natassamarkidou.com

Alternative Investing | By GREGORY ZUCKERMAN

Q: How can one invest in bank loans ? Are there mutual funds or ETFs that invest in the area?

A: As the economy improves, investors have shifted to riskier investments, such as stocks and junk bonds. Lately, more have taken an interest in so-called leveraged loans, or those made by banks to companies with lower credit ratings. These loans can have sizable yields, a nice feature in a world where Treasurys and investment-grade bonds offer skimpy interest rates. Lately, more of these loans have been placed in vehicles called collateralized loan obligations.

Investors are flocking to leveraged loans partly because of a view that corporate defaults will stay low. These loans also kept their value better than some other investments during the financial crisis.

One newer exchange-traded fund that buys bank loans and is recommended by some advisers: The PowerShares Senior Loan Portfolio

. This fund aims to track a leading index of leveraged loans, or those made to non-investment-grade companies. It has a yield of about 4.7% and as of late April owns loans including to Tribune Co. and Clear Channel Communications, two media companies.

Floating-rate mutual funds, such as the T. Rowe Price Floating Rate Fund

and Eaton Vance Floating Rate Fund,

also buy bank loans, as well as other debt securities. They have yields of 2.6% to 4%.

Scott Miller Jr., a managing partner of Blue Bell Private Wealth Management LLC in Blue Bell, Pa., recommends that investors use closed-end mutual funds to invest in senior loans. Closed-end funds buy a group of loans, giving an investor diversification. And because a portfolio manager buys and sells the loans, there’s a level of due diligence that’s necessary because some of these loans can be risky.

“Even though these loans are secured by cash, assets or other property, a seasoned manager with a dependable track record is essential to avoid” losses caused by defaults and other issues, he says.

As with any closed-end fund, those that trade at a premium to their net asset value are least attractive, advisers say. Buying a bank-loan closed-end fund at a discount to its NAV provides a better chance for safety and higher return than buying a fund at a premium or a new issue.

Investments in bank loans could do better than bonds if inflation flares up and interest rates climb. That’s because many of these loans are short term and their rates float. So if inflation rises and rates jump, the loans will be replaced by new, higher-yielding loans, helping an investor, advisers say.

But returns are not likely to match those of stocks or junk bonds if the economy continues to improve. And if the economy slips, loan defaults could rise, hurting these investments.

Mr. Miller notes that these loans are usually illiquid, or can be hard to sell at short notice without moving prices. And prices can tumble if a loan payment is missed. That’s why most of the mutual funds focused on this investment can only be redeemed quarterly, reducing their attractiveness, some advisers say.

Q: Are managed-futures mutual funds good investments in this rocky market?

A: Managed-futures traders use futures contracts to bet on commodities, currencies and other investments. Returns from managed-futures investing often are not correlated to stock and bond markets, which is one reason this area has attracted a surge of money in recent years. Some managed-futures investors bucked the market in 2008. Mutual funds have been rolled out that allow individuals to make these kinds of investments.

“Unlike most traditional investments, the performance of managed-futures funds is based on factors such as trend following, price movement and volatility rather than economic fundamentals,” says Robert Benson, chief investment officer at Laird Norton Tyee, a wealth-management firm in Seattle.

But there are real dangers. For one thing, Bradley Alford, chief investment officer of Alpha Capital Management, in Atlanta, warns there often are hefty fees that investors may not be aware of. “I don’t like these products, the fees are high and it can be hard to figure out all the underlying fees,” Mr. Alford says.

Indeed, managed-futures funds aren’t required to spell out all their fees. Terry Tian, an analyst at Morningstar, says some larger funds have annual expense ratios of as much as 5%, even though their websites list fees of only about 2%. “It’s very hard for investors to know” what they’re paying, he says.

Many also don’t fully divulge details of their investments. Funds often do much or all of their investing through offshore subsidiaries, giving them favorable tax treatment for investment gains, Mr. Tian says. But some of those subsidiaries also pay fees to investment advisers. Some say these performance-based fees can act as an incentive for an investment manager to take bigger risks in search of bigger payoffs. Investors usually aren’t told how much the managers are paid.

