So what do L.A.’s local, non-institutional investors think about the Federal Reserve’s decision to raise rates and the subsequent market turmoil last week?

They are cool as cucumbers, according to Michael Fusco, 30-year market veteran and branch manager for Merrill Lynch in Beverly Hills. He oversees 68 brokers.

“I don’t see any panic or concern … we aren’t getting more phone calls than usual. My brokers are not coming to me, asking how they should deal with clients,” said Fusco.

Most of his investors are taking a long view of the market, said Fusco. “They know there will be ups and downs.”

However, Fusco said that a sustained bear market could shake investors. “If this continues over time, then maybe our clients get restless. But not yet,” he said.

Equity investors may start pulling in their horns, and go into the bond market, said Jeff Rollert, managing director at ALM Advisors Inc. in Pasadena, a bond shop.

The historic, long-run return on stocks runs between 9 percent and 10 percent said Rollert. When the equity market gets choppy, and bond yields move up, people start to seek refuge in the relative safety of bonds.

Rollert’s strategy on bonds: Let lesser-grade bonds slide in value, and then buy. “Right now, you see a lot more sellers of junk than buyers. People are becoming worried about credit quality,” he said. “Look for opportunities to buy.”

Sell into REITs?

Some pension-fund mavens have been talking about the way big pensions can make hundreds of millions of dollars risk-free: Convert their real property holdings into real estate investment trusts and then sell them off to the public.

REITs invested in office buildings, and trading on an exchange, sell for about 62 percent above their net asset (market) value, according to a recent report issued by PaineWebber, the big New York-based brokerage.

Pension funds, including the $20 billion Los Angeles County Employees Retirement Association, have accumulated real property over the previous decades. Many want to shed their holdings.

But most pensions have purchased their buildings whole, at close to market value.

Why do REITs trade at such a premium to the underlying value of the assets?

PaineWebber postulates that liquidity, diversity and management are important. When investors buy a whole office building, they’re stuck with it for a while. REIT stocks, in contrast, can be sold at any time. There is a value to liquidity.

Too, when one invests in a single office building, a risk is taken on that property what if the neighborhood goes bad? A diversified portfolio of office buildings, in contrast, offers some protection against downside plummets, and can be culled of loser properties.

And, in theory, in a REIT you get stellar management of properties, or at least the prospectus always says so.

REITs trade at big premiums above the underlying market values of office buildings that make up the REIT a huge opportunity for pension funds, if they could group their own buildings, and then sell them off to the public in REITs.

So what do pension fund managers think of this idea?

“Well, we’re not the first people to think about this, and, of course, people have suggested they do this (form a REIT) for us, for a fee, of course,” said Ken Shaffer, chief investment officer for the L.A. County pension fund.

Shaffer said he has a few buildings in his portfolio, for which a REIT would be “a possible exit strategy.”

Like many other pension funds, LACERA lightened its load of buildings in the 1990s, after poor returns, he said. “But there are still some to get rid of,” he said.

Quick takes

If you know anything about computers (which leaves me out), you know that networking them is hot stuff.

Word on the Street is that Santa Monica-based NetVantage Inc., a network-switch manufacturer is hot stuff indeed, as it is signing contracts with big manufacturers (called OEMs) to provide product.

NetVantage announced last week that a deal has been signed with monster Murray Hill-based Lucent Technologies Inc. confirming weeks-old chatter on some websites, including

NetVantage sells network “switches” only to other manufacturers, who re-brand under their own names. The switches allow computers to work together more efficiently.

NetVantage has $28 million in the bank more than annual sales in 1996 and no debt. Sales were under $2 million in 1995, and ramped up to $26 million last year, breaking even in the fourth quarter. Estimates are for $5 million in net income on revenues of $45 million this year.

That’s all the good news. The bad news is look what happened to Calabasas-based Xylan Corp., another networking stock, and a red-hot IPO last year: After hitting a 52-week-high of $76, Xylan last week traded under $20 a share

Merisel Inc., the huge El Segundo-based computer software distributor, is in negotiations with holders of $125 million of bonds, hoping to get them to convert their IOUs into stock.

Merisel has had it tough of late; it posted losses of $140.4 million on revenues of $5.5 billion in 1996, although the fourth quarter came into the black the first profitable period in two years. In the fourth, Merisel had net income of $1.7 million on revenues of $1.15 billion.

The company needs to get the debt wolves off of its neck. “Merisel can only achieve long-term profitability if the company’s debt levels can be reduced significantly,” said Dwight Steffensen, company chief executive and chairman.

The company has about $300 million in long-term debt. One spokeswoman said negotiations with bondholders are “going excellently.” The Century City offices of Donaldson, Lufkin & Jenrette Inc. are assisting in the debt restructuring

Los Angeles-based Dove Entertainment Inc. said last week it has received a $6 million equity investment from Media Equities International. Dove Entertainment is a diversified entertainment company, in audio and printed books, television and films.

Benjamin Mark Cole is senior reporter for the Los Angeles Business Journal and covers the investment community.

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