to investment grade status," he said.

Separately, Finance Secretary Cesar V. Purisima said the Philippines "can now clearly make our case for an investment grade status."

"This is the eight positive credit ratings action under the Aquino administration and this only gives us more confidence to continue with the work that we have started towards macroeconomic stability, fiscal sustainability and inclusive economic growth," he added.

On Tuesday, the Cabinet economic cluster, meeting with President Benigno Aquino III, forecast GDP growth in the second quarter exceeding the better-than-expected 6.4 percent in the first quarter. The Philippines' first-quarter growth was Asia's second fastest after China.

Budget Secretary Florencio Abad said he already cleared for disbursement 91 percent of the infrastructure outlay falling under the Department of Public Works and Highways, laying the ground for more government spending in the coming months.

source: interaksyon.com