An alternative for investors who qualify is to invest directly in a managed-futures trading firm.

Mr. Zuckerman is a special writer for The Wall Street Journal in New York. He can be reached at gregory.zuckerman@wsj.com. Send questions about alternative investing to reports@wsj.com.

A version of this article appeared April 30, 2012, on page R2 in the U.S. edition of The Wall Street Journal, with the headline: Don’t Bank On It.

By LAURA SAUNDERS

In a fresh warning to U.S. taxpayers who haven’t confessed secret offshore accounts, the U.S. Attorney for the Southern District of New York and the Internal Revenue Service announced the arrest of Michael Little, a British investment adviser who allegedly helped several members of a prominent American family conceal more than $10 million in Swiss bank accounts for 11 years.

Mr. Little, 61 years old, was arrested Thursday night at John F. Kennedy International Airport in New York. His bail was set at $2 million, and he wasn’t released.

Elkan Abramowitz, an attorney who represents Mr. Little, said in an email: “We are studying the charges contained in the complaint. We are confident that in the end we will be able to demonstrate that there is no merit to them.”

A news release identified Mr. Little’s clients as the widow and four relatives of the late Harry Seggerman, a pioneer of investing in Asian companies. Mr. Seggerman was president of the Japan Fund and later worked for many years at Fidelity Investments, retiring as a vice chairman in 1992.

The charges against Mr. Little detail elaborate schemes to help Seggerman family members conceal and maintain access to $10 million in Swiss accounts left by Mr. Seggerman, who died in 2001.

In August of that year, according to the charges, Mr. Little had a family meeting at the Four Seasons Hotel in New York with five of Mr. Seggerman’s relatives, discussing various ways to conceal the existence of the funds without alerting the IRS.

According to the charges, Mr. Little advised the family members to set up Swiss accounts that would nominally be controlled by him and a Swiss lawyer. He also advised them to bring the money back “in little chunks,” through traveler’s checks or money transfers ostensibly for jewelry or art.

In addition, he is alleged to have established a sham mortgage that allowed one family member access to about $600,000 in undeclared overseas assets.

Mr. Little is said to have arranged transfers of funds from the Swiss accounts to London, where family members picked up the funds, usually in amounts of $10,000 or less, while on trips there.

According to the charges, members of the Seggerman family worked out a system of code words to use in communications about the offshore assets. “FDA” stood for IRS, “beef” was code for money, “rusty nail” signified a trust and “small” was for Mr. Little himself. The charges also say Mr. Little worked with a New Jersey accountant to prepare false tax returns.

One of the Seggerman family members, Suzanne Seggerman, previously pleaded guilty in December 2010 to conspiracy to defraud U.S. taxing authorities and subscribing to false individual tax returns. Her case is still pending and she awaits sentencing, according to the U.S. attorney’s office.

Russell Gioella, an attorney for Ms. Seggerman, said “she’s fully cooperated with the authorities in their investigation, and she regrets not having reported the existence of the foreign accounts left by her father from the outset.”

—Reed Albergotti contributed to this article.

Write to Laura Saunders at laura.saunders@wsj.com

By TIMOTHY AEPPEL

MINERVA, Ohio — Workers at Summitville Tiles Inc. gathered on the factory floor Wednesday morning to hear their boss — using a bullhorn to pierce the cavernous space — tell them he was laying off a third of the staff.

To pull through this crisis, owner David Johnson said, the company must “cut to the bone.”

Huddled around half-century-old kilns for warmth, some workers masked their anxiety with nervous optimism. “I’ll go back to hang drywall,” said Dustin Bourne, a lanky 22-year-old, chatting with three high-school buddies. Of course, they all knew the truth: Mr. Bourne took a job here last year because drywall work had disappeared.

Rosanne Dangelo, a mother of two grown children, was stoic at the prospect of unemployment. “I’ll get by,” she said, then quipped, “I don’t need the Internet.”

