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Rest Well, Robert Hughes

by Mike Ma

It is with a heavy, sad heart that I am writing to inform friends of kasina that Robert Hughes has passed. We knew him as Robert Larson-Hughes, as he was a Principal of the firm and also has served on our Board of Advisors after he left us in 2005.

Anyone who has been to our office should feel his presence. In addition to a number of other things I'd like to talk about below, he designed our office space.

Larry Cecil of Van Kampen paid us one of the best compliments that makes me think of Robert. Larry said, "This is exactly what I thought kasina's offices would look like."

Of course. It was designed by my friend, Robert Hughes.

In his short tenure with us, he left an indelible mark on our firm and me personally. I credit him with a lot of what I know about consulting and business. He challenged me on improving our process across the board for our clients. I still can hear him repeat one of his favorite Robert-isms, "All we sell is a process. So it better be good."

However, if I limited his credits to that I would be doing him a great disservice.

He taught me the value of surrounding yourself with a vibrant, passionate community. He was previously Steven's boss at McGladrey and came to work for his former employee because he thought Steven would stimulate him the most. He didn't need the money. He wanted to be in New York for personal reasons and wanted to be challenged. He thought we were the best fit. I don't know of many people whose pride would take such a back seat to his commitment to passion, learning, and community.

As I mentioned earlier, he also impressed on us the value of physical space. An MIT-trained architect, Robert graced us with his ingenious eye. If you have been here, you will realize that he placed a premium on community and elegant simplicity. He was a noncomformist who was savvy enough to conform when appropriate. He was a master of working with what was there and making it better.

All the things I love about kasina in our office. All Robert.

As you may see, I always sensed a kindred connection with him and it was solidified when he chose to move to Vermont after leaving us, not more than a few miles from me. It afforded me the luxury of seeing him more often than most others here at kasina. For that, I am grateful.

Robert, we will miss you.

Please hug your loved ones extra hard tonight. I know I will.

It Takes a Village

by Lee

Last week, Barron's wrote about Trader Mark -- a.k.a. Mark Smith -- whose blog, Fund My Mutual Fund, has helped him raise $3 million towards a $7 million goal and the potential launch of a mutual fund. The article has all the juicy details about Mark's Rising Tide Growth portfolio, but what I found most interesting was one of the social networking sites mentioned: Marketocracy.

Using community input to guide investment decisions and providing higher levels of transparency are nothing new -- Metamarkets comes to mind from the late '90s -- but Marketocracy takes this to another level. The firm boasts over 55,000 people managing over 65,000 model portfolios. Based on the 100 best investors each month, Marketocracy creates the m100 Index, which is in turn used as input for Marketocracy Capital Management's investment decisions in their mutual fund. They have even signed research contracts with about 500 members of their community.

Listening to individual investors' ideas about individual securities is not going to be the right research approach for every portfolio manager, but I do think that every firm can learn from Marketocracy and from Mark Smith: in the never-ending quest for alpha, firms must get creative in their investment approaches. Online communities are only one piece, but they can be a valuable tool in identifying product or investment trends and in identifying and recruiting investment talent.

IT Credibility

by Johanna

When it comes to the expertise needed on e-business teams, skills that come to mind immediately include:

• Understanding of the business
• Liaison with sales
• Writing for the web

Absent from this list is IT expertise. e-Business teams today do a balancing act between Marketing and IT, and many are closer to marketing than they are to IT. Some could even be called Web marketers, not technical Web developers. The implementation aspects often fall to IT, and e-business focuses on having a good relationship with IT.

What does it mean to have a good relationship with IT? kasina has spent the past few months envisioning, developing, and implementing a Web forum where our clients post questions and engage in a dialogue with each other, and with us. As an observer of the building process for the forum, I gained a new perspective on the development process needed for the Web.

Within kasina we have computer science degrees, IT backgrounds, and on-the-job experience in dealing with the nitty gritty of technical Web site development. Personally, I have a background in finance and economics, and on-the-job experience in strategic planning research and consulting, which means I have little credibility with IT and Web developers when discussing time and effort. For example, when our outsourced IT partner quoted 3 days to enhance the forum, it was extremely valuable to have a colleague who knew that the changes should only take 1 day (actually, it should've taken 20 minutes). "A good relationship" with IT, coupled with a more in-depth knowledge of the technical aspects of the Web, meant that he could call them back and demand a faster turnaround.

While e-business still needs to answer to the business units and senior executives, and should avoid doing technical implementation better left to IT, having expertise on e-biz teams at both a strategic level and a technical level would allow the group to better succeed in the balancing act.

