The Bahrain-based Investcorp has scrapped its derivatives trading department after suffering losses that led to a 24 per cent drop in company profits to $51 million in 1994. However, the company says other investments performed well.
Elias Hallack, co-chief operating officer, says the company has withdrawn all its investment in derivatives, which include warrants, convertible bonds, futures and swaps. ‘The risk reward in derivatives is not well balanced, and is inconsistent with our risk balance,’ he says.
The company is dismantling the department within the proprietary trading unit which dealt with the derivatives, as well as conventional financial products. The trading unit reported losses of about $8 million because of poor performance in the derivatives market. Trade in conventional products will continue.
Investcorp began trading in derivatives about four years ago. Until last year the department was profitable, Hallack says. However, the company lost money alongside many other international investors over the past 12 months, he says.
Derivatives are financial instruments whose value reflects that of an underlying asset, such as commodities, bonds, shares and currencies. They are used to either reduce risk or assume risk in return for extra rewards. Last year, many derivatives investors were hit by the slump in the bond market after the rise in short-term US interest rates, when the bond market had been expected to improve.
‘We performed extremely well in our other areas of business,’ says Hallack. These include corporate acquisitions, fund management and property investment. In 1994, the company’s activities involved four acquisitions and several capital transactions, including the public share offering of Thorn Lighting Group.
In May, Investcorp signed a $300 million, three-year Eurodollar facility, the eighth since the company was founded. The company’s medium-term facilities stand at $630 million. Hallack says the company has no immediate need to raise any further financing this year.
The company also announced in mid-January that Saks Fifth Avenue, the US retail company acquired in 1990, has itself acquired four Magnin stores in the west and southwest of the US. ‘This is part of Saks’ own management strategy…we are interested owners,’ says Hallack.
The return on average assets was 3.7 per cent in 1994, down 1.7 percentage points on a year earlier.
Assets rose by more than 4 per cent to $1,395 million. The board of directors has recommended payment of a $15 million cash dividend. The company has distributed an annual dividend of 15 per cent of paid-in capital since it began 12 years ago.