NU Online News Service, July 18, 12:15 p.m. – American Express Company, New York, says its American Express Financial Advisors unit is cutting back sharply on investments in low-rated “junk bonds” to cope with the weak economy.
“During the second quarter, default rates rose to historically high levels,” American Express says in a statement announcing the changes.
The company has decided that the benefit of owning junk bonds is “not sufficient to compensate for the underlying risk during difficult market cycles.”
AEFA will limit junk bonds to 7% of its investment portfolio, down from 12% in 1998, and it will also restructure the rest of its portfolio to reduce its vulnerability to the failure of one company, or problems in one industry, the company says.
American Express estimates AEFA will report a loss of $307 million for the second quarter because of charges related to the portfolio restructuring. Excluding those charges, AEFA earnings will be down about 22%, the company says.
AEFA’s financial planning business is still strong, and more assets are flowing into AEFA investment funds than flowing out. But American Express is expecting the economy to remain weak until some time in 2002. That weakness will eat into asset management fees, distribution fees and AEFA’s own investment income, the company says.
American Express plans to cope by reducing operating expenses. The company is eliminating 6,600 jobs; shifting some finance, operations and customer service operations overseas; and hiring outside companies to handle some data processing.
American Express is also hoping to cut costs by putting more human resources, expense report and employee travel booking services on the Web.