The U.S. is losing jobs at a pace not seen since the 1940s. Monday alone, 65,000 fresh layoffs were announced at giants including Caterpillar and Home Depot.

But tiny firms like Summitville Tiles have an outsized role in employment. For the past decade, small businesses have created 60% to 80% of net new jobs. Small companies of 500 or fewer people employ more than half of the country’s private-sector workers.

Many of these small companies are staffed with people who have spent their entire lives in one place, creating tight factory-floor communities, but also making it harder to land a new job.

“That woman’s mother was my grandfather’s secretary for years,” said Mr. Johnson, the third generation of his family to head Summitville, pointing toward a worker packing boxes of tiles.

She’ll keep her job, due to seniority. So will David Eick, who has been here nearly 11 years. But Mr. Eick’s wife, Melanie, won’t. She worked at Summitville for eight years, but fatefully left in 2007, then recently returned to be closer to friends. By leaving, she lost seniority.

Mr. Eick, 36, pulled Mr. Johnson aside with a nervous wave. “She’s pretty upset,” he said, dropping his voice. Mr. Eick said he might need to ask relatives to help cover the couple’s $1,100 house payment if his financial condition worsens and his wife’s layoff drags on.

Mr. Johnson’s family owns Summitville Tiles and has been involved with the company since shortly after its founding in 1912. Summitville proudly notes that its staff has a cumulative 2,819 years on the job. In other words, the average worker has stuck around 14 years.

The company’s tiles line the floors of Washington, D.C.’s subway stations and Mexico’s 7-Elevens, and protect the roof of the White House’s East and West wings. But with the global economy in crisis, not much tile is being purchased right now.

Mr. Johnson, 49, spent much of last Tuesday huddled with his managers and his older brother, Bruce, trying to figure out how deep to cut. They settled on eliminating 59 jobs, almost a third of the staff.

Some managers urged deeper cuts, to avoid more layoffs later if the economy weakens further. But the counter view prevailed: Keep enough people to allow the lines to run smoothly and respond to rush orders.

It’s not the first dark chapter in Summitville’s history. In the 1950s, a pair of fires nearly destroyed the company. More recently, cheap imports from China and Turkey forced it into bankruptcy protection; it emerged only in 2004.

The 1970s and 1980s were glory days. The company employed 750 people at multiple plants. Traveling abroad, Mr. Johnson’s father noted that one European ceramic maker used a castle as its guesthouse, so when he returned to Ohio, he bought a small, 19th-century inn with five guest rooms near his own factory, the Spread Eagle Tavern.

“That was its historical name,” Mr. Johnson notes, somewhat emphatically. “Contrary to some people’s thinking, it was not a house of ill repute.”

The decision to slash staff weighs heavily on him. “These guys don’t make a lot of money anyway, and we’re taking away their livelihood,” he said over dinner at the Spread Eagle Tavern the night before his factory-floor meeting.

The morning of the meeting, the temperature outside was four degrees. The factory is a drafty place, so people gathered near the kilns. Mr. Johnson set his bullhorn on a pile of tiles and delivered the grim news.

Fifty-nine jobs would be eliminated, based mostly — but not entirely — on seniority. People in key jobs, such as kiln operators, would stay.

He asked for volunteers, and told the assembled staff that the full list of layoffs would be released two days later, on Friday.

Mr. Johnson tried to strike a reassuring note. “There’s one factory around the corner closing for good — fortunately, that’s not the position we’re in,” he said. He emphasized that he hoped this layoff would last only eight to 10 weeks. Employees would be guaranteed their old jobs and preferred shifts when they get called back. But he cautioned it was impossible to know when that might happen, given the unsettled economy.

Shannon Buck, a 23-year-old with a lip ring, was one of the few to cry during the meeting. Having worked only a few months, she has no savings. “I’ll do what I can to find another job, do what I can,” she said. “If all else fails, I can stay with my mom.”

