Ireland's pain begins
Once the 'best place to live in the world', Ireland is haunted by the spectre of bread queues as public services are slashed
Mary Fitzgerald guardian.co.uk, Friday 10 April 2009 11.30 BST
For a country that was enjoying roaring growth just a few years ago, the outlook for Ireland is now shockingly bleak. The number of unemployed is expected to reach 450,000 by the end of the year, which, in a country of only 4 million, is staggering. Privately, financial experts say that Taoiseach Brian Cowen's prediction of a 10% drop in living standards is "a dream" – the reality is likely to be closer to 30%. Of those still in jobs, nine out of 10 have taken pay cuts to keep them. It's all beginning to look "quite 1930s", as one friend observed: dole queues have quadrupled and April saw the first bread queues in Dublin for more than 20 years.
Just as in Britain and the US, there is outrage at the bonuses paid to the chairmen of banks bailed out by the government. Unlike anywhere else, though, the government seems to be blaming its own citizens for the crisis, and punishing them for it. Tapping into old Catholic traditions of guilt and penance, it's pushing a message of "collective guilt". Society has overindulged and must now pay the price, or so the logic goes, and so finance minister Brian Lenihan framed his emergency budget earlier this week as "a call to patriotic action".
What it is, in reality, is a cynical cutback on vital public services – at a time when they are more likely to be needed than ever. In an attempt to balance its books, the government aims to shed €6.6bn from the public purse by 2011, including some €725m earmarked for badly needed road projects, €81m from the education budget and €62m from the Department of Health's budget. Even services that, in a recession, will be relied upon more than ever, face cuts.
Peter McVerry, who runs a Dublin-based trust for homeless people, says that the government's kneejerk reaction of "indiscriminate, slash and burn cutbacks" amounts to little more than an outright attack on the poor. The decision to halve jobseeker's allowance for the under-20s was particularly brutal, as McVerry points out, given the rampant inflation of the past decade, a young homeless person "just cannot survive on just €100 a week".
The government is making a big show of practising the austerity that it preaches, culling the number of junior cabinet ministers and announcing pay cuts for those remaining. Yet, despite the protests from some quarters against "taxation with a vengeance", the truth is that Lenihan's budget increases taxes on the rich only marginally. In short, those who did well from the boom are not being made to pay for its consequences.
"The real pain of political self-interest, incompetence, negligence and laziness will be kept clear of those who have left the Irish economy so unprepared for the severe global slowdown that is forecast in 2009," predicts Michael Hennigan, founder and editor of Finfacts.ie.
Worse still, the government has squandered many of the opportunities afforded during the good years to reinvest in the country. Although average incomes have risen, little has been done to pull the generational poor out of poverty. Just minutes from the sleek new Smithfield development in north Dublin, with its organic shops and crisp new apartments, lies the Devaney housing project, where many windows and doors are boarded up and shops are Portakabins with bars on their windows and doors. Some of the apartment blocks have been demolished and local authorities have been promising for years to redevelop the estate, but there is as yet no sign of this, and families still live in appalling conditions. Scenes like these, familiar in all of Ireland's cities, stand at sharp odds with the official brand image of a country judged by The Economist in 2004 to be the "best place to live in the world".
Unlike in previous generations, the Irish cannot blame their problems on anyone else now: this is their own mess – and they will have to fix it. They could start by electing a new government.
http://www.guardian.co.uk/commentisfree/2009/apr/09/globalrecession-banking
Sunday, 19 April 2009
Divorce is a financial catastrophe
How to prevent 'I do' turning into 'I don't'
Divorce is a financial catastrophe and some couples are more at risk than others. A leading lawyer explains why 'pre-nups' may have a role to play.
By Jane Keir
Last Updated: 3:26PM BST 18 Apr 2009
The Office for National Statistics (ONS) tells us that in 2007 the average age of those divorcing in England and Wales was nearly 44 for men and just over 41 for women. What really catches the eye, however, is that, of those divorces, one in five had a previous marriage end in divorce – a proportion that has doubled since 1980.
So why are second marriages more vulnerable? The answer may lie in trying to align emotional and romantic expectations for one another, while at the same time recognising the financial needs, responsibilities and priorities with regard to the children of each previous relationship.
Children who may already have experienced the seismic upheaval of the separation and divorce of their parents may now dread and therefore oppose, consciously or otherwise, the refocusing of the attention and love of one or both of their parents on a newcomer.
Parents will usually strive to ensure that the development of a new relationship moves at a pace with which the children can cope, but they often overlook the financial consequences of remarriage.
EXAMPLES OF POTENTIAL COMPLICATIONS
1. When a father is committed to funding the full cost of private education for his children in circumstances where they may still have several years to go before the end of secondary education and whose second wife-to-be has similar aspirations, but not the financial means, for her children who are living with them.
2. When a couple, whose children are older and no longer living at home, both have their own properties and she invites him to move in with her, sell his property and live off of the sale proceeds.
The prospects arising from the situations above may be enough to put the brakes on remarriage or lead to very substantial reluctance perhaps to even live together, unless there is good – and even brave – communication between them so they can talk through their concerns.
Family law is not all about divorce and separation. Many solicitors are spending an increasing amount of time looking at premarital contracts (more commonly known as ''pre-nups'') which are often given a hard time in the media as being "unromantic'' and viewed as some sort of self-fulfilling prophecy.
The reality is that the preparation of such a contract requires a couple to sit down and take a long, hard look at what they have in the way of financial resources and how they should organise them. For those marrying for a second time such an exercise – not necessarily negotiating a premarital contract, but talking together about what they both have and what they want to achieve – may take away a lot of the heartache, angst and even mistrust that builds up where there is a problem, but no willingness or even ability to talk about it.
Take the father in example one who wishes to preserve a large part of his income to pay school fees. The couple might find out that, by combining their respective resources and running one household rather than two, that it is possible. They might also agree that, were he to die before the children finish school, then he will nominate some part of his death in service benefits to ensure that there is sufficient in the pot to enable the rest of the school fees to be paid. Thus, in the event of his early death, his second wife knows exactly where she stands and there is no danger of expensive and stressful litigation with the "first family''.
In example two, the couple may agree to transfer the wife's property into joint names after they marry (but not necessarily into equal shares if her property is worth considerably more than his) and to prepare new wills. The preparation of new wills not only addresses the question of who gets what upon death but also, like the work that goes into the preparation of a premarital contract, it requires both parties to take a considered look at their respective finances and to work out what they want to happen.
The added advantage to the process is that they may well discover that there are steps they can be taking now to maximise and protect their wealth, for example, by using their lifetime allowances and rebalancing the risk of both inheritance tax and capital gains tax (CGT) liabilities. Or they might agree to rent out his property, so that they can enjoy the income it generates (albeit that the rent is likely to be subject to income tax and possibly a charge to CGT if sold during his lifetime, so that they may still need to review whether she should give him a share in her property).
The preparation of new wills may also help to mollify older children concerned at the prospect of "their'' inheritance moving away from them to a new stepmother/father. Of course, children have no absolute right to inherit in England and Wales – in contrast to some other European jurisdictions – as apart from an obligation to provide for "dependants'' – that is, people financially dependant on a person at the time of his death – anyone may leave his estate to whomever or whatever he likes, or spend it all entirely in his lifetime.
Jane Keir is a partner and head of family law at Kingsley Napley
http://www.telegraph.co.uk/finance/personalfinance/consumertips/5178027/How-to-prevent-I-do-turning-into-I-dont.html
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How to survive a divorce
Pre-nuptial agreements on the rise
Divorce is a financial catastrophe and some couples are more at risk than others. A leading lawyer explains why 'pre-nups' may have a role to play.
