Why is External Management in REITs Frowned Upon?

The external or outside management requirement is perceived to create a conflict of interest since REIT sponsors usually own the management company and not much of the REITs themselves. They have more of an incentive to grow the REIT to increase assets under management, and hence receive more management fees, rather than manage the REIT to maximize shareholder value. By contrast, internally managed REITs staff compensation and incentive is based on corporate level performance rather than property level cash flows – and are perceived as providing better alignment of management and shareholder interests.

Active Equity Management – Table of Contents

Never judge a book by its cover, but rather by its table of contents. Check out the TOC here and decide for yourself..

Active Equity Management provides a comprehensive understanding of technical, fundamental, and economic signals used in equities trading. It explores in detail how such signals may be created, rigorously tested and successfully implemented. Filled with practitioner insights derived from years of experience in the hedge fund industry, and supported with academic theory, Active Equity Management provides an in-depth review of basic financial concepts, examines data sources useful for equities trading, and delves into popular seasonal effects and market indicators. It also highlights best practices in model development, portfolio construction, risk management, and execution. In combining topical thinking with the latest trends, research, and quantitative frameworks, Active Equity Management will help both the novice and the veteran practitioner understand the exciting world of equities trading.

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Climate Change – The Science Behind It——-

As scientific consensus on climate change has gained strength during 2010-20, dissenting views appear increasingly marginal. I am quite convinced that the Public Sector needs to be the heart of the response to climate change. Here are my quick thoughts on causes, effects, key impacts, physical manifestations and the scientific consensus that has emerged.

Strategic Asset Allocation Improvement and Superior Implementation

#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly.  We further demonstrated concrete steps to enhance their portfolio by approximately 40 bps as described here. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).

4-SAA Case Study continued

Citi Alternative Investments 2008 Journal—

How time flies! I had the privilege to lead thought leadership ( inter alia) at Citi during the tumultuous 2007 Global Financial Crisis.  During that period I also edited the Alternative Investments Journal for its corporate clients. I found this issue floating online – I wrote 3 out of the 5 articles here. All of them have stood the test of time, sans the piece on Asian Real Estate, which of course has come a long way since 2008. This Journal, discontinued after my departure, had some cutting edge investment pieces.

Demographics Effect on Western Europe Pensions

Europe is aging and becoming a greyer society.  By 2050, European Union will face a significant change in age structure with higher dependent population due to increasing life expectancy. Demographics are intrinsically linked with public policy and the European growth agenda. The way a government manages national resources and exercises choices is also driven by demographics. As a result of aging populations, government budgets will come under severe strain – impacting investments in economic productivity building inputs such as education & training and infrastructure. The prospects of fiscally over-whelming pension and healthcare budgets make demographics a strategic issue. The pensions gap solution is simple – decrease liabilities and/ or increase assets. However, there is a distinction between solutions: public-policy and finance – and these we highlight in this report.

Financial Sector Restructuring : Visiting History

History never repeats itself but does it really rhyme? I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  I examined 10 historical financial sector restructurings across USA, Sweden, Korea, Malaysia, France, Japan – the contagion, the transmission mechanism as well as government interventions. Having had the privilege of a ringside seat, as well as participated in some of these events, this reflection has helped me connect multiple dots. I hope you find it useful too.

Trends in Corporate Governance, Proxy Fights & Poison Pills

In this study I examine activism trends, proxy fights issues and success rates, as well as arrive at defense and poison pill analytics. Poison pills in force are declining and companies are increasingly letting pills expire naturally – and with that there are fewer plans in force, resulting in a decline in the number of shareholder proposals in favor of redeeming or removing plans.

It appears that companies have seen little impact on stock price as a result of adopting or renewing a poison pill. I also shed light on triggers and historical precedent rights plans. My study reveals that historically, only a handful of companies increased the exercise price of their poison pills and in most cases this resulted in excess abnormal returns. Counterintuitively and interestingly, a targets’ ability to fend off a hostile acquirer is not dependent on having a poison pill. I then describe with examples structural defense and takeover defense.