Many workers say they share Mr. Johnson’s view that the economy will recover. There is reason for guarded optimism. Most of Summitville’s products fill specialized niches. Among other things, the company makes what’s known as hygienic non-slip tile floors used in restaurants, and heavy industrial flooring used in power plants.

It also makes “thin brick,” which is fused into the pre-made concrete walls of commercial and government buildings to give the look of a traditional brick exterior. That type of affordable construction could revive quickly if banks start lending again, Mr. Johnson pointed out.

As soon as she heard the 59-person cutoff point, Ms. Dangelo, the mother of two, realized immediately she was “on the bubble.” Everyone knows where they stand on the seniority list, given that it’s posted on a wall beside the clock where people punch in.

But Ms. Dangelo went up and checked the list again, just to be sure. “I’m 57,” she said, putting her in the group likely to be laid off. Then, her manager chimed in and corrected her — actually she was No. 56, he said. Ms. Dangelo cringed.

Nevertheless, on Friday, the final cuts were announced, Ms. Dangelo kept her job. Seven people had volunteered for layoffs, even though they got no severance pay, only the promise to be hired back if things improve.

“I was saved,” Ms. Dangelo said.

She didn’t celebrate, however. For one thing, many friends’ jobs weren’t saved. In any case, she and her husband aren’t in the mood these days. Celebrating, she said, is something “we cut out already.”

Write to Timothy Aeppel at timothy.aeppel@wsj.com

Printed in The Wall Street Journal, page A1

Buried in the health-care and education bill that Congress passed Thursday is modest help for parents borrowing to pay college costs. But the legislation doesn’t address current and former students who are wrestling with education debt.

Under financial-aid provisions in the bill, all students and parents beginning next fall will borrow directly from the federal government, ending a program in which the government subsidized private lenders to provide federal loans. Parents pay an annual interest rate of 7.9% under the direct program, compared with 8.5% under the old program.

Mark Matcho

Student borrowing rates for federal loans aren’t affected: They will be 4.5% this coming school year for students with financial need and 6.8% for everybody else.

A second provision in the bill sweetens a program that caps student-debt payments based on income and family size—but only for students who begin school in 2014 or later. The current income-based repayment program, begun in July, limits payments to 15% of a borrower’s discretionary income and forgives any debt that isn’t paid off in 25 years. The future changes limit payments to 10% of discretionary income and forgive debt after 20 years.

The bill also provides more funding for Pell Grants, which are available mostly to students from families making $50,000 a year or less.

The changes come as tuition, fees and room and board continue to grow faster than inflation, reaching eye-popping levels at top schools amid state budget crises and declines in endowments. The University of California system, for example, has raised tuition and fees to more than $11,000 next year, from about $8,700 last fall. Brown, Dartmouth, Duke, Harvard and Stanford universities, among many others, say that their tuition, room, board and fees will top $50,000 for the first time in 2010-11.

So despite the new benefits for borrowers, paying for college remains a monumental task. Here are some ways to make it less painful:

• Don’t assume a school’s sticker price is real. Many public and private schools have raised their financial aid along with tuition, and some have committed to packages that limit or eliminate student loans. Roughly 50% of students at top schools receive financial aid, and even families with incomes of $200,000 or more may qualify.

At Brown, for instance, more than 40% of the students receive some aid, with the average annual package around $31,000. Provost David Kertzer says the school’s income from tuition, after subtracting financial aid, was essentially flat in 2009 compared with 2006.

Experts say that some students may actually pay less at a private school than a public one. But competition for aid is tough: More than 18.8 million Free Application for Federal Student Aid forms have been filed so far this school year, up 20% over a year ago.

• Parent borrowers need a better credit record than students. Parents can take out federal PLUS loans at a 7.9% interest rate. But while FICO scores aren’t a factor, parent borrowers can’t have any missed payments in the previous 90 days or had a bankruptcy or foreclosure in the past five years. If parents don’t qualify, students can borrow more in federal Stafford loans.

• Students should limit their total education debt to about what they expect to earn their first year out of school, says Mark Kantrowitz, publisher of finaid.org. If you need to borrow much more than $40,000, you probably ought to consider whether that school is the right fit.

• If the government loan programs aren’t enough, financial-aid experts say parents should compare the rates for a home-equity loan before taking out a private education loan, which can carry a double-digit interest rate. While a home-equity loan can put a borrower’s house at risk, rates on such loans are often lower—and the interest may be tax-deductible.

Write to Karen Blumenthal at karen.blumenthal@wsj.com

Your emerging-markets stock fund might need more exposure to emerging markets.

Many such funds have large exposure in markets that bear more economic resemblance to the U.S. than to China and India. They also tend to favor companies with global operations over those with local ones.

This hidden exposure to mature economies might crimp returns. Just as important, it can cause emerging-markets funds to behave much like U.S. ones. So far this year, the MSCI Emerging Markets index has returned 10.9%, versus 12% for the Standard & Poor’s 500-stock index.

When an investor’s holdings trade alike, it reduces diversification a

nd increases risk. The solution isn’t to sell broad emerging-markets funds but to complement them with more targeted bets instead.

The MSCI index, which has by far the largest market share in the field, has some quirks. Korea and Taiwan together make up about one-quarter of its market value, though the International Monetary Fund has considered both developed markets for more than a decade. Based on gross domestic product per person, they’re around four times as prosperous as China and more than 10 times as prosperous as India.

Roughly half of the index consists of three economic sectors—finance, energy and materials—that depend as much on global trade as on local consumers. Its top holding, Korea’s Samsung Electronics, collected more than half its revenues from the U.S. and Europe last year.

Brett Hammond, head of index research at MSCI, says the emerging-markets index is designed for high liquidity and low trading costs, and that Korea and Taiwan still resemble emerging markets.

The question, though, isn’t just whether emerging-markets funds will do well but whether they will chart a course distinct from that of the S&P 500. That is part of the goal of diversification: having some holdings that zig when others are zagging.

For true diversification, investors should avoid getting all of their emerging-markets exposure from funds linked to the broad MSCI index. Instead, they should use them as part of a “core and satellite” approach, says Sameer Samana, international strategist at Wells Fargo Advisors.

Single-country funds—iShares offers many of them—work well for this purpose. Mr. Samana favors Malaysia, Thailand and Indonesia, which are “ancillary benefactors of China’s growth,” and Mexico, whose “key trading partner, the U.S., is outperforming Europe.”

Small-company funds, by contrast, solve one problem but not another. They avoid relying too heavily on multinationals but can still be tilted toward mature economies. The WisdomTree Emerging Markets SmallCap Dividend

exchange-traded fund, for example, has more than a one-third weighting in Taiwan and Korea.

For that matter, the S&P 500 itself gives plenty of emerging-markets exposure, because many U.S. companies do brisk business in China and elsewhere. But the same companies do business in slow-growth markets, too.

Here’s a relatively new approach: economic indexing. The idea is to select emerging-markets portfolios based on where companies make their money, rather than where they’re based.

EGShares Emerging Markets Consumer,

an ETF, uses such an approach. Companies collect at least 90% of their sales at home or in other emerging markets. The fund’s index also uses a definition of “emerging” that is similar to the IMF’s; Korea and Taiwan are out, in other words.

The fund’s largest country weightings are Mexico, Brazil, South Africa and India; its biggest industries include food, beverages and retail. Year-to-date, it has returned 12.5%. Last year, it lost 5.2% while Vanguard MSCI Emerging Markets lost 18.7%. Fees are higher for the EGShares fund: 0.85% of assets per year, versus 0.2% for the Vanguard fund.

A final approach is to look for mutual funds whose managers let country and sector weightings fall where they may as they look for good stocks. William Rocco, an emerging-markets fund analyst at Morningstar, recommends two such funds.

Oppenheimer Developing Markets

has limited exposure to Taiwan and Korea but plenty to India and Brazil, and to consumer companies. It returned 6.4% a year over the past five years, ranking in the top 3% of peers, according to Morningstar, despite a hefty sales charge of up to 5.75% (Charles Schwab customers can avoid it) and annual expenses of 1.4%.

Lazard Emerging Markets Equity

has a low China weighting but high weightings in Brazil and South Africa. It has returned 3.9% a year over the past five years, putting it in the top 11% of peers, according to Morningstar. The fund has no upfront charge and carries yearly expenses of 1.49%.

—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

A version of this article appeared April 28, 2012, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: In Emerging Markets, Going Deeper Can Boost Returns.

Small-business owners often complain of feeling caught in the cross hairs of the tax code. For a change, here’s good news.

The Tax Court has just blessed a new technique that owners of closely held businesses—and wealthy families—can use to pass assets to heirs with a minimum of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.

Lee Hasler

David Kautter, a director of American University’s Kogod Tax Center, calls the ruling a “landmark decision, because it allows tax-free ownership transfers from one generation to another with certainty and in an orderly manner.”

Here is why Wandry matters. Our current system imposes a gift tax of up to 35% when taxpayers give assets away, with exceptions. Individuals now get one $5.12 million lifetime exemption, and they can also give up to $13,000 of assets a year to an unlimited number of recipients. (Next year the lifetime break is scheduled to drop to $1 million and the top rate to rise to 55%.)

This means an owner who wants to give a business to children or others, such as employees, can use these exemptions to transfer ownership tax-free. He can even use the $13,000 annual exclusion to transfer value bit by bit.

That is what happened in the Wandry case. Dean and Joanne Wandry, a Colorado couple, each gave units in a family-owned limited-liability company worth $1,099,000 to their heirs in 2004. To avoid paying tax, they specified the gifts should equal the dollar amount of their exemptions—a key point. (At the time, the lifetime exemption was $1 million and the annual exclusion $11,000.)

The hitch in Wandry and other cases is that the givers have to get a professional appraisal if—as is common—the company is hard to value. Often values are lowballed a bit in order to maximize the gift. But the Internal Revenue Service can contest the appraisal after the gift—and often does. In Wandry, the value rose about 20%.

That brings up an important issue: If values rise after an IRS challenge, must the giver write a big check for tax on the amounts above the exemption?

According to the Wandry decision, no. The judge held the couple intended to make a gift equal to their exemptions, so the excess was never actually given by them. No tax was due.

Here’s a simplified example: John’s business is appraised at $6 million. He gave units worth $5 million to relatives last year, with more to come in $13,000 annual gifts over time.

The IRS later determines that the $5 million of units were actually worth $6.2 million. Does John owe gift tax of about $400,000 on the $1.2 million? Not if he arranges the transaction as the Wandrys did, and the $1.2 million is deemed never to have been given. It remains John’s.

The IRS must feel like this decision stacks the deck in taxpayers’ favor, because they don’t risk writing a check if they lowball the value of a gift.

According to attorney John Porter of Baker Botts in Houston, Wandry is the latest in a line of related cases lost by the IRS. Absent the Wandry decision, often the best outcome is for a family to designate a charity to receive the excess. No tax is due, but the family gives up some control.

The Wandry case is a boon not only for business owners but also wealthy families with “family limited partnerships” or entities holding publicly traded stocks. Even though the stocks’ value is easy to determine, submerging them in a nontraded company provides valuable discounts when units are transferred to heirs.

As a “memorandum” decision, Wandry may be cited as precedent in future cases. The IRS had no comment either on the decision or whether it will appeal the case to the 10th Circuit Court of Appeals.

The catch: The IRS has more than three months to appeal the case. Mr. Porter believes its reasoning is sound, but taxpayers who rely on it while gift-tax exemptions are high and rates are low run a risk.

Still, it may be important to act soon. The decision is so advantageous for taxpayers that it could inspire a response from Congress or the IRS.

Proposals on passing wealth through partnerships that would undercut Wandry have been raised repeatedly by lawmakers, notes Kogod’s Mr. Kautter, and the decision could help revive them.

—Email: taxreport@wsj.com

A version of this article appeared April 28, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: Shielding the Family Business.