Jones & Shipman plans significant US expansion .sx By Andrew Baxter .sx JONES & SHIPMAN , the Leicester-based machine tool manufacturer , plans a significant expansion of its US activities through the acquisition of Rhode Island-based Brown & Sharpe Grinding Machines ( BSGM ) , a joint venture between J&S and Brown & Sharpe of the US .sx J&S has reached agreement in principle to acquire Brown & Sharpe's share of BSGM , which was set up in 1989 to provide a marketing and servicing facility for the two companies in North America .sx No terms for the deal were disclosed , but the sum is unlikely to be large .sx At the end of last month Brown & Sharpe , once the largest US machine tool maker , announced it was pulling out of the industry to concentrate on its metrology products .sx Mr John Wareing , J&S managing director , said the acquisition would make the Leicester company solely responsible for sales and service of its machines in North America .sx Additionally , J&S will acquire the rights to Brown & Sharpe's Hi-Tech creep-feed grinders and Techmaster surface grinders .sx Production will be moved from Rhode Island to Leicester .sx Creep-feed machines grind the workpiece at a slow pace but with deep cuts , and are ideal for composite materials and ceramics which would crack under normal grinding .sx J&S will now be able to compete with three European manufacturers of creep-feed grinders , which are heavily used by the aerospace industry .sx Mr Wareing said the deal would add at least pounds3m-pounds4m to annual sales .sx In the 15 months to end-March 1990 , the company made pre-tax profits of pounds2 .sx 1m on sales of pounds30 .sx 9m. Chile changes the rules for conversion .sx The central bank has responded to pressure from investors , writes Leslie Crawford .sx CHILE'S central bank , under pressure from foreign and Chilean investors , has relaxed the rules of its debt-equity conversion programme .sx Foreign companies who used debt swaps to invest in Chile can now repatriate capital after three years , instead of the 10 years stipulated in the original debt-conversion contracts .sx But those who wish to unlock their investments before 10 years will have to pay a penalty .sx The central bank says it will charge an exist fee based on the length of time the company has been in Chile , and on the bonus the company gained through the purchase of Chilean debt at a discount on the secondary markets .sx The central bank says the exit fee will put companies who invested through debt swaps , otherwise known as Chapter XIX of the Compendium of Foreign Exchange Regulations , on an equal footing with foreign investors who brought their own capital into Chile .sx The central bank adopted these more flexible rules due to the difficulties two large foreign investors are having in trying to pull out of Chile .sx Carter Holt Harvey , the New Zealand forestry group , is seeking a buyer for its $500m stake in Copec , Chile's largest private industrial group , and Security Pacific , the US bank , has been unable to sell 60 per cent of its Chilean bank .sx Both companies were among the first to take advantage of the incentives offered by Chile's debt swap programme .sx Carter Holt bought into Copec in 1987 with a $161m debt swap .sx It later expanded its Chilean holdings in forestry , cellulose production and fishing with $135m of its own resources .sx It also launched a $1 .sx 2bn investment programme with Chile's Angelini group , the other main shareholder in Copec .sx Given that the bulk of these investments will begin to bear fruit next year , when Copec's $600m Arauco II cellulose plant comes on stream , Carter Holt's plans to sell its Chilean assets came as a surprise , The New Zealand group said in February that the sale would ease the company's debt burden following a series of acquisitions in Australia and at home .sx But under the old Chapter XIX rules , Carter Holt's divestment plans hit a snag :sx it had signed a pact with Mr Anacleto Angelini in 1987 giving his group the first option to purchase Carter Holt's Copec shares if the New Zealanders ever decided to pull out of Chile .sx And by selling to a Chilean group , the proceeds would remain tied in Chile until 1997 .sx So Copec joined the growing chorus of corporate critics against the central bank .sx " It is grossly unfair to forbid Chileans from taking over these investments , " says Mr Jose Antonio Guzman Dumas , Copec's vice-president .sx Security Pacific says it is in a different boat .sx It set up operations in Santiago in 1987 , converting $68m of Chilean debt that it held in its own books .sx " The subsidy issue therefore does not arise , " argues Mr Rodrigo Mu n-tilde oz , the general manager at Security Pacific Valores .sx The US bank , which has closed operations in several European capitals in order to strengthen reserves at home , says it would not be pulling out of Chile completely .sx It wants to sell 60 per cent of its Chilean assets to the bank's local employees .sx This has already been approved by Chile's banking regulators .sx With the new Chapter XIX rules , both Security Pacific and Carter Holt will be able to unlock their investments in Chile , subject to the central bank's exit fee .sx The new rules effectively spell the end of Chile's debt-conversion programme , which has retired $3 .sx 6bn of debt over the past six years .sx For the past year , critics have argued that the usefulness of the scheme had run its course and that the central bank was deliberately blocking Chileans from participating in the country's investment bonanza .sx With Chilean debt now trading at close to 85 per cent of par value in the secondary markets , there is very little to gain from Chapter XIX swaps .sx They have all but ceased .sx Direct foreign investment , however , totalled over $1 .sx 4bn last year .sx The critics argued that with so much money pouring into the country , the central bank could afford to be more flexible in its foreign investment rules .sx By easing restrictions now , at a time when the country's net international reserves total a record $5 .sx 73bn , the central bank will be averting a sudden swell of capital repatriation in the second half of the decade .sx A better tale for 1991 .sx After last year's investment setback , equity market buoyancy in the first quarter of 1991 has dramatically changed the pension fund picture , writes Barry Riley .sx But scheme surpluses are likely to fall , partly because of the European Court judgment on sex equality .sx IT WAS important to get 1990 out of the way .sx After a brilliant decade for investment performance during the 1980s , UK pension fund managers were overdue for a market setback .sx In fact , the minus 10.5 per cent median rate of return was the first negative result in nominal terms since 1974 .sx But fund managers will now be hoping that the shake-out in the markets has been left well behind .sx Certainly the first quarter of 1991 has presented a dramatically different picture , with equities buoyant around the world :sx the FT-Actuaries World Index jumped 21 per cent in sterling terms in the three months , a highly encouraging statistic given that the average UK pension fund held around three-quarters of its portfolio in equities at the end of last year .sx This stock market strength has been of considerable commercial importance .sx The fees of external fund managers are generally calculated on the basis of the value of portfolios at the end of each calendar quarter .sx When stock markets hit their low points at the end of the third quarter of 1990 , fund managers were squeezed nastily , while their costs were rising quite fast .sx It was not much better in December .sx But March will have brought a substantial recovery in income .sx For UK pension schemes themselves , however , the arithmetic of poverty or prosperity is done very differently .sx Surpluses and deficiencies are calculated on the basis of actuarial rather than market valuations .sx In general , these are income-based , certainly for UK equities , which make up more than half of most portfolios .sx Therefore , because dividends continued to be buoyant for much of last year , with a rise of 11 per cent for the year as a whole , many schemes stayed comfortably in surplus .sx In a curious way , this turned out badly for fund management companies .sx The over - funded pension schemes very often enjoyed contribution holidays , thus choking off much of the cash flow into their funds .sx According to the WM Company's performance measurement service the new money flowing into UK occupational pension schemes in 1980 was equivalent to 19 per cent of their initial value , whereas 10 years later it was less than 4 per cent , implying net shrinkage after adjustment for investment income .sx The strange 1990 picture of bloated funds and squeezed fund managers will now change quite quickly , however .sx Not only have market values risen , thus increasing the investment managers' revenues quite sharply , but the scene is set for a very rapid rundown of pension scheme surpluses .sx This is firstly because dividend growth is bound to slow down very sharply this year .sx After averaging an extraordinary 16 per cent a year during the second half of the 1980s , the rate of increase may well drop to under 5 per cent for 1991 because of the economic squeeze on companies .sx This increase is likely to be less than the underlying growth of average employee earnings ( still running at 9.5 per cent) .sx Another important consideration is that large unfunded liabilities are crystallising for many pension schemes .sx These relate in part to the so-called Barber judgment in the European Court on equal treatment for the sexes , which could impose equal retirement ages and other expensive adjustments on schemes .sx At the same time , the Social Security Act 1990 laid down that partial inflation-proofing of benefits ( limited price indexation , or LPI , of up to a limit of 5 per cent a year ) must be applied in future , after a certain A-Day , the date of which has yet to be announced .sx In addition , to the extend that there are surpluses in the scheme , this LPI protection must be backdated to cover past service .sx What is bad news for schemes could nevertheless be good for pension fund managers , as extra contributions and top-ups begin to roll in ; at least , this will be true unless the pressure on final salary-linked schemes becomes so intense that companies decided to wind them up in favour of cheaper arrangements .sx In these potentially troubled times , however , UK pension fund managers can justifiably point to the very high returns that they have succeeded in generating over many years .sx According to the other main performance measurement service , Caps , the average rate of return achieved by the median fund over the past 10 years has been 15.4 per cent .sx This is a considerably high return than has been enjoyed by typical funds in the US or on the Continent , even after adjustment for currency changes .sx The uniquely aggressive strategy of UK funds , relying heavily on equities , has paid off handsomely .sx The one bad year , 1990 , has only made a small dent in this record .sx In the latest edition of Phillips & Drew Fund Management's Pension Fund Indicators , perhaps the best source-book on UK pension fund investment , Mr Jim McCaughan , a PDFM director , argues :sx " The long-term investor might justifiably regard the unsettled market conditions of 1990 as a blessing since opportunities were presented to acquire investments at favourable prices .sx " .sx Yet the equity orientation of UK pension funds has relied heavily on the willingness of British companies to adopt a high pay-out strategy .sx That has led to criticism from the UK corporate sector on the grounds that continental and Japanese companies do not face the same pressures from their own institutional shareholders .sx Moreover the entry of the UK to full membership of the European Monetary System six months ago posed the possibility of fundamental structural change .sx Has the focus of UK funds on equities been merely the consequence of persistent UK inflation ?sx Will bonds be much more attractive if they offer a reliable real rate of return ?sx But Mr McCaughan does not see UK fund managers going back to government bonds , in which they invested heavily during the 1970s .sx " Pension funds no longer see themselves as natural buyers of gilts , " he says .sx