Glaxo to move cash mountain to external fund managers: Review of holdings follows rumours of pounds 100m losses on volatile US bonds

GLAXO has decided to transfer most of its pounds 2.2bn cash mountain to outside managers. It is thought that the pharmaceuticals company has suffered losses of about pounds 100m on its holdings of US bonds, some of which were in the form of more risky derivative products.

A Glaxo spokesman would not comment yesterday on the sums involved. However, the company has never denied stock market speculation that about pounds 100m of realised and unrealised losses on holdings of bonds would be written off against investment income in the year to 30 June. Glaxo is expected to report 1993/4 pre-tax profits of over pounds 2bn in September.

A review of the internal management of pounds 1.7bn of Glaxo's liquid fund holdings of pounds 2.2bn was launched in April by John Coombe, finance director.

The conclusion of the review, according to the spokesman, was that Glaxo ought to concentrate on pharmaceuticals and not attempt to be an investment banker.

As a result fund management should be taken away from the internal operation in Bermuda and given to external professionals.

The write-downs partly reflect the need to put the former fund management arm's books in order before handing over control.

Most of Glaxo's funds have been invested in conventional bonds and collateralised mortgage obligations. A small amount has been held in 'structured' notes, which are derivative products, paying either interest or principal only, and inherently more volatile than conventional bonds.

The Glaxo spokesman would not comment on reports in the New York money markets that the company had liquidated a dollars 1bn portfolio of bonds because of a disappointing performance.

The expected write-offs counteract Glaxo's previous reputation for good fund management. It had managed to keep the income on its cash pile rising, despite falling interest rates, confounding those who warned that the cash holding would start to dilute earnings. It had also traditionally kept most of the funds in liquid funds, so that it was available if needed, rather than investing in equity instruments.

Recent volatility in both share and bond markets has caught out many experienced investors in derivatives - even George Soros recently admitted to a dollars 600m loss by backing the dollar against the yen.

The need to earn a good return on its cash pile has become much more pressing for Glaxo because of the pressure on its core drug business from cost-cutting by governments around the world.

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