Poison Pills – Overview & Mechanics

U.S. companies are dismantling their takeover defenses. The decrease can be attributed to companies switching to annually elected directors from staggered board terms, companies removing poison pills, and less companies providing that directors can only be removed for cause. The pace at which companies are erecting barriers against proxy contests and enacting rules to maintain tight rein over shareholder meetings has slowed significantly too. Also companies are increasingly allowing poison pills to expire.

I tackle these and other issues in our M&A series. Here I explain the general idea behind poison pills; in the event of a hostile takeover attempt, poison pills give shareholders (except for the would-be acquirer) the right to buy stock in their own company or in the acquiring company at a deep discount, if the bidder acquires a certain percentage of the outstanding shares. With other shareholders then able to buy shares at discounted price, the target company would become financially unattractive and the voting power of the potential acquirer would be diluted -i.e., acquiring the company under those terms would be like swallowing a poison pill.

USPS Should Exit the Real Estate Business

United States Postal Service (USPS) is in dire financial straits and in desperate need of reform. Privatization is not an option.  Monetization of its real estate portfolio offers significant potential strategic, financial and operating advantages. I examine its portfolio of asset holdings and show how asset monetization can still support its strategic, financial, operational and execution objectives. I also show how this can be done – given political will.

Spin-Offs and Carve-Outs

As the Covid-19 induced crisis progresses, we expect companies to separate portions of business. Such actions will be driven by strategic decisions to divest businesses and/or valuation creation opportunities. These may take form of spin-offs, carve-outs or sales.

Primary reasons for spin-off include (i) Value creation – both for parent company and new separate public company; (ii) Certainty of execution; (iii) Tax free to parent and its shareholders; (iv) Can be run parallel with other divestiture alternative. These are typically a 6-12-month process that involves carving out a business from the parent (e.g. financials, management). It involves various documentation and filing requirements (e.g. SEC filings, IRS private letter ruling) and may or may not be preceded by an IPO. We provide an overview here.

Decluttering HealthCare – a System Dynamics Approach

I took a long hard look at the confusing HealthCare sector, replete with acrimonious public debate in the U.S. To arrive at inter-sector allocation we leaned heavily on the System Dynamics discipline conceived at MIT – one that ” can help us better understand complex challenges, shape policy, influence decision-making, and yield lasting benefits for businesses and society.” I present a preview of how we transcend traditional thinking to arriving at an understanding of what HealthCare investing is really all about. Schematic representation of elements, processes and pathways can be further developed in a comprehensive system dynamics model.

Measuring Political Risk Premium

Sovereign spreads sometimes overstate and sometimes understate the actual extent of an investment’s “political risk”, for example. We suggest an alternative to spreads between Sovereign Bonds of the country and US Treasury as proxy for country risk premium. The Political Risk Premium (PRP) can be arrived at from Residual Income Value (RIV) implied cost of equity for the companies in EM and then compared to the weighted average cost of equity of global peers.

Capital Distribution Decision – Share Buybacks

The Fed now allows the nation’s big banks to resume share buybacks in the first quarter of 2021 though dividends will continue to be capped. Banks have healthy key capital ratios and augmented loss absorption capacity. Meanwhile to preserve cash during the pandemic many S&P 500 companies suspended buybacks.

I examined 6045 Company announcements over the years and was positively pleased to see a direct relation between share repurchase size and excess returns at announcement. Both self-tender offers and open market repurchase programs have historically generated lasting excess returns. Also I found that multiple repurchasers benefit from large repurchase announcements. And share repurchase can enhance EPS growth, inter alia. When tax rates on dividends and capital gains are equivalent, share buybacks give investors the option to benefit from continued appreciation and defer taxes by selling shares at later date.

Contents : Distribution Decision, Dividends vs. Share Repurchases, Positive Effects of Distributions, Positive Reaction to Share Buybacks, Special Dividends for S&P 1500 Companies, Open Market vs. Tender Offers , Share Repurchase Can Enhance EPS Growth, Formulating a Repurchase Strategy, Tender Offer Program Overview