Do-who? Doha.

by Tricia

The Doha talks collapsed last week when India and China refused to buckle under US demands that they lower tariffs on manufactured goods in return for more favorable agricultural policies. The story didn't get a lot of play in American households -- let's face it, how much does the average American need to know about Doha? -- but to me, the point was less the specifics of the trade disagreement than the fact that India and China were willing and able to flex their growing global muscle in an international forum.

It feels like it was a particularly rough week for once flagship American businesses -- if the ongoing mortgage crisis and the again-record-setting-low-profits for GM and Ford weren't bad enough, US Airways announced today that they'd stop giving out water on their flights -- they're going to charge for it, bottled or not. This was the final straw in moving my focus off US businesses and onto a more global landscape.

I've developed a four-pronged strategy for fighting off total despondency over the American economy.

The first thing is, I'm turning my attention to my new favorite sector, emerging markets infrastructure. I've always been fascinated by things that make other things go, to put it simply, and the ongoing urbanization boom in the developing world calls for some $22 trillion dollars in infrastructure spending in the next decade -- transportation, logistics, communication, and materials.

Second, I'm coming up with imaginative scenarios as to how the need for this investment will dovetail (and it will) with the $10 trillion or so in sovereign wealth funds looking for a place to grow.

Third, I concentrate on global trade numbers and capital flows to remind me that the world is a complex, vibrant place full of interesting and surprising opportunities: Global trade volume is up from $8 trillion just five years ago to $14 trillion this year. UNCTAD says FDI is up 25% since 2002. As long as these trends continue, there's velocity and momentum in global finance.

Fourth, and my personal favorite, I've declared a moratorium on the front pages. Now I just skip straight to the Sports section, where the Yankees are still in the fight. How long is the moratorium going on for? Check back in October.

Funds Cannot Get Sued Over Sudan

by Steven

The investment situation in Darfur illustrates why it's good business for mutual funds to be more socially conscious.

When I go to the grocery store, I look for three things: quality of produce (taste and health benefits), cost, and the environmental impact of the produce.

Should fund firms let social awareness determine which companies they work with, or should they just focus on getting the maximum return for their investors?

A recent SEC ruling provides a "Safe Harbor" for mutual funds that divest from Sudan. This ruling provides certain legal protections to funds that divest from companies (PetroChina, Sinopec, India's Oil and Natural Gas Corporation Ltd., Petronas, Schlumberger, and Tatneft) doing business with the Sudanese government. Under these legal protections, the fund firms cannot be sued for making investment decisions based on divestment criteria.

Divesting in companies that do business with the Sudanese government is a choice--there are other, alternative, socially responsible funds companies can select instead.

Additionally, it's simply good business to avoid companies that engage in "bad" corporate citizenship. Engaging with the Sudanese government, for example, puts companies at risk. Not only are they risking exposure to negative public opinion, but they are also linking themselves to a highly unstable government.

Consumers are very powerful, and their demand has made organic products a huge category within stores. Similarly, investors, specifically institutional investors, are becoming more socially aware. No doubt, we will see more fund managers adopt some of the social screens that the SRI sector has utilized for years.

Update: Santander Posts 4.73 Billion Euro Profit for 1H2008

by Tricia

Yesterday, Santander's first half results went out over European wires, showing a net profit of 4.73 billion euros (about US$ 7.5 billion). A moderate decline in its domestic market was offset by double-digit growth abroad, in the UK and Latin America, and the sale of its holdings in two European commercial banks, Intesa Sanpaolo of Italy and BPI Portgual. Santander seems also to have navigated around the global credit snafu that is afflicting many of its global peer group -- owing to a pretty stringent regulatory environment and conservative lending policies.

I admire Santander as a case study in how to make money abroad when your home market is slowing down. Profits are up 20% in both the UK and Latin America, to 485 million pounds and 2.17 billion, respectively. Santander, to my mind, has been exceptionally sure-footed in its global expansion strategy, shedding as efficiently as it acquires to streamline growth around its core strengths. It has been absolutely fearless in penetrating Latin American financial services, where the national infrastructures and regulatory environments are still developing.

The numbers support an emerging view that the bank is positioning itself to command top dollar for Santander Asset Management, and raising a little money for another purchase abroad -- but let's wait and see. I also thought the Yankees were gonna win last night.

Mirror, Mirror on the Wall: Self-Reflect Before Going Global

by Corianna

Are you an asset manager looking to break into a foreign market? If so, I suggest that rather than simply going after hot markets, or basing operations in regions where you already have pre-existing investments you take a good long look in the mirror. Ask yourself, does your brand or areas of expertise make you particularly well suited to serve a particular region?

In follow-up conversations after the Future of Distribution study we have begun to see some patterns emerging amongst our clients who are pursuing international expansion.

One common approach is:

• Step 1: Push to the EU through the institutional channel.
• Step 2: Layer on retail in Europe and push institutional eastward through Middle East.
• Step 3: Arriving in Japan.

Granted, to the extent that questions of market entry are about market size, international compliance rules and savings, all firms will come up with similar answers--access to data, government regulatory information, an excel document, and some simple equations are all that's needed to figure out which regions will be most friendly to asset managers in general.

However this does not mean that all asset managers should pursue the same markets. Rather than following the herd, why not pay attention to what makes your firm unique? Perhaps you are a company whose brand hinges on reliability and low-cost. Maybe your best bet is to start in Japan, where investors are particularly risk-averse, and go to Europe later. By focusing on what makes you different you may be able to throw the conventional expansion model on its head, and carve out your own unique empire.

Eating Our Own Dog Food

by Lindsay

kasina has been talking for years about the rise of online social networking and Web 2.0. We've recommended that asset managers create venues for advisors, individual investors, and institutional investors to communicate about their experiences, share advice, and ask each other questions. We've pointed to the medical community, which has Sermo, an online network for physicians, supported, in part, by Pfizer.

But what about kasina's clients and other professionals in the asset management industry? Where can they go to share best practices, solicit advice from their peers, or ask questions about pressing e-Business and Distribution issues in the industry?

Starting today, they can visit the kasina Web Forum. kasina developed the Web Forum to give our clients a means to continue the types of conversations that happen at our Roundtables, and keep the dialogue open on an ongoing basis. The Forum is open ONLY to the industry, so registered participants won't have to worry about press or vendors trying to sell to them.

When users sign up for the Forum, they'll be able to:

• Post new topics and questions, or add replies to existing conversation threads
• Send private messages to other Forum members
• Create a profile and view the profiles of other members
• Search for specific topics or members

The Forum is still in Beta, and kasina is actively soliciting feedback from members so that we can work on improving it to meet the needs of our clients. Try it out and let us know what you think!

The Santander Reconquista

by Tricia

I am keeping a very close eye on Banco Santander's decision to sell off its perfectly healthy asset management business.

Whoever buys Santander Asset Management will inherit a profitable business and a sure foothold in a truly global business. Santander is rumored to be talking to US firms that could design products for them -- very specifically dollar funds for the Latin American market (Santander retail banks, along with BBVA, led what we call the "Reconquista" of Latin America following the liberalization of financial services circa 1999, and retain dominance in the key markets). Banco Santander would likely retain control of distribution through its retail branches. I've heard Franklin Templeton, State Street, and JP Morgan, but I wouldn't want to spread any rumors.

Santander, based in Spain, is Europe's biggest bank by market capitalization. Its balance sheets remain quite healthy despite a recent slowdown in the Spanish economy following about ten solid boom years. I've heard valuations between 2.5-3 billion euros.

Also earlier this month, Santander bought Alliance and Leicester to round out is purchase of Abbey National in 2004. (I've always thought of this as revenge for the defeat of the Spanish Armada). Analysts are wondering if the sell-off signals intent to buy another retail bank, strengthening Santander's core business. I can't wait to find out who the lucky suitor will be.

Planning the Downside

by Anu

Recently, I read an interesting article on oil price's impact on the global distribution of packaged goods. The head of P&G global supply detailed how the company plans for different oil price scenarios. He commented that his company's distribution system was built on decades-old assumptions of cheap oil, ad infinitum.

Decades old-assumptions are no longer relevant for P&G and the packaged-goods industry, which brings to mind the question: are executives in our industry making similar mistakes?

Specifically, is our industry assuming intermediaries will exist, ad infinitum? In recent conversations with Sales executives, we heard the push to place product at all distributor platforms, at any and all costs. During the 1980s S&L debacle, 10% of US banks failed. Is it inconceivable that distributors may fail? These are interesting times we live in. Two weeks ago, a major retail bank had trading halted on the New York Stock Exchange. Last week, securities regulators coordinated a six-state probe into sales practices on auction-rate securities. And this week, the Treasury announced that government-sponsored entities may require the US taxpayer to provide a $25B bailout (note: double the MSFT annual net income).

With the brainpower in the industry, the C-suite could plan for "extreme" scenarios. It seems that in the case of distribution disruptions, a bit of business contingency planning would enable quick decision-making. In these interesting times, is this money well spent?