By Jane Keir
Last Updated: 3:26PM BST 18 Apr 2009
The Office for National Statistics (ONS) tells us that in 2007 the average age of those divorcing in England and Wales was nearly 44 for men and just over 41 for women. What really catches the eye, however, is that, of those divorces, one in five had a previous marriage end in divorce – a proportion that has doubled since 1980.
So why are second marriages more vulnerable? The answer may lie in trying to align emotional and romantic expectations for one another, while at the same time recognising the financial needs, responsibilities and priorities with regard to the children of each previous relationship.
Children who may already have experienced the seismic upheaval of the separation and divorce of their parents may now dread and therefore oppose, consciously or otherwise, the refocusing of the attention and love of one or both of their parents on a newcomer.
Parents will usually strive to ensure that the development of a new relationship moves at a pace with which the children can cope, but they often overlook the financial consequences of remarriage.
EXAMPLES OF POTENTIAL COMPLICATIONS
1. When a father is committed to funding the full cost of private education for his children in circumstances where they may still have several years to go before the end of secondary education and whose second wife-to-be has similar aspirations, but not the financial means, for her children who are living with them.
2. When a couple, whose children are older and no longer living at home, both have their own properties and she invites him to move in with her, sell his property and live off of the sale proceeds.
The prospects arising from the situations above may be enough to put the brakes on remarriage or lead to very substantial reluctance perhaps to even live together, unless there is good – and even brave – communication between them so they can talk through their concerns.
Family law is not all about divorce and separation. Many solicitors are spending an increasing amount of time looking at premarital contracts (more commonly known as ''pre-nups'') which are often given a hard time in the media as being "unromantic'' and viewed as some sort of self-fulfilling prophecy.
The reality is that the preparation of such a contract requires a couple to sit down and take a long, hard look at what they have in the way of financial resources and how they should organise them. For those marrying for a second time such an exercise – not necessarily negotiating a premarital contract, but talking together about what they both have and what they want to achieve – may take away a lot of the heartache, angst and even mistrust that builds up where there is a problem, but no willingness or even ability to talk about it.
Take the father in example one who wishes to preserve a large part of his income to pay school fees. The couple might find out that, by combining their respective resources and running one household rather than two, that it is possible. They might also agree that, were he to die before the children finish school, then he will nominate some part of his death in service benefits to ensure that there is sufficient in the pot to enable the rest of the school fees to be paid. Thus, in the event of his early death, his second wife knows exactly where she stands and there is no danger of expensive and stressful litigation with the "first family''.
In example two, the couple may agree to transfer the wife's property into joint names after they marry (but not necessarily into equal shares if her property is worth considerably more than his) and to prepare new wills. The preparation of new wills not only addresses the question of who gets what upon death but also, like the work that goes into the preparation of a premarital contract, it requires both parties to take a considered look at their respective finances and to work out what they want to happen.
The added advantage to the process is that they may well discover that there are steps they can be taking now to maximise and protect their wealth, for example, by using their lifetime allowances and rebalancing the risk of both inheritance tax and capital gains tax (CGT) liabilities. Or they might agree to rent out his property, so that they can enjoy the income it generates (albeit that the rent is likely to be subject to income tax and possibly a charge to CGT if sold during his lifetime, so that they may still need to review whether she should give him a share in her property).
The preparation of new wills may also help to mollify older children concerned at the prospect of "their'' inheritance moving away from them to a new stepmother/father. Of course, children have no absolute right to inherit in England and Wales – in contrast to some other European jurisdictions – as apart from an obligation to provide for "dependants'' – that is, people financially dependant on a person at the time of his death – anyone may leave his estate to whomever or whatever he likes, or spend it all entirely in his lifetime.
Jane Keir is a partner and head of family law at Kingsley Napley
http://www.telegraph.co.uk/finance/personalfinance/consumertips/5178027/How-to-prevent-I-do-turning-into-I-dont.html
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'Catastrophe cover' aims to quell fear of the big C
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How to survive a divorce
Pre-nuptial agreements on the rise
Warsaw alternative looks less risky than the Anglo-American model
Warsaw's solution to crisis could yet be a masterstroke
Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.
By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009
The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.
When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.
The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.
It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.
But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.
http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html
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Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.
By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009
The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.
When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.
The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.
It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.
But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.
http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html
Related Articles
Crisis has seen power shift and the East emerge from West's shadow
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A world currency moves nearer after Tim Geithner's slip
Will copper outshine gold and silver?
Will copper outshine gold and silver?
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.
By Paul Farrow
Last Updated: 7:55AM BST 18 Apr 2009
The copper price has risen by more than 50pc this year Photo: GETTY
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.
It is only a year ago that the commodity bull run was still in full swing. The wheels fell off in August, since when the price of metals has nose-dived. Orders for metals dried up overnight and the subsequent price falls have been deeper than during the worst years of the Great Depression.
But could there be glimmer of hope for a metals revival?
John Meyer, a mining analyst at Fairfax, the investment bank, thinks so. He is revising many of his metal forecasts upwards because of several factors, including a weaker US dollar, inflation fears and the renewed demand from China.
"The ratio of the copper price versus gold is at its lowest level since 1990 – people forget that many metals, not just gold, are a hedge against inflation. China is buying up copper and, while some see it as strategic buying, it also has to buy metals simply to maintain its economic growth," said Meyer. "Copper is our principal focus, although lead, zinc and tin may fare well too."
The revelation that China's State Reserves Bureau (SRB) has been buying copper on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons has caught many investors' imagination. There's even talk of China creating a 'copper standard' for the world's currency system.
Nobu Su, the head of Taiwan's TMT group, which ships commodities to China, said the next industrial revolution was going to be led by hybrid cars - and that needs copper. "You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel and rarer metals such as titanium, indium (used in thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
Evy Hambro, who runs the BlackRock World Mining investment trust, said the key question for metal commodities was whether the renewed demand for metals was due to companies restocking inventory levels which had been run down, or whether they were turning the capacity tap back on. If it is the former, the commodity revival could be short-lived.
He remained unconvinced that it was the latter. "We are not seeing a pick-up in demand in Europe or the US – and demand for commodities tends to slow in the summer in the northern hemisphere anyway. But we remain overweight copper, which has some of the best fundamentals."
Investors looking at copper ought to be aware that its price has risen by more than 50pc this year, so late joiners have missed some of the recovery already.
Hambro is still positive on gold, but is less convinced that aluminium will shine. Aluminium's price has fallen by more than half since last summer, but there is still a huge oversupply, which is unsupportive of a sharp price rise if demand turns.
The central banks' stimulus to kick-start the flagging car industry could also provide a fillip to metals. For example, more than 80pc of lead is used for car batteries, while 53pc of a car is made from steel.
Fairfax pointed out that sales of cars rose sharply in Germany in February after its government introduced a stimulus plan which allows consumers to trade an old car for a new one with state aid of €2,500. "That's a pretty huge increase – sales had fallen 14pc year-on-year in January," said Meyer.
Hambro agreed that fiscal stimulus would boost many metals involved in car production, but that it was difficult to judge when it would be seen to filter through. "If a car plan is announced in next week's Budget, will orders for aluminium rise sharply? Unlikely."
But early signs that the economic downturn may be reaching a floor have led many analysts to believe that silver could outperform gold. The debate about the relative merits of gold and silver was triggered because the world's largest consumer, India, did not import any gold in March for the second month running.
"In India you have people who can only afford silver and people who will only buy gold, but there are a large number of people in the middle who will rotate from gold to silver," said Ashok Shah, the chief investment officer at London & Capital.
That phenomenon is likely to be repeated in other countries as unemployment, salary cuts and potential tax rises take their toll on consumer spending. Eugen Weinberg, an analyst at Commerzbank, said: "Silver over the past 30 years has been the poor cousin. In the first half of the last century gold and silver were on a similar footing in terms of monetary value and their roles as safe havens."
Just as with copper, a measure of value is the ratio of gold to silver prices, which in the last century fell as low as 14 and compares with levels of around 70 now – suggesting gold is overvalued. Since the early 1980s the ratio has averaged about 65 and mostly ranged between 30 and 100.
Weinberg added: "The ratio could drop to between 40 and 50 in the medium term. People who cannot afford to buy gold for jewellery will buy silver."
Industrial demand for silver, including from the photography industry, is reckoned to be about 65pc of total global supplies, estimated at 895 tonnes. For gold, industrial and dental demand is about 11pc of supplies estimated at around 3,880 tonnes, according to consultants GFMS.
Part of the boost for silver will come from investment demand. With gold prices still near $900 an ounce, holdings of exchange- traded silver funds are expected to rise.
The iShares Silver Trust, the largest silver-backed exchange-traded fund listed in New York, holds a record 8,413 tonnes, a gain of more than 20pc since early January. That compares with a rise of more than 40pc in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund.
Metal commodities have become a staple part of many portfolios, as investors look for diversification and assets that are not correlated to the performance of shares. There are several ways you can get exposure to individual metals – one of the most popular is exchange-traded commodities (ETCs), which you can buy through most stockbrokers or online share dealers.
London-listed ETCs last week experienced net inflows for the fifth consecutive week, with precious metals ETCs seeing the largest inflows. They included ETFS Physical Gold ($38m), ETFS Physical Platinum ($14m) and ETFS Nickel ($2m).
The other option is to buy a unit or investment trust that invests in a spread of equity-related commodities. Popular funds include BlackRock World Mining, Investec Resource Enhanced or JPM Natural Resources.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5165209/Will-copper-outshine-gold-and-silver.html
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Gold's appeal eases
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.
By Paul Farrow
Last Updated: 7:55AM BST 18 Apr 2009
The copper price has risen by more than 50pc this year Photo: GETTY
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.
It is only a year ago that the commodity bull run was still in full swing. The wheels fell off in August, since when the price of metals has nose-dived. Orders for metals dried up overnight and the subsequent price falls have been deeper than during the worst years of the Great Depression.
But could there be glimmer of hope for a metals revival?
John Meyer, a mining analyst at Fairfax, the investment bank, thinks so. He is revising many of his metal forecasts upwards because of several factors, including a weaker US dollar, inflation fears and the renewed demand from China.
"The ratio of the copper price versus gold is at its lowest level since 1990 – people forget that many metals, not just gold, are a hedge against inflation. China is buying up copper and, while some see it as strategic buying, it also has to buy metals simply to maintain its economic growth," said Meyer. "Copper is our principal focus, although lead, zinc and tin may fare well too."
The revelation that China's State Reserves Bureau (SRB) has been buying copper on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons has caught many investors' imagination. There's even talk of China creating a 'copper standard' for the world's currency system.
Nobu Su, the head of Taiwan's TMT group, which ships commodities to China, said the next industrial revolution was going to be led by hybrid cars - and that needs copper. "You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel and rarer metals such as titanium, indium (used in thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
Evy Hambro, who runs the BlackRock World Mining investment trust, said the key question for metal commodities was whether the renewed demand for metals was due to companies restocking inventory levels which had been run down, or whether they were turning the capacity tap back on. If it is the former, the commodity revival could be short-lived.
He remained unconvinced that it was the latter. "We are not seeing a pick-up in demand in Europe or the US – and demand for commodities tends to slow in the summer in the northern hemisphere anyway. But we remain overweight copper, which has some of the best fundamentals."
Investors looking at copper ought to be aware that its price has risen by more than 50pc this year, so late joiners have missed some of the recovery already.
Hambro is still positive on gold, but is less convinced that aluminium will shine. Aluminium's price has fallen by more than half since last summer, but there is still a huge oversupply, which is unsupportive of a sharp price rise if demand turns.
The central banks' stimulus to kick-start the flagging car industry could also provide a fillip to metals. For example, more than 80pc of lead is used for car batteries, while 53pc of a car is made from steel.
Fairfax pointed out that sales of cars rose sharply in Germany in February after its government introduced a stimulus plan which allows consumers to trade an old car for a new one with state aid of €2,500. "That's a pretty huge increase – sales had fallen 14pc year-on-year in January," said Meyer.
Hambro agreed that fiscal stimulus would boost many metals involved in car production, but that it was difficult to judge when it would be seen to filter through. "If a car plan is announced in next week's Budget, will orders for aluminium rise sharply? Unlikely."
But early signs that the economic downturn may be reaching a floor have led many analysts to believe that silver could outperform gold. The debate about the relative merits of gold and silver was triggered because the world's largest consumer, India, did not import any gold in March for the second month running.
"In India you have people who can only afford silver and people who will only buy gold, but there are a large number of people in the middle who will rotate from gold to silver," said Ashok Shah, the chief investment officer at London & Capital.
That phenomenon is likely to be repeated in other countries as unemployment, salary cuts and potential tax rises take their toll on consumer spending. Eugen Weinberg, an analyst at Commerzbank, said: "Silver over the past 30 years has been the poor cousin. In the first half of the last century gold and silver were on a similar footing in terms of monetary value and their roles as safe havens."
Just as with copper, a measure of value is the ratio of gold to silver prices, which in the last century fell as low as 14 and compares with levels of around 70 now – suggesting gold is overvalued. Since the early 1980s the ratio has averaged about 65 and mostly ranged between 30 and 100.
Weinberg added: "The ratio could drop to between 40 and 50 in the medium term. People who cannot afford to buy gold for jewellery will buy silver."
Industrial demand for silver, including from the photography industry, is reckoned to be about 65pc of total global supplies, estimated at 895 tonnes. For gold, industrial and dental demand is about 11pc of supplies estimated at around 3,880 tonnes, according to consultants GFMS.
Part of the boost for silver will come from investment demand. With gold prices still near $900 an ounce, holdings of exchange- traded silver funds are expected to rise.
The iShares Silver Trust, the largest silver-backed exchange-traded fund listed in New York, holds a record 8,413 tonnes, a gain of more than 20pc since early January. That compares with a rise of more than 40pc in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund.
Metal commodities have become a staple part of many portfolios, as investors look for diversification and assets that are not correlated to the performance of shares. There are several ways you can get exposure to individual metals – one of the most popular is exchange-traded commodities (ETCs), which you can buy through most stockbrokers or online share dealers.
London-listed ETCs last week experienced net inflows for the fifth consecutive week, with precious metals ETCs seeing the largest inflows. They included ETFS Physical Gold ($38m), ETFS Physical Platinum ($14m) and ETFS Nickel ($2m).
The other option is to buy a unit or investment trust that invests in a spread of equity-related commodities. Popular funds include BlackRock World Mining, Investec Resource Enhanced or JPM Natural Resources.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5165209/Will-copper-outshine-gold-and-silver.html
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Gold: longest losing streak since August
Gold headed for its fourth weekly decline, the longest losing streak since August, as a global stock rally eroded demand for the metal as a store of value.
By Bloomberg staff
Last Updated: 4:19PM BST 17 Apr 2009
Gold eased as Asian stocks advanced on growing confidence the global recession is easing. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, dropped to 1,119.43 metric tons after holding at a record high of 1,127.68 tons the previous four days.
“Further strength in equity markets would signal an increasing risk appetite, which would be detrimental to precious metals, which have relied on safe-haven demand for support as the majority of commodity prices collapsed under the weight of rapid and severe economic deterioration,” said Toby Hassall, an analyst at Commodity Warrants Australia Pty.
Bullion for immediate delivery fell for a second day by as much as 0.4pc to $872.63 an ounce. It traded at $873.30 in Singapore, down 1pc for the week. Gold has fallen 4.6pc in the past month while the benchmark MSCI Asia Pacific Index soared 18pc.
US stocks rose after the government said fewer Americans filed claims for jobless benefits last week, and as JPMorgan Chase & Co posted better-than-expected earnings yesterday. A day earlier, US consumer prices posted their first annual decline since 1955, alleviating concern that Federal Reserve actions will cause inflation to soar.
“Over the longer term however, unprecedented fiscal and monetary stimuli have increased inflationary expectations, which will be constructive to gold prices,” said Hassall.
Among other precious metals for immediate delivery, silver was down 0.5pc at $12.18 an ounce, platinum gained 0.4pc to $1,211.50 an ounce, and palladium climbed 0.4pc to $234.50 an ounce.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5172424/Gold-longest-losing-streak-since-August.html
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Is silver the new gold?
Gold headed for its fourth weekly decline, the longest losing streak since August, as a global stock rally eroded demand for the metal as a store of value.
By Bloomberg staff
Last Updated: 4:19PM BST 17 Apr 2009
Gold eased as Asian stocks advanced on growing confidence the global recession is easing. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, dropped to 1,119.43 metric tons after holding at a record high of 1,127.68 tons the previous four days.
“Further strength in equity markets would signal an increasing risk appetite, which would be detrimental to precious metals, which have relied on safe-haven demand for support as the majority of commodity prices collapsed under the weight of rapid and severe economic deterioration,” said Toby Hassall, an analyst at Commodity Warrants Australia Pty.
Bullion for immediate delivery fell for a second day by as much as 0.4pc to $872.63 an ounce. It traded at $873.30 in Singapore, down 1pc for the week. Gold has fallen 4.6pc in the past month while the benchmark MSCI Asia Pacific Index soared 18pc.
US stocks rose after the government said fewer Americans filed claims for jobless benefits last week, and as JPMorgan Chase & Co posted better-than-expected earnings yesterday. A day earlier, US consumer prices posted their first annual decline since 1955, alleviating concern that Federal Reserve actions will cause inflation to soar.
“Over the longer term however, unprecedented fiscal and monetary stimuli have increased inflationary expectations, which will be constructive to gold prices,” said Hassall.
Among other precious metals for immediate delivery, silver was down 0.5pc at $12.18 an ounce, platinum gained 0.4pc to $1,211.50 an ounce, and palladium climbed 0.4pc to $234.50 an ounce.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5172424/Gold-longest-losing-streak-since-August.html
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Is silver the new gold?
A 'Copper Standard' for the world's currency system?
A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
By Ambrose Evans-Pritchard
Last Updated: 2:41PM BST 16 Apr 2009
Comments 83 Comment on this article
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
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"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
By Ambrose Evans-Pritchard
Last Updated: 2:41PM BST 16 Apr 2009
Comments 83 Comment on this article
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
Related Articles
Will copper outshine gold and silver?
'Unhappy China' bestseller claims Beijing should 'lead the world'
The G20 moves the world a step closer to a global currency
China's growth more Occident than design
A world currency moves nearer after Tim Geithner's slip
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
IMF warns over parallels to Great Depression
IMF warns over parallels to Great Depression
The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:42PM BST 17 Apr 2009
Comments 8 Comment on this article
This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.
Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.
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"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."
Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.
"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.
While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.
The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely specific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.
The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.
Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.
Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.
http://www.telegraph.co.uk/finance/financetopics/recession/5166956/IMF-warns-over-parallels-to-Great-Depression.html
##In every crisis, there exists some opportunities. Be brave.
The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:42PM BST 17 Apr 2009
Comments 8 Comment on this article
This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.
Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.
Related Articles
The global economy is at the point of maximum danger
Private equity collapse on cards, says IMF
Gold hits record against euro on fear of Zimbabwean-style response to bank crisis
Bank losses from credit crisis may run to $1,600bn, warns Bridgewater
Sharp rate rises could create risks for euro-zone, warns IMF
"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."
Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.
"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.
While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.
The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely specific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.
The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.
Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.
Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.
http://www.telegraph.co.uk/finance/financetopics/recession/5166956/IMF-warns-over-parallels-to-Great-Depression.html
##In every crisis, there exists some opportunities. Be brave.
Almost one million UK home owners in negative equity, says CML
Almost one million home owners in negative equity, says CML
Almost one million home owners are in negative equity, the Council of Mortgage Lenders has suggested.
By Myra Butterworth, Personal Finance Correspondent
Last Updated: 7:54AM BST 18 Apr 2009
It claimed that about 900,000 home owners currently have some degree of negative equity, where the value of their home is less than their mortgage.
Bob Pannell, head of research at the CML, said negative equity had "resurfaced" as house prices have fallen and that it "will contribute to subdued property turnover".
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However, the CML said the majority of those in negative equity - around two thirds - face only modest shortfalls of less than 10 per cent, equating to around £6,000 for those first-time buyers with negative equity, and £8,000 for other home-buyers.
The CML's estimate is less than some economists' predictions that nearly four million home owners are already suffering from the predicament. And it is still less than the 1.5 million households estimated to have negative equity at the depth of the last housing market slump in 1993.
It said: "Falling house prices have once again raised the prospect of negative equity for borrowers. Although negative equity may reduce a household's coping strategies should they encounter payment difficulties, it does not of itself affect the ability to keep up mortgage payments or create a risk of repossession."
Comment: Probably not dire. Once the housing problems settled and confidence returns, these negative equities will disappear. Should inflation sets in, the losses may turn to gains.
Banking Industry Showing Signs of a Recovery
Banking Industry Showing Signs of a Recovery
By ERIC DASH
Published: April 16, 2009
Just three short months ago, many of the nation’s biggest banks were on life support.
Related
Times Topics: JPMorgan Chase & Company
Now, a number are showing glimpses of a recovery, aided by a tentative improvement in some corners of the economy and new business picked up from rivals that stumbled in the wake of the financial crisis.
On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits in the first quarter. The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over.
Banks are enjoying a fresh wave of profits from the government’s efforts to nurse the industry back to life. Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets. And even before the results of a new health test for the nation’s 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money.
But this silver cloud has a dark lining: millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance: on Thursday, General Growth Properties, one of the nation’s largest mall operators, filed for bankruptcy in one of the biggest such collapses in United States history.
“We are in the eye of the storm,” Gerard Cassidy, a banking analyst at RBC Capital Markets. “The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”
JPMorgan Chase reported a $2.1 billion profit in the first quarter, besting analysts’ average forecasts. Revenue increased to $25 billion, up 45 percent from $16.9 billion in the period last year.
Still, the results reflected continued turmoil in sectors like credit card services and private equity, businesses that reported losses or steep drops in revenue, reflecting the lingering effects of the recession on consumer spending and the credit markets.
Many banks are preparing for the next rainy stretch, setting aside more money now to cover future loan losses. Regional and community lenders, which are particularly exposed to corporate and real estate loan defaults, are socking away tens of millions of dollars to add to their reserves; big banks like JPMorgan are adding billions. “Times aren’t exactly great as we speak,” Michael J. Cavanagh, the bank’s finance chief, said in a brief interview. “Until home prices stabilize and unemployment peaks, we will continue to be under pressure for losses on our balance sheet.”
As long as interest rates remain low, and the government continues to offer financial support, banks hope to earn enough profit to cushion the blow of some of these looming losses.
The question remains whether the profitability is sustainable if the recession worsens.
Some experts are saying fears of nationalization and bank solvency are subsiding. “What we are recognizing now is that they can produce profits,” Charles Peabody, a financial services analyst at Portales Partners. “The next debate is on the sustainability of those profits.”
With good reason: the banking industry has gotten relief from recent changes to accounting rules, which could inflate earnings.
What’s more, a brief moratorium on home foreclosures during the winter will postpone when some banks book losses on a big swath of soured loans. At the same time, banks have benefited from unusually good trading results and low interest rates, which have propped up the value of their mortgage investments.
The official stress test findings, expected to be released on May 4, may help investors sort out the handful of banks that can generate enough earnings to absorb their losses if the economy worsens. Their conclusions may bear little resemblance to banks’ first-quarter results because the stress test is taking a forward-looking view of the banks’ conditions over the next two years. Quarterly earnings reports, by their nature, look back.
Officials involved in the stress test say they expect the results to show that some banks will need to raise fresh capital. A senior administration official emphasized, however, that those banks would not necessarily need new government money. Besides tapping private investors, banks could derive a major source of capital by converting the preferred stock now held by the government into common shares, as Citigroup intends. The Treasury is likely to rely on individual banks to release their results, and officials said they expected banks that need more capital to immediately announce plans for raising it.
But even ahead of the stress test, investors already appear to be rendering verdicts on which banks will emerge as survivors. Goldman Sachs shares are around $121. Citigroup shares, which fell below $1 in March, are trading at just over $4; Bank of America’s shares have rebounded to above $10.
On Tuesday, Goldman Sachs raised $5 billion of fresh capital in anticipation of repaying the government’s investment.
Jamie Dimon, JPMorgan’s chairman and chief executive, was adamant on Thursday that his company would pay back $25 billion as soon as regulators allowed. “Folks, it has become a scarlet letter,” said Mr. Dimon, referring to the taxpayer infusion the bank received in October. “We could pay it back tomorrow,” he said. “We have the money.”
Mr. Dimon added that his bank did not plan to be a buyer or seller in the Treasury’s public-private partnership program to siphon loss-making investments from banks’ books. “We’re certainly not going to borrow from the federal government because we’ve learned our lesson about that,” Mr. Dimon said.
Stephen Labaton contributed reporting from Washington.
http://www.nytimes.com/2009/04/17/business/17bank.html?em
By ERIC DASH
Published: April 16, 2009
Just three short months ago, many of the nation’s biggest banks were on life support.
Related
Times Topics: JPMorgan Chase & Company
Now, a number are showing glimpses of a recovery, aided by a tentative improvement in some corners of the economy and new business picked up from rivals that stumbled in the wake of the financial crisis.
On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits in the first quarter. The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over.
Banks are enjoying a fresh wave of profits from the government’s efforts to nurse the industry back to life. Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets. And even before the results of a new health test for the nation’s 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money.
But this silver cloud has a dark lining: millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance: on Thursday, General Growth Properties, one of the nation’s largest mall operators, filed for bankruptcy in one of the biggest such collapses in United States history.
“We are in the eye of the storm,” Gerard Cassidy, a banking analyst at RBC Capital Markets. “The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud.”
JPMorgan Chase reported a $2.1 billion profit in the first quarter, besting analysts’ average forecasts. Revenue increased to $25 billion, up 45 percent from $16.9 billion in the period last year.
Still, the results reflected continued turmoil in sectors like credit card services and private equity, businesses that reported losses or steep drops in revenue, reflecting the lingering effects of the recession on consumer spending and the credit markets.
Many banks are preparing for the next rainy stretch, setting aside more money now to cover future loan losses. Regional and community lenders, which are particularly exposed to corporate and real estate loan defaults, are socking away tens of millions of dollars to add to their reserves; big banks like JPMorgan are adding billions. “Times aren’t exactly great as we speak,” Michael J. Cavanagh, the bank’s finance chief, said in a brief interview. “Until home prices stabilize and unemployment peaks, we will continue to be under pressure for losses on our balance sheet.”
As long as interest rates remain low, and the government continues to offer financial support, banks hope to earn enough profit to cushion the blow of some of these looming losses.
The question remains whether the profitability is sustainable if the recession worsens.
Some experts are saying fears of nationalization and bank solvency are subsiding. “What we are recognizing now is that they can produce profits,” Charles Peabody, a financial services analyst at Portales Partners. “The next debate is on the sustainability of those profits.”
With good reason: the banking industry has gotten relief from recent changes to accounting rules, which could inflate earnings.
What’s more, a brief moratorium on home foreclosures during the winter will postpone when some banks book losses on a big swath of soured loans. At the same time, banks have benefited from unusually good trading results and low interest rates, which have propped up the value of their mortgage investments.
The official stress test findings, expected to be released on May 4, may help investors sort out the handful of banks that can generate enough earnings to absorb their losses if the economy worsens. Their conclusions may bear little resemblance to banks’ first-quarter results because the stress test is taking a forward-looking view of the banks’ conditions over the next two years. Quarterly earnings reports, by their nature, look back.
Officials involved in the stress test say they expect the results to show that some banks will need to raise fresh capital. A senior administration official emphasized, however, that those banks would not necessarily need new government money. Besides tapping private investors, banks could derive a major source of capital by converting the preferred stock now held by the government into common shares, as Citigroup intends. The Treasury is likely to rely on individual banks to release their results, and officials said they expected banks that need more capital to immediately announce plans for raising it.
But even ahead of the stress test, investors already appear to be rendering verdicts on which banks will emerge as survivors. Goldman Sachs shares are around $121. Citigroup shares, which fell below $1 in March, are trading at just over $4; Bank of America’s shares have rebounded to above $10.
On Tuesday, Goldman Sachs raised $5 billion of fresh capital in anticipation of repaying the government’s investment.
Jamie Dimon, JPMorgan’s chairman and chief executive, was adamant on Thursday that his company would pay back $25 billion as soon as regulators allowed. “Folks, it has become a scarlet letter,” said Mr. Dimon, referring to the taxpayer infusion the bank received in October. “We could pay it back tomorrow,” he said. “We have the money.”
Mr. Dimon added that his bank did not plan to be a buyer or seller in the Treasury’s public-private partnership program to siphon loss-making investments from banks’ books. “We’re certainly not going to borrow from the federal government because we’ve learned our lesson about that,” Mr. Dimon said.
Stephen Labaton contributed reporting from Washington.
http://www.nytimes.com/2009/04/17/business/17bank.html?em
Saturday, 18 April 2009
Tips for Investors Just Starting Out
Tips for Investors Just Starting Out
These tips help investing newbies seize the day.
By Hilary Fazzone 04-14-09 06:00 AM
Not so long ago, my newly employed friends and I applauded ourselves for being responsible and choosing to make high automatic contributions to our 401(k)s. A few years later, we've hardly been rewarded for taking the "prudent" route. Far from watching our savings grow, we've lost much of it.
For those of us in our twenties who are beginning to generate income and wondering how to make the most of our savings, the behavior of the stock market during the past few years has been uninspiring to say the least. To start, the performance of domestic equities over the past 10 years has been unimpressive. If one invested $10,000 in the Dow Jones Wilshire 5000 Index, which tracks the 5,000-largest public companies in the United States and which is a nearly complete representation of the broader stock market, three years ago, it would have been worth about $6,500 at the end of March 2009 (based on the return of SPDR DJ Wilshire Total Market TMW), an exchange-traded fund that tracks the Wilshire 5000).
What's more, the precipitous marketwide downfall that characterized the second half of 2008 called into question for many the worth of diversification, as nearly all asset classes apart from Treasury bonds suffered severe blows. This came as a shock to those who believed that diversification would help them avoid portfoliowide stumbles. Furthermore, the deleterious and hard-to-predict impact that heavy-hitting, low-transparency vehicles such as hedge funds have had on the broader market recently, combined with the market's recent apparent disregard for company fundamentals, has left many less-sophisticated investors feeling as though the deck is stacked against them.
Yet investor sentiment often runs the most negative when it's most opportune to invest, and right now is shaping up as a golden opportunity for newbies. By many measures, stocks look cheap. Although they've been early, many of the mutual fund managers with whom Morningstar analysts speak daily have been touting the cheapness of stocks for months.
Brian Rogers, T. Rowe Price's chief investment officer and manager of T. Rowe Price Equity Income (PRFDX), has said that stocks look inexpensive relative to historic norms. Marty Whitman and Ian Lapey have been increasing their personal investments in their own Third Avenue Value (TAVFX ) for the attractiveness of its current portfolio. Chuck Royce and Whitney George have been bargain-hunting for their Royce Premier (RYPRX ) portfolio.
Morningstar's stock analysts agree. The Market Valuation Graph that values in aggregate the entire universe of stocks covered by Morningstar analysts showed a ratio of 0.81 on Friday, April 3, meaning that stocks are 19% undervalued, according to our analyst team. Warren Buffett also agrees. The stock market cap/gross domestic product ratio that he uses to gauge the market's attractiveness indicates that as of March 2009, the total value of publicly traded U.S. stocks represented just more than 60% of GDP. At the end of 2007, by contrast, the stock market represented more than 140% of GDP. Buffett thinks that a higher ratio indicates overvaluation while a lower ratio indicates undervaluation.
For all of the uncertainties that plague the market, the long-term upside potential appears to be there, and the rewards are apt to be particularly great for new investors who have many years to see their investments compound.
How to do it is the question. What follows is an introductory, though not exhaustive, explanation of some of the best ways to begin investing.
Index Funds
One of the most difficult decisions in investing is what kind of stocks to buy. Broadly diversified index funds make that decision easier by giving you exposure to many different companies and industries in a single mutual fund. The Dow Jones Wilshire 5000 Index, for example, captures practically every stock in the U.S. market. The Russell 2000 tracks the smaller end of the market-cap range, and so forth. In addition to providing one-stop diversification, index funds can also be cheap. Traditional index funds and exchange-traded funds that track major indexes typically cost much less than actively managed mutual funds. Fidelity is an industry leader on the low-cost index-fund front. Vanguard also provides some of the most competitively priced index funds and offers them with relatively low minimums, which make it easier for new investors to dip their toes in the water. Dan Culloton, editor of Morningstar's Vanguard Fund Family Report, examined in a recent article how index funds fared during the recent bear market, and the results were competitive with active funds' returns.
All-In-One Funds
Generally speaking, those of us in the early stages of our investing careers can tolerate higher stock allocations, which can present greater downside risk but also greater return potential, because we have longer time horizons over which to recoup our losses. Still, given the behavior of the stock market in recent years and the uncertainties that do remain in the current downturn, new investors may be uncomfortable having the bulk of their assets in stocks. All-in-one funds such as those in Morningstar's moderate-allocation category provide a nice middle ground, giving you stock exposure but also muting volatility with some bonds and cash. Target-date funds are an all-in-one, low-maintenance way to shift from a higher to a lower stock allocation over time as your risk tolerance decreases. Both target-date and moderate-allocation funds tend to offer smoother rides than equity-only funds and are good alternatives for those who would like to start investing but are nervous about the downside risk of equities. Morningstar's Analyst Picks in the moderate-allocation and target-date categories are a great place to start looking for topnotch all-in-one options.
Dollar-Cost Averaging
When to buy a particular stock or mutual fund is another hot topic for investors just starting out. It's a mistake to get too hung up trying to buy and sell at the perfect time; the typical investor isn't any good at calling the market's highs and lows. Dollar-cost averaging, which is the default investing method for most 401(k) plans, is an easier way. Once you've decided that a certain stock or fund is a good long-term fit for you, dollar-cost averaging enables you to invest in it gradually and regularly over time. By investing uniform chunks of money at set intervals, you reduce the chance that you'll be putting a lot of money to work right before the market goes down. For a more in-depth discussion of dollar-cost averaging, click here.
There is much more to investing than the simple tips I've laid forth here, such as navigating fund fee structures and understanding investment vehicles such as 401(k)s, but these introductory guidelines are a good start for investors who are wary of the stock market and wondering how to make good, basic decisions at a time when opportunity is abundant.
http://news.morningstar.com/articlenet/article.aspx?id=286673
These tips help investing newbies seize the day.
By Hilary Fazzone 04-14-09 06:00 AM
Not so long ago, my newly employed friends and I applauded ourselves for being responsible and choosing to make high automatic contributions to our 401(k)s. A few years later, we've hardly been rewarded for taking the "prudent" route. Far from watching our savings grow, we've lost much of it.
For those of us in our twenties who are beginning to generate income and wondering how to make the most of our savings, the behavior of the stock market during the past few years has been uninspiring to say the least. To start, the performance of domestic equities over the past 10 years has been unimpressive. If one invested $10,000 in the Dow Jones Wilshire 5000 Index, which tracks the 5,000-largest public companies in the United States and which is a nearly complete representation of the broader stock market, three years ago, it would have been worth about $6,500 at the end of March 2009 (based on the return of SPDR DJ Wilshire Total Market TMW), an exchange-traded fund that tracks the Wilshire 5000).
What's more, the precipitous marketwide downfall that characterized the second half of 2008 called into question for many the worth of diversification, as nearly all asset classes apart from Treasury bonds suffered severe blows. This came as a shock to those who believed that diversification would help them avoid portfoliowide stumbles. Furthermore, the deleterious and hard-to-predict impact that heavy-hitting, low-transparency vehicles such as hedge funds have had on the broader market recently, combined with the market's recent apparent disregard for company fundamentals, has left many less-sophisticated investors feeling as though the deck is stacked against them.
Yet investor sentiment often runs the most negative when it's most opportune to invest, and right now is shaping up as a golden opportunity for newbies. By many measures, stocks look cheap. Although they've been early, many of the mutual fund managers with whom Morningstar analysts speak daily have been touting the cheapness of stocks for months.
Brian Rogers, T. Rowe Price's chief investment officer and manager of T. Rowe Price Equity Income (PRFDX), has said that stocks look inexpensive relative to historic norms. Marty Whitman and Ian Lapey have been increasing their personal investments in their own Third Avenue Value (TAVFX ) for the attractiveness of its current portfolio. Chuck Royce and Whitney George have been bargain-hunting for their Royce Premier (RYPRX ) portfolio.
Morningstar's stock analysts agree. The Market Valuation Graph that values in aggregate the entire universe of stocks covered by Morningstar analysts showed a ratio of 0.81 on Friday, April 3, meaning that stocks are 19% undervalued, according to our analyst team. Warren Buffett also agrees. The stock market cap/gross domestic product ratio that he uses to gauge the market's attractiveness indicates that as of March 2009, the total value of publicly traded U.S. stocks represented just more than 60% of GDP. At the end of 2007, by contrast, the stock market represented more than 140% of GDP. Buffett thinks that a higher ratio indicates overvaluation while a lower ratio indicates undervaluation.
For all of the uncertainties that plague the market, the long-term upside potential appears to be there, and the rewards are apt to be particularly great for new investors who have many years to see their investments compound.
How to do it is the question. What follows is an introductory, though not exhaustive, explanation of some of the best ways to begin investing.
Index Funds
One of the most difficult decisions in investing is what kind of stocks to buy. Broadly diversified index funds make that decision easier by giving you exposure to many different companies and industries in a single mutual fund. The Dow Jones Wilshire 5000 Index, for example, captures practically every stock in the U.S. market. The Russell 2000 tracks the smaller end of the market-cap range, and so forth. In addition to providing one-stop diversification, index funds can also be cheap. Traditional index funds and exchange-traded funds that track major indexes typically cost much less than actively managed mutual funds. Fidelity is an industry leader on the low-cost index-fund front. Vanguard also provides some of the most competitively priced index funds and offers them with relatively low minimums, which make it easier for new investors to dip their toes in the water. Dan Culloton, editor of Morningstar's Vanguard Fund Family Report, examined in a recent article how index funds fared during the recent bear market, and the results were competitive with active funds' returns.
All-In-One Funds
Generally speaking, those of us in the early stages of our investing careers can tolerate higher stock allocations, which can present greater downside risk but also greater return potential, because we have longer time horizons over which to recoup our losses. Still, given the behavior of the stock market in recent years and the uncertainties that do remain in the current downturn, new investors may be uncomfortable having the bulk of their assets in stocks. All-in-one funds such as those in Morningstar's moderate-allocation category provide a nice middle ground, giving you stock exposure but also muting volatility with some bonds and cash. Target-date funds are an all-in-one, low-maintenance way to shift from a higher to a lower stock allocation over time as your risk tolerance decreases. Both target-date and moderate-allocation funds tend to offer smoother rides than equity-only funds and are good alternatives for those who would like to start investing but are nervous about the downside risk of equities. Morningstar's Analyst Picks in the moderate-allocation and target-date categories are a great place to start looking for topnotch all-in-one options.
Dollar-Cost Averaging
When to buy a particular stock or mutual fund is another hot topic for investors just starting out. It's a mistake to get too hung up trying to buy and sell at the perfect time; the typical investor isn't any good at calling the market's highs and lows. Dollar-cost averaging, which is the default investing method for most 401(k) plans, is an easier way. Once you've decided that a certain stock or fund is a good long-term fit for you, dollar-cost averaging enables you to invest in it gradually and regularly over time. By investing uniform chunks of money at set intervals, you reduce the chance that you'll be putting a lot of money to work right before the market goes down. For a more in-depth discussion of dollar-cost averaging, click here.
There is much more to investing than the simple tips I've laid forth here, such as navigating fund fee structures and understanding investment vehicles such as 401(k)s, but these introductory guidelines are a good start for investors who are wary of the stock market and wondering how to make good, basic decisions at a time when opportunity is abundant.
http://news.morningstar.com/articlenet/article.aspx?id=286673
****Warren Buffett MBA Talk on Investing and Stock Market Wisdom (Videos)
Warren Buffett MBA Talk on Investing and Stock Market Wisdom
Warren Buffett is the richest guy in the whole world and his wisdom on stock market, value investing and corporate governance is priceless. Many people from all over the world come and listen to him. When it comes to value and growth investing methodology, Warren Buffett is the guy.
Warren Buffett talk to MBA students on various topics ranging from business management to investing for growth. Visit this site to see the 10 parts video: http://tradeorinvest.com/warren-buffett-investing-and-stock-market-wisdom-mba-talk/.
These are also posted below. Enjoy them.
Warren Buffett MBA Talk - Part 1
Warren Buffett MBA Talk - Part 2
Warren Buffett MBA Talk - Part 3
Warren Buffett MBA Talk - Part 4
Warren Buffett MBA Talk - Part 5
Warren Buffett MBA Talk - Part 6
Warren Buffett MBA Talk - Part 7
Warren Buffett MBA Talk - Part 8
Warren Buffett MBA Talk - Part 9
Warren Buffett MBA Talk - Part 10
Warren Buffett is the richest guy in the whole world and his wisdom on stock market, value investing and corporate governance is priceless. Many people from all over the world come and listen to him. When it comes to value and growth investing methodology, Warren Buffett is the guy.
Warren Buffett talk to MBA students on various topics ranging from business management to investing for growth. Visit this site to see the 10 parts video: http://tradeorinvest.com/warren-buffett-investing-and-stock-market-wisdom-mba-talk/.
These are also posted below. Enjoy them.
Warren Buffett MBA Talk - Part 1
Warren Buffett MBA Talk - Part 2
Warren Buffett MBA Talk - Part 3
Warren Buffett MBA Talk - Part 4
Warren Buffett MBA Talk - Part 5
Warren Buffett MBA Talk - Part 6
Warren Buffett MBA Talk - Part 7
Warren Buffett MBA Talk - Part 8
Warren Buffett MBA Talk - Part 9
Warren Buffett MBA Talk - Part 10
5 Reasons To Avoid Index Funds
5 Reasons To Avoid Index Funds
by Wayne Pinsent (Contact Author Biography)
Modern portfolio theory suggests that markets are efficient, and that a security's price includes all available information. The suggestion is that active management of a portfolio is useless, and investors would be better off buying an index and letting it ride. However, stock prices do not always seem rational, and there is also ample evidence going against efficient markets. So, although many people say that index investing is the way to go, we'll look at some reasons why it isn't always the best choice. (For background reading, see our Index Investing Tutorial and Modern Portfolio Theory: An Overview.)
1. Lack of Downside Protection
The stock market has proved to be a great investment in the long run, but over the years it has had its fair share of bumps and bruises. Investing in an index fund, such as one that tracks the S&P 500, will give you the upside when the market is doing well, but also leaves you completely vulnerable to the downside. You can choose to hedge your exposure to the index by shorting the index, or buying a put against the index, but because these move in the exact opposite direction of each other, using them together could defeat the purpose of investing (it's a breakeven strategy). (To learn how to protect against dreaded downturns, check out 4 ETF Strategies For A Down Market.)
2. Lack of Reactive Ability
Sometimes obvious mispricing can occur in the market. If there's one company in the internet sector that has a unique benefit and all other internet company stock prices move up in sympathy, they may become overvalued as a group. The opposite can also happen. One company may have disastrous results that are unique to that company, but it may take down the stock prices of all companies in its sector. That sector may be a compelling value, but in a broad market value weighted index, exposure to that sector will actually be reduced instead of increased. Active management can take advantage of this misguided behavior in the market. An investor can watch out for good companies that become undervalued based on factors other than fundamentals, and sell companies that become overvalued for the same reason. (Find out how to tell whether your stock is a bargain or a bank breaker in see Sympathy Sell-Off: An Investor's Guide.)
Index investing does not allow for this advantageous behavior. If a stock becomes overvalued, it actually starts to carry more weight in the index. Unfortunately, this is just when astute investors would want to be lowering their portfolios' exposure to that stock. So even if you have a clear idea of a stock that is over- or undervalued, if you invest solely through an index, you will not be able to act on that knowledge.
3. No Control Over Holdings
Indexes are set portfolios. If an investor buys an index fund, he or she has no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy. Similarly, in everyday life, you may have experiences that lead you believe that one company is markedly better than another; maybe it has better brands, management or customer service. As a result, you may want to invest in that company specifically and not in its peers.
At the same time, you may have ill feelings toward other companies for moral or other personal reasons. For example, you may have issues with the way a company treats the environment or the products it makes. Your portfolio can be augmented by adding specific stocks you like, but the components of an index portion are out of your hands.(To learn about socially responsible investing, see Change The World One Investment At A Time.)
4. Limited Exposure to Different Strategies
There are countless strategies that investors have used with success; unfortunately, buying an index of the market may not give you access to a lot of these good ideas and strategies. Investing strategies can, at times, be combined to provide investors with better risk-adjusted returns. Index investing will give you diversification, but that can also be achieved with as few as 30 stocks, instead of the 500 stocks an S&P 500 Index would track. If you conduct research, you may be able to find the best value stocks, the best growth stocks and the best stocks for other strategies. After you've done the research, you can combine them into a smaller, more targeted portfolio. You may be able to provide yourself with a better-positioned portfolio than the overall market, or one that's better suited to your personal goals and risk tolerances. (To learn more, read A Guide To Portfolio Construction.)
5. Dampened Personal Satisfaction
Finally, investing can be worrying and stressful, especially during times of market turmoil. Selecting certain stocks may leave you constantly checking quotes, and can keep you awake at night, but these situations will not be averted by investing in an index. You can still find yourself constantly checking on how the market is performing and being worried sick about the economic landscape. On top of this, you will lose the satisfaction and excitement of making good investments and being successful with your money.
Conclusion
There have been studies both in favor and against active management. Many managers perform worse than their comparative benchmarks, but that does not change the fact that there are exceptional managers who regularly outperform the market. Index investing has merit if you want to take a broad economic view, but there are many reasons why it's not always the best route to achieving your personal investing goals.
by Wayne Pinsent, (Contact Author Biography)
http://investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp?partner=basics4b1
by Wayne Pinsent (Contact Author Biography)
Modern portfolio theory suggests that markets are efficient, and that a security's price includes all available information. The suggestion is that active management of a portfolio is useless, and investors would be better off buying an index and letting it ride. However, stock prices do not always seem rational, and there is also ample evidence going against efficient markets. So, although many people say that index investing is the way to go, we'll look at some reasons why it isn't always the best choice. (For background reading, see our Index Investing Tutorial and Modern Portfolio Theory: An Overview.)
1. Lack of Downside Protection
The stock market has proved to be a great investment in the long run, but over the years it has had its fair share of bumps and bruises. Investing in an index fund, such as one that tracks the S&P 500, will give you the upside when the market is doing well, but also leaves you completely vulnerable to the downside. You can choose to hedge your exposure to the index by shorting the index, or buying a put against the index, but because these move in the exact opposite direction of each other, using them together could defeat the purpose of investing (it's a breakeven strategy). (To learn how to protect against dreaded downturns, check out 4 ETF Strategies For A Down Market.)
2. Lack of Reactive Ability
Sometimes obvious mispricing can occur in the market. If there's one company in the internet sector that has a unique benefit and all other internet company stock prices move up in sympathy, they may become overvalued as a group. The opposite can also happen. One company may have disastrous results that are unique to that company, but it may take down the stock prices of all companies in its sector. That sector may be a compelling value, but in a broad market value weighted index, exposure to that sector will actually be reduced instead of increased. Active management can take advantage of this misguided behavior in the market. An investor can watch out for good companies that become undervalued based on factors other than fundamentals, and sell companies that become overvalued for the same reason. (Find out how to tell whether your stock is a bargain or a bank breaker in see Sympathy Sell-Off: An Investor's Guide.)
Index investing does not allow for this advantageous behavior. If a stock becomes overvalued, it actually starts to carry more weight in the index. Unfortunately, this is just when astute investors would want to be lowering their portfolios' exposure to that stock. So even if you have a clear idea of a stock that is over- or undervalued, if you invest solely through an index, you will not be able to act on that knowledge.
3. No Control Over Holdings
Indexes are set portfolios. If an investor buys an index fund, he or she has no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy. Similarly, in everyday life, you may have experiences that lead you believe that one company is markedly better than another; maybe it has better brands, management or customer service. As a result, you may want to invest in that company specifically and not in its peers.
At the same time, you may have ill feelings toward other companies for moral or other personal reasons. For example, you may have issues with the way a company treats the environment or the products it makes. Your portfolio can be augmented by adding specific stocks you like, but the components of an index portion are out of your hands.(To learn about socially responsible investing, see Change The World One Investment At A Time.)
4. Limited Exposure to Different Strategies
There are countless strategies that investors have used with success; unfortunately, buying an index of the market may not give you access to a lot of these good ideas and strategies. Investing strategies can, at times, be combined to provide investors with better risk-adjusted returns. Index investing will give you diversification, but that can also be achieved with as few as 30 stocks, instead of the 500 stocks an S&P 500 Index would track. If you conduct research, you may be able to find the best value stocks, the best growth stocks and the best stocks for other strategies. After you've done the research, you can combine them into a smaller, more targeted portfolio. You may be able to provide yourself with a better-positioned portfolio than the overall market, or one that's better suited to your personal goals and risk tolerances. (To learn more, read A Guide To Portfolio Construction.)
5. Dampened Personal Satisfaction
Finally, investing can be worrying and stressful, especially during times of market turmoil. Selecting certain stocks may leave you constantly checking quotes, and can keep you awake at night, but these situations will not be averted by investing in an index. You can still find yourself constantly checking on how the market is performing and being worried sick about the economic landscape. On top of this, you will lose the satisfaction and excitement of making good investments and being successful with your money.
Conclusion
There have been studies both in favor and against active management. Many managers perform worse than their comparative benchmarks, but that does not change the fact that there are exceptional managers who regularly outperform the market. Index investing has merit if you want to take a broad economic view, but there are many reasons why it's not always the best route to achieving your personal investing goals.
by Wayne Pinsent, (Contact Author Biography)
http://investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp?partner=basics4b1
Bears Retreat As Bullish Tilt Spreads
Bears Retreat As Bullish Tilt Spreads
Paul Katzeff
Thursday April 16, 2009, 7:36 pm EDT
Glaciers continued to melt. But investors were not quite ready to declare the Ice Age over in the April Merrill Lynch survey of global fund managers.
Optimism about growth reached its highest since early 2004. A net 24% of managers said the global economy will strengthen in the next 12 months.
Last month the percentage of managers who expected global growth equaled the portion who forecast worsening GDP. In January a net 24% forecast further contraction.
"March's apocalyptic bearishness has been replaced by reluctant bullishness," said Michael Hartnett, co-head of Banc of America Securities-Merrill Lynch international investment strategy.
Managers believe the worst is over in terms of the global slowdown. "But there is no bull market euphoria," Hartnett said.
China remained the main catalyst for optimism. The U.S. was a key too. But the brighter outlook broadened to include Europe and Japan.
In March a net 1% of managers feared China's economy would slow in the year ahead. This month 26% see China growing.
Going forward, bulls will be watching for signs that economies are responding to government stimulus steps, Hