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SPECIAL REPORT:

OLD ENERGY
NEW IDEAS

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Potential benets of adding Sector SPDR ETFs to your portfolio include:


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The all-day tradability of stocks
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Total transparency
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An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and
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The S&P 500, SPDRs, and Select Sector SPDRs are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use. The stocks included in each Select
Sector Index were selected by the compilation agent. Their composition and weighting can be expected to differ to that in any similar indexes that are published by S&P.
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. The index is heavily weighted
toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investors cannot invest

Financial Sector SPDR ETF


Top Ten Holdings*

XLF - FINANCIAL
Company Name

1
2
3
4
5
6
7
8
9
10

Symbol

Wells Fargo
JP Morgan Chase
Berkshire Hathaway B
Bank of America
Citigroup
American Express
US Bancorp
American Intl Group
Goldman Sachs
Metlife

WFC
JPM
BRK.b
BAC
C
AXP
USB
AIG
GS
MET

Weight

8.41%
8.08%
7.88%
6.67%
5.58%
3.18%
2.84%
2.77%
2.65%
2.15%

* Components and weightings as of 2/28/14.


Please see website for daily updates. Holdings subject to change.

directly in an index. The S&P 500 Index gures do not reect any fees, expenses or taxes. Ordinary brokerage commissions apply. ETFs are considered transparent
because their portfolio holdings are disclosed daily. Liquidity is characterized by a high level of trading activity.
Select Sector SPDRs are subject to risks similar to those of stocks, including those regarding short-selling and margin account maintenance. All ETFs are subject to risk,
including possible loss of principal. Funds focusing on a single sector generally experience greater volatility. Diversication does not eliminate the risk of experiencing
investment losses.
ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust.
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may
volume 23

number 5

Features
cover stories: old energy/new ideas

40 The Lord of Fracking


Former BP CEO John Browne has become the controversial face
of hydraulic fracturing, which his opponents say could despoil
the English countryside.
by edward robinson

56

Cleaning Up Dirty Gas


The fossil fuel the U.S. embraces as less noxious than oil or coal still
spews carbon dioxide. Some entrepreneurs smell opportunity.
by John lippert

56

68

Qatars LNG Ambitions


The worlds biggest liquefied natural gas exporter is being challenged by
Australia and the U.S. The emirates response: buy up the competition.

74

Double-Wide Returns
Former Wall Street bankers and private-equity firms are jostling for
position in an unlikely asset class: trailer parks.
by anthony eFFinger and katherine burton

96

80 The City on Edge


As much as London bankers grumble about meddling from Brussels,
they say it would be a disaster for the U.K. to pull out of the EU.
by stephanie baker and ben Moshinsky

88

We Want to Be Everywhere
From his beachhead on the Chinese island of Hainan, Chen Feng has
built a global business conglomerate thats worth $58 billion.
by williaM Mellor and JasMine wang

96

All in the Dynasty


Teresita Sy-Coson, the eldest child of the Philippines richest man,
explains how she and her siblings run the family empire by committee.

102

on the cover
John Browne
in London
Photograph by
alan clarke

by yooliM lee and ian sayson

c o u n t r y Focus

102 German Engineering


Twenty-five years after the fall of the Berlin Wall, the country is
reaping returns from its investment in the unification of east and west.
by leon Mangasarian

12 bloomberg markets May 2014

groomer for cover photo: Khandiz Joni; from top to bottom: Spencer lowell; Steve tirona; barbel Schmidt

by robert tuttle

We clear 92% of the market!


*

SwapClears lead in IRS clearing continues to grow as we


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THANK YOU FOR MAKING US NO. 1

*Estimated market share based on aggregate buy-side and sell-side notional cleared as of February 12, 2014.

May

continued

get our ipad app.

Download at MKTS <Go> or bit.ly/bbmarkets.


24

s t r at e g i e s

110 Profile

Betting on Comebacks

113 Charts

Using Heikin-Ashi

by akshay chinchalkar

114 Riskless Return

Compounding Machines

by charles stein

32

agenda

22
24
26
28
30
32

116 Influential News


118 Clean Energy
Really Green Shoots

The New Deflation Menace


Wal-Marts Minimum-Wage Dilemma
Bullish on Egypt
Forecasting Peak Car
On Dry Land in California
Tips From Billionaire Jon Oringer

by Joseph salvatore

120 Cheat Sheet

Corporate Finance

121 Clean Energy

Decarbonizing Portfolios

by gregory elders

124 Whats New

c o m m e n ta r y

16 Editors View

Innovation and Conflict

18 Letters
34 Bloomberg View

Londons Bankers Must Find Their Voice

14 blooMberg Markets May 2014

110

from top to bottom: j.d. pooley/getty images (worker); beth hall/bloomberg (wal-mart); drew kelly; robyn twomey

by Jon asmundsson

TYPE UNHC <GO>

Editors View

EdiTor-in-chiEF, BloomBErg nEWs

Matthew Winkler

Innovation
and Conflict
Shale gas
could be very
important,
Browne says.
It could be
transformative.

During a 38-year career at BP Plc, John Browne played a part in


opening up some of the worlds largest petroleum reserves
including Alaska, western Siberia and the Gulf of Mexico. Now,
Lord Browne of Madingley, to use his formal title, stands at the
forefront of another energy frontierhydraulic fracturing, better known as fracking. As Edward Robinson writes in the first
story of our three-part special report, Old Energy/New Ideas,
Browne, 66, has become a leading force in efforts to bring fracking for natural gas to the U.K. (ThE Lord of frAckinG, page
40). Shale gas could be very, very important for this country; it
could be transformative, says Browne, who was BPs chief executive officer for 12 years and is now a partner at private-equity
firm Riverstone Holdings LLC.
Its a transformation opponents of fracking dont want. They
say unearthing previously inaccessible reserves of gas could
damage the countryside and prolong the U.K.s reliance on
carbon-spewing fossil fuels. Similar battles are being waged
around the world, as fracking spreads
from the U.S. to China, Russia, India,
South Africa, Australia and Argentina.
While natural gas is often touted as
the cleanest form of old energy, it still
generates noxious carbon dioxide.
Some entrepreneurs see that as an
opportunity, John Lippert reports
(cLEAninG Up dirTy GAs, page
56). To the dismay of environmentalists, theyre selling CO2
captured from gas to oil drillers, who use it to get an even dirtier fuel out of the ground. Liquefied natural gas, meanwhile,
has made tiny Qatar very rich. Robert Tuttle shows how the
worlds biggest exporter of LNG is acquiring reserves overseas
(QATArs LnG AMBiTions, page 68)another sign that the
drive to transform old energy with new ideas knows no borders.

ExEcutivE Editor

To write a letter to the editor, e-mail bloombergmag@bloomberg.net or type MAG <Go> on the Bloomberg Professional service.
For subscription questions, e-mail bloombergmarkets@cdsfulllment.com.
Visit us at bloombergmarkets.com and follow us on Twitter at @BloombergMrkts.
16 BLooMBErG MArkETs May 2014

ExEcuTiVE EdiTor

ronald henkoff
managing EdiTor

dan ferrara
crEaTiVE dirEcTor

siung Tjia
assisTanT managing EdiTor

Michael s. serrill
dirEcTor oF PhoTograPhy

Brenda Milis
sEnior EdiTors

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 (rio de Janeiro)
dEsign

Lou Vega (senior Art director)


John Genzo
(Managing Art director)
Lily chow (Graphics director)
Tim Vienckowski (designer)
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)
rocky swift
(Associate strategies Editor)
sTraTEgiEs conTriBuTors

Akshay chinchalkar, Gregory


Elders, Joseph salvatore,
charles stein

TYPE HOND <GO>

founder, bloomberg lp

michael r. bloomberg
chAirmAn

Peter t. grauer

Letters

chief executive officer

Daniel L. Doctoroff

Argentinas Oil Bonanza


April 2014

publisher

michael Dukmejian
212-617-2653
Advertising sAles director,
AmericAs

Chris kurtz 212-617-3087

This article gives me a much


better idea of Argentinas
crony capitalism, information
I value as a shareholder
in four companies affected
by the countrys politics.
My interest is partly about evaluating risk, but Im also
concerned about governance.
WAyNE CROOkES
Vancouver

Advertising sAles director,


emeA

emma Winchurch-beale
44-20-7392-0593

Advertising sAles director,


AsiA-pAcific

Patrick brownlow
65-6231-3486

AssociAte publisher And


globAl mArketing director

steve Nazaruk 212-617-2389


finAnciAl director

John maresca 212-617-4128


u.s. sAles

Don bussey 212-617-3293


ted Dolan 212-617-2182
Lisaminh Woodruff
212-617-3688
west coAst Account director

rich Fimbres 323-782-4249


midwest Account director

Paul kissane 312-443-5924

upDATES

Indias Shadow
Banker Jailed
Subrata Roy, who built an $11 billion empire
collecting small deposits, was ordered imprisoned in New Delhi in late February by
Indias Supreme Court. He was being held
until he presents a plan to refund $3.9 billion
to 30 million customers. Roy has maintained
in court that his company, Sahara India Pariwar, has already completed the refunds.
In Indias Shadow Banker (January
2014), BLOOMBERG MARKETS reported that
Roy was fighting to hold on to his assets
after regulators sanctioned him for selling
investment products without approval.
Roys lawyers have proposed selling
Saharas holdings to pay the refunds in
exchange for his release.
BhuMA ShRIvASTAvA

Joe Dears Calpers Legacy


Joe Dear, who took charge of investments
at the California Public Employees Retirement System in March 2009, died of prostate cancer on Feb. 26 at age 62. In Cleaning
Up Calpers (October 2010), BLOOMBERG
MARKETS reported on how Dear rallied the
biggest U.S. public pension fund after taking
over amid a corruption scandal and $70 billion in losses. Calperss assets of $277 billion
last year surpassed their 2007 peak.
EDWARD ROBINSON

detroit sAles

Dan Flavin 248-515-8654


texAs sAles

Carol orr 214-521-6116


luxury sAles director

David bowling 212-617-4059


fAshion director

michele Chicoine 212-617-6629


trAvel director

Jonathan spitz 212-617-7068


lAtin AmericAn sAles

tiago Castro 55-11-3048-4645


europeAn sAles

Clare bowen 44-20-3216-4275


marie Friel 44-20-3525-8528
mArketing executive

Laura Cameron
44-20-7073-3425

north AsiA sAles mAnAger

David bradford
852-2977-4719
AsiAn sAles

mark Froude 65-6499-2818

Correction
In Argentinas Oil Bonanza, we should
have said that Jose Luis Manzano was
majority leader in the lower house of
Argentinas National Congress from 1989
to 1991, when President Carlos Menem
appointed him as interior minister.

consumer mArketing
director

Johnna ayres 212-617-1833


consumer mArketing
mAnAgers

alexandria Lopez 212-617-6019


Joelle Quinones 212-617-8777
operAtions director

bernie schraml 212-617-3088


Ad production director

James Delahanty 212-617-1781


production mAnAgers

melvin arriaza 212-617-8778


Debra Foley 212-617-1938
digitAl production mAnAger

I N F O R M AT I O N F O R R E A D E R S
lETTERS TO ThE EDITOR

Send an e-mail to bloombergmag@bloomberg.net or type mag <go> on the Bloomberg


Professional service. We reserve the right to edit all letters for space and clarity.
REpRINTS

steven J. mcCarthy
212-617-4332

AssistAnt to the publisher

richette robillard
212-617-0838

Contact The YGS Group at 717-505-9701 x104 or BloombergReprints@theYGSgroup.com.

A bpA international
business publication

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18 bLoomberg markets May 2014

GLOBAL X MLP & ENERGY


INFRASTRUCTURE ETF
YOUR VEHICLE TO THE ENERGY INFRASTRUCTURE SPACE

Carefully consider the Funds investment objectives, risk factors, charges and expenses before investing.
This and additional information can be found in the Funds prospectus, which may be obtained by calling
1-888-GX-FUND-1 (1.888.493.8631), or by visiting www.globalxfunds.com. Read the prospectus carefully
before investing.
Investing involves risk, including the possible loss of principal. Investments in securities of MLPs involve risk that differ from investments in common stock including
risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular
issuers nancial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable
cash ow). High short-term performance of the fund is unusual and investors should not expect such performances to be repeated. The MLP fund invests in the energy
industry, which entails signicant risk and volatility. The fund is non-diversied which represents a heightened risk to investors. Furthermore, the fund invests in small
and mid-capitalization companies, which pose greater risks than large companies. The Fund also expects to pay distributions, which will be treated as a return of
capital for tax purposes rather than from net prots and shareholders should not assume that the source of distributions is from the net prots of the fund. Solactive
Indexes have been licensed by Solactive AG for use by Global X Management Company, LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by
Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds. Global X Management Company, LLC serves
as an advisor to the Global X Funds.
The Fund derives substantially all of its cash ow from investments in equity securities of MLPs. The amount of cash that the Fund will have available to pay or
distribute to you depends entirely on the ability of the MLPs that the Fund owns to make distributions to their partners and the tax character of those distributions.
Neither the Fund nor the Adviser has control over the actions of underlying MLPs. The amount of cash that each individual MLP can distribute to its partners will depend
on the amount of cash it generates from operations, which will vary from quarter to quarter depending on factors affecting the energy infrastructure market generally.
Available cash will also depend on the MLPs level of operating costs (including incentive distributions to the general partner), level of capital expenditures, debt service
requirements, acquisition costs (if any), uctuations in working capital needs, and other factors. The MLP holdings of the Fund expect to generate signicant investment
income, and the Funds investments may not distribute the expected or anticipated levels of cash, resulting in the risk that the Fund may not have the ability to make
cash distributions as investors expect from MLP-focused investments.
TYPE GXFS <GO>

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p e op l e, c om pan ies a nd i de a s t h at mov e m a r k et s

Prices are rising more slowly in the U.s.


and are falling in some Parts of eUroPe
as the threat of a downward sPiral
hangs over the recovery.
22 bloomberg markets May 2014

economic expansion, with sputtering


growth finally becoming steady. The
euro zone is rebounding after the tumult of its sovereign-debt crisis. So is it
time to start worrying about inflation?
Not at all. The trend is in the opposite
directionand the real cause for concern may be there, too.
Inflation is decelerating in the U.S.
Prices are falling in countries such as
Spain, which emerged from a doubledip recession only in the middle of last

IllustratIon by DomInIc clIfforD

The New
Deation Menace

The U.S. iS five years into an

disinflation sets in

The U.S. is experiencing a slowdown in the rate of price increases, which raises the risk
of a deflationary spiral.
in f lati o n s lowi n g down

inflat ion sp eeding up

The chart shows


how changes in
the inflation rate
for specific goods
and services
combined to trim
0.7 percentage
point from the
core PCE index
from December
2011 to December
2013. Larger bars
represent a bigger
effect on the
inflation rate,
after considering
the relative
weight of that
component of
the index.

RecReational
goods

MOtOr
vehicles

0.04

0.15
0.01
foReign tRavel
0.30

0.25

0.20

0.15

0.10

0.15

0.10

0.05

0.05

0.10

0.01
spending abrOad
0.03
hOusehOld
recreatiOnal supplies
iteMs

0.07

0.16

recreatiOn

0.03
transpOrtatiOn

Housing

0.05

Medical
gOOds

health-care
services

0.15

dUraBles
0.2 %

Other
durables

0.12

clOthing

0.02
communication

0.07

Furnishings,
equipMent

0.14

0.01 PeRsonal-caRe PRoducts


0.01 tobacco
0.01 newsPaPeR, stationeRy

nonPRofit
seRvices

0.10

0.10

0.03
FOOd services,
accOMMOdatiOns
0.20

0.25

0.30

nondUraBles

0.3%

services

0.05

0.2%

0.01
Financial
Water, sanitatiOn
services, educatiOn
insurance
0.01
sOcial, religiOus services
0.35

0.40

0.45

0.50

0.55

Numbers may not add due to rounding. Sources: Bloomberg, Commerce Department

year, and the inflation rate for the entire


euro zone is less than half the level that
the European Central Bank seeks.
Tame inflation can be a good thing, of
course. It allows central bankers to
keep money supplies loose and spur
growth. It also can be very bad. When
disinflation, which is a slowdown in the
rate of inflation, morphs into deflation,
an outright decline in prices, growth is
in trouble. Consumers delay purchases
in the expectation of lower prices, and
businesses stop hiring and postpone investments as sales weaken. Deflation
has had a grip on Japans economy for
the better part of two decades.
The risk of Japanification of the
euro area is high and rising, says
Joachim Fels, chief international economist at Morgan Stanley in London. He
puts the odds of a price decline in the
euro zone at about 35 percentand
finds little solace in assurances that low
inflation will linger without tipping into
deflation. Deflation wasnt on Japans
radar either, Fels says.
Inflation was just 0.7 percent in February for the 18 countries that share the
euro and hasnt been lower since 2009.
U.S. prices rose 1.2 percent in 2013,

according to the Commerce Departments personal consumption expenditures core index, which excludes food
and energy. That matches the pace in
2009, when a recession was ending, and
otherwise is the lowest since 1955.
The PCE price index was 1.9 percent
in 2011. The deceleration of inflation
over the past two years is occurring
across the U.S. economy. Price increases
slowed or stopped in 18 out of 27 index
categories, ranging from automobiles to
medications to clothing.
Theres a lack of pricing power in
most areas of the economy, says Laura
Rosner, an economist at BNP Paribas
SA in New York. Prices may be weak in
health care one month, soft in apparel
the next and so on. Its a weakness that
never quite fades, Rosner says.
Medical goods and services were 0.3
percentage point out of the 0.7 point
slowdown in the PCE index. A jump in
housing costs countered the trend. Rents
appear to be stabilizing, so housing in
2014 may give less support to inflation.
Inflation rates persistently below the
stated target can be a cause for real concern, Boston Federal Reserve Bank
President Eric Rosengren said in

January. The Fed has a goal of 2 percent


inflation, using the main PCE index, including food and energy, which it prefers
to the consumer price index. Overly low
inflation raises the risk that a shock can
tip the economy into deflation, he said.
Fed Chair Janet Yellen said on March
19 that inflation will move, over time, toward the target level. The central bank is
gradually eliminating the securities purchases that have been providing extra
stimulus to the economy. Mario Draghi,
president of the ECB, told reporters on
March 6 in Frankfurt that there is no deflation threat in the euro zone.
International Monetary Fund Managing Director Christine Lagarde, on
the other hand, is less optimistic. Deflation is the ogre that must be fought
decisively, she said in January.
Even when the risk of deflation is
slim, central bankers should worry, says
Christian Noyer, a member of the ECB
Governing Council. Precisely because
deflation is hard to reverse, even small
probabilities should not be neglected.
The ogre is hard to defeat once its out of
its lair.

mICHelle JamrIsko
aND sImoN keNNeDY

May 2014 bloomberg markets 23

Economics

13%

amount
by w h I c h

Ag e n dA

minimum wages in China are to


each year
under the
governments
five-year plan

e
ris

DEBATE

Wal-Marts
Wage Dilemma
the retAilers employees And customers show the
two sides of the economic Argument over proposAls
to rAise the minimum wAge.

Would raising the


minimum wage in
the U.S. hurt workers by increasing
unemployment?

yes

says senate republican


leader mitch mcconnEll

ThE highEr wAgE floor backed

by President Barack Obama would


cut both ways for Wal-Mart Stores
Inc. The biggest U.S. employer would
spend more on its workersand might
also see higher sales.
Raising minimum pay to $10.10 an
hour from $7.25 would increase
Wal-Marts annual labor bill by about
$200 million, the Center for Labor
Research and Education at the
University of California at Berkeley
estimates. Thats less than 1 percent of
the companys employee expenses and
is equal to about a penny for every
$16 worth of goods the retailer sells.
On the other side of the cash
register, customers would have more
to spend. That matters to Wal-Mart,
which said on Feb. 20 that profit will
trail analysts estimates this year as
customers face a weak economy and
24 bloomberg markets May 2014

government benefit cuts.


The nonpartisan Congressional
Budget Office said in a report in
February that the presidents proposal
would put an additional $31 billion in
the pockets of some 16.5 million
low-wage workers in 2016, while
500,000 jobs could be lost. High
wages make your employees better
customers, says Wallace Hopp of the
University of Michigans business
school. Youre putting this money in
the hands of people who are most
definitely going to spend it.
The last time Congress raised the
minimum wage, in 2007, H. Lee Scott,
then Wal-Marts chief executive
officer, was in favor and spoke of the
benefit to those who were struggling
to get by. This time, the company has
stayed neutral.
reNee DUDleY

no

says socialist seattle


city council MeMber
Kshama sawant

The idea that raising


the wage would harm
the most-disadvantaged
workers is a fig leaf to
justify anti-worker
policy making.

IllustratIons by tIna bernIng; J.D. Pooley/getty Images (worker); beth hall/bloomberg (wal-mart)

The last thing we need


to be doing right now in
our country is passing
legislation that destroys
even more jobs.

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Ag e n dA

Economics

egyPts PoPulation is

40 times that of qatar.


its economy is Just
3 times as big.
Source: Bloomberg

Bullish on Egypt
QAtAr bAcked the MusliM brotherhood in egypt. the eMirAtes lArgest
bAnk is betting the country will do fine with Mursi out.

We will also see foreign


investment come back to Egypt.
This is very important, and we
will facilitate such investments,
especially from the Gulffrom
Qatar itself.
I am very, very positive on Egypt
in the medium to long term.
Egypt is a big country, a big
economy and very diversified.
qATAR EXTENDED

$8 billion of economic
support to Egypt during
the one-year presidency of
the Muslim Brotherhoods
Mohamed Mursi. His
ouster created an awkward
situation. Egypts new

government returned
$2 billion of Qatari funds,
while Saudi Arabia and
other Persian Gulf states
stepped in with $15 billion
in aid.
So how does Qatar
National Bank SAQ, the

worlds strongest bank in


BLOOMBERG MARKETS
ranking last year (June
2013), feel about the bet it
placed with the purchase in
March 2013 of Societe
Generale SAs Egyptian unit
for about $2 billion? QNBs

Ali Ahmed Al-Kuwari says


hes optimistic about Egypt
post-Mursi. He spoke with
Robert Tuttle of Bloomberg
News and Ron Henkoff,
executive editor of
BLOOMBERG MARKETS, on
Feb. 24 at his office in Doha.

Demolition Derby
mattEo rEnzi, italys third

prime minister in a year, comes


into ofce with the nickname
Demolition man and a promise to
reform a failing system. one sign
of whats wrong: overly frequent
condence votes in Parliament.

enrico letta
comes to power
4/28/13

mario monti
comes to power
11/16/11

2011

2012

2013

ConFiDenCe Votes on goVernment or key legislation

26 bloomberg markets May 2014

matteo renzi
comes to power
2/22/14

2014

courtesy of qatar national bank; left to right: alfonso Jimenez Valero/getty images; filiPPo monteforte/afP/getty images; sean galluP/getty images

The rebuilding opportunities,the


trade business is going to be huge
in Egypt. Even real estate. There is
going to be an opportunity there
for development projects.

Delivering Solid Performance


Net Income

28.5%
Loans

24.9%
Total Assets

16.0%
Return on Equity

22.5%
Growing and Expanding
to Provide Greater Value
to Our Customers and Investors
Total Assets
Loans
Customer Deposits
Net Interest Income
Operating Income
Net Income
Return on Equity
Non Performing Loans - Net

FY 2012
(Rp billion)
333,304
200,742
257,661
15,459
23,905
7,046
20.0%
0.8%

FY 2013
(Rp billion)
386,655
250,638
291,890
19,058
28,499
9,054
22.5%
0.5%

Y-o-Y
(%)
16.0%
24.9%
13.3%
23.3%
19.2%
28.5%

BNI, the fourth largest commercial bank in terms of assets in Indonesia, recorded
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and customer deposits, while posting increasing protability and improving cost
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Ag e n dA

Ideas

For every one vehicle


in a car-sharing fleet

automakers lose the sale


of 32 vehicles

Source: AlixPartners

Forecasting Peak Car

EvEn as car sales have

surged in recent years,


some industry analysts
are beginning to warn of
limits to that growth. They
say the world may be
nearing peak car, a leveling
off of sales in response to
urban gridlock and foul air.
The personal vehicle that
transformed the very idea of
mobility in the last century,
the argument goes, may not
reign as the dominant form
of transport for this century.
In fast-growing large
cities, especially in the
developing world, those who
find the purchase of an
automobile newly within
reach also face horrendous
traffic jams. The promise of
the open road is giving way
to the reality that taking
mass transit, biking or
walking is often more
convenient.
Researcher IHS Automotive sees annual vehicle sales

LImIts to
Growth
As more people
move to cities,
trafc jams and
pollution may
discourage car
ownership.

Moscow

Tokyo

Sao Paulo

Beijing

topping out at about 100


million in the next decade.
That may spell trouble for
an industry that is ramping
up to have factory capacity
for the production of more

Portion of population
living in urban areas
100%

global annual vehicle sales


(in millions)
86.8 %

61.7 %
u.s.

20

120

World
1950

28 bloomberg markets May 2014

JeFF greeN
aND keItH NaUgHtoN

1983

2010

2013

87.3 %

75.5 %

69.5 %

average age of U.s. cars and light trucks


2002

urban
Constraints
sCenario

30
2035

129
102

90
60

40
Sources:
United Nations,
IHS Automotive,
Transportation
Research Institute

Current industry trend

a reckoning for automakers


as they find the urban
landscape choked by the
products they sell.

Percentage of
U.s. 19-yearolds with a
drivers license

150

80
60

than 120 million cars a year


by 2016. No one predicts
that sales will suddenly fall
offor that cars will lose
their power as status
symbols. Still, there may be

2000

2035

9.8 years
2013

11.4 years

clockwise: kimimasa mayama/BloomBerg; Julia HieBaum/getty images; levi Bianco/getty images; andrey rudakov/BloomBerg

As An ever- greAter percentAge of the worlds people settle in cities,


congestion And pollution mAy restrAin demAnd for new Automobiles.

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Ag e n dA

EnvironmEnt

WATER
POWER
Uses of
fresh water
in the U.s.

41% POWER PLANTS (COOLING)


37% IRRIGATION
Hydroelectric
not included.
14% TAP WATER
Source: U.S.
5% INDUSTRY
Geological
Survey
3% OTHER

On Dry Land

Ski reSortS had a

lousy winter. Dry


vegetation got the fire
season off to an early start.
Electricity prices may climb
because there is so little
water behind hydroelectric
dams. But the worst pain of
Californias deepening
drought will likely come in
the farming communities of
the Central Valley.
Without water, we cant
produce, says Bill Diedrich, a fourth-generation
California farmer who
grows almonds on land that

Drought has shrunk the lake


behind the san luis Dam.

is some of the most


productive in the world
when its irrigated. Without water, we dont have

Shallow watEr

1. TRiniTY lAkE
CAPACiTY:
2.45 mILLION
ACRE-fEET
CuRREnT lEvEl:
52% Of CAPACITY

1 2
o
i f
C a l

Storms in February and


March brought heavy rainfall
to California for a few days,
but it was a drop in the
bucket in reservoirs that are
drastically below normal.

2. ShASTA lAkE
4.55 mILLION
44%

3. lAkE OROvillE
3.54 mILLION
45%

5. DOn PEDRO RESERvOiR


2.03 mILLION
53%

4. nEW MElOnES lAkE


2.40 mILLION
44%

6. SAn luiS RESERvOiR


2.04 mILLION
38%

30 bloomberg markets May 2014

of Mendota, which calls


itself the Cantaloupe
Center of the World,
unemployment was already
34 percent in February. In
the last big drought, five
years ago, joblessness
reached 50 percent. Local
officials fear it may get
worse this time.
The state and federal
systems that manage
Californias water anjobs for folks. Its going to
nounced in February that
be devastating.
they will have no supplies to
Just south of Diedrichs
allocate this year, which
almond groves, in the town
leaves local agencies and
farmers to rely on wells and
other sources,
The states Department of Water Resources
including
sometimes refers to the snow in the mountains
private
as Californias largest reservoir. This part of the
water supply system is in even worse shape.
purchases of
water. In
Fresno County, the top
nORThERn MOunTAinS
agricultural county in the
SnOWPACk:
20% Of NORmAL
U.S. in 2012 based on its $6.6
billion in farm products,
CEnTRAl MOunTAinS
farmers will fallow 250,000
35%
acres (100,000 hectares) that
would typically be in
SOuThERn MOunTAinS
cultivation, about a quarter
33%
of the countys irrigated land.
Were going to be in
some uncharted territory,
says Steve Malanca, general
manager of a John Deere
OvERAll
farm equipment dealership
29%
in Fresno County. With
the zero allocation, I can
tell you that my customers
priority is not farm
Snowpack data and reservoir levels
as of March 12. Source: California
equipment. Its water.
Department of Water Resources

mICHael b. maroIs

ken james/bloomberg

As CAliforniAs drought idles fArmers, unemployment mAy top


50 perCent in some AgriCulturAl Communities.

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TYPE CSUI <GO>

Ag e n dA

loss of wealth for 19 richest


Russians in the two weeks after
troops entered Crimea (leaving
them with $208 billion)

InvestIng

Source: Bloomberg Billionaires Index

billionaire

Jon Oringer

The founder of ShuTTerSTock SeekS diverSificATion when he inveSTS in


AnyThing beyond hiS own compAnybuT hedge fundS need noT Apply.

Are technology stocks in a


bubble?
If you think about the seismic changes that are going
on, I dont think were in
a bubble. Theres so much
disruption left, and theres
so much more that we can
sell over the Internet.
Whats been your best
investment?
Shutterstock, by far. I
would say it was around a
$15,000 investment. It was
a Canon Rebel camera, a
few servers at Rackspace,
lights and an office.
And your worst investment?
A bunch of these hedge
funds at Goldman Sachs that
I personally invested in, unfortunately. It wasnt that
big. After that, I learned my
lesson: Invest in things you
know about and that you can
really understand well.
What do you invest in now?
If its not Shutterstock, its
going to be something diversified from it. So its either cash, cash equivalent or
some sort of bond product.
Lately, what I think is really interestingnot a large
part of my portfolio yet, but
it could beis LendingClub,
the San Franciscobased
32 bloomberg markets May 2014

BLOOMBERG BILLIONAIRES
INDEX NET WORTH:
$1.7 BILLION
AGE: TURNS 40 IN MAY
CITIZENSHIP: U.S.
RESIDENCES:
NEW YORK, MIAMI
PRIMARY ASSET:
SHUTTERSTOCK INC.

(New York)

INDUSTRY: PHOTO AGENCY

LENDINGCLUB,
TECH STOCKS

GOLDMAN SACHS
HEDGE FUNDS

peer-to-peer lending company. I dont really invest


in companies, because any
company I invest in would
be way too correlated to
Shutterstock. Theres no
reason for me to buy equity in one right now unless
its an entrepreneur I want
to get closer with or a business I want to see from the
inside.
Whats the best advice
you ever got?
Ive mostly gone on my own

gut. When I went through


Shutterstocks initial public offering, I asked CEOs of
several public companies
what advice they had. It was
always: Concentrate on the
business. Keep doing what
youre good at instead of
trying to change it because
of others perceptions.
Whats the best city in the
world to buy an apartment in today?
New York. Miami is a good
place to sell an apartment.

The markets really good


there. Miami is a good place
to retire. Its hard to get
stuff done down there.
Whats the last thing you
would get rid of in hard
times?
My Leica Monochrom, the
camera that literally cannot
be destroyed.

EXCERPTED FROM A FEB. 26


INTERVIEW BY DaVID De JoNg
CONDUCTED AT SHUTTERSTOCKS
HEADQUARTERS IN THE EMPIRE
STATE BUILDING IN NEW YORK.

PHOTOGRAPH BY DREW KELLY

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Londons Bankers Must


Find Their Voice

the wider economy: Britains possible departure from the isnt universal. Its not as though the City would be speakEuropean Union, as Stephanie Baker and Ben Moshinsky ing with one voice.
report in The City on Edge (page 80).
That feelings are mixed should come as no surprise. The
Prime Minister David Cameron has promised a referen- EUs efforts to strengthen and extend financial regulation have
dum on EU membership by the end of 2017assuming his aroused intense opposition in the City. Some of these reforms
Conservative Party wins remake sense; others dont.
election in 2015. At the moCamerons government has
ment, a Tory majority is
taken EU institutions to court
looking unlikely, and the opto push back against rules it
position Labour Party says
sees as misguided and, in some
that if it won, it would hold a
cases, unfairly directed at U.K.
referendum only if the U.K.
interests. Some of these lecedes more powers to the
gal battles, including one over
EU. Still, the EU is unpopa proposed financial transacular, and polling at the motions tax, arent settled.
ment points to a close call.
The City applauds this reIts quite possible that Britsistance. Yet it also underish voters, given the choice,
stands whats at stake if the
would elect to quit.
U.K. leaves the union. LonThat would be bad and
don is a global financial cenu.k. financial district leaders have
possibly catastrophic news
ter, its true, but much of its
had little to say about the biggest
issue clouding their future: britains
for the City. Without further
business depends on links to
possible exit from the eu.
delay, leaders of the finanEurope. Restrictions on comcial services industry should
merce with Europe and curbs
start explaining the dangers of a so-called Brexit.
on the free movement of capital and people would wound
Why the reticence to date? Two reasons. Right now, the whole economy, but banking and finance are especially
with the crash a vivid memory, the City is about as popu- exposed to a loss of business to Frankfurt or Paris. A 2013
lar in the U.K. as Wall Street is in the U.S. Theres a fear survey showed that more than 80 percent of financial leaders
and its warrantedthat too strident a pitch about whats want the U.K. to remain a member.
good for the City might have the opposite effect on the
The City needs to figure out a way to speak up. If it doesnt, the
electorate than the one intended. Staying out of what is U.K. cant have a proper debate or make a fully informed choice.
already a heated political debate seems wise. Also, the
opinion that an exit from the EU would badly hurt U.K. BY THE EDITORS Of BlOOmBERg vIEw
To read more editorials, type view <go> on the Bloomberg Professional service or
financial companies, though widely held in the industry, go to BloomBerg.com/view.
34 BloomBerg markets May 2014

Jason Larkin/BLoomBerg markets

Financial services have such a dominant role in the U.K. economy


that the country cant prosper unless the City, Londons financial
district, does. Yet, banks and other financial companies have had
little to say about the biggest issue clouding their future and that of

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John Browne
says drillers will
have to be very
thoughtful
about the land
atop the shale
formations.

o l d e n e rgy

n E w i d E as

formEr Bp cEo John BrownE has BEcomE thE


controvErsial facE of hydraulic fracturing,
which his opponEnts say could dEspoil thE u.k.
landscapE, including thE lancashirE hills.
By Edward roBinson

BloomBErg markEts 41

photographs By alan clarkE

o l d e n e rgy

n e w i d e as

is pelting about 30 protesters whove


converged at the gate of a natural gas
drilling site near Manchester, England. On the other side of a fence
topped with razor wire, a 10-storyhigh rig is boring into shale to determine if its suitable for hydraulic
fracturing, or fracking. The demonstrators unfurl a banner: Fracking
will poison our children. As a phalanx of police officers pushes the protesters back, a convoy of supply
trucks inches out of the gate and past
an encampment of tents and trailers
sporting placards decrying the drilling practice. Fracking will not lower
gas prices, Lord Browne, one reads
on this January morning.
The following week, the man the
protesters call the fracking czar is
seated in a solariumlike conference
room overlooking the rooftops of
Mayfair in central London. John
Browne, a former chief executive officer of oil giant BP Plc, is clad in a crisp,
white dress shirt, enameled cuff links,
a royal-blue necktie and dark trousers.
Browne, an independent member of
the House of Lords and a nonexecutive
director in the U.K. governments
Cabinet Office, is lamenting how the
protests may slow his efforts to bring
Americas shale boom to Britain.
Browne says fracking would secure a
new domestic energy source, create
thousands of jobs, generate billions of
pounds in tax revenue and be a far
cheaper alternative than constructing
nuclear plants. Shale gas could be very,
very important for this country; it
42 bloomberg markets May 2014

could be transformative, says Browne,


66, whos now chairman of Cuadrilla
Resources Ltd., a British exploration
firm that plans to frack the English
countryside. Its like the opening of
Alaska or western Siberia or the Gulf of
Mexico.
Browne, who was trained as a petroleum engineer, played a part in
each of those pivotal events during 38

2012, will be a net exporter of the hydrocarbon by 2018.


Even as evidence mounts that
fracking operations drain aquifers
and spew methane into the air, energy
firms are fanning out across mammoth shale deposits in China, Russia,
India, South Africa, Australia, Argentina and elsewhere. Royal Dutch Shell
Plc, based in The Hague, has joined
forces with Beijing-based China Petroleum & Chemical Corp., or Sinopec, in central and southern China to
exploit the worlds largest shale gas
laden formations. And San Ramon,
Californiabased Chevron Corp. has
agreed to invest as much as $16 billion in partnership with YPF SA, Argentinas state oil producer, to drill in
the Vaca Muerta formation near the
Andes. That deposit alone could multiply the South American nations oil
reserves eightfold and make it a

years at BP, including 12 as CEO. Now,


seven years after leaving BP, hes at
the forefront of a push by major energy companies and wildcatters to
take fracking global. Hydraulic fracturingin which drillers blast water,
sand and chemicals into shale deep
beneath the earth to release oil and
natural gasis revolutionizing the
energy game in the worlds No. 1 economy: After steadily declining for
about 25 years, U.S. oil production
surged 47 percent from 2008 to 2013,
according to data compiled by Bloomberg. And the Department of Energy
forecasts that the U.S., which imported 6 percent of the gas it used in

power in natural gas exports, according to the U.S. Energy Information


Administration, or EIA.
U.S. wildcatters, who started the
shale boom in the mid-2000s, are
ready to pounce now that Mexican
President Enrique Pena Nieto has
opened his country to foreign petroleum investment. One choice target:
the gas-rich Eagle Ford formation
that snakes from Texas into the Mexican state of Tamaulipas. Its the
best shale play in Texas, but when
you hit Mexico, theres no activity,
says Chris Wright, CEO of Liberty Resources II LLC, a Denver-based producer that fracks oil in North Dakota.

opening spread: groomer: khandiz joni

a drilling-site
protest near
manchester,
england.
activists, left
to right,
opposite, gave
their names as
Beth, gigi, mac,
maggie and
john-jo.

Even relatively small Britain is sitting on a gas mother lode. The Bowland-Hodder formation, a belt of
shale that stretches across Englands
midsection, holds more than 37 trillion cubic meters (1,300 trillion cubic feet) of natural gas, according to
estimates from the British Geological Survey. Thats almost the same
size as the Marcellus deposit under
the Appalachian Mountains, the No. 1
shale gas find in the U.S. The mineral
is so impermeable that it yields only
a fraction of its hydrocarbons to producers. The Marcellus is on course to
give up about 9 percent, according to
data from the Marcellus Center for
Outreach and Research at Pennsylvania State University in University
Park. If the Bowland performs similarly, Britain will have enough gas
to meet its needs for more than 40
years, according to data from the BGS
and the EIA.
Such a windfall would be welcome
in a country that expects to import 70
percent of its natural gas by 2020 as
its North Sea reserves dwindle, says

Michael Fallon, the U.K. energy minister. Shale gas is coming to the U.K.
one way or another, says Fallon,
Prime Minister David Camerons
point man on shale gas development.
It would be far nicer if it came from
underneath Britain rather than be
imported from the U.S. or elsewhere.
Later this year, the U.K. government
plans to issue a new round of oil and
gas exploration licenses for an area

by relying more on wind, sunlight and


other renewable resources. In the
midst of a brutal winter that left record snowfall and flooding in the
Northern Hemisphere, the European
Commission in January proposed reducing carbon dioxide emissions to
40 percent below 1990 levels by 2030.
Yet soaring demand for energy
worldwide will require an investment
of about $37 trillion over the next 21
years on new infrastructure for electricity and fuel production, according
to the Paris-based International Energy Agency. Forecasting that renewable sources would account for just 18
percent of energy usage by 2035,
compared with 13 percent in 2011, it
suggested the world may be entering
a Golden Age of Gas. We are definitely going to have to burn hydrocarbons for a considerable amount of
time; we have no choice, says
Browne, who became the first CEO of
an oil major to acknowledge that fossil fuels contributed to climate
change, in a 1997 speech he gave at
Stanford University.
Even the green-leaning EU may
find shale irresistible, says Fadel
Gheit, an oil industry analyst at
Oppenheimer & Co. in New York.
Natural gas, which is composed primarily of methane, emits half the
carbon dioxide of coal when burned
in power plants, according to the U.S.

sha l e gas cou l d b e v ery, v ery


im porta n t for th is cou ntry,
form er b p c eo j ohn b row ne says.
it cou l d b e tra nsform ativ e.
covering about 60 percent of England, Scotland and Wales.
The shale boom is striking as the
worlds leading economies struggle to
find a balance between promoting
economic growth and addressing climate change. The U.S., the European
Union and China, among others, have
vowed to reduce greenhouse gas
emissions over the next two decades

Environmental Protection Agency.


It could offer the 28-nation bloc
relief from steep energy prices. European manufacturers pay more than
twice what they would in the U.S. for
electricity, the European Commission says.
Then theres the Russia angle. The
EU imports about 30 percent of its
natural gas from its neighbor to the
May 2014 bloomberg markets 43

n e w i d e as

east, with several pipelines traversing


strife-torn Ukraine on Russias southwest flank. On March 3, natural gas
futures in Germany, the U.K. and
other European markets spiked as
much as 10 percent as Russian troops
took control of Ukraines Crimea
region.
Europes vulnerability contrasts
with the energy security that the U.S.
has derived from its shale bonanza.
Following approval from the Obama
administration, American producers
will begin exporting natural gas in
2015. Meanwhile, U.S. Senator Lisa
Murkowski, an Alaska Republican, is
leading an effort for suspension of the
39-year-old ban on oil exports. The
State Departments Bureau of Energy
Resources, formed in 2011, plans to
use American hydrocarbons as a new
tool of foreign policy.
Browne says the upheaval in
Ukraine should spur European political leaders to clear the way for shale
gas. I hope this reminds people that
having indigenous sources is a good
thing, he says. Germany, Spain and
the Scandinavian nations have approved shale exploration, and Cuadrilla has leased sites in the
Netherlands. John Browne is on the
right track, Gheit says. Fracking has
transformed our thinking in the U.S.
about our energy future. And Europe
will have to finally wake up and realize that it needs to make some hard
choices about developing its own domestic resources.
Renewable energy advocates counter that shale gas may deepen dependence on hydrocarbons and worsen
global warming. The impact of methane, in its unburned form, on climate
change is 20 times that of carbon dioxide, according to the EPA. In August, a study conducted by scientists
from the U.S. National Oceanic and
Atmospheric Administration found
that natural gas wells in Utah were releasing 6 to 12 percent of their output
into the air.
Such leakage could erase the advantage natural gas has over coal,
44 bloomberg markets May 2014

if shale gas development isnt


accompanied by a constraint of coal,
then its going to be a disaster,
green alliances spencer says.
says Nicholas Stern, chairman of the
Grantham Research Institute on Climate Change and the Environment at
the London School of Economics and
Political Science. He says hes concerned policy makers will embrace
shale at the expense of alternatives
such as wind and solar power. It is

Brownes Pivot
Po ints
His 45-year career
mirrors tHe evolution
of tHe modern oil
industry.
1969
posted to Alaskas North slope as
a petroleum engineer for bp.

1981
manages oil production from the Forties field in
the North sea off scotland.
1988
leads bps deep-water
exploration of the Gulf
of mexico.
1997
becomes the first industry
head to acknowledge
climate change. Three
years later, he refurbishes
the company logo.
2003
Forges a joint britishRussian oil venture,
TNK-bp, winning over
president vladimir putin.
2014
leads the fracking push in the u.K. against strong
public opposition.
Source: Bloomberg

important that policies to encourage


the development of shale gas do not
create uncertainty and undermine
the confidence of investors about the
future for low-carbon energy sources
in the U.K., Stern said in an e-mailed
response to questions. It would not
be helpful, for instance, if the promotion of shale gas by the government
slowed down the deployment of wind
farms. U.K. Energy Minister Fallon
says the government remains committed to renewable energy, citing
the 66 million pounds ($110 million)
in investments its making to spur the
development of offshore wind farms
and other projects.
Even if natural gas supplants coal
in the U.K. or throughout the EU, the
dirtier fossil fuel will still be burned
elsewhere, says Matthew Spencer, the
director of Green Alliance, a Londonbased environmental group. U.S. coal
exports to Brazil, Germany and other
markets have doubled since fracking
took off in 2005, as American utilities
have opted for cheap natural gas, according to the DOE. Spencer says the
influx of shale gas may have the perverse effect of forcing coal producers
to lower prices to compete. That, in
turn, will make coal more attractive
to burn, increasing carbon dioxide
emissions, the No. 1 cause of atmospheric warming, according to the
EPA. Even though gas is a cleaner
fuel, the growth of shale runs a locomotive through our attempts to limit
climate change, Spencer says. If
shale gas development isnt accompanied by a constraint of coal, then its
going to be a disaster.
Brownes shale play vaults him into
the center of yet another historic
shift in the global energy industry.
Only this time hes not running a
company with 97,000 employees that

Top To boTTom: JoHNNY EGGITT/AFp/GETTY ImAGEs; RAlpH CRANE/TImE & lIFE pICTuREs/GETTY ImAGEs; HulToN ARCHIvE/GETTY ImAGEs; GIllEs bAssIGNAC/GAmmA-RApHo vIA GETTY ImAGEs

o l d e n e rgy

o l d e n e rgy

n e w i d e as

produced almost 4 million barrels of


oil equivalent a day in more than 100
countries. Today, Browne, an elegant
man with wavy brown hair and
amused eyes, is a partner at Riverstone Holdings LLC, a New York
based private-equity firm with $27
billion invested in energy companies
ranging from biofuel makers to pipeline operators. In 2010, a Riverstone
fund acquired a 41 percent stake in
Cuadrilla for $58 million, and Browne
joined its board. Based in Lichfield,
England, the seven-year-old company
is named after the team of helpers
who aid the matador in a bullfight.
Cuadrillas primary asset: the government-issued shale gas exploration
license for a huge chunk of the Bowland deposit in Lancashire, a county
in northwestern England. In February, the company said it planned to
apply to the local county council for
permits to frack eight exploratory
wells there, the biggest such operation to date in the U.K. The geology
looks so promising that in June, Centrica Plc, a publicly traded energy
company based in Windsor, England,
bought a 25 percent interest in Cuadrillas Bowland license for 40 million and agreed to pay up to 120

46 bloomberg markets May 2014

million in exploration costs. Cuadrilla


paid 1,000 for the license.
Browne has become the face of
fracking in the U.K.so much so
that the protesters at the drilling site
near Manchester singled him out
even though another company, IGas

dispatched that November to the oil


rush then dawning on Alaskas forbidding North Slope. During the next
25 years, Browne managed some of
BPs most-valued exploration and
production projects, including the
now-legendary Forties field in the

cuadrilla is not doing this in the


national interest, says ian roberts,
co-fou n der of a n a n ti-f rac king
grou p. its sel f-interest.
Energy Plc, not Cuadrilla, is the
operator there. Browne has been
steeped in the petroleum trade since he
spent part of his childhood amid Irans
oil fields. His father, John, worked for
BP, and his mother, Paula, a Hungarian
of Jewish descent who was imprisoned
in Auschwitz, was a hatmaker. Browne
says one of his most vivid boyhood
memories is of a well fire that burned
for more than a month.
After earning a degree in physics
from the University of Cambridge
in 1969, Browne joined British Petroleum as a field engineer and was
IGas Energys 10-story-high rig
drills into the gas-rich BowlandHodder formation.

North Sea and deep-water exploration in the Gulf of Mexico.


Browne kicked off the era of the oil
supermajor after he became CEO in
1995. In 1998, he executed the $62 billion takeover of Amoco Corp., the biggest oil deal of its kind up to then. The
next year, Exxon Corp. acquired Mobil Corp. for $88 billion. Big Oil was in
full swing.
Browne broke from industry orthodoxy in 2000 by pledging to address
global warming with investments in
renewable energy projects. He shortened the companys official name to
BP, adopted the slogan Beyond petroleum and replaced the companys
shield logo with a sunburst in green,
yellow and white.
Finding oil remained paramount,
and in the early 2000s, Browne
abetted by his friend Tony Blair,
thenU.K. prime ministernegotiated one-on-one with Russian President Vladimir Putin to open Siberia
in a big way to Western petroleum
companies. That led to the formation
in 2003 of TNK-BP, a joint venture
that has since unwound and left the
British company with a 20 percent
stake in OAO Rosneft, Russias No. 1
oil concern.
By 2006, Browne had become
one of the most influential oilmen
of his era and a member of the British establishment. He was ennobled by Elizabeth II in 2001, when
Blair was in office, as Lord Browne
of Madingley, after a village near

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Why Consider Commodities


in 2014?

Analyzing historic business cycles shows strong commodity


performance has historically followed strong equity markets.
Historically, allocating to commodities has improved
portfolio risk-adjusted returns and may serve as a core
component of investors liquid alternative allocations.
Despite recent underperformance in commodities,
heading into 2014 there are a number of reasons we
believe investors should consider commodities. Namely,
strong performance in the late expansion segment of the
business cycle, but also:

Reversion to low-correlation between


commodities and stocks

Potential rising future levels of ination

Contrarian play on bearish market sentiment

Stabilization in China and Emerging Markets

Strong Performance in the Late Expansion


Segment of the Business Cycle
Commodities have historically performed much
differently across various segments of the business
cycle than stocks and bonds. Typically, stocks and
bonds have their strongest performance in the late
recession and early expansion segments of the
business cycle. Following a surge in equity markets
since 2008, we may be approaching the late expansion
segment in which commodities have their strongest
performance, equities average slightly negative
performance and bonds produce minimal gains.

Business Cycle

Early
Recession

Late
Expansion
Current
Phase
Late
Recession

Early
Expansion

Asset allocation/diversication does not guarantee a prot or elimate the risk of loss.

Source: Invesco PowerShares


For illustrative purposes only

ADVERTISEMENT
The following table depicts early and late recession segments that are dened as equal halves of a historical recession.
Trailing one year prior to a recession is dened as late expansion and one year post recession as early expansion.

From 19592013 (Eight Recessions)


Equities

Bonds

Late Recession

32.39%

20.30%

-1.14%

Early Expansion

14.49%

8.62%

5.96%

Late Expansion

-1.72%

1.01%

22.67%

Early Recession

-25.04%

3.03%

-4.48%

Source: Vanguard calculations, based on CRB: Datastream,


Thomson Reuters from 1959 2009. From 2009 2013
Invesco PowerShares and Bloomberg, L.P., as of November
30, 2013. Stocks are represented by the S&P 500 Index,
bonds by the Barclays U.S. Aggregate Index and commodities
by an equal weight composite of the DBIQ OY Energy Index,
DBIQ OY Base Metals Index, DBIQ Diversied Agriculture
Index and the DBIQ OY Precious Metals Index.

Commodities

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE


RESULTS. An investor cannot invest directly in an index.
Stocks are more volatile than bonds and bonds are subject to
the effects of changing interest rates. Returns are annualized.
Commodities may subject an investor to greater volatility than
traditional securities such as stocks and bonds.

To learn more about the opportunities we are seeing in commodities,


please call us at 800.983.0903.
Important Information
Commodities and futures generally are volatile and are not suitable for all investors. The information provided is for
educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a
particular investor.
Opinions expressed are based on current market conditions and are subject to change without notice. These opinions may
differ from those of other Invesco investment professionals.
Glossary of Terms
Bear market: Represents a period of sustained falling
securities prices of typically 20% or more across multiple
indexes and for a period of longer than two months
Business cycle: Represents uctuations in economic activity
over time and dened by periods of economic expansion and
recession
Correlation: Indicates the degree to which two investments
have historically moved in the same direction and magnitude.

Expansion: Represents a period of economic growth

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For US Use Only

Ination: The rate at which the prices of goods and services


rises and subsequent purchasing power declines
Recession: Represents a period of economic contraction
Risk-adjusted returns: A measure of how much risk is taken
on by a security to produce a certain level of return.

o l d e n e rgy

n e W i d e as

Cambridge where he lived. He served


as president of the Royal Academy
of Engineering, became a director of
Goldman Sachs Group Inc. and was
a regular at the annual World Economic Forum in Davos, Switzerland.
His green credentials got him heralded as the Sun King in a 2002
Financial Times profile.
Then a spate of disasters battered
Brownes fortunesand those of BP,
which began to lose its green luster.
In 2005, an explosion killed 15 BP
workers at a refinery near Houston
that had inadequate safety practices,
according to a commission led by former U.S. Secretary of State James
Baker. The next year, a BP pipeline in
Alaska dumped more than 212,000
gallons of crude onto the tundra.
Those events foreshadowed others
that occurred after Browne left BP,
including the worst oil spill in history,

the 2010 Deepwater Horizon rig


blowout in the Gulf of Mexico.
In January 2007, Browne, a gay
man whod kept his sexual orientation a secret, faced a personal crisis. A
former boyfriend gave an account of
his relationship with the BP CEO to
the Mail on Sunday newspaper. Seeking an injunction to block its publication, Browne misled the court, saying
in a witness statement that theyd
met while jogging in a park rather
than through an escort agency. He resigned as CEO on May 1, 2007.
Browne has now become an advocate for addressing homophobia
in the corporate world. Hes written
a book, The Glass Closet, to be published in May by WH Allen, that tells

his own story and those of other men


and women whove struggled with
whether to come out in their professional lives. I wrote it because
I never want anyone to go through
what I went through, he says.

Denver-based oilman Chris Wright


says opposition by local residents in
england could stymie fracking there.
50 bloomberg markets May 2014

andrew Pemberton keeps 130 cows


on his dairy farm, which is located
downstream from a proposed drill site.

In his new business incarnation,


Browne will seek to overcome the opposition of many Britons who find
unconscionable his plans for their
densely populated island kingdom,
which is only slightly larger than
Minnesota. Because gas output from
shale typically falls 70 percent after
the first 12 months of operation, Cuadrilla and other operators would have
to drill 2,000 to 3,000 new wells a
year to match the annual volume of
imported natural gas, says David
King, a former U.K. government chief
scientific adviser whos now the Foreign Offices special representative
for climate change. If you want to
keep up production, you have to keep
up fracking, King told the House of
Lords Economic Affairs Committee
in January.
Dozens of community groups have
joined forces with environmental organizations to appeal to local county
councils not to approve fracking applications. In one stratagem organized

bottom: benjamin rasmussen/bloomberg markets

if i have to raise cows on radioactive


grass, whos going to buy my milk?
dairy far m e r a n d rew p e m b erton
says. im out of business.

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o l d e n e rgy

n e w i d e as

by Greenpeace, homeowners are asking the courts to block Cuadrilla and


other operators from drilling horizontally under their land, a key maneuver
in fracking. Unlike in the U.S., British property owners dont hold title to
the oil and gas under their landthe
Crown does. So drillers such as Cuadrilla cant win grass-roots support by
paying out royalties in exchange for
drilling rights, which is a crucial instrument U.S. operators have used to
lock up sites.
At the Manchester-area site operated by IGas, a London firm thats
one-fifth owned by Hong Kongbased
explorer Cnooc Ltd., demonstrators
have been blocking an access road
and trying to slow delivery vehicles
since December. Its going to be
amazingly political, says Garry
White, a spokesman for Charles
Stanley & Co., a London investment
firm that held 515,681 shares in IGas
as of March 10. As projects get delayed, operators will have to raise
capital, so as a shareholder you have
to ask whether youll get diluted out.
As of that date, IGas shares had returned 26 percent in 12 months.
Browne says hed rather face public
opprobrium, legal challenges and environmental regulations in Britain
than the political uncertainty that
prevails in other countries. This is
the next place to go to, Browne says.
Its easier than us going to China,
where there was a land-grab free-forall with lots of Chinese companies, or
Argentina, or India, or South Africa.
There are rules in Europe, and they
are slavishly applied. And we are
quite sure we can operate within
those rules.
Brownes shale bet will be decided
in a bucket-shaped piece of land
called the Fylde that juts into the
Irish Sea north of Liverpool. Framed
by the gritty seaside city of Blackpool
to the west and the moors of the Bowland Fells to the east, this coastal
plain is quilted with rich pastureland,
rural villages and some industry.
52 bloomberg markets May 2014

Whe re t h e Sh a l e IS
TwenTy years afTer a Texas wildcaTTer named GeorGe miTchell blasTed shale
wiTh waTer, enerGy firms are racinG To frack The mineral for oil and naTural
Gas around The Globe.
shale formaTions
conTaininG oil and Gas,
as of may 2013

CAnAdA 5

U.S. 2

top shale oil finds*


(billions of barrels)

1
2
3
4
5

russia
U.s.
China
argentina
libya

75
58
32
27
26

top shale gas finds*


(Trillions of cubic feeT)

1
2
3
4
5

China
argentina
algeria
U.s.
Canada

1,115
802
707
665
573

ArgentinA 4

*Extractable quantities. Sources: Bloomberg, company reports, U.S. Energy Information Administration

(Defense contractor BAE Systems Plc


assembles jet fighters here.) It sits on
a part of the Bowland shale thats
1,800 meters (6,000 feet) thick.
Cuadrilla has been testing the rock
here since 2007. We have no doubt
theres a lot of gas here, says Andrew

Quarles van Ufford, Cuadrillas technical director.


In 2010, Cuadrillas operations in
the Fylde got off to a shaky startliterallywhen its drilling triggered
two tremors registering 2.3 and 1.5 on
the Richter scale. The events alarmed

The Bowland-Hodder
formation may yield a 40-year
supply of natural gas for the U.K.
The Bazhenov formation may double
Russias crude output.

players: Cuadrilla Resources,

IGas, Total

players: Exxon Mobil, Lukoil, Rosneft


Russia 1

China 3
algeRia 3

libya 5

The Neuquen Basin


may multiply
Argentinas oil
reserves eightfold.

Australias little-explored
Canning Basin has
geology similar to
North Dakotas booming
Bakken formation.
players: Apache, Buru

Energy, Mitsubishi

players: Chevron,

Shell, YPF

local residents, and the national government declared a moratorium to


evaluate seismic risk, which has since
been lifted.
If the company eventually moves
to full-scale production, the Fylde
will become a less tranquil place,

according to a strategic environmental assessment released by the U.K.


Department of Energy and Climate
Change in December. Tanker trucks
hauling water and equipment will
make dozens of trips every day to the
well sites, which will teem with rigs

and chemical storage tanks. Up to


18,750 cubic meters of water pumped
into each well to frack the shale will
come back to the surface as mud and
wastewater, enough to fill about eight
Olympic-sized swimming pools for
each well. The assessment concludes
May 2014 bloomberg markets 53

o l d e n e rgy

n e w i d e as

that fracking may harm air quality,


contaminate groundwater and despoil the landscape. It says regulators
and local officials can prevent these
adverse effects by making sure the
wells are properly constructed and
that wastewater is safely removed
from drilling sites.
Thats cold comfort for Andrew
Pemberton, a dairy farmer located
about 1 kilometers south of one of
the proposed fracking sites. On a wet
February afternoon, Pemberton,
wearing blue coveralls and waterproof
Wellington boots, is churning up grass
and beets for his 130 milk cows in a
whirring machine that looks like a giant kitchen mixer. He says hes anxious because a network of dykes and
brooks drains his land southward: If

land we use on top of the shale; this is


not Texas, Browne says. Public
pressure is an amazing innovator of
technology.
Even so, government and industry
are using old-fashioned largess to
win fracking support. In January,
Prime Minister Cameron announced
that county councils would be entitled to keep 100 percent of the taxes
drillers paytwice what municipal
bodies normally collect. The U.K. Onshore Operators Group, the industry
lobby, pledged to pay 100,000 per
well to boroughs and villages. In Lancashire, Cuadrilla has sponsored soccer teams, a theater group and a
young engineers contest for students
with a prize of 10,000 for the winning high school.

w h e n you lo o k at th e ba l a nc e of
ris k an d r ewa rd, i t s ev i d e nt that
t h is is s om e t h i n g t h ats going to
b e don e , b row n e says .
a well ruptured or wastewater spilled
upstream from his farm, it could contaminate his pastures.
Whats more, the U.K. Environment Agency found in 2011 that the
flowback water from Cuadrillas
fracked well contained high levels of
radium, a naturally occurring radioactive byproduct of uranium that can
cause cancer. Im not a bloody treehugger, but if I have to raise cows on
radioactive grass, whos going to buy
my milk? Pemberton, 57, says. Im
out of business.
Browne says fracking and farming
can coexist because the shale lies
thousands of meters below the water
table. By making sure the wells remain intact, there will be little danger
that wastewater will leak near the
surface, he says. To minimize the surface area of land affected by drill
sites, Cuadrilla plans to bore two to
four lateral underground shafts from
each vertical well. Well have to be
very thoughtful here about how much
54 bloomberg markets May 2014

Ian Roberts, co-founder of Residents Action on Fylde Fracking, decries these gestures as bribes. His
organization is urging the Lancashire
County Council to reject Cuadrillas
fracking applications in coming
months. Cuadrilla is not doing this
in the national interest; its self-interest, says Roberts, a retired human resources manager at HM
Revenue & Customs, the British tax
collection agency. We still have the
power to stop it, adds Tina Rothery,

bloomberg tps

another leader of the group.


Viewed from abroad, this sort of
local opposition is off-putting for energy companies. Liberty Resources
Wright says it presents an obstacle
to development. I looked at the
Bowland four years ago, but the process in England has been very slow
and cumbersome, and thats because
the locals arent on board yet,
Wright says.
As Browne sizes up the challenge
before him, he reflects on how a
technique promoted by a Texas wildcatter named George Mitchell in the
early 1990s is changing the worlds
biggest industry. Shale, a mineral
composed primarily of quartz and
clay that happens to be a superb container for oil and gas molecules, is
everywhere. And as nations around
the globe grasp the potential for
greater energy independence, theres
little chance theyll leave their shale
untouched.
For Browne, the engineer son of an
oilman, exploration has always been
about measuring the probabilities:
You focus on a promising piece of
ground, analyze the rock and drill test
wells. Browne says fracking is inevitable. When you look at the balance of
risk and reward, its evident that this
is something thats going to be done,
he says. And whether his compatriots
like it or not, Brownes test well is
Britain.
edward robinson is a senior writer
at bloomberg markets in london.
edrobinson@bloomberg.net

Digging into shale

You can use the Bloomberg Industries natural gas production dashboard to
find research and data related to European shale gas. Type BI NGASE <Go>
and click on Themes. Scroll down to the theme entitled The Challenge
From Shale Gas in Europe and click on it to display recent research pieces.
For information on the portfolio of Riverstone Holdings, John Brownes
private-equity firm, type 312903Z US <Equity> DES <Go> and click on Portfolio. To watch a recent appearance by Browne on Charlie Rose, type NSN
N27U0R6S972R <Go> 97 <Go>. JON ASMUNDSSON

Powershares QQQ looks to companies that are looking forward. Thats why the ETF
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TYPE POWE <GO>

Drillers burn off the


natural gas that
surfaces with oil on a
farm in North Dakota.

o l d e n e rgy

n e w i d e as

The fossil fuel The u.s.


embraces as cheap,
abundanT and less
noxious Than oil or coal
sTill spews The co2
heaTing The aTmosphere.
some enTrepreneurs
smell opporTuniTy.
by John lipperT
phoTographs by
spencer lowell

bloomberg markeTs 57

o l d e n e rgy

n e w i d e as

chief executive officer of Inventys


Thermal Technologies Inc. in Burnaby, British Columbia, holds up a
6-inch piece of charcoal, showing how
light passes through toothpick-sized
air shafts. He says the crevices in this
filter offer a cheap way to capture carbon dioxide before it ascends into the
atmosphere and haunts future
generations.
Boulet, who has spent $12 million on
his seven-year-old company, predicts
Inventyss sales may reach hundreds of
millions of dollars in five yearsdriven
in part by North Americas natural gas
boom. President Barack Obama calls
gas a bridge fuel for the U.S. economy.
Power plants, factories and refineries
are jumping onboard, lured by a 71 percent plunge in U.S. prices from 2005 to
March 10. The country generated 28
percent of electricity with gas in 2013,
up from 22 percent six years earlier, according to Bloomberg New Energy
Finance.
Buoyed by gas, the fossil-fuel industry is trying to bask in a newfound
green image. America is now the
worlds No. 1 natural gas producer,
thanks to safe, proven hydraulic fracturing technologymaking cleanburning, domestic natural gas the fuel
of choice, the American Petroleum Institute proclaims.
Even the U.S. Environmental Protection Agency says natural gas has advantages: It releases 50 percent less carbon
dioxide in producing electricity than
58 bloomberg markets May 2014

does coal, the major fossil-fuel polluter,


the agency says.
Climate scientists say gas isnt as
clean as its made out to be. A 50 percent reduction in CO2 doesnt mean the
air is getting better, says Anna Michalak, a climate researcher in Stanford,
California, with the Carnegie Institution for Science. It means its getting
worse at a slower rate.
Compounding the harm, methane,
the main component of natural gas,
leaks from oil and gas wells. The EPA
may be underestimating the amount
of this greenhouse gas in the

atmosphere by 50 percent, Michalak


says.
Entrepreneurs trying to clean up gas
encounter a perverse twist. Boulet says
that for now, the only way he can fund
his research is to sell the CO2 his filter
traps to oil companies. Theyll use it to
drill for crude that is dirtierand more
harmful to the environmentthan natural gas.
Boulet is working with Calgarybased Husky Energy Inc., in which
Hong Kong billionaire Li Ka-shing and
his companies have a 70 percent stake.
He says Husky will trap carbon from its

natural-gas-powered boiler that creates steam to extract petroleum from


Canadas oil sands, which the Sierra
Club says produce the planets most
toxic fossil fuel.
Boulet says Husky will inject the carbon into an oil field near Lloydminster,
a town that straddles Alberta and Saskatchewan, to boost production in a
process called enhanced oil recovery,
or EOR. Mel Duvall, a Husky spokesman, declined to comment.
John Bennett, the Sierra Clubs executive director in Canada, says such efforts to trap CO 2 are misdirected.
Carbon capture is a myth the oil industry uses to convince us to continue
burning fossil fuels, says Bennett, who
adds that governments should back renewables and conservation as higher
priorities.
Boulet says hes willing to work
in the oil sands in the short run because the money he makes will enable him to invest in research with far

a steppingstone, Boulet says. A little


bit of evil for the greater good.
The U.S. has no such restrictions on
carbon dioxide, at least not yet. The EPA
says CO2 accounts for most greenhouse
gas emissions from human activity. In
2009, the agency labeled six gases, including CO2 and methane, as threats to
public health because they contribute to
global warming. The U.S. is scheduled to
complete its first CO2 rules by January,
starting with new coal-fired power

I f w e d on t
ca ptu re ca rb on
fro m n atu ra l
gas , w e ca n t get
w h e re w e n eed
to b e o n c l Im ate
fast en ou gh, J oh n
th o m pson says.

andre boulet,
CEO of Inventys,
opposite, stands
in front of the
prototype of his
carbon-capture
equipment, left.

broader uses: helping gas- and coalfired power plants and industrial sites
respond should governments restrict
CO2. Starting in 2015, Canada will cut
average pollution from new coal-fired
plants roughly in half by limiting them
to 925 pounds (420 kilograms) of CO2
emissions per megawatt hour. EOR is

plants. The regulations wont affect


most new large gas-fired facilities,
which with todays technology typically
operate at less than their proposed limit
of 1,000 pounds of CO2 emissions per
megawatt hour.
Leniency for natural gas may not
last. Four years ago, Obama told United

Nations delegates the country would


cut greenhouse gases 17 percent by
2020 from 2005 levels, and 83 percent
by 2050; in September, the State Department predicted a 7.5 percent drop
by 2020 without additional regulatory
measures.
John Thompson, director of the Fossil Transition Project for the Bostonbased Clean Air Task Force, says the
EPA may require carbon capture on gas
when the agency updates its mandate
in eight years. The ratchet only turns
one way, says Thompson, whose group
works with businesses and governments to promote low-carbon research
in the U.S. and China.
Thompson says the world also needs
CO2 restraints on cement factories,
steel mills and petrochemical plants.
These facilities, which cant run solely
on renewables, produce a quarter of
global CO2 emissions, he says. In the
U.S., about 100 gas-fired industrial sites
that have won operating permits since
2012 will emit as much CO2 as 20 new
coal plants, the Washington-based Environmental Integrity Project says. If
we dont capture carbon from natural
gas, we cant get where we need to be on
climate fast enough, Thompson says.
The U.S. Department of Energy, for
its part, is funding research on how to
lower the cost and improve the efficiency of capturing CO 2 emissions
from both coal and natural gas, says
Julio Friedmann, deputy assistant
secretary for clean coal. These investments, and the technical ability to capture and safely store emissions from
natural gas, are an important part of
the administrations efforts to move
toward a low-carbon energy future,
Friedmann says. He declined to comment on whether legal limits on CO2
emissions from natural gas may get
lowered in the future.
Inventyss Boulet, 40, is part of a
small band of entrepreneurs chasing
riches by removing carbon from the socalled clean fossil fuel. Hes betting hydrocarbon consumers will increasingly
opt to trap emissions from natural gas,
May 2014 bloomberg markets 59

n e w i d e as

if not to help the environment then to


duck potential government sanctions
or to sell CO2 at a profit. He says he can
capture CO2 for $15 a ton, about onesixth the cost of technology that relies
on ammonia-based chemicals called
amines. I dont want to be a tourist in
life, says Boulet, who retired for two
years after his wife got rich in the stock

market, then returned to start Inventys


in 2007. This isnt such a daunting
task.
Steven Chu, an Inventys director
who was Obamas energy secretary
from 2009 to 2013, says if the invention
works outside the lab, it could join a parade of rapid advances in low-carbon
technologies in the past five years.

t ra p p i ng ca rb o n with c harc oal


Inventys technology uses actIvated charcoal to capture c0 2 from burnIng natural
gas for $15 a ton, about one-sIxth the cost of current methods.
FEED

CapturE

CO 2

Flue gas, which consists


of C02, nitrogen and
other chemicals, arrives
from a natural-gas power
plant, refinery or other
emissions source.

C
o

2
1

VEnt
n

The nitrogen is
released through
a vent.

Flue
gaS

wash
4
The carbon filter
turns. Steam
breaks the chemical
bond and washes
away the CO2.

CO 2
5

SCale

output

C
o

CO2 is collected, pressurized and


pumped into a pipeline for enhanced
oil recovery or storage.

human
60 bloomberg markets May 2014

Source: Inventys

Among them are photovoltaic cells


whose prices have fallen 80 percent
and cheaper automotive batteries. Inventys can do something these technologies cant: reduce carbon emissions
from steel mills and petrochemical
plants, says Chu, a Nobel Prizewinning physicist. Im investing the most
valuable thing I havemy timeto
help them get a real shot at success, he
says.
Boulet, who holds a chemical engineering degree from the University of
British Columbia, worked with industrial gases at what was then QuestAir
Technologies Inc. in Burnaby. He designed gear to extract hydrogen from
natural gas, and, in turn, use hydrogen
to power fuel cells for cars.
At Inventys, he began experimenting
with so-called activated charcoal, a
form of carbon thats treated with oxygen to open tiny pores. He discovered
that when CO2 is exposed to cold air, it
forms a weak chemical bond akin to
static cling inside the pores. Steam is all
thats needed to break the bond.
A prototype in his Burnaby lab outside Vancouver sandwiches 4-foot
(1.2-meter) tubes of charcoal between
metal discs and stands them straight
up. The assembly rotates, and valves
open to saturate the charcoal with CO2rich gas that in a real-life setting would
spew out. Steam washes away the CO2,
which can be shipped to oil fields for
EOR. Boulet says 10 percent of a plants
heat is needed to break the charcoal
bond, 20 percentage points less than
plants using ammonia-based chemicals. He says his carbon-filter equipment will be small enough to attach to
the side of a smokestack.
Some inventors see a future in which
natural gas is burned inside sealed systems that prevent carbon from escaping in the first place. They capture CO2
and pump it into pipelines for distribution to oil fields for EOR or to underground aquifers for long-term
sequestration. The U.S. had 4,100 miles
(6,600 kilometers) of CO2 pipelines in
2013.

illustration by Jing Zhang

o l d e n e rgy

o l d e n e rgy

n e w i d e as

Clean Energy Systems Inc. in Rancho Cordova, California, uses a modified space shuttle engine, which can
also burn synthesis gas, or syngas, extracted from coal, for combustion. The
companys roots date to World War II.
Founder Rudi Beichel worked on V-2
rockets with Wernher von Braun, the
German physicist who emigrated to the
U.S. and later helped put men on the
moon.
Rocket scientists always understood
that sealed, high-pressure combustion
needs less fuel and produces fewer
emissions than other types, but they
didnt see a civilian power market because nobody got penalized
NET Powers
for pollution. The model we
bill brown is
have today is to take carbon
working with
out of the ground, use it and turbine maker
Toshiba
throw it into the air, CEO
Power.
Keith Pronske, 54, says. In
the future, we should put it back, he
says, referring to sequestration or EOR.
Pronskes engine looks like a hydraheaded machine with its tangle of natural gas, oxygen and water tubes. A
honeycombed fuel injector lets in
enough gas and oxygen for combustion
and enough water to prevent melting.
Burning produces CO 2 and steam,
which spins a turbine to create power.
Most plants waste energy in this step.
Pronske says his system is 45 percent
efficient, meaning that it converts that
much of its fuel to usable power. That
theres absolutely
equals the efficiency of so-called combined-cycle gas plants, which use gas
no doubt this
and steam turbines in tandem, and retechnology can
lease CO2. Customers can sweeten the
produce tens of
deal with Clean Energys technique by
billions in revenue
selling CO2 for $30 a ton. A 250-megawithin 10 years, ceo
watt plant would also create 600,000
bill brown says of
gallons (2.3 million liters) of potable
water a day, enough for 6,000 people,
net powers systeM.
Pronske says.
Clean Energy is finding interest in
major gas-producing locales. Maersk
Oil, a unit of Copenhagen-based A.P.
is part of the United Arab Emirates,
Moeller-Maersk A/S, agreed in Januwhich wants to devote more of the
ary to investigate the technology with
worlds second-largest proven gas restate-owned developer Masdar Abu
serves to its industries. In 2018, a gasDhabi Future Energy Co. Abu Dhabi
fired plant is scheduled to supply
62 bloomberg markets May 2014

electricity for an aluminum smelter


and CO2 for offshore oil fields. We are
always under pressure, as we are perceived to be responsible for pollution,
says Pieter Kapteijn, a technical director at Maersk, which has a license to
market Clean Energy Systems technology. This allows us to differentiate
our company and use CO2 for EOR.
Bill Brown, CEO of NET Power LLC
in Durham, North Carolina, says his
technology can generate electricity at a
lower price than todays power plants
and capture CO2 with no unplanned
emissions. NET Power starts with a
sealed, high-pressure system. Oxygen
and natural gas are burned to heat up
and liquefy CO2, which drives a device

P ollution P ro o fing
P ow e r P la nts

Inventors are testIng ways to elImInate emIssIons


whIle cuttIng the costs of generatIng electrIcIty.

combined-cycle plant (current technology)


resources in

2
1

combustIon
chamber

rEsourcEs out

heat-recovery
steam generator

ExhAust gAs

natural
gas

generator

e lect r i c i t y
p r o d u ct i o n
c ost 1

$ 91.63 2

per megawatt
hour wIth
carbon capture

ElEctricity

Steam
gas turbIne
condenser
steam turbIne

exhaust
stack

air

115
metrIc tons of

generator

nItrogen oxIde

ElEctricity
1 Natural gas mixes with air and burns, creating pressure that spins a gas turbine. 2 The hot exhaust gas expands through a
heat-recovery unit and powers a separate steam turbine. 3 Thirty percent of the plants heat is used to convert cooling water into
steam. CO2 and other emissions can be captured or released up the stack. 4 Both turbines power generators to make electricity.

net powers proposed plant


generator

resources in
1

rEsourcEs out

co 2
turbIne

heat exchanger

combustor

aIr-separatIon unIt

CO2 +

H2O

wAtEr

illustration by Jing Zhang

e lect r i c i t y
p r o d u ct i o n
c ost 1

$ 62.85

Av e r Ag e A n n uAl
e mi ss i o n s 3

CO2

Or syngas

tons of co 2

ElEctricity

water
separator

natural
gas

1.5
mIllIon metrIc

per megawatt
hour burnIng
natural gas

Pure
oxygen

Av e r Ag e A n n uAl
e mi ss i o n s
w i t ho u t cA r b on
cA pt u r e

some Co 2 ReCyCled

EnhancEd Oil
rEcOvEry Or
stOragE

0nItrogen oxIde
0 co

somE co 2
pipEd Out

1 Minimum

1 Oxygen is separated from nitrogen in the air-separation unit and sent to the combustion chamber. 2 A mix of oxygen, CO2 and
natural gas or other fuel burns, creating pressure to spin a CO2-powered turbine and run an electricity generator. 3 Hot CO2 from the
combustor passes alongside cool CO2 coming back from a device that separates water from CO2. 4 Some CO2 is recycled back to the
combustor, where its reburned. 5 Other CO2 can be diverted to a pipeline for enhanced oil recovery or storage underground at no
additional cost.

depending
on size of plant, etc.
2 Electricity
production costs
without carbon
capture are $63.98.
3 Diverting CO 2
into a pipeline for
storage or EOR.
Sources: NET Power,
Panda Power Funds

May 2014 bloomberg markets 63

o l d e n e rgy

n e w i d e as

similar to a gas turbine. The CO2 is recycled back to the combustion chamber. It arrives at 750 degrees Celsius
(1,382 degrees Fahrenheit), meaning
NET Power needs just 400 degrees Celsius more to hit its optimal operating
temperature. The process saves fuel
and eliminates a boiler, steam turbine
and condenser, says Brown, 58, who has
worked at Goldman Sachs Group Inc.
and Morgan Stanley, where he was
global co-head of listed derivatives.
We have to replace a lot of power
plants that were built after World War
II, says Ralph Eads, vice chairman of
Jefferies Group LLC, which holds an
equity stake in the startup. NET Power
has a solution thats economical and
environmentally friendly.
NET Power has attracted Toshiba
Power Systems Co., one of the worlds
largest turbine makers. Hideo Nomoto,
the Yokohama, Japanbased research director of Toshiba Power, ranks NET Powers technology among the top energy
innovations of the past 100 years, alongside nuclear power and combined-cycle
combustion. Chicago Bridge & Iron Co.
has signed on to build NET Power electricity plants if a demonstration project
succeeds; Exelon Corp. will run them.
The arrangement melds the creativity of
startups with the massive resources
needed to fight climate change, Nomoto
says. We will have a very big market, he
predicts. It could be any power plant,
anywhere in the world.
NET Power can with no added cost divert CO2 into a pipeline for EOR or sequestration. The company says it
achieves 51 percent efficiency for coal
and 59 percent for natural gas. It also
says costs, including capital and operating expenses, are $62.85 per megawatt
hour for a NET Power plant burning
natural gas. That compares with $91.63
for a combined-cycle gas plant capturing CO2. A coal plant trapping carbon
costs $101.25, NET Power says.
Weve got to be cheaper, says Brown,
who left Wall Street in 2007 to teach at
his alma mater Duke University School
of Law and start 8 Rivers Capital LLC,
64 bloomberg markets May 2014

Clean Energy
Systems
CEO keith Pronske
uses a modified
space shuttle
engine, shown
below, to produce
power without
releasing emissions
into the air.

THE MODEL WE HAVE TODAY


IS TO TAKE CARBON OUT OF
THE GROUND AND THROW IT
INTO THE AIR, SAYS CLEAN
ENERGY SYSTEMS CEO
KEITH PRONSKE, WHO
WANTS TO CHANGE THAT.

which owns NET Power. Weve got to


be better environmentally, he says of
comparisons to current power plants.
Theres absolutely no doubt this technology can produce tens of billions in
revenue within 10 years.
NET Power is attracting interest in
petroleum country. In North Dakotas
Bakken formation, oil drilling exploded
so fast that few companies waited for
pipelines to haul away natural gas that

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o l d e n e rgy

n e w i d e as

comes with the crude. Roaring gas flares


light up the desolate landscape, emitting
amounts of CO2 equal to 2 coal plants,
according to a Clean Air Task Force
analysis. Brenda Jorgenson, who raises
cattle atop a valley explored by Meriwether Lewis, says gas fumes turn trees
yellow. When a flare sometimes blows
out, it fills her home with methane.
Natural gas cant be the bridge fuel
that the industry portrays if too much
methane escapes, says Jim Barry, the
Dublin-based head of renewable power
investing at BlackRock Inc., the worlds
biggest money manager. You see estimates of 1 to 6 percent of gas being released at wellheads, Barry says. Its
been suggested if its more than 3 percent, natural gas is no better than coal,
Barry says, referring to studies at Cornell University and elsewhere showing
that the combination of methane and
CO2 amplifies damage from gas. This
must be objectively determined.
North Dakota is investigating
whether NET Power can help with an
array of energy issues, including flaring. Last year, the state and two power
companies that belong to the Lignite
Energy Council spent $1 million to assess the technology for electricity the
Bakken needs. Lignite is a low-grade
coal North Dakota has in abundance.
Initial findings on the plant, which
could burn natural gas or syngas from
lignite or both, were encouraging, says
Al Rudeck, planning vice president for
Minnesota Power, a unit of Allete Inc.
NET Power is a breakthrough, he
says. It helps us move to less carbon
intensity in a responsible way.
John Harju sees another plus. Harju,
associate director for research at the
Energy and Environmental Research
Center in Grand Forks, North Dakota,
says such a plant could sell carbon for
EOR and help prolong the biggest U.S.
oil discovery in four decades. He says
hes confident he can make EOR work
in the Bakkens nonporous rockand
potentially develop a market for billions of tons of CO2 that would otherwise linger in the atmosphere. The oil
66 bloomberg markets May 2014

How Hy d roca rb on s stac k Up


All fossil fuels
leAve their
footprint on
the environment.
nAturAl gAs is
growing in
populArity for
electricity
generAtion in the
u.s. it releAses less
cArbon thAn oil And
coAl. methAne,
Another greenhouse
gAs, cAn leAk from
nAturAl gAs And oil
wellheAds.

Main Use

natUral gas

petroleUM

coal

Power plants,
refineries,
petrochemical plants

Transportation,
home heating

Power plants, steel


mills, cement
factories

p o U n ds o f co 2
p er M M bt U

117.0

157.2 1

205.7

av er age
ef f i ci en cy o f
U. s . p ow er
p l a n t f l eet

42.4 %

31 %

32.5 %

cost p er
M M bt U 2

$4.65

$19.26

$2.36

1 Gasoline only.
2 Reflects U.S. only.

Sources: BNEF, BP, EIA

itself will then be burned and produce


more CO2. If oil produced with EOR replaces Midwestern U.S. crude extracted
through traditional drilling, about
four-fifths of the CO2 consumed in the
process will remain trapped underground, a 2013 study by the Pembina
Institute, a Calgary-based environmental group, found.
Captured CO2 from power plants and
elsewhere might also create incentives to
build gas pipelines and help reduce flaring, says Brad Crabtree, vice president of
the Minneapolis-based Great Plains Institute. Without a longer life for the Bakken, theres less enthusiasm for such
infrastructure. In the short run, North

bloomberg tps

Dakota should force drillers to spend


more to combat flaring, Crabtree says.
Tim Profeta, who chairs the advisory
board for NET Power owner 8 Rivers
Capital, says the U.S. natural gas boom
can go two ways in the next decade.
These 10 years will be our enemy if we
only think about cheap gas and stop investing in low-carbon technology, says
Profeta, who also directs Dukes Nicholas Institute for Environmental Policy
Solutions. These 10 years will be our
friend if we use them wisely.
john lippert is a senior writer at
bloomberg markets in chicago.
jlippert@bloomberg.net with assistance
from jim polson in new york, mark drajem
in washington and rebecca penty
in calgary.

sifting tHROUgH
emissiOns data

Type ESG <Go> for information on environmental, social and governance data
on the Bloomberg Professional service. You can use the Financial Analysis
function to dig into environmental data for a company. Type AEP US <Equity>
FA ESG <Go>, for example, to analyze data for Columbus, Ohiobased American Electric Power Co. Click on the Environmental subtab for the companys
greenhouse gas emissions. Type BI CLIMG <Go> for the Bloomberg Industries
dashboard on climate change. Click on Utilities under Industries on the left
side of the screen for research on power generation. JON ASMUNDSSON

I V Y FUNDS Research & Process

Individual Insights.
Collective Wisdom.

To really understand an
opportunity, you cant rely on
a single viewpoint. You need
expert input from all sides.
Z AC K SH A FR A N

Global Director, Equity & Fixed Income Research

At Ivy Funds, we believe that true market awareness


comes only through a cross-disciplinary approach.
Which is why, in addition to doing our own research
throughout the world, we base our nal investment
strategies on input from our industry experts.
Through bull and bear markets, weve followed a
time-tested investment process, marked by rigorous debate,
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approach. Because we never forget its our clients money
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I V Y F U N D S .C O M
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o l d e n e rgy

n e w i d e as

A ship loads up with


liquid natural gas at
the port of Ras Laffan,
the worlds largest
such facility.

68 bLoombeRg maRkets

by robert tuttle

the worlds biggest liquefied natural gas exporter is being


challenged by australia and the u.s. the emirates response:
buy up the competition.

n e w i d e as

70 meters high brighten the night sky


above Qatars Ras Laffan Industrial
City. The 295-square-kilometer complex houses the worlds largest assemblage of liquefied natural gas
plants and the biggest port for LNG
exports on the globe. Ras Laffan chills
to a fluid more gas in a year than Canada consumes and then ships it to run
electric plants and warm homes from
Tokyo to Buenos Aires. The gas facilities within its grounds produce almost a third of the worlds LNG
exports.
The government takes every precaution against sabotage. Entry to the
Industrial City for those who dont
work there is severely restricted;
photography is forbidden. Ras Laffan
is what makes Qatar the richest nation in the world, with a per capita income for its citizens of $101,000 in
2012, according to International
Monetary Fund data.
The greatest threat to Qatars enormous wealth is competition. Other
nations are challenging its LNG dominance. Australia is constructing liquefaction plants that will more than
triple its annual LNG-manufacturing
capacity to 85 million tons by 2018,
surpassing Qatar, according to data
compiled by Bloomberg Industries.
Taking advantage of new production
from hydraulic fracturing, U.S. companies such as Houston-based Cheniere Energy Inc. and ConocoPhillips;
70 bloomberg markets May 2014

Richmond, Virginiabased Dominion


Resources Inc.; and San Diegobased
Sempra Energy have sought U.S. Energy Department approval for 37
LNG export projects. U.S. producers
have signed contracts to supply Asian
LNG buyers, including GAIL India
Ltd., Korea Gas Corp. and Tokyo Electric Power Co., at prices that undercut what Qatar is being paid. Canada,
Mozambique, Russia and Tanzania
also plan new LNG export plants, according to Bloomberg Industries
data. The global LNG market is going
to loosen, and that has a big impact
for the Qataris, says Trevor Sikorski,
a gas, coal and carbon analyst at consulting firm Energy Aspects Ltd. in
London. Pressure will mount
through the rest of this decade. First,
you have the Australians, and then
you have the U.S.
LNG spot prices in northeast Asia,
where Qatar shipped 63 percent of its

LNG in 2012, could fall as low as $12


per million British thermal units by
2016 as new supply enters the market, Sikorski says. They climbed to a
record $19.70 in February, according
to the New Yorkbased Energy Intelligence Groups World Gas Intelligence publication.
Qatar faces diminished market
share and the possibility of lower
prices just as the country embarks on
$200 billion of infrastructure spending before hosting the 2022 soccer
World Cup. Gross domestic product
growth is projected to slow to an average of 6.3 percent in the next five
years after increasing an average of 11
percent annually for the five years
at center, rob sherwin, shells deputy
country chairman, and, to his left, energy
minister mohammed bin saleh al sada

previous spread: courtesy of Qatar petroleum

o l d e n e rgy

ended in 2013, according


to the IMF.
Qatars response is
typical of its free-spending government: Sheikh
Tamim bin Hamad Al
Thani, the emirates
ruler, is buying up the competition.
Qatar Petroleum International Ltd.,
the state energy companys foreign
investment unit, has purchased
stakes in gas and oil fields in Brazil,
Canada and the Republic of Congo
since April 2013. QPI owns a 70 percent stake in Houston-based Golden
Pass Products LLC, a joint venture
with Exxon Mobil Corp. that operates
an LNG import terminal in Sabine
Pass, Texas. QPI is seeking final permission from the Energy Department
to add an export terminal to the existing import terminal.
In addition, Qatars main sovereign
wealth fund, the Qatar Investment
Authority, has taken stakes in Royal
Dutch Shell Plc and Frances Total SA,
both of which operate LNG plants
around the world. We are capitalizing on our experiences and successes
as the biggest LNG producer and exporter, Qatari Energy Minister Mohammed bin Saleh Al Sada wrote in a
February e-mail to BloomBerg markets. It is natural that we expand
our LNG business to cover other parts
of the world, including the United
States.
Al Sada says the surge in gas production around the globe just proves
there is great demand for Qatars
main export. He says it is evidence
that natural gas will have a bigger
share in the worlds overall energy
mix; this is advantageous.
Forty years ago, Qatar was a petroleum backwater compared with its
Persian Gulf neighbors Kuwait, Saudi
Arabia and the United Arab Emirates.
Its transformation began in 1971,
when Shell discovered Qatars North
Field, the worlds largest gas reservoir. Little was done to develop the
field until the country completed its

shell has spent


$21 billion on an
lnG plant and
the Pearl, left,
a gas-to-liquids
facility at ras
laffan.

this spread: courtesy of shell and qatar petroleum (2)

g as wa r ?

Price per million btus


$20

the lnG tariff for


asian importers
has been indexed to
the price of oil.
With the flood of
cheap neW Gas from
the u.s., that
connection Will
be compromised.

Japan
$16.90

15
10

$9.69

U.k.
5

Japan price is for LNG;


U.S. and U.K. figures are
for nonliquid gas.

$4.65

U.s.

3/10/13

ToP 5 LNg exPorTers, 2012


QaTar

77.4 Million
Tons

ToP 5 LNg imPorTers , 2012

malaysia australia niGeria indonesia

23.1

3/10/14

20.8

20.0

18.1

JaPaN

88.1 Million
Tons

south Korea china

36.8

14.7

spain

india

14.5

13.3

Sources: Bloomberg, International Gas Union, International Group of Liquefied Natural


Gas Importers

May 2014 bloomberg markets 71

o l d e n e rgy

n e w i d e as

first LNG plants at Ras Laffan in 1996


in partnership with Mobil.
During the next 15 years, 14 LNG
plants were built, all of them in partnership with Western petroleum
companies. The plants are capable of
producing a total of 77 million tons of
the fuel each year. Proceeds from gas
exports have given Qatar the highest
per capita GDP in the world, 29 percent higher than No. 2 Luxembourg.
Shell left Qatar in the early 1990s
amid low oil prices and returned in
2002. It spent $21 billion building an

r eve n ue f ro m t h e
exp ort of nat u ra l
gas h as giv e n
qatar s c it i ze n s
the h igh est p e r
cap ita in co m e
i n t h e wor l d :
$ 10 1 ,0 0 0 in 20 1 2.

LNG plant at Ras Laffan and another


facility called the Pearl, which is the
worlds largest gas-to-liquids plant.
The Pearl plant turns natural gas into
140,000 barrels a day of liquid fuels
that would normally be made in an oil
refinery, including kerosene for jet
fuel and base oil, which is used to
make motor oil for autos. There is
probably no other country in the
world where it could have happened
that Shell would have had the confidence to invest $21 billion of its own
cash, says Rob Sherwin, Shells deputy country chairman. It has become, in just a decade, a new
heartland for Shell.
The Qatari government has put a
moratorium on further development
of the North Field so it can assess
ways to maintain output levels and
has suspended construction of new
LNG plants. That creates an opening
for competing nations. In Australia,
72 bloomberg markets May 2014

ac q u is itiv e

Qatar Petroleum InternatIonal has resPonded to the challenges to Its lng hegemony
by buyIng uP gas and oIl fIelds and exPort facIlItIes around the world.
ActiOn

investment

Oct. 2012

Houston-based Golden Pass Products, a joint venture with Exxon


Mobil, is given approval to export LNG from the U.S.

$10 billion

April 2013

Teams with U.K.-based Centrica to buy natural gas fields from


Canadas Suncor Energy.

$902 million

Dec. 2013

Finalizes purchase of 15 percent stake in Totals Republic of Congo


operations through a capital injection.

$1.6 billion

JAn. 2014

Buys 23 percent of Brazilian offshore oil fields Parque das Conchas.

$1 billion

Sources: Bloomberg, Qatar Petroleum

London-based BG Group Plc is scheduled to start up its Queensland LNG


export plant in the fourth quarter,
while Adelaide-based Santos Ltd. and
Sydney-based Origin Energy Ltd. are
due to launch plants next year. San
Ramon, Californiabased Chevron
Corp. and ConocoPhillips are also
building LNG export facilities, as is
Texas gas producer Cheniere.
The gas exporters see that their
world is changing. The U.S.s new ability to produce gas by cracking underground shale deposits is a game
changer for the industry, says Mohammad Hossein Adeli, secretarygeneral of the 13-nation, Doha-based
Gas Exporting Countries Forum. (For
more on the future of hydraulic fracturing, see The Lord of Fracking,
page 40.)
U.S. exports are a particular challenge because their price wont necessarily follow a longtime convention

bloomberg tps

that links LNG tariffs to the price of


oil, says Thierry Bros, a gas analyst at
Paris-based bank Societe Generale
SA. Under the arrangement, Japan
bought LNG for an average of $16.06
per million BTUs in 2013, according
to LNG Japan Corp. U.S. gas futures,
meanwhile, traded at an average of
$3.73. The cost of liquefaction, shipping to Asia and turning LNG back
into gas will add $6 to $8 per million
BTUs to the price of the U.S. gas, according to an April 2013 report by
NERA Economic Consulting. Thats
still a bargain for Japanese and other
Asian importers.
With the U.S. LNG exports looming,
Japanese and other Asian companies
do not want to pay oil-indexation
prices for the gas any longer, Bros says.
Qatar will have to adapt.
robert tuttle covers the gas industry
at BloomBerg news in doha.
rtuttle@BloomBerg.net

Looking at
Lng Prices

You can use Bloomberg Industries data to analyze global LNG prices. Type
BI LNGG <Go> and click on Trade & Prices in the left column for a list of
netbacks for LNG exports from and to various countries. A netback is the
price at the import destination minus shipping costs. Click on the plus sign
next to From Qatar To for prices of Qatari gas in different countries. To track
shipments from Qatars Ras Laffan, type NOON LNG <Go> for the Noon
Seaborne Report and click on the plus sign to the left of Middle East.
rocky swifT

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TYPE VETF <GO>

Former Wall Street bankerS and


private-equity FirmS are
joStling For poSition in an unlikely
aSSet claSS: trailer parkS.

By Anthony EffingEr And KAthErinE Burton


PhotogrAPhs By nolAn ConwAy
74

bloomberg marketS

A colorful sampling of mobile


homes from Little Texas, Dan
Weissman and David
Shlachters park in Austin

hen Dan Weissman worked at


Goldman Sachs Group Inc. and, later,
at a hedge fund, he didnt have to worry
about methamphetamine addicts chasing his employees with metal pipes. Or
SWAT teams barging into his workplace looking for arsonists.
Both things have happened since he
left Wall Street and bought five mobile
home parks: four in Texas and one in
Indiana. Yet he says hes never been so
relaxed in his life.
Weissman, a University of Michigan
economics graduate, attributes his newfound calm to the supply-demand equation in the trailer park industry. With
more of the U.S. middle class sliding into
poverty and many towns banning new

76 bloomberg markets May 2014

trailer parks, enterprising owners are


getting rich renting the concrete pads
and surrounding dirt on which residents park their homes. The greatest
part of the business is that we go to sleep
at night not ever worrying about demand
for our product, Weissman, 34, says.
Its the best decision Ive ever made.
Better yet, Weissman says, the field
isnt packed with the hyperdriven geeks
and MBAs who crowd technology and
finance in the San Francisco Bay area,
where he and David Shlachter, his business partner and brother-in-law, both
live. Youve got a lot of really smart
people trying to come up with a better
way to put a calendar on an iPhone,
says Shlachter, 32, who has a masters degree in development economics from Harvards Kennedy School of
Government. Wed rather sit at a different poker table, where none of those
people dare to go because it doesnt
sound good at a cocktail party.
Weissman and Shlachter are part
of a white-collar exodus to rougher

industries, as investors seek yield amid


chronically low rates or steady income after being cast out from finance
or law. Steven Uster, a former investment banker at Zurich-based UBS AG,
moved back to his native Toronto to start
Zillidy Inc., an online lender that charges
as much as 2.99 percent a month, or 35.9
percent a year, loaning against jewelry,
watches and gold. In 2009, Ed Vasser
left his job at a hedge fund and started investing his own capital in a wide range of
down-and-dirty investments, including
subsidized housing, storage units and
tax liens. Hes in the midst of buying part
of a truck wash. I like to say I turned in
my Rolex for a pinky ring, Vasser says.
The economics of mobile homes are
particularly alluring to folks whove
made their living in the markets. Many
counties in the U.S. have banned or discouraged construction of new trailer
parks because the inhabitants are poor,

Weissman, left, and shlachter show off


a home at their Austin trailer park.

pay little in taxes and drain resources.


Yet demand is higher than ever, new
investors in the parks say, because so
many people never got back on their
feet after the recession.
David Protiva, a former mortgagebacked-bond salesman at Kidder,
Peabody & Co. and Donaldson, Lufkin &
Jenrette Inc., now owns four trailer parks
in Georgia. Hes noticed that until 2008,
most people coming into his parks were
moving up; they owned nothing before
buying a trailer. Since 2009, half of his
residents have come to him from conventional homes, moving down, he says.
Roughly 6 percent of Americans lived
in mobile homes in 2012, according to
the U.S. Census Bureau. Until recently,
billionaire Sam Zell and a few other investors who run real estate investment
trusts had the market to themselves.
We like the oligopoly nature of our
business, Zell said on a 2012 analyst
conference call for his Chicago-based
Equity Lifestyle Properties Inc., which
owns 71,500 trailer sites. Warren Buffett targeted the industry more than a
decade ago when he purchased Clayton
Homes Inc., the largest manufacturer
of mobile homes. Now, private-equity
firms are starting to prowl the parks.
Carlyle Group LP bought two in Florida
in October for a combined $31 million.
Both are high-end senior parks, where
tenants must be 55 or over, and one is
just steps from the Atlantic.

A tree-lined street through little texas,


which was renovated by its new owners

The new tycoons in the business


are professionals like Weissman and
Shlachter, who are willing to buy
smaller, sometimes squalid parks,
where tenants have damaged credit and
maybe criminal records. The sellers
are often mom-and-pop owners who
set up the parks in the 1960s and 1970s
and have little incentive to improve
them because tenants cant afford to
leave. One Colorado owner bragged to
Shlachter about never plowing the
snow, which saved him money. Its
hairy, and its colorful, and its sometimes scary, Shlachter says.
Weissman and Shlachter take pride

The biggest eye-opener, they say, has


been finding so many capable people
banished to poverty by a stupid mistake,
like getting busted for drugs. Weissman
and Shlachter hire those people as managers, with, they say, excellent results.
They give them incentives for collecting
100 percent of the rents on time and for
finding tenants for vacant sites. Nothing makes us happier than cutting bonus checks, Weissman says.
Frank Rolfe and his partner, Dave
ReynoldsFrank and Dave, as theyre
known in the industrysay the 20 percent return many parks throw off annually is enough to get the genteel set
over the idea of owning a community of
ramshackle double-widesextra-wide
trailers that have to be transported
in halves. Rolfe and Reynolds own
100 parks in 16 states and also run the
Mobile Home University, an academy
that holds three-day boot camps for aspiring trailer lords for $1,999 a person.
An increasing number of his students,
Rolfe says, are bankers and engineers.
The beauty of a trailer parkfor its
owner, anywayis that once a tenant trucks a home to a site, then lowers it onto a pad, as its known in the
business, and hooks up to the electricity and septic systems, hes unlikely to
leave. It costs at least $5,000 to move a
home, a sum that trailer dwellers rarely
accumulate more than once, Rolfe says.
Were like a Waffle House where ev-

the jaffa parks owners say their new life in


cheap housing is richer. its hairy and colorful
and sometimes scary, shlachter says.
in improving the lives of residents in
some of the more rundown parks theyve
bought. And they say owning trailer parks
has taught them what its like to be poor
in America. Many tenants cant get bank
accounts because they have wretched
credit. Instead, they use prepaid debit
cards that charge a fee of as much as $4
to load just $20 onto them. Its expensive to be poor, Shlachter says.

eryone is chained to the booths.


One of Rolfes former pupils is
Jefferson Lilly, who has an MBA from
the University of Pennsylvanias Wharton School and is a former Bain & Co.
consultant. Lilly, 46, spent 10 years selling software for various tech firms, including MBlox Inc., a company that
makes mobile-phone texting systems.
Then he got sick of it. In March 2007,
May 2014 bloomberg markets 77

after countless hours of prospecting, he found, on EBay, a 66-pad


park in Slaughterville, Oklahoma,
1,600 miles (2,600 kilometers) from
his apartment in San Francisco. I
went from mobile phones to mobile
homes, Lilly says. I never thought
Id be Slaughtervilles largest landlord. If youd told me that while I was
at Wharton getting my fancy MBA, I
would have said you were nuts.
Lilly bought a second, 20-pad
park in Tuttle, Oklahomathis
time off Craigslist. Its on a hillside
with a dirt road and a smattering
of trees. Visiting it one frigid night
in February, Lilly discovers water leaking from one of the homes.
His manager and two residents
struggle to get it stopped. As they
work, an oil well in the next field
vents sulfurous gas that drifts over.
Yet residents stay, in part because
they can send their kids to Tuttles
schools, which are among the best
in the region, he says.
Lilly will take tenants whove been
through bankruptcy as well as felons.
Just no violent ones or child molesters.
Im the Wal-Mart of housing, Lilly
says. Nobody can undercut me.
The key measure in mobile homes,
as in all rental real estate, is the capitalization, or cap, rate. Its the amount
of income a property throws off from
pad rents, minus mortgage payments
and other costs, divided by the price of
the property. Nationwide, rents average about $390 per pad per month, according to real estate researcher JLT &
Associates. So if a mobile home park is
worth $1 million and nets $70,000 from
rent annually, it has a cap rate of 7 percent. Rolfe and Reynolds aim for a cap
rate of 9 to 10 percent when they buy.
The way to instant profits is to find
a distressed parka place where rent
checks are late, water meters dont
exist and trailers date from the 1980s
or 1990sbuy it cheaply and turn it
around. At the Tuttle property, which
cost Lilly $280,000 to buy in 2013, the
previous owners had paid the water bill.
78 bloomberg markets May 2014

Lilly installed meters on each trailer so


the renters could pay for their own water
usagesaving him about $13,000 a year.
Sometimes parks need what Shlachter
calls a cultural reset to get people to
pay their rent on time and take care of
their homes. He and Weissman have
instituted a late fee of $40 if they dont
get a check by the sixth of the month
and another $40 if the money still isnt
there by the 16th. They mow the grass
around tenants pads if it gets too high
and then charge them.
The pair also tries to make life better
in their parks. Nita Holcomb, 80, who has
lived in Little Texas, their 73-pad park in
Austin, since 1995, praises the two men
for putting in speed bumps and fixing
3-foot-deep (1-meter-deep) potholes.
Theyve landscaped the yard in front of
the clubhouse. They hold block parties
and hand out school supplies to kids.
Their goal is to instill pride of ownership,
which helps them, too. We want our kids
to own these things, Shlachter says.
Weissman and Shlachter call their
company Jaffa Parks LLC, named for
a neighborhood in Tel Aviv that they

Jefferson lilly says he went from


mobile phones to mobile homes.

both love. Weissman, whos originally


from Seattle, worked at Goldman from
2002 to 2004 before joining Chicagobased TradeLink Holdings LLC, where
he traded stocks for a hedge fund. He
hated the hours and the stress, so in
2009 he moved to the Bay area and set
up his own investment firm, managing
money for friends and family while he
scouted new industries.
Shlachter, whos from Portland,
Oregon, was working in Israel at Better Place Inc. when he and Weissman
started talking about going into business together. Better Place was in the
midst of spending $850 million in equity capital trying to build charging
stations for electric cars. The company
went bankrupt last year.
When they got together in 2010, Weissman and Shlachter looked for a business
that was unsexy and fragmented, with
operations that could be run by deputies. Shlachter is a big-wave surfer, which
requires being available when the swell

Digging for golD in


a Trailer Park
Jeferson Lilly paid $280,000 for
Tuttle Estates, shown here, a 20-pad
park in Oklahoma. Hes made a number
of changes to boost revenue:
1. Increased lot rents by $25 a month.
2. Repaired mobile homes and

hits. The litmus test was if we told someone at a cocktail party what we do and
their response was a grimace, we were
on the right track, Shlachter says.
A family friend had made a fortune
in roller rinks, so real property enticed
them. They settled on trailer parks and
started a long, hard search. Many of the
nicest parks are owned by Zell or another big player. The smaller parks are
often neglected slums.
In Fort Worth, Texas, a woman with
the e-mail name spaceylacey0420 was
selling a park that looked promising,
save for the sewage it drained into a nature preserve. In Banning, California,
a barista at the local Starbucks
which was, strangely, out of milktold
Shlachter to get out of town because
there was nothing good there.
Finally, in November 2012, they
closed on a 191-pad park in Odessa,
Texas, called the Vista West Mobile
Home Ranch. They were finally park

negotiated rent-to-buy deals with


the tenants.
3. Began charging residents for the

water they use, saving $13,000 and


reducing water use by 25 percent.
4. Renegotiated the contract for

garbage pickup, saving $2,000.


5. Expects to increase annual

prot from $29,000 to $68,000,


raising the cap rate for the project
to 24 percent from 10 percent.
Source: Jefferson Lilly

owners. Then, Highland Estates, a park


in Indianapolis with 159 pads, popped
up. They flew out and looked it over. It
was a 78-acre (32-hectare) dystopia.
More than 70 homes were abandoned,
and some of them contained evidence
that the former residents had cooked
meth. They went for it anyway. These
things are hard to find, Weissman says.
Two hours after the deal closed,
while Shlachter was heading out to
surf on the California coast, the park

manager called to tell him his new asset


had made the national news. A SWAT
team had descended on one of the
trailers, whose owner was suspected of
blowing up a house nearby for the insurance money and flattening part of a
subdivision in the process, killing two.
The trailer owner and two others were
charged with arson and murder.
Later, a squatter on meth chased
the park manager with a metal pipe.
The county health department delivered a stack of violations 8 inches high.
When you stop maintaining anything,
it goes bad, Shlachter says. When you
stop maintaining a mobile home park,
it goes real bad, real fast.
Jaffa paid a local scrapper to stuff 60
of the abandoned, vandalized homes
into a compactor at $1,800 apiece. They
bought a backhoe to fix sewer lines and
landscape the place and brought in 23
brand-new homes and rented them.
They renovated 14 others, fixed up the
clubhouse, refurbished the pool and
raised rents. Jaffa paid $485,000 for the
park, including back taxes, and made
$250,000 in improvements. The owners expect to earn $150,000 in 2014
and the place is only 40 percent full.
These days, Weissman and Shlachter
are looking to get bigger. Theyre eying
a $17 million park in a location they decline to disclose. Were ready to step up
to the big leagues now, Weissman says.
But we couldnt have done it without
getting our hands dirty. Very dirty.
Soon, Jaffa Parks will have a
new office in Mill Valley north of
San Francisco. Its many tax brackets away from the pairs trailer
park in Austin. Weissman and
Shlachter say they appreciate their
lives more now that theyve seen how
the other half lives. And when they
meet new people at cocktail parties,
many of them creating apps for mobile
phones at companies in San Francisco,
they say that theyre in mobile, too.
anthony effinger is a senior writer
at BloomBerg markets in Portland.
aeffinger@BloomBerg.net
katherine burton covers hedge funds
at BloomBerg news in new York.
kBurton@BloomBerg.net

May 2014 bloomberg markets 79

As much As London bAnkers grumbLe About meddLing from brusseLs,

they sAy it wouLd be A disAster for the u.k. to puLL out of the europeAn union.

From a corner
conference room
overlooking the
Thames, Michael
Sherwood, a vice
chairman of
Goldman Sachs
Group Inc., has
the guts to voice
publicly what many
in Londons centuries-old financial
district are increasingly worried about
behind closed doors: that threats to
Britains membership in the European
Union are threats to British business.
Over the past 15 years, Goldman, like
many of the other 250 foreign-owned
banks in the City, has consolidated its
European operations in London to take
advantage of the EUs $16.6 trilliona-year single market. Wideopen access to that market is now
in doubt because of U.K. Prime
Minister David Camerons promise to hold a referendum on EU
membership by the end of 2017.
If Britain votes to quit the EU,
Sherwood says, parts of Londons banking business would
inevitably drift to Frankfurt
and Paris. We want the U.K. to
stay in Europe, the 49-year-old
banker says. The U.K. leaving
the EU would lead to some sort
of fragmentation of our business. The City would definitely
be impacted.
Sherwood is not alone in opposing a Brexit, as a British departure
from the EU is known. A 2013 survey by TheCityUK, a bank lobby
group, found that 84 percent of
finance industry leaders want
82 bloomberg markets May 2014

the U.K. to remain a member of the EU.


While London bankers recoil at the raft
of regulations from Brusselsa cap on
their bonuses being the cause celebre
the overwhelming majority in the City
is far more worried about losing the
constitutionally established advantages of the EU: the free movement of
labor, capital, goods and services. London is really the most important financial center in Europe, and we benefit
enormously by being part of Europe,
says Win Bischoff, chairman of Lloyds
Banking Group Plc. An exit from Europe, he says, wouldnt be a cliff event,
but over a period of time, market share
will go to other centers.
The Citys priorities put it on a collision course with wide swaths of the
British public and Camerons Conservative Party. More than half of the partys 22.5 million pounds ($37.4 million)
in political contributions in the election year of 2010 came from donors
working in the financial services industry, according to a 2011 Bureau of Investigative Journalism analysis. Yet all
that financial support doesnt necessarily buy the City what it wants from the

Tories. Camerons referendum pledge,


made in January 2013, was a concession to his partys euroskeptic wing,
which gathered strength as anti-immigration and anti-EU sentiment rose in
the aftermath of the financial crisis. A
March 11 YouGov Plc poll found that 41
percent of Britons surveyed would vote
to stay in and 39 percent to get out; the
rest were undecided.
Bankers are all but absent from the
public debate. Scorned by Britons in
the wake of the financial crisis, theyve
generally let lobbying groups such as
TheCityUK do the talking. Most of
the senior bank executives contacted
by BLOOMBERG MARKETS declined to
speak on the record about the in-out
conundrum. Theyre in a Catch-22,
says Sharon Bowles, a U.K. Liberal
Democrat member of the European
Parliament, or MEP, whos leaving office this year. Bankers are so hated by
the public at large that saying the bankers want us to stay in Europe might

michael sherwood is
opposed to a Brexit, as
a British exit from the
28-nation EU is known.

lead the public to say, Well then, Im


coming out.
The question of Britains membership will be put to the test repeatedly
over the next three years. In May, voters across Europe will elect a new,
751-member European Parliament.
In the U.K., the vote is shaping up as a
dry run for the promised referendum.
The U.K. Independence Party, or UKIP,
which wants Britain out of the EU, will
come in first in the election, with 30
percent of likely voters, according to a
March ComRes poll. Labour will come
in second, at 28 percent, with the Conservatives trailing a distant third, according to the poll.
In between the European Parliament vote and any referendum on the
EU in the U.K. comes a general election
on May 7, 2015, that has Cameron currying support among euroskeptic voters. On March 12, Labour Party leader
Ed Miliband said in a speech that if his
party came in first in the 2015 election,
it would hold a referendum only in the
event of a further transfer of powers
away from Britain and toward the EU.
With MEPs flexing their muscles
on financial regulation, Britain and its
largest industryfinancehave a lot
riding on the outcome of the elections
this May, says Mark Hoban, a Conservative MP who served as a U.K. Treasury minister in charge of financial
services policy from 2010 to 2012. He
says Britain cant afford to write off the
European Parliament as UKIP leader
and MEP Nigel Farage has done. It is
a serious legislative body, and you cant
afford to have a protest vote, Hoban
says. You want to see British MEPs
engage with the process in Brussels,
and I dont think UKIP MEPs do that.
And so youre fighting with diminished
resources. As an MEP, Farage racked
up the 10th-worst attendance rate over
the past five years. My attendance is
lower because I am leading a national
party in the U.K., which is time-consuming, he says.
The financial services industry and
related professions employ 2 million

wall streeton-thames
Londons centuries-old Square Mile is a financial
gateway to Europe and the rest of the world.

Number of overseas baNks:


Number of emPloyees
iN u.k. fiNaNcial
services aNd related
ProfessioNs:

2 million

7%
of the
worKing
PoPUlation

coNtributioN of
fiNaNcial aNd related
services to u.k. GdP:

174 Billion

251
No. 1
market iN:

derivatives*

49%

of global total

ForeiGn eXChanGe

40.9%

of global total

12.6%
of U.K. gDP

Number of HedGe fuNds:

800

Cross-Border
Bank lendinG

18%

of global total
managing
85% of
eUroPe-baSeD
heDge-fUnD
aSSetS

U.S.
11%

*Interest-rate over-the-counter derivatives turnover.


Sources: Bank for International Settlements, Perep
Analytics, TheCityUK

people in the U.K. and accounted for


12.6 percent of gross domestic product in 2012, according to TheCityUK.
Financial services alone contribute 12
percent of tax receipts. In November,
the Confederation of British Industry,
which represents more than 240,000
companies, said that having unfettered
access to the EUs 500 million consumers is worth from 4 to 5 percent of U.K.
GDP, or as much as 78 billion a year.
In toying with departure, the U.K.
risks unsettling foreign investors by
casting a pall of uncertainty over the future of the financial district, says Chris
Cummings, chief executive officer of
TheCityUK. The possibility of an exit
is the No. 1 issue on everyones desk, he

says. Businesses are drawing up contingency plans, and people are asking if
the U.K. is still investable. He says the
prospect of Scotlands voting for independence from the U.K. in a September
referendumhowever unlikely that
looks in the latest pollingcompounds
the climate of indecision, further putting off investors.
U.S. banks seeking a gateway to Europe are major players in the City, and
Washington has expressed concern
over Britains increasingly strained
relations with Brussels. In January
2013, President Barack Obama phoned
Cameron and told him the U.S. values a strong U.K. in a strong European
Union, according to the White House.
In a rebuff to Obama, Cameron days
later set out his referendum pledge in
a speech, prompting UKIPS Farage
to say, The genie is out of the bottle.
In his speech, Cameron vowed to claw
back U.K. powers that he said had been
usurped by Brussels. There is a growing frustration that the EU is seen as
something that is done to people rather
than acting on their behalf, he said.
German Chancellor Angela Merkel
has backed Camerons calls for limited
change to EU institutions, stopping
short of supporting a wholesale renegotiation of the U.K.s membership.
We need a strong United Kingdom
with a strong voice inside the European
Union, Merkel said in February in an
address to the lower and upper houses
of the U.K. Parliament.
Camerons stand on Europe is temperate compared with many Tories.
Brooks Newmark, a Conservative MP
and a former partner at private-equity
firm Apollo Management LP, says the
U.K. should leave the 28-nation club.
Its a sclerotic, flat-lining EU with an
aging population, and I dont want to be
a part of it, he says. Were a global financial center.
There are City executives who agree
with him. Helena Morrissey, CEO of
Newton Asset Management Ltd., says
being in the EU is like being in a bad
marriage. You dont need to know
May 2014 bloomberg markets 83

Conservatives george osborne,


near right, and David Cameron,
far right, are under pressure
from uKIp leader
Nigel Farage, below.

a million people, I could


not let that happen.
In that spirit, Osbornes Treasury has
taken the EU to court
several times. In September, the ministry
sued the EU at the European Court of Justice in
Luxembourg over bonus
cap legislation approved
six months earlier. The
measure limits bonuses to 100 percent of
base salary for employees earning more than
500,000 euros ($697,000) a year. The
rules apply to all staff at institutions
that have headquarters in the EU, even
if the employees are based outside the
bloc. The suit was ongoing as of March
10. Last year, the Treasury filed a suit to
overturn EU powers to ban short selling in market emergencies. On Jan. 22,

bonus storm
New European Union rules restrict bonus pay to 100 percent of salary. In 2011, a weak U.K. economy ate
into higher 2010 salaries. In 2012, even as base pay rose amid healthier growth, the bonus ratio remained
about the same in anticipation of the EU cap, which was approved in 2013 and took effect in January.
average U.k. compensation for investment bankers earning more than 1 million a year

2010

average
salary

2011

average bonus
2.1 million

324,484

647%

1,809 high earners

279,712

2012

bonus-to-salary
ratio

1,934 high earners

1.1 million

393%

2,188 high earners

404,457
average total Pay

0
million

1.5 million
0.5

84 bloomberg markets May 2014

1.0

1.5

2.0

2.5

371%

Source: European
Banking Authority

the European Court of Justice rejected


the U.K.s claim.
In 2011, the U.K. sued the Frankfurtbased European Central Bank, claiming
clearing rules for derivatives discriminated against companies based in Britain.
The U.K. has a big stake in the pending
outcome: London is the worlds leading derivatives center, with a 49 percent
share of the market, more than double the
share of the U.S., according to TheCityUK.
Osborne has also said he will challenge a proposed tax on financial
transactions thats being discussed in
Brussels. The EU says the levy could
raise as much as 35 billion a year.
As grateful as the City is for Osbornes protection, the governments
swashbuckling legal tactics dont always help the cause of the London finance industry, Boleat says. The
British government is trying to be seen
as tough with Europe, he says. It is
not helpful to the general atmosphere
if Britain is perceived to be rushing off
to its lawyers all the time.
While the City cherishes the freedoms to do business set out in a string
of European treaties beginning in 1957,
its chafing under rules emanating

top: pool/reuters/landov; Bottom: FranCoIs lenoIr/reuters/landov

who your next husband is, she said at


a conference at Bloomberg LPs London office in February. You just have
to leave.
Not so fast, says Mark Boleat, chairman of policy at the City of London
Corporation, which governs the socalled Square Mile, in which many
banks are based. He says a Brexit could
make it harder to attract talent. About
a quarter of the financial workforce in
London is non-British, according to a
2012 estimate by the Cambridge Journal of Regions, Economy and Society.
Boleat says financial firms like being
able to move their employees around
hassle-free in a borderless Europe. If
that didnt happen, it would affect an
awful lot of businesses, he says.
Like Cameron and bankers themselves, U.K. Chancellor of the Exchequer George Osborne is weighing the
advantages of EU membership against
the disadvantages of Brussels regulations that irk the City. Theres a very
real risk that badly thought-through
legislation will be imposed on the U.K.,
Osborne said in a speech in January.
As the chancellor of a country where
financial services represent a 10th of
the economy and employ more than

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from Brussels. The bonus cap legislation, which Osborne tried and failed
to kill, showed that power in Europe is
shifting away from unelected bureaucrats and toward the parliament. It
was dreadful negotiating tactics from
the U.K., MEP Bowles says. They
thought they would get support from
other member states on bonuses and
the parliament would yield further
down the track.
As it turns out, banks in the City are
finding ways around the rules. As of
March 10, Barclays Plc, HSBC Holdings Plc and Lloyds Banking Group
had announced plans to pay what they
call allowances to staff, sidestepping
the cap. In the case of HSBC, it will give
665 bankers a fixed-pay allowance that
is neither salary nor bonus, CEO Stuart Gulliver said on a conference call
with reporters in February. I think we
had a compensation plan that shareholders liked, Gulliver said. Sadly,

The City of London


Corporations mark
boleat says banks
benefit from doing
business in a
borderless Europe.
86 bloomberg markets May 2014

because of the EU directive, weve had


to change.
With populist and center-left parties
looking strong in polling ahead of the May
elections, the changing makeup of the European Parliament will probably work
against the City, says Vicky Ford, a Conservative MEP who represents the East

plan to form an alliance with Marine Le


Pens National Front Party in France.
Ford predicts the new parliament
will seek to reopen the debate on the
financial transaction tax, or FTT. The
European Commission, the EUs executive body, has proposed charging a
0.1 percent tax on the sale of stocks and

lonDon is really the most important FinanCial


Center in eUrope, anD We beneFit enormoUsly
by being part oF eUrope, says Win bisChoFF,
Chairman oF lloyDs banking groUp.
of England constituency. Europes socialist parties are expected to have their
strongest showing since 1994 and become the biggest bloc in the parliament,
according to the PollWatch 2014 website.
The survey also projects strong showings
for populist parties in Austria, Belgium,
Italy, the Netherlands and Sweden that

bonds and a 0.01 percent tax on derivatives trades. After EU finance ministers rejected an EU-wide tax in 2012,
11 member statesincluding Germany,
France and Spainpushed ahead with
plans to set up a common FTT.
Although the U.K. was not one of the
11, the common FTT could affect banks
based in the City. The levy could apply, for example, to shares in a German
company traded in London between
two U.S. banks. This is not a Robin
Hood tax, Ford says. This type of tax
ends up hitting pensioners and savers.
As vociferous as these arguments
have become among politicians, the
lips of City bankers are mostly sealed.
Bank lobbyists do what they can to
ward off, postpone or circumvent vexing red tape coming at them from Brussels. At the same time, theyre urging
the U.K. government not to abandon
Europe and the rich market that lies
across the English Channel. While the
battles rage, few bankers dare to put
their heads above the parapet. Boleat
puts the case mildly: Theyre all a bit
reluctant to get into what is a political
debate. With UKIP and euroskeptic
Tories rallying for a Brexit and a potentially game-changing European election coming up, the silence of the banks
may cost them.
stephanie baker is a senior writer at
bloomberg markets in london.
stebaker@bloomberg.net ben moshinsky
covers financial regulation at bloomberg
news in london.
bmoshinsky@bloomberg.net

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by
William mellor
and
Jasmine Wang

Riding a boom that tRansfoRmed the balmy Chinese


island of hainan into a billionaiRes playgRound, Chen feng
built a global business empiRe thats woRth $58 billion.
88

P h o t o g r a P h b y D a N I E L E M at t I o L I

We Want to Be everyWhere

other corporate titans. I dont drink,


smoke, have banquets, go to karaoke or
get massages, he says. Im different
from the other entrepreneurs in China.
Where Chen, 60, is more like them is
in his vaulting global ambition. In 1995,
Chen flew to New York and persuaded
George Soros to invest $25 million in
his fledgling Hainan Airlines Co. Since
then, backed by the Soros imprimatur, he has ridden the boom that transformed balmy, coconut palmfringed
Hainan, 2,500 kilometers (1,550 miles)
south of Beijing, from a backwater into
a billionaires playground reminiscent
of a Chinese Hawaii or Riviera.
From his Buddha-shaped, 31-story
headquarters in Hainans increasingly
high-rise capital, Haikou, Chen now
chairs HNA Group Co., a closely held
global transportation, logistics, retail,
property, tourism and financial services empire that reported revenue of
$17.5 billion and pretax profits of $837
million for 2012. Among its $58 billion worth of assets: a New York office
tower, a Spanish hotel group, a French
airline and controlling stakes in 10
companies listed on mainland Chinese
and Hong Kong exchanges.
Chens smart, brave and a gambler,
says Albert Louie, founder of Hong
Kongbased consulting firm A. Louie
Associates Ltd., who advises foreign
90 bloomberg markets May 2014

In the 1990s, Chen served the


passengers on his startup
airlines Boeing 737.

investors in China. Hes also politically well connected, and unlike Chinas Internet entrepreneurs, he isnt in
industries that the government might
consider threatening to Communist
Party control.
Chen has spent more than $3 billion
on foreign acquisitions in the past six
years alone. His biggest bet was the $1.05
billion purchase in 2011 of GE SeaCo,
the worlds fifth-biggest container-leasing company, from General Electric Co.
Such deals would make HNA Group, if
publicly traded, one of the worlds top
250 companies by assets, according
to data compiled by Bloomberg. The
founder, though, has much loftier goals.
By 2020, we can become one of the top
100 companies, and by 2030, we want to

be one of the top 50, Chen says.


Assets are still cheap in the U.S.
and Europe, and we will continue to acquire them. We need
a batch of world-class companies
to emerge from China to help the
countrys growth, and HNA will
be one of those. We want to be
everywhere.
Thats a familiar refrain among
Chinas entrepreneurs. Since the
global financial crisis ravaged the
rest of the world in 2008, Chinese companies have made about $360 billion
worth of foreign acquisitions, according
to Bloomberg. And, increasingly, private
businessmen such as Chen are replacing state-owned enterprises as leaders
of China Inc.s global push, says Thilo
Haneman, head of the cross-border
practice at New Yorkbased research
firm Rhodium Group LLC. Whats going on is remarkable, Haneman says.
Its similar to what we saw from Japan
20 years ago.
Chen shouldnt be short of cash for
his next deal. At the end of 2012, HNA
had $60 billion in credit lines from Chinese banks, according to its latest financial statements. And Chen says he plans
to raise additional capital by selling
shares in several HNA units that are unlisted. In coming months, Chen says, he
will announce the initial public offering

courtesy of hna group

wenty years ago, Chen Feng used to push the refreshment


trolley up and down the aisle of the lone Boeing 737 that
comprised his startup airline. Today, based on the tropical Chinese island of Hainan, he controls a fleet of 483
planesand has a jet of his own, a Gulfstream G550. Even
so,Chen, a devout Buddhist, says hes far from the stereotypical Chinese tycoon. I live a simple life, he says. As
he sips a caffe latte in the lounge of the chaletlike Sheraton Davos Waldhuus Hotel in Davos, Switzerland, his words jar with the
setting: At Januarys World Economic Forum, hes surrounded by

top: Akos stiller/BloomBerg; chArt: left to right: Jerome fAvre/BloomBerg; mhp; stephen hilger/BloomBerg; cAssA hotel; seBAstien BoZon/Afp/getty imAges; vincenZo lomBArdo/getty imAges

of Hong Kong Airlines Ltd.,


the second-biggest carrier in
the former British colony. He
acquired the airline in 2006.
The listing may raise about $1
billion later this year, according to a person with knowledge of the plan.
For now, the jewel in HNAs
crown remains Shanghailisted Hainan Airlines, Chens
biggest public company, with
a market value of $3.6 billion
as of March 10. Together with
five smaller affiliate airlines,
it has a 15 percent share in the
China market, according to the
Sydney-based CAPA Centre for
Aviation. Only the so-called
Big Three state-owned carriersAir
China Ltd., China Southern Airlines Co.
and China Eastern Airlines Corp.have
larger shares in the worlds second-largest aviation market after the U.S.
Hainan Airlines 23 international
destinations include Chicago, Seattle and Toronto. Later this year, Chen
will add a Boston service using Boeing 787 Dreamliners. That shows his
determination to gain market share
on ChinaNorth America routes now

chen got an early boost from


billionaire investor george soros.

dominated by Air China and United


Continental Holdings Inc., says Will
Horton, a Hong Kongbased CAPA analyst. Hainan is leaner and more internationally minded than the Big
Three, Horton says. It can become a
serious player to North America. The
airlines key selling points include a
crash-free record; doting, glamorously

global shopping spree

garbed flight attendants; and flat-bed


business-class seats that made it the
first Chinese airline to win five stars
from London-based rating agency Skytrax. Hainan is one of my favorite airlines, says Allan Zeman, 65, a director
of Las Vegasbased Wynn Resorts Ltd.,
whose private company, Lan Kwai Fong
Group, has investments across China.
The first-class service is excellent, and
the airplanes are relatively new.
Many of Chens shareholders have
had a less enjoyable ride. Since 2009, the
Shanghai Stock Exchange Composite
Index has been the seventh-worst performer out of 94 tracked by Bloomberg.
And in the 12 months ended on March
10, Hainan Airlines shares have declined 11 percent compared with the indexs 14 percent tumble. Five of Chens
other seven companies listed in Shanghai and Shenzhen have also fallen. In
contrast, the unit into which Chen injected his GE SeaCo acquisition, Bohai Leasing Co., has jumped 8 percent
over the same period. In Hong Kong,
shares in Hainan Meilan International
Airport Co.owner of Haikous airporthave fallen 4 percent, mirroring the decline in the Hang Seng Index.
Chens most famous backer, Soros, is one

Beginning in 2006, having already expanded across China, the cash-rich Chen poured
money into a diverse batch of acquisitions in Hong Kong, Europe and the U.S.

Hong Kong
Airlines And Hong
Kong express

1180 sixtH Ave.,


New York

ge seAco
(siNce reNamed
seaco)

cAssA Hotel,
70 west 45th st.,
New York

Aigle Azur
trAnsports
Aeriens

nH Hoteles

Hong kong airlines is


tHe second-largest
carrier in tHe former
britisH colony.

22-story
office tower

worlds fiftH-biggest
container-leasing
company

located near
times square and
rockefeller center

frances secondbiggest airline, based


in paris

spains largest
business Hotel cHain,
witH 400 properties
around tHe world

Acquired by HNA Group


in stages for undisclosed
amounts beginning in
2006. Chen says he is
preparing to sell shares in
Hong Kong Airlines.

May 2011. Price: $259


million.

December 2011. Price:


$1.05 billion. Acquired from
General Electric.

January 2012. Price: $126


million.

October 2012. Price:


51.8 million. Stake:
48 percent.

April 2013. Price: 286.6


million. Stake: 24 percent.

Sources:
Bloomberg,
companies

May 2014 bloomberg markets 91

investor showing a paper profit, according to data compiled by Bloomberg. In


2005, Soros doubled his bet on Hainan
Airlines to $50 million. As of March 10,
following a share swap, he owned 10
percent of an unlisted HNA unit, Grand
China Air, which in turn owned 30 percent of Hainan Airlines. As of March 10,
that holding, equivalent to 3 percent of
the carrier, was worth about $100 million. Soros, through a spokesman, Michael Vachon, declined to comment.
Even as he launches more public
companies, Chen continues to control
his empire through an unlisted holding company that isnt required to disclose its complete balance sheet or the
identities of its main shareholders. One
key item HNA does not release is its net
profit. Chen says that last year he and
six other directors, who between them
owned almost all of the stock, donated
20 percent of HNAs shares, worth $1.4
billion, to what he describes as a privateequity fund for charity. The fund, named
Ci Hang after a Chinese goddess, is HNAs
largest shareholder, he says. He says he
ranks as the joint second-biggest shareholder, although he declines to reveal
the size of his personal holding, making
it impossible to determine how rich he
is. Given Chens calculation of the value
of the donation, HNA is worth $7 billion.

hna owns two airports


in hainan, including
haikous meilan.

Chen Feng is my idol, but I dont


understand his companys structure
none of us can understand, says Wang
Dafu, 48, a Cohiba cigarchomping
property developer worth $1.2 billion
as of March 11, according to the Bloomberg Billionaires Index. Wang heads Visun Group and serves as Chens deputy
chairman at the Hainan Federation of
Industry and Commerce.
Although Chen is under no obligation to disclose more than he has about
the workings of his private company,
investors in Hong Kong Airlines IPO should expect HNAs
ownership to be more transparent, says Ronald Wan, who helps
Chen runs his closely held, far-flung HNA
manage $200 million at Hong
empire out of booming Haikou, the capital
of Hainan province.
Kongbased Asian Capital Holdings Ltd. Hainan Airlines has a
ToTal asseTs: $58 Billion
ReTuRn on sales 2012: 4.78%
competitive edge, and people alRevenue 2012: $17.5 Billion employees: 77,400
ways talk about the Soros investment, Wan says. But when you
DebT-To-equiTy RaTio: 0.79:1 aiR fleeT: 483 planes
invest in Chinese companies,
As of Dec. 31, 2012; air fleet as of March
10. Source: HNA Group
you have to be clear about the
shareholding.
Chen talks freely about how
he navigated some of the most
turbulent years in Chinas recent history. Raised in Beijing as
the son of middle-ranking Communist Party officials, Chen was
forced to leave school in his early

by the numbers

92 bloomberg markets May 2014

teens after the Cultural Revolution


broke out in 1966. Unlike most young
people who were ordered to labor in
the fields, Chen was sent to work for
the Peoples Liberation Army Air Force
in the Western province of Sichuan.
When the turmoil ended in 1976, Chen
parlayed that experience into a job in
Beijing with the Civil Aviation Administration of China.
In 1984, he won a scholarshipone
of only 20 offered in China, he saysto
study at an air-transportation school in
Germany run by Deutsche Lufthansa
AG. In 1989, he took a job at the World
Banks loan office in Haikou. The following year, Hainans administration
hired him to launch its first airline.
Given just $1.4 million in government
seed money, Chen raised a further $41
million from local investors before successfully wooing Soros. For the U.S. billionaire, $25 million was small change.
For Chen, it meant much more. Soros
reputation helped our image, he says.
Perhaps even more helpful has been
the surging development of Hainan,
Chinas smallest province, with a population of 9 million. In the past five
years, the islands economy has averaged 11.7 percent annual growth, compared with the national figure of 9.2
percent. Today, around the resort of
Sanya, centuries-old fishing villages
have been replaced by marinas packed
with megayachts. Luxury hotels line
its sandy beaches, including what

courtesy of hna group (2)

We Want to Be everyWhere

transportation turbulenCe
chens Hainan Airlines dived along with the shanghai index, while Bohai, his containerleasing company, outperformed a gauge of 40 top companies listed in shenzhen.
Comparative returns
Hainan airlines
sHangHai stock excHange composite index

BoHai leasing
sHenzHen stock excHange a sHare index

30%
30%

30%
30%

20
20

20
20
10
10

10
10

7.9%

00

00
10
10
20
20
3/8/13

10
10
11.2%
13.8%
3/10/14

20
20

21.9%

3/8/13

3/10/14

Source: Bloomberg

Marriott International Inc. says is its


most profitable Ritz-Carltonbranded
property. Last year, Tiger Woods and
Rory McIlroy played Mission Hills
Haikou, a $5.4 billion golf resort that
boasts 10 courses. Hainan was an absolute dump, says Peter Churchouse,
chairman of Hong Kongbased property investor Portwood Capital Ltd.
The word phenomenal would not overstate the extent of the change.
Nobody has been better placed to
exploit that change than Chen. Last
year, the number of visitors to Hainan
jumped 11 percent to 37 million. And of
those arriving by air, 44 percent flew
in on his planes, HNA says. Chen even
profited from those who traveled on
rival carriers because he owns both of
Hainans airports, as well as hotels and
travel agencies in the province. HNA is
also the biggest property developer in
Haikou. Its impossible to visit Hainan
and not put a yuan in Chens pocket,
consultant Louie says.
In 2006, having already expanded
across mainland China, Chen turned to
Hong Kong, acquiring, for an undisclosed
price, Hong Kong Airlines and a second

carrier, Hong Kong Express Airways Ltd,


which he subsequently rebranded as a
low-cost airline. In 2011 and 2012 came
a flurry of Western acquisitions, including GE SeaCo. HNA paid $259 million
for a foreclosure-threatened Manhattan office tower, 1180 Sixth Ave., and
$126 million for Cassa Hotel New York
near Rockefeller Center. He bought 24
percent of Spains biggest business hotel
chain, NH Hoteles SA, for 286.6 million
euros ($397.6 million) and 48 percent of
Frances No. 2 airline, Aigle Azur Transports Aeriens SAS, for 51.8 million.
Not all of Chens bets have been
winners. In 2012, Hong Kong Airlines

bloomberg tps

abandoned an all-business-class service between Hong Kong and London


as corporate travel slowed. Expansion into shipping coincided with a
collapse in freight rates. Last year,
an HNA-owned cruise liner carrying
2,300 passengers and crew was detained in South Korea, after another
Chinese company obtained a court
order over $58 million it said it was
owed for unpaid charter fees and ship
broker commissions. HNA, while denying liability, issued a public apology
to stranded passengers.
Asked about the companys financial
strength, Chen says HNAs debt-toequity ratio declined to 0.79:1 in 2012
from 0.81:1 in 2009. People dont understand that our industry always has
high debt levels, he says.
Chens ambitions dont end with
making HNA a global top 50 company.
He has another grand plan. Chen is
rigorously private about his immediate family, except to say, Its not good
for your children to have such wealth.
Having already donated 20 percent of
HNA shares to charity, Chen says he
and his partners aim to make arrangements to do the same with the rest of
their stock after their deaths. Given
that Chen values the remainder of
HNAs shares at $5.6 billion, his last
deal could well be his biggest.
William mellor is A senior Writer At
BloomBerg mArkets in sydney.
Wmellor@BloomBerg.net Jasmine Wang
covers Airlines At BloomBerg neWs in Hong
kong. JWAng513@BloomBerg.net
WitH AssistAnce from ZiJing Wu in dAvos,
bonnie Cao And miChael Wei in sHAngHAi,
Fox hu And natasha khan in Hong kong And
xiaoqing Pi in BeiJing.

tracking chinas
u.s. purchases

To quantify Chinas cross-border purchases, type MA <Go> on the Bloomberg Professional service for the Mergers & Acquisitions page and click on
Custom Search. Under Company Universe, click on Region/Country and, in
the pop-up window, the plus sign next to Asia Pacific (Emerging) and on
China. Make sure only the box next to Acquirer is checked below and click on
Update. Click on Region/Country again. Then click on the plus sign next to
North America and on United States. Ensure that only Target is checked and
click on Update. Click on Results at the bottom of the page. Rocky Swift

May 2014 bloomberg markets 93

Fitch Credit Research


on Bloomberg
If you use a Bloomberg terminal, you know how important it
is to be at the forefront of the latest credit information and
industry trends. Thats why Fitch Ratings full suite of global
research and commentary, used by over 90% of the worlds
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FII <GO>

This terminal just got better

TeresiTa sy-Coson,
The eldesT Child
of The PhiliPPines
riChesT man, exPlains
how she and her
siblings are running
The family emPire as
a CommiTTee of six.
By yoolim lee and ian sayson

Photograph by Steve tirona

97

TeresiTa sy-Coson siTs


down wiTh her five
siblings for lunCh every
Tuesday To ploT The
direCTion of The
philippines largesT
family-run ConglomeraTe.
The sessions sTarT aT 11
and invariably spill
over The alloTTed
Two hours, says sy-Coson,
63, Chairman of bdo unibanK
His four sons and two daughters get
one vote eachand the majority wins.
The discussions can get so heated
that the siblings blurt out ideas in three
languagesFilipino, English and the
Chinese dialect of Hokkien, Sy-Coson
says. Sometimes the executives move
swiftly, as they did in 2012, when they
authorized a $1 billion rights offering

the six children of Henry sy, seated, have equal


say in decisions via a family management board.
from left to right, the sys are: Herbert; Henry
Jr.; elizabeth; their mother, Felicidad; tessie;
Hans; and Harley.

courtesy of sm investments corp.

Inc. and the eldest child of Henry Sy,


the countrys richest man.
Its not always quiet, says Sy-Coson,
who goes by Tessie. Her 89-year-old father, the founder of SM Investments
Corp., the anchor of the familys $11.3
billion fortune, rarely attends. And he
no longer vetoes decisions about his
retail, banking and real estate empire.

for BDO, the nations biggest lender. Today, the bank has 1.3 trillion pesos ($29
billion) in deposits and 819 branches.
Its lending to companies investing in
infrastructure, a cornerstone of President Benigno S. Aquino IIIs economic
development plan. We can argue
across the table, or we can say yes, says
Sy-Coson, who, along with three of her
siblings, is a billionaire in her own right.
After years of refinement, I can say we
work together very well.
As the Sys move from management
by patriarch to management by committee, they face new challenges to
their realm of 600 malls, department
stores and retail shops. Retailing generated 71 percent of SM Investments
253.5 billion pesos of revenue in 2013.
Lucio Co, who owns Puregold Price
Club Inc., has unleashed more than
200 supermarkets and hypermarkets.
His Cosco Capital Inc. in March acquired the biggest shopping center in
Cabanatuan, a provincial city north of
Manila. Billionaire John Gokongweis
Robinsons Land Corp. plans seven new
malls in the year ending Sept. 30 for
a total of 39closing in on the Sys 48.
Profits from retailing slipped to 21 percent of SM Investments 27.4 billion
pesos of net income last year from 30.8
percent in 2007.

98 bloomberg markets May 2014

they have such a leg up not only in


retailing and banking but in
understanding the whole of the
philippines, donald gimbel says of the sys.

Sy-Coson is a natural to eventually succeed Henry. The family will figure it


out, but personally, I think Tessie is the
strongest member, he says.
Sy-Coson says her father hasnt
named a successor, and she wont speculate on who will succeed Henry after he dies. She says her father never
groomed one child to be first among
equals. He gave his two daughters the
same respect and compensation as he
gave his sons, she says. Each child held
multiple senior positions in SM Group,
which includes SM Investments and
the Sys listed and unlisted companies.
Its like Dad has multiplied to six people, she says. Its a transition from
a strong man to a strong board.
Henry Sy, like many aging Chinese

Several Filipino billionaires are cirsays Donald Gimbel, who heads Geneva
cling. Jaime Augusto Zobel de AyaInvestment Management of Chicago
las Ayala Land Inc. and Andrew Tans
LLCs international investment and
Megaworld Corp. are targeting propcounts SM Investments, SM Prime and
erty development and tourism. To
BDO Unibankthree of the nations 10
strengthen their real estate foray, the
most valuable companiesamong the
Sys agreed last year to meld SMs prop$7.5 billion of equities he helps manerty businesses, including the Pico de
age. They have such a leg up not only
Loro Cove resort south of Manila, into
in retailing and banking but in undertheir mall development company, SM
standing the whole of the Philippines.
Prime Holdings Inc. The move bumped
Gimbel says Henry Sys multiheaded
SM Prime above Ayala Land as the
management is working well now and
countrys biggest developer by
market value.
As the government spends
to rebuild after Super Typhoon
Haiyan, Hans Sy, Henrys secsm INVestmeNts, tHe sYs HolDINg ComPaNY, INClUDes bDo UNIbaNk.
tessIe sY-CosoN Is CHaIrmaN oF tHe baNk, tHe PHIlIPPINes largest leNDer.
ond son and SM Primes president, sees a chance to profit.
SM Investments
BDO Unibank
Hes planning new malls in
the Visayas chain of islands in
Banking contributed the most to
Under Sy-Coson, BDO Unibank went on an acquisition
the central Philippines, which
SM Investments profit last year.
spree and opened 52 branches last year.
took the brunt of the November storm that killed more
Commercial banking
Private
Property
Retail
2013
2013
Net Income 36%
Net Income 86.1%
Banking
than 6,200 people. And he sees
21%
4.9%
27.4
22.6
growth on the southern isBillion
Pesos
Billion
Pesos
Others
land of Mindanao, the site of
($615 million)
($500 million)
4.6%
a four-decade Muslim insurInvestment
gency. Hans, 58, is also targetbanking
ing China, where SM Prime will
2.6%
Banks
open one mall a year, adding to
Leasing and
43%
the five it has there now.
Finance
1.8%
Investors like the Sys
chances for growtheven without Henry calling the shots.
Price Change (in Philippine pesos)
Shares of SM Investments
600%
gained 275 percent through
SM Investments
389%
500
March 10 from their March
BDO Unibank
400
2005 listing in the countrys
369%
Philippine Stock Exchange Index
then-largest public offering.
300
250%
That outpaces a 219 percent
200
gain for the Philippine Stock
100
Exchange Index.
0
When I look at the Philip2009
2010
2011
2012
2013
3/13/09
3/10/14
pines, its tough to wander very
Based on consolidated figures. Sources: Bloomberg, SM Investments
far away from the Sy family,

FAMILY FORTUNE

May 2014 bloomberg markets 99

of Stanley Ho, the then-89-year-old


Hong Kong casino billionaire, battled
over his assets in 2011. Ho resolved the
dispute by giving up almost all his stake
in parent company SJM Holdings Ltd.
In South Korea, Samsung Group Chairman Lee Kun Hee fought over his inheritance with elder brother Lee Maeng
Hee after their father, Samsung founder
Lee Byung Chull, died in 1987 without
a will. A Seoul court ruled in favor of Lee
Kun Hee in February, ending a two-year
battle.
Henry Sys father, Sy Xiu Shi, paved
the way for the family dynasty in the
1930s with a store in Manila that sold
rice and sardines. Henry migrated in
1936 at age 12 from Jinjiang, China. After World War II, he branched out to
sell shoes and opened ShoeMart, the
genesis of the SM in company names,
in 1958. In 1972, the year President

I want you to come


to the school of
hard knocks,
sy-coson recalls
her father sayIng
to Implore her
to work In the
famIly company.

Governance, Institutions and Organisations. Some patriarchs resist ceding


control or make no plans, sparking
fights that damage their company, says
Wang Gungwu, chairman of the East
Asian Institute in Singapore. The family

BRANDISHING
BILLIONS
the families of these
five men dominate
some of the largest
industries in
the Philippines.

Net Worth*
(in billions)

*Figures relate to the


person and his immediate
family members (spouse
and children) and exclude
other relatives.
Source: Bloomberg
Billionaires Index

Industry
Percentage of
Philippine GDP

100 bloomberg markets May 2014

Ferdinand Marcos imposed martial law,


he unveiled his first department store.
The Marcos era, which stretched until 1986, was marked by upheaval. Opposition leader Benigno Aquino Jr., the
current presidents father, was assassinated in 1983. In 1984, inflation soared
47 percent and GDP contracted 7.3 percent. The following year, when GDP
shrank by the same rate, Sy opened his
first shopping mall with a few tenants.
When the Marcos regime collapsed and
the economy rebounded, Sy was poised
to benefit. We always had our faith in
the Philippines, Sy-Coson says.
Sy-Coson says she didnt join the family business by choice. After graduating
from Metro Manilas Assumption College in 1970 with two degrees, in commerce and liberal arts, she applied for
a masters degree at the Ateneo de Manila
University. She says her father refused to

Henry
Sy

Lucio
Tan

enrique
razon

andrew
Tan

david
conSunji

$11.3

$6.7

$4.9

$4.6

$3.4

Retail
and banks

beveRages and
tobacco

poRts and
gaming

Real estate and


gaming

constRuction
and eneRgy

4.5%

2.7%

2.0%

1.8%

1.4%

courtesy of sm investments corp. (2); chart: Left to right: teD aLJiBe/afp/getty images; Jay Directo/afp/getty images; ahmaD yusni/LanDov; JoeL nito/afp/getty images; kriz John rosaLes

tycoons who run family dynasties


throughout Asia, is facing the task of
planning an orderly handover. By involving all of his children as managers
and giving them an ownership stake,
Sy has been more proactive than some
Asian magnateseven if he hasnt publicly designated a successor. The six
wield a combined 44.3 percent stake
that makes them SM Investments biggest shareholder.
While choosing successors is important, more crucial is allowing the next
generation to make their own decisions,
says Marleen Dieleman, associate director of the National University of Singapore Business Schools Centre for

pay her tuition, pushing her to instead


join his company. When he asked me to
work for him, he said, I want you to come
to the school of hard knocks, she recalls.
Sy-Coson says she agreed to take
over banking in 1984 at age 34 because
someone had to. I always thought,
When I reach 40, Im going to stop,
she says. Im still here.
To compete, she says, she dressed
and acted like a man. A dark suit and
white shirt became her trademark.
I realized early on that in business, its
a mans world, she says. I thought, Im
not going to be different from them.
Starting in 2001, with the purchase
of the Philippine unit of Dao Heng
Bank Ltd., Sy-Coson built BDO into
the countrys largest lender. BDO made
nine acquisitions totaling about $1.34
billion through 2007. After her husband, Filipino-Chinese lumber tycoon
Louis Coson, died in 2003, she says, she
became more involved in her work.
Sy-Coson says the biggest risk she
took was leading BDOs acquisition of
Equitable PCI Bank Inc. in 2004. Equitable had assets of 291 billion pesos at
the end of 2003, double BDOs. Negotiations dragged, and Sy-Coson says she

The Sys are the Philippines biggest retailers,


running sm stores such as the one shown
opposite. Their Pico de loro Cove resort
south of Manila features a beach club,
a hotel and residences.

felt terrible for instigating a deal that


might fail. Her father advised her to step
away. Both sides renegotiated, completing the transaction in June 2007 after
more than two years. When it was over,
I went abroad and splurged, she says.
Boosted by the 2012 rights offering,
BDO increased its capital adequacy
level, a measure of capital compared
with risk-weighted assets, to 19.2 percent in 2012 from 15.8 percent a year
earlier. Last year, BDOs net income

bloomberg tps

soared 56 percent to a record 22.6 billion pesos. Customer loans jumped 19


percent from 2012 to more than 900
billion pesos, while total deposits surged
44 percent to 1.3 trillion pesos. The bank
opened 52 branches last year.
The rights offering positioned BDO
on a continuous growth path, says Edser Trinidad, an analyst at CIMB SB
Equities in Manila. It shows that Tessie and her management team have
a long-term vision.
Sy-Coson says she no longer feels
compelled to dress like a man all of the
time; she occasionally wears a dress
when going out. I am happy, and I
guess Ive finally become one of the
boys, she says.
Her childrentwo daughters and
one son in their 20sarent interested in joining SM now, Sy-Coson
says. Theyre pursuing culinary studies, writing and painting.
She says the booming economy will
create opportunities and encourage
old and new rivalsa frequent topic
at the familys Tuesday lunches. We
have to continually think of new ways
to withstand competition, she says. In
10 years, she says, real estate may become bigger than retailing in SMs expanding empire. It doesnt have to be
the same ball that keeps on rolling,
she says.
yoolim lee is a senior writer at
bloomberg markets in singapore.
yoolim@bloomberg.net ian sayson
covers asian emerging-markets stocks
at bloomberg news in manila.
isayson@bloomberg.net with assistance
from netty ismail in singapore and
Clarissa batino in manila.

AnAlyzing The
PhiliPPine economy

You can use Bloomberg analytics to get a macro picture of the Philippine
economy. Type COUN <Go> for the Country Guide function. Tab in to the
field, enter PHILIPPINES and press <Go>. COUN defaults to the Financial
Snapshot tab, which gives data on the main stock index, bond yields and
currency rates. Click on the Risk tab to view ratings data at the top of the
screen. Click on the fever-line icon to the right of Standard & Poors for
a history of the countrys foreign-currency, long-term debt rating. S&P
upgraded the sovereign to BBB on May 2, 2013. ROCky Swift

May 2014 bloomberg markets 101

COUNTRY
FOCUS

Leipzigs augustusplatz today and, on


the screen, in 1989, when it was named
Karl-Marx-Platz. Protests like that one
led to the fall of the Berlin Wall.

102 bloomberg markets May 2014

It hasnt been easy or cheap. but


25 years after the fall of the
berlIn Wall, Germany Is reapInG
the benefIts of Its commItment
to erasInG the dIfferences
betWeen east and West.
By leon manGasarIan
Photo illustration by BarBel Schmidt

May 2014 bloomberg markets 103

FOCUS

german engineering

TwenTy-five years ago, Leipzig was


The cenTer of proTesTs ThaT
expLoded across communisT easT
germany and uLTimaTeLy broughT
down The hard-Line regime of erich
honecker and Then The berLin waLL.
Back then, the few people who owned
cars mainly drove Trabants running on
a stinking mix of gasoline and oil. There
were strip mines on the edges of the
city. The airport was a third-rate Eastern bloc hub served by Soviet Aeroflot
and the not-at-all-lamented East German national airline, Interflug.
The city was crumbling, grim and
gray, says Dietmar Busse, 48, a Leipzig
resident who took part in the 1989
anti-communist protests and is now a
construction engineer for TAG Immobilien AG. All the roads were kaput except the one used by Honecker for the
two international trade fairs each year.
Theyd paint the facades and plant
flower beds along it so hed have a nice
Potemkin village.
We used to joke that the airport was
a country landing strip, Busse continues. There was a story that when the
Bavarian prime minister, Franz Josef
Strauss, who flew his own airplane, was
due to land for the Leipzig trade fair, he
wanted to abort because he couldnt
believe that such a small, shabby barrack could be the airport for a city with
half a million people.
A quarter of a century later, the
Leipzig airport operates 24 hours a day
as the European hub for global flights
by Deutsche Post AGs DHL parcel and
airfreight service. In a 48,000-squaremeter (517,000-square-foot) hall near
one of the two runways, conveyor belts
totaling 6.5 kilometers (4 miles) in
length allow the automatic scanning
and sorting of 100,000 parcels and letters an hour. In December, DHL began
a 150 million euro ($208 million) expansion that will double the facilitys
104 bloomberg markets May 2014

size. As for automotive culture, Leipzig


is now home to a Porsche Automobil
Holding SE factory producing the companys best-selling Cayenne SUV and
the new Macan SUV. Down the road,
theres a Bayerische Motoren Werke
AG plant churning out four BMW models, including the i3 electric car.
Leipzig is only one story of renewal
in the east since the reunification of
Germany in 1990. Dresden is another,
Potsdam another, Jena another. The
transformation of the east hasnt been
easy, and, above all, it hasnt been
cheap: Public investment in the east
since 1990 has reached 1.8 trillion
an amount roughly equal to Germanys
gross domestic product at the time of
reunificationaccording to Joachim
Ragnitz, managing director of the Munich-based Ifo Institute for Economic
Research.
It has been a commitment without modern parallel; this is the age of

separatism, not of integration. And it


has worked. German unity has turned
out much better than people thought,
says Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. Back in
1990, the economic cognoscenti almost
all believed it would end in tears. Instead, Germanys economy is the largest and healthiest in Europe, producing
20 percent of the GDP of the European
Union. German GDP will expand 1.8
percent this yearmore than the GDP
of any other European country except
Denmarkand 2 percent in 2015, the
Economy Ministry forecast in its annual economic report published on Feb.
12. Unemployment, which stood at 6.9
percent in February, may fall to a postunity low this year. Germany had a balanced budget in 2013, its first since
reunification.
Size matters in global political and
economic clout, Erixon says, and
without its eastern wing, Germany
wouldnt have been as strong a factor
in European politics over the past two
decades.
Germany has devoted 33.9 billion
to the transportation infrastructure
in the east, which now boasts the finest autobahns in car-crazed Germany.
as a young man, Dietmar busse
took to the streets of leipzig. today,
hes a booster for his city.

previous spread: ullstein bild/the granger collection (leipZig protest); barbel schmidt

COUNTRY

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COUNTRY

Remote sections, such as the A15,


which hits the Polish border at the
German city of Forst, and the A20,
which skirts the Baltic Sea, are loved by
speedsters because the pristine, pothole-free conditions allow them to get
their Porsches and BMWs to more than
250 kilometers an hour.
The eastern infrastructure is now
so modern that western Germans are
grumbling and demanding equal attention for their comparatively decrepit
bridges, roads and railways. Now,
its west Germanys turn, Hannelore
Kraft, prime minister of North Rhine
Westphalia, Germanys most populous state, told the business newspaper
Handelsblatt in 2012.
Eastern Germany isnt just catching
up economically. Its people are running the country. Chancellor Angela
Merkel, 59, and President Joachim
Gauck, 74, both grew up in the communist east. She was a physicist, and
he was a dissident pastor in the Lutheran church. Leading roles for easterners were unthinkable after the
first all- German elections, in 1990.
In Chancellor Helmut Kohls first
post-unity cabinet, easterners were
relegated to second- and third-tier
positions. He made Merkel minister
for womens affairs and dubbed her
my girl.
Merkel, Germanys first female chancellor, was re-elected to a third term
in September. She may even be on the

a long-term
project
Massive federal spending
notwithstanding, the east still
trails the west
by many measures. Note that
the population
of the east is
about 20 percent of the total.
Sources: Federal
Labor Agency,
Federal Statistical
Office

Western
Germany
eastern
Germany

easterners held little power


in early unity governments.
angela merkel, shown here
in 1991, had a minor role.

cusp of an oil boom in her eastern election district: Central European Petroleum GmbH plans to start production
in 2017 in Brandenburg and MecklenburgWestern Pomerania. Proceeds
from drilling rigs, operating costs, royalties and taxes may pump $27.6 billion
into eastern Germanys economy during
the next 25 years, according to data provided by the oil company.
Eastern Germany still lags behind
the western part of the country in most
economic indicators. The unemployment ratewhich rose to 18.7 percent
as recently as 2005was 9.9 percent
in February, compared with 6 percent
in western Germany, according to the
Federal Labor Agency. The east, with
about 20 percent of Germanys total
population of 81 million, produces 15
percent of the nations GDP. Wages and

ContRibution to geRman gDP, 2012

15 %

85 %

aveRage Wage

Jobless Rate

40,000

20%

35,000
30,000

15

25,000
20,000

10

15,000
10,000

1991

106 bloomberg markets May 2014

2012

1994

2013

salaries in the east are on


average 70 percent to 80
percent of those for comparable work in the west.
Struggles like these
suggest that 25 years
isnt a particularly long
time when set against 45
years of communist rule.
All major businesses
were confiscated by the
state in the Soviet zone
of occupationwhat would become the
German Democratic Republic, or East
Germanyafter World War II. So were
large farm and forestry holdings. The
GDR was largely sealed off from the
global economy and subject to shortages of anything and everything. The
East German mark, though officially
pegged to the West German mark,
bought less and less. They pretend to
pay us, and we pretend to work, was
the joke.
There are still regions of eastern
Germany that are struggling economically, including parts of Saxony-Anhalt,
MecklenburgWestern Pomerania and
Brandenburg states. Here you see what
infrastructure spending cant do. Several state-funded projects in Brandenburg have failed, including the
EuroSpeedway Lausitzring racetrack
and a bid to build zeppelins for transporting freight. The giant hall built for
the now-dead zeppelin company, Cargolifter AG, has been sold and converted into an indoor swimming pool
and resort called Tropical Islands.
Brandenburg is also home to Germanys most-notorious delayed and overbudget project: Berlins new airport,
which was supposed to open in 2011.
After the repeated cancellation of announced opening dates, theres still no
concrete time frame for completion;
2016 is being held out as a possibility.
The price for the project, originally set
at 2.8 billion, is approaching 5 billion.
There are many broken work and life
biographies in eastern Germany, especially for people now ages 50 to 70, who
in many cases saw their jobs vanish as

Ullstein bild/the granger collection

German enGineerinG

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huge state-owned factories were shut


down or sold and made drastically
smaller. Other people saw their qualifications made worthless overnight,
such as those who had received degrees in Marxism-Leninism. Still others were branded by having worked for
the hated Stasi, the East German secret
police.
Fifty-six-year-old Rainer Rieck was
one. He was a policeman in Guben,
a town on the German-Polish border.
When the Stasi came to recruit me,
I wasnt man enough to say no, he says.
Rieck says he lost his job in 1991 after
his bosses found out about his Stasi
past. Then, he says, his wife left him. He
was a metal worker until 2003 and has
been unemployed since. For me, they
might as well rebuild the Berlin Wall,
he says. Ive never found my bearings
in unified Germany.
About a two-hour drive southwest of

german engineering

a worker preps
a Porsche
macan for
painting at the
recently
expanded
leipzig
Porsche plant.

10 when the Berlin Wall came down,


says Christian Graf von Wedel, a real
estate investor and head of Frankfurtbased GW Wohnen GmbH, which owns
thousands of apartments and several
office buildings in the east. So they
dont have all this communist stuff
in their heads. Easterners are more
ambitious and harder working than

easterners are more ambitious and


harder working, says investor
christian graf von wedel. they dont
have the luxury of inheriting.
Berlin, in the hilly state of Thuringia, is
the city of Jena, which has been a center of higher education and technology
in Germany for centuries. Famed lensmaker Carl Zeiss AG, among other stalwarts of the Mittelstand (the small and
midsize companies that are at the heart
of the German economy), was founded
here in 1846. A post-reunification spinoff of Carl Zeiss, the optoelectronics
company Jenoptik AG, is among Jenas
largest employers.
Jena, with a population of 105,000,
has one of the strongest property markets in central Germany. The average
price of a home rose 27 percent from
2009 to 2013, and the rental market
has been swept clean, with just 1 percent of apartments empty in the city,
according to a study by real estate company Immowelt AG. The people moving into management positions here
are aged around 35, meaning they were
108 bloomberg markets May 2014

west Germans. They dont have the luxury of inheriting, and so theyre hungry
and want to get ahead.
Wedel says the 15-story office building his company owns in Jena, one of
the citys two skyscrapers, was 70 percent empty when he bought it in 2011.
Its now 100 percent rented. Wedel says
reducing the size of rental units to cater
to information technology startups had

bloomberg tps

led to the surge of tenants. The city lists


45 IT companies on its website.
Twenty-five years after he joined the
anti-communist protests centered at
Leipzigs Nikolaikirche, or St. Nicholas
Church, Busse, the construction engineer who helped rebuild the city, has
bought a house in Leipzig, and he and
his wife are raising their three children
there. History has been good to us, he
says. Thats why we have three kids.
Aside from political and economic
freedom, Busse says, the thing he most
appreciates about modern eastern Germany is the clean air and water. In his
youth, Leipzigs canals were filthy and
stinking; now, he boats on them with
his family. On the edges of the city, he
visits lakes and parks built where the
East German government once tore up
the ground to mine cheap, dirty coal.
I go there once a week to clear my
head, Busse says. What a change!
leon mangasarian is an editor at
bloomberg news in berlin.
lmangasarian@bloomberg.net

SnapShotS of
German data

For an overview of Germanys markets and economic data, type COUN


GERMANY <Go> for the Country Guide function. The Financial Snapshot

page shows that as of mid-March, the price-earnings ratio of the DAX Index
was higher than its 52-week average. Click on the Economics tab to display
forecasts and news. To track financial conditions in the euro area, type FCON
<Go>, click on the arrow in the upper-left corner of the screen and select
Euro Area. To track German trade flows, type ECTR <Go>, tab in to the field
in the upper left, enter GERMANY and press <Go>. JON ASMUNDSSON

krisztian bocsi/bloomberg

COUNTRY

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strategies
PRoFILE

Betting on Comebacks
Richard Mashaal and Brian Gonicks Senvest Partners hedge fund
racked up a 79.4 percent return last year by finding
beaten-down stocks with the potential to bounce back.
By jon asmundsson
PhOTOGRAPh By ROByn TwOMEy

RichaRd Mashaal and BRian Gonick have

a target for their Senvest Partners LP hedge fund:


Stocks they buy should have the potential to double or triple in price over one to three years.
The strategy worked in 2013, when seven of Senvests top 20 holdings surged 100 percent or more.
Those stocks helped the $550 million long/short
fund rack up a return of 79.4 percent for the year.
Senvest Partners was the best-performing midsize fund in BLOOMBERG MARKETS 2013 hedgefund ranking.
Senvest gained an average of 20.6 percent annually in the 17 years from its inception through
December 2013, according to data provided by
the fund. Along the way, there have been ups and
downs, including moonshots of 229 percent in
2009 and 169 percent in 2003 and a plunge of 54
percent in 2008.
While Senvest today hunts for hidden turnaround stories, it traces its roots to a company that
specialized in nabbing shoplifters. U.S.-based Sensormatic Electronics Corp. in the mid-1960s developed electronic tracking tags for retailers, and
Mashaals father, Victor, bought the Canadian license for the equipment. In 1972, he held an initial public offering of his holding company, Senvest
Capital Inc. The firm later sold the Sensormatic

110 bloomberg markets May 2014

license back to the U.S. company, which was acquired by Tyco International Ltd. in 2001. Senvest Capital, meanwhile, remains public with
shares trading on the Toronto Stock Exchange at
C$160 on March 10. That valued the Montrealbased company, which is 70 percent owned by the
extended Mashaal family, at
C$449 million ($404 million).
FoR two decades, sen-

Richard mashaal
and Brian Gonick

(from left)
vest Capital made privateMAnAGERS,
equity investments, includSEnvEST PARTnERS
ing in one of Canadas first
Target double or triple returns
pay-TV channels, the younger
on stocks in one to three years.
Mashaal says. After he joined
Buy well below highs.
the firm in 1989, the son
Seek turnaround situations.
shifted the companys focus
to publicly traded securities.
For Mashaal, 48, the reason was simple: Stocks
were liquid and could be cheaper. Private companies are often expensive, as bidders tend to run
up a targets price at auction, he says. By contrast,
public shares may lose favor or be misunderstood
or unfollowed, creating the potential for bargains.
So Mashaal opened Senvest Partners in 1997.
Our whole premise since we started the fund is,
were doing this with our own money anyway,

strategies

As markets recovered, the team looked


for a way to play the housing rebound.
Homebuilder stock gains had outrun comtype hFnd
pany performance, Mashaal says. So the
<go> for
the Hedge
fund turned its focus to mortgage insurfund Home
he says. New Yorkbased RIMA Senvest
ance. The sector was going from being the
Page.
Management, the funds general partner,
worst possible business you could be in
and affiliates oversee $1 billion altogether.
insuring the value of houses at the peak
Of that, about 60 percent is the Mashaal familys.
to being the best possible business you could be in,
The fund managers look for investing situa- which is insuring the value of houses at the bottions that Mashaal likens to a pendulum. A good tom, he says.
company thats fallen out of favor may see its stock
swing back in a year or two, he says. It doesnt The challenge was figuring ouT which
have to swing all the way back; it just has to get to insurers had the reserves to handle their crisisera claims. Where we had to make a call was in
neutraland well do quite well, he says.
If such a company starts delivering positive re- our understanding of the accounting, our projecsults over a year or two, its price-earnings ratio tions of how claims were going to develop, he
may rise as investors jump aboard and analysts says. We got up to speed very quickly.
The firms research led it to Radian Group Inc.,
raise their ratings, Gonick, 49, says. How that pays
off for the firms stock picks is due a Philadelphia-based mortgage insurer, which had
to sentiment to a large degree, he risen as high as $67 a share in 2007 before crashsays. But also there has to be some ing to a low of 77 cents the following year. Senvest
fundamental change and transfor- Partners first bought Radian in 2010, Gonick says,
later paying as little as $2 a share. Last year, the
mation or rehabilitation.
Coming out of the market melt- stock rose 131 percent to close at $14.12 on Dec. 31.
The firms largest holding as of mid-March was
down in 2008, Senvest Partners
was searching for companies near Howard Hughes Corp., Gonick says. Shares of the
their bottom, Mashaal says. It was Dallas-based property developer, whose chairclearly a financial services, real es- man is hedge-fund manager Bill Ackman of Pertate, insurance bust, he says. And thats where shing Square Capital Management LP, rose 19
percent this year to $142.89 on March 10.
we were looking to buy.
The key attraction of Howard Hughes, Mashaal
Early on, the fund loaded up on trust-preferred
securities issued by entities related to Bank of says, is its collection of real estate in the U.S., inAmerica Corp., Citigroup Inc. and other banks cluding the South Street Seaport project in New
that were trading at about 20 cents per dollar of York and locations in Honolulu, Houston and
par value, Mashaal says. He was willing to be wrong Las Vegas. We just felt like all four of these were
on some of them. If we were wrong on all of them, home-run type of developments, he says.
the whole world wouldnt exist, he says. Wed all
Jon Asmundsson is strategies editor of BloomBerg
markets. jasmundsson@BloomBerg.net
be running around in loincloths.

PROFiLe

tiP BOx

iF we weRe
wROng On aLL OF
the tRustPReFeRReds, the
whOLe wORLd
wOuLdnt exist,
mashaaL says.

Finding dOwntROdden shaRes


You can use the equity screening (eQs) function to search for stocks that are
trading within 5 percent of their 52-week lows. type eQs <go>. to screen
using the russell 3000 index, tab in to the add Criteria eld, enter RAY
and click on the index in the list of matches. tab in to the eld again, enter 52
WEEK LOW and click on the 52 Week low Change Percent item in the list of
matches. Click on <= less than or equal to. enter 5 in the eld to the right of
% and press <go>. Click on results. JOn asmundssOn

112 bloomberg mArkets May 2014

strategies
ChArTs

Using Heikin-Ashi
The new GPHA lets you chart with combo candles
to better track trends and identify reversals.
By AkshAy ChinChAlkAr

Heikin-AsHi cAndlesticks Are A power-

TiP BOX
In G and
Launchpad
charts, right
click on the
price series,
choose Select
Series Type
and click on
Heikin-Ashi.

ful tool for analyzing price action. To help stay


with a trend or to anticipate a reversal, you can
now use the new Heikin Ashi Chart (GPHA) function on the Bloomberg Professional service.
Heikin-Ashi is often translated from Japanese
as average pace. Thats what the charts capture:
the average pace of price moves. The charts are
typically smoother, clearer and more consistent
than a standard candlestick chart when graphing
a security thats in a trending move.
Heikin-Ashi candles are constructed from standard candles. While a standard candle shows the
open, high, low and close in a given period, a HeikinAshi candle combines data for the period with levels
from the previous one to create an amalgamated
candle. The main benefit of such so-called combo
candles lies in filtering out noise that might otherwise whipsaw traders. The smoother chart can help

Heikin-Ashi can filter out noise that may whipsaw traders.

you better track the direction of the prevailing trend


until the market shows visible signs of a reversal.
tHere Are four importAnt differences

CAndle mAking
Here are the calculations for a Heikin-Ashi candle.
Previous Period (t1)
Current Period (t)

HA High(t) = Max [High(t),


HA Open(t) or HA Close(t)]
HA Close(t) = [Open(t) +
High(t) + Low(t) + Close(t)]/4
HA Low(t) = Min [Low(t),
HA Open(t) or HA Close(t)]

HA Open(t) = [HA Open(t1) + HA Close(t1)]/2


Source: Bloomberg

between a Heikin-Ashi and a standard candle


chart. First, Heikin-Ashi charts dont allow for
price gaps. In a standard candle chart, an upward
gap, for example, occurs when the low of the current candle has no overlap with the high of the preceding candle. By removing gaps, Heikin-Ashi
charts display a more consistent view of a trend.
Second, up and down candles are built in different ways. In a standard chart, an up candle occurs
when the close exceeds the open. On a HeikinAshi chart, an up candle forms when the close exceeds the midpoint of the prior candle.
Third, on a Heikin-Ashi chart, after the prevailing trend has been in force for a time, a

May 2014 bLOOmberg mArkets 113

strategies
Charts
change in the candle color often signals a reversal.
Last, a long-legged Dojia candlestick pattern in which the open-close range is narrow
and the upper and lower shadows are similar
lengthsis often a precursor to a trend change
on a Heikin-Ashi chart. For example, if such
a Doji appears after an uptrend, followed by a
change in color in the next session, the odds
favor a reversal. In addition, when the down

Heikin-Ashi candles can make it easier to follow trends.

Heikin-Ashi candle has no upper shadowwhich


represents price weaknesstechnical analysts
typically consider the signal even more significant.
akshay ChinChalkar is a technical analysis
application specialist at BloomBerg in mumBai.
achinchalka1@BloomBerg.net

risKless return

Compounding Machines
By Charles stein

More than Four years aFter setting out

on his own, Chuck Akre is back on top.


The $2.8 billion Akre Focus Fund, started by
Akre after he left FBR Fund Advisers Inc. in a dispute over fees, produced the best risk-adjusted
performance among large-cap value funds from its
inception on Aug. 31, 2009, to March 10, according
to the Bloomberg Riskless Return ranking. The
fund combined the best total return with lowerthan-average volatility among a group of 83 peers.
Akre, 71, who previously ran the top-performing FBR Focus Fund, looks for businesses he

aKre tOPs large-CaP Value leaDers

riskadJusted
total
return volatility return

1 akre FoCus
2 sunameriCa FoCused dividend
3 Weitz value
4 JPmorgan equity inCome
delaWare valuea

9.1%
8.5
8.0
7.2
7.2

13.9
14.6
13.9
15.7
15.1

125.9%
123.4
111.3
113.5
108.5

Figures are from Aug. 31, 2009, to March 10. 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 dramatically during a specified period,
reducing the potential for unexpected losses. Source: Bloomberg

114 bloomberg markets May 2014

calls compounding machines, companies that


produce high rates of return for shareholders
over a long period of time, and holds them. He
has owned one stock, insurer Markel Corp., for
more than 20 years. If he likes a business, he will
stick with it, even when its valuation looks expensive or when it underperforms the broader
stock market.
Akre Focus Fund produced a risk-adjusted
return of 9.1 percent from inception. It had a total
return of 125.9 percent combined with a volatility
of 13.9, better than the average among its peer
value funds with at least $1 billion in assets that
buy stocks with large market capitalizations.
Among the top 10 holdings in Akres fund as of
February were discount retailers Dollar Tree Inc.
and Ross Stores Inc., which doubled in the three
years through 2013, and credit card companies
MasterCard Inc. and Visa Inc., which more than
tripled in that time. The really good companies
are scarce and hard to find, Akre says. In our experience, our shareholders are better served when
we hold on.
Charles stein covers mutual-fund companies at
BloomBerg news in Boston. cstein4@BloomBerg.net

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strategies
INFLUENTIAL NEWS

Mobile Moves

TIP BOX
type NI
INFLUENTIAL
<Go> for daily
roundups of
exclusive
market-moving
stories.

deutsche telekom Ag Chief executive officer


timotheus Hoettges told directors on march 5 that
regulatory hurdles are making a sale of the companys t-mobile Us inc. unit less likely in the near
term, according to two people with direct knowledge of the matter.
while a sale of deutsche telekoms 67 percent
holding in t-mobile to Japans softbank Corp. remains the preferred option, the german carrier is
open to alternatives, said the people, asking not
to be identified because the deliberations are private. Consolidation has been viewed with little
enthusiasm by U.s. watchdogs concerned about
rising prices.
t-mobile, the smallest of the four nationwide
U.s. wireless service providers, has attracted the
interest of softbank Ceo masayoshi son, who has
said he aims to combine t-mobile with the companys sprint Corp. unit, people familiar with the
matter have said. softbank shares surged as concern eased over the potential impact of a takeover
of t-mobile on the Japanese companys debt.
Hoettges said a positive outlook in the U.s.
means t-mobile can go it alone, at least for now.
we have a stand-alone position which is good
and which were building out, he said at an earnings press conference in bonn. for the original
story, type NSN N21AEM6K50Y8 <Go>.

Rupiah Rally
A surge in indonesias rupiah sent it to its mostoverbought level in almost three years, positioning
the currency for a reversal.
the rupiah rose more than 5 percent in february and extended gains into march, reaching
11,344 per dollar on march 10 and pushing its
14-day relative strength index to 18, a level not
seen since April 2011.
indonesias december trade surplus was the
biggest in more than two years and helped rein
in a current-account deficit. the government
banned shipments of unprocessed ore in January,
a policy that analysts say distorted trade figures.
the current account remains suspect, and an
election in July poses another currency risk, says
leong sook mei, an analyst at bank of tokyo
mitsubishi UfJ ltd. theres very little room for
the rupiah to gain because it has already strengthened so much, she says. for the original story,
type NSN N16SH76S972B <Go>.

softbank surge

The shares rose on


speculation it
wouldnt be able to
purchase T-Mobile.

CrOSS-BOrdEr FLOWS
type WFII <Go> to track investment ows
into a selected country. Click on the bond and
portfolio tabs to show amounts for those asset
classes split up over various time frames.

Compiled by rocky swift rswift5@bloomberg.net

116 bloomberg markets May 2014

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strategies
Clean energy

Really Green Shoots

Environmental bonds are growing out of their niche status as companies


put a green stamp on their debt and underwriters agree on standards.
By JoSepH Salvatore

record issuance of green bonds lasT

tIp BoX
Type BneF
<go> for the
Bloomberg New
Energy Finance
portal.

year underscores the growing presence of corporations in the environmental debt sector and the
creation of new standards that are helping to attract a wider range of investors.
Total sales reached $13.7 billion in 2013, marking average annual growth of 35 percent from
2007, when the term green bonds was first coined
by market players. Last years performance
was driven by a surge in issuance from international financial institutions and the entrance of a
new type of green bondthe self-labeled corporate. Issuance in the sector this year had already
reached $4.86 billion as of March 10, putting it on
pace to exceed $20 billion in 2014.
What defines a green bond tends to vary by issuer and industry. Until 2013, the primary securities in the market were either project bonds
whose cash flows were backed by clean-energy
developments or debt sold by global bodies like the
World Bank to fund energy and climate-change initiatives, either directly or through lending pools.
You can use the Fixed Income Search (SRCH)

top unDerwrIterS oF green BonDS ISSueD By


InternatIonal FInanCIal InStItutIonS

1 seb
2 morgan stanley
3 bank of america merrill lynch
4 JPmorgan chase
5 citigrouP
In 2013. Source: Bloomberg New Energy Finance

1 1 8 bloomberg markets May 2014


118

amount,
in millions

number
of issues

$1,247
1,061
892
791
745

7
6
5
4
4

function on the Bloomberg Professional service


to explore this market. Type SrCH <go> and enter
GREEN BOND in the field. Click on the first option that appears and then on the Results button
to see the list of securities.
The emergence of the self-labeled corporate
green bond has signaled a significant growth opportunity. Similar to the way that the World Bank
can earmark green-bond proceeds to pay for, say,
rooftop solar panels in the developing world, corporations can specify an environmental purpose
for their securities and call them green.
The largesT corporaTe issuer lasT

year was Electricite de France SA, which raised


1.4 billion euros ($1.9 billion) in November
through a 7-year note. Type eJ9330295 <Corp>
DeS <go> to view a description of the bond, which
funds solar and wind projects developed by subsidiary EDF Energies Nouvelles. Corporate issuance isnt limited to energy companies. That
same month, Bank of America Merrill Lynch sold
a $500 million, three-year note that will help fund
clean-energy and energy-efficiency initiatives.
Asset managers from Vanguard Group Inc. to
Invesco Ltd. are holders of the Bank of America
Corp. units bond, demonstrating how demand in
the market has expanded beyond niche investors.
Type eJ9455639 <Corp> HDS <go> to see a list of
the reported holders of the bond.
Green-bond issuance from international financial institutions reached $7 billion in 2013, a
fourfold increase from the prior year and exceeding the previous record, set in 2010, by 75 percent. The World Bank was the largest seller, with

strategies
Clean eneRGy
almost $2.8 billion in bonds
from its International Finance
Corp. and International Bank
for Reconstruction and Development units.
The World Bank and regional
bodies like the European InType SRCH <Go> to access the Fixed Income Search and filter for green bonds.
vestment Bank still dominate
this subsector of the market,
though new players are appearing. Nederlandse 2020 Project Bond Initiative, which aims to boost
FinancieringsMaatschappij voor Ontwikkel- credit ratings on the securities and enable more
ingslanden NVthe Dutch development bank involvement from institutional investors.
Citigroup Inc., Barclays Plc and Royal Bank
known as FMO for shorthad its first issue in
November, and the Export-Import Bank of Ko- of Scotland Group Plc were the top three underwriters for clean-energy-project bonds
rea sold a $500 million bond in February.
Clean-energy bonds also had a record year, last year. The banks cooperated on three mawith $3.2 billion raised through 10 confirmed jor deals: Solar Stars, Topazs and Continensales. Des Moines, Iowabased MidAmerican tal Wind LLCsa $613 million bond backed by
Energy Holdings Co., owned by Warren Buffetts a portfolio of Exelon Corp.owned wind farms.
Berkshire Hathaway Inc., sold two bonds worth
a combined $1.25 billion to fund the 579-mega- While many major buy-side players are
watt Solar Star project and a $250 million bond signatories to sustainable-investing initiatives,
for its Topaz solar development, both in South- investors have often cited a lack of clarity on
green-bond definitions as a roadblock to growth
ern California.
Perhaps the most noteworthy development in the market.
Efforts to develop rules for the burgeoning
last year was the 305 million pound ($509 million) bond to fund the U.K.s Greater Gabbard green-bond market began in earnest in 2011 with
offshore transmission link. The project will con- the start of the Climate Bonds Standard by the
nect the 500-megawatt Greater Gabbard offshore independent Climate Bonds Initiative. The stanwind farm to the electricity grid on the mainland. dard sought to certify bonds that meet stringent
It was the first offshore-transmission bond and guidelines developed by industry working groups.
The push took another step forward on Jan. 13,
the first clean-energy issuance to use credit enhancements from the European Unions Europe when a group of major banks backed what they
called the Green Bond Principles, which set out
a fundamental definition of the securities and
provide a stamp of approval on the integrity of
Top undeRwRiTeRS of
environmental-based investments. Notably, the
Clean-eneRGy-pRojeCT bondS
initiative represents an implicit endorsement of
amount,
number
in millions
of issues
the green-bond concept by eight of the worlds top
$788
3
1 Citigroup
10 corporate-bond underwriters. This move by
2 barClays
538
3
some of the worlds leading banks could be a ma royal bank of sCotland group
538
3
jor step toward providing clarity for investors, sup4 bank of nova sCotia
441
1
porting future growth in the green-bond sector.
5 banCo santander
hsbC holdings

In 2013. Source: Bloomberg New Energy Finance

1 2 0 bloomberg markets May 2014


120

248
248

1
1

Joseph salvatore is a capital markets research


associate at BloomBerg in new York.
JsalVatore1@BloomBerg.net

strategies
cheat sheet

Corporate Finance
Bi <Go>
is the portal for exclusive research from
bloomberg industries
analysts as well as for
customized tools for
digging deeper into
sectors from banking
to telecommunications to gaming.
Bill <Go>
lets you track
pending legislation,
the industries and
companies afected
and the likelihood of
passage.
twtr <Go>
lets you construct
lters for twitter
postings related to
companies, industries,
authors or bloombergrecommended
markets and topics.
pBar <Go>

TEAR OUT AND SAVE.

can help you zero


in on factors driving
a selected companys
stock price relative
to that of its
competitors, suppliers
and customers.

drsK <Go>
lets you analyze
the credit health of
a selected company.
cast <Go>
displays a breakdown of a selected
companys capital
structure, including
the types of borrowing
ranked by seniority
and whether subsidiary debt has recourse
up the corporate ladder.
anr coMps <Go>
lets you compare
analyst recommendations for a selected
companys stock with
those of peer
companies.
reG <Go>
is a portal for information related to nancial regulations.
Fa esG <Go>
displays environmental, social and
corporate governance
data for a selected
company.

nia <Go>

wacc <Go>

can help you plan the structure and


timing of bond sales using analysis
based on Bloomberg Valuation Service
issuer curves.
cacs <Go>

splc <Go>

displays a calendar of
corporate actions for
a selected company,
including events such
as stock buybacks,
capital changes and
distributions.

displays supplychain data for


a selected company,
its suppliers and
customers.

MrGc <Go>

displays a summary
of litigation cases
involving a selected
company.

provides evaluations
of merger scenarios
involving a selected
company, including
the impact on an
acquirers earnings per
share, leverage,
revenue segmentation
and operating margins.

liti <Go>

enables you to
analyze the weighted
average cost of
capital for a selected
company.
BudG <Go>
enables you to identify
revenue and spending trends in the u.s.
federal budget and to
access related news
stories and insights
from bloomberg government analysts.
coMpiled by Rocky SWifT
rswift5@blooMberg.net

Want to learn
more? Turn over
to read our ad.

pull out and save. // May 2014 // press <help> twice to send a question to the blooMberg analytics help desk.

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strategies
Clean enerGy

Decarbonizing
Portfolios
Climate-change risks are rising. Here are some tools you can use
to gauge and reduce the greenhouse-gas exposure of your investments.
By GreGory elders

The u.s. and china, which are respon-

Type PorT <Go>


to use the Portfolio
& Risk Analytics
function to analyze
carbon risks.

sible for almost 40 percent of global energy consumption and an even larger share of carbon
dioxide production, are ratcheting up regulations
designed to limit emissions. From California to
Shanghai, regulations on power-plant carbon intensity, vehicle fuel-efficiency and carbon pricing
mean that investments with a high greenhouse-gas
exposure may face growing financial pressure.
One sign that investors are taking action: A
group of 70 global investors representing more
than $3 trillion in assets has asked the 45 top oil,
gas, coal and electric power companies to assess
the financial risks of climate change on their business models. In addition, investors have taken a
shine to clean technology. The NYSE Bloomberg
New Energy Finance Americas Clean Energy

Tracking Emissions

Data show the S&P


500 is more carbon
intense than a European
benchmark.

Index returned 43.4 percent in 2013, outpacing


the Nasdaq Composite Indexs 38.3 percent rise.
Bloomberg Industries now provides analysis
and insight into how sectors and companies are
exposed to the opportunities and risks of climate
change. Type BI ClIMG <Go> for the BI climate
change dashboard. To learn more about the key
issues in, for example, the oil, gas and coal sector,
click on that category under the Industries heading on the left side of the page.
To undersTand The carbon inTensiTy

of your investments, you can use the Portfolio &


Risk Analytics (PORT) function, accessing company environmental, social and governance
(ESG) data.
Lets take a look at the Standard & Poors 500
Index. To load the index in the PORT function,
type sPX <Index> PorT/I <Go>. Click on the Characteristics tab. To benchmark the S&P 500
against the Bloomberg European 500 Index, click
on the arrow to the right of Vs and select [More
Sources]. Click on Indices. In the Add INdEx
field, enter BE500. Click on the Bloomberg European 500 Index item in the list of matches and
then on the Select button.
Next, click on the arrow to the right of By, select
BICS Sectors and press <Go> to view sector-level
exposure using the Bloomberg Industry Classification Standard.
To add carbon data, right click on the Name
column heading and select Add/Remove Fields.

May 2014 bloombErg markETs 121

strategies

the Bloomberg European 500. Utilities


show the greatest difference. The European index clocks in with an intensity
type BNEF
<Go> for the
of 823, less than one-third of the correBloomberg
sponding value for the U.S. benchmark
new energy
In the Edit Template window that apindex of almost 3,000. Seven of the 10
Finance
home page.
pears, click on the More Equity Fields
sectors in the S&P 500 show higher emisbutton. In the Select Field window that
sions intensity.
appears, enter GREENHOUSE GAS. Click on the
Unburnable carbon is a phrase used in research
Greenhouse Gas Intensity per Sales item in the published last year by the London-based Carbon
list of matches. Select Latest Year to see the lat- Tracker Initiative. The expression refers to the
est disclosed annual company data. Click on the idea that in order to hold a global temperature
Select button. A Latest FY Greenhouse Gas In- rise to 2 degrees Celsius (3.6 degrees Fahrenheit)
tensity per Sales data item will now appear un- and avoid significant climate-change risks, most
der Selected Fields on the right side of the Edit of the worlds fossil-fuel reserves would need to
Template window. To display data on green- remain in the ground and unburned. Such a scehouse-gas intensity for the benchmark and the nario would mean that 80 percent of oil, gas and
difference relative coal reserves of listed companies would become
to the benchmark, stranded, according to the CTI. Investors holdclick on the boxes ing securities of those companies could thus face
to the right of the losses. (Type CTRE <Go> for the CTIs research.)
item in the Bmrk
To address such investor concerns, the Carbon
and +/ columns so Risks Valuation Tool sample spreadsheet is a
that check marks first-cut attempt to quantify the earnings and
appear. Click on share-price risk companies may face under unUpdate.
burnable-carbon-stranding scenarios. You can
The S&P 500 had use the Excel Template Library (XLTP) function
a carbon intensity to access the spreadsheet. Type XLTP CARBON
RISKS <Go> and click on the Open button.

CLEAN ENERGy

TIP BOX

To analyze a parTicular energy com-

Type XLTP
CARBON
RISKS <Go>
1 <Go> to
download the
spreadsheet.

that was almost 14 percent higher than that of


the Bloomberg European 500 as of March 10. The
S&P 500 showed a carbon intensity of 183, meaning that the weighted average of the S&P 500 constituents emit 183 tons of greenhouse gases per
$1 million of revenue. That compares with 157 for

1 2 2 bloomberg markets May 2014


122

pany, enter its ticker in cell A3. Next, click on cell


A6 and then on the arrow that appears to the
right to select one of the five predefined stranding scenarios. The tool relies on Bloombergs
consensus earnings estimates data and shocks
a companys revenue and earnings. You can adjust any of the underlying assumptions by entering values in the salmon-shaded cells.
Click on the O&G Price Shock tab to dig deeper
into a companys oil and gas reserves. The tab enables you to analyze how the move to oil that's
more difficult to extract, such as tar sands and
deep offshore, increases costs and decreases profits. Click on the Enviro Costs tab to model how
changes in company carbon emissions and carbon futures prices could positively or negatively
affect earnings.
gregory elders is an environmental, social and
governance analyst at BloomBerg industries
in london. gelders2@BloomBerg.net

Vernissage | Wednesday, May 14, 2014 | By invitation only


artbasel.com | facebook.com/artbasel | twitter.com/artbasel

strategies
WhATS nEW
seeing
senTimenT

Tracking Twitter
Sentiment

In BSVC, positive
tweets are shown
in green.

Bloomberg Social Velocity alerts have been enhanced to


display sentiment. The alerts are triggered when Twitter
postings related to a particular company signicantly
exceed the average volume during the previous 30 days.
Charts tracking the postings now also let you see the number of
tweets with positive, negative and neutral sentiment. Type MSFT
US <Equity> BSVC <Go> to use the Social Velocity function to
track postings related to Redmond, Washingtonbased software
giant Microsoft Corp., for example. In addition, the Bloomberg Execution Management System has been enhanced to let you display
real-time Twitter sentiment data in a column in your trading blotter.
The analytic assigns a numerical value from minus 1 for negative
sentiment to 1 for positive and displays a bar chart visualization. For
a demonstration of the enhancement, type EMSX !DEMO <Go>.
EMSX is a multiasset, broker-neutral trading platform that lets you
route orders to more than 2,500 destinations.

FX ArBiTrAGE
EnhAnCEMEnTS

The FXInterest Rate


Arbitrage function
has been enhanced
with a number of new
features, including the
ability to easily use
your own choice of
benchmark moneymarket rate and a new
mid view that lets you
imply values without
specifying bids and
ofers. Type EUr
<Crncy> FXFA <Go>

to identify coveredinterest-rate-arbitrage

opportunities involving
the euro. For more
information, type nSn
n2A4YA6JTSES
<Go>.
COMBO CAnDlES

Heikin Ashi Chart is


a new function that
lets you graph prices
with candlesticks that
blend data from the
open, high, low and
close of the current
period with levels from
the previous period.
Such candles measure
the average pace of

price moves. To graph


shares of Menlo Park,
Californiabased
Facebook Inc. with
Heikin-Ashi candles,
type FB US <Equity>
GPhA <Go>. On the
same screen, try
comparing Heikin-Ashi
candles with standard
candles by typing G X
1671 <Go>.
hOME PAGE
FOr PriVATE
EqUiTY

Type PE <Go> for the


new Private Equity
Overview function. PE

TrAding AnAlyTic

This column in EMSX


displays the relative
Twitter sentiment.

lets you access private


equityrelated tools
and data, and it allows
you to track deals, fund
launches and investor
commitments.
ShArinG
ECOnOMiC
ChArTS

The Economic Workbench function has


been enhanced to let
you circulate charts
created in ECWB by
sharing links with
other Bloomberg
users. Type ECWB
<Go> and select the

chart you want to


share. Click on the
Actions button on
the red tool bar, select Share Chart and
click on Create Public
Link. Click on Copy
Link. You can then
paste the link into
messages or research
reports and notes.
COMPILEd BY
Jon Asmundsson
jASMundSSOn@
BLOOMBERg.nET

TiP BOX
For more recent enhancements,
type nEW <Go>.

The BLOOMBERg PROFESSIOnAL service (BPS) is owned and distributed by Bloomberg Finance L.P. (BFLP), except that Bloomberg L.P. and its subsidiaries distribute the BPS in Argentina, Bermuda, China, japan, Korea and India. Bloomberg Tradebook is
provided by Bloomberg Tradebook LLC and its afliates and is available on the BPS. BLOOMBERg, BLOOMBERg PROFESSIOnAL, BLOOMBERg MARKETS, BLOOMBERg nEWS, BLOOMBERg AnYWHERE and BLOOMBERg TRAdEBOOK are trademarks and
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herein was obtained from reliable sources but does not guarantee its accuracy.
Communicated, as applicable, by Bloomberg Tradebook LLC; Bloomberg Tradebook Europe Ltd., authorized and regulated by the u.K. Financial Services Authority; Bloomberg Tradebook (Bermuda) Ltd.; Bloomberg Tradebook Services LLC. This communication is directed only to market professionals who are eligible to be customers of the relevant Bloomberg Tradebook entity. Please visit http://www.bloombergtradebook.com/pdfs/disclaimer.pdf for more information and a list of Tradebook afliates involved with
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not been solicited by issuers, and issuers do not pay Bloomberg any fees to rate them or their securities. Customers should not use or rely on Bloombergs ratings to comply with applicable laws or regulations that prescribe the use of ratings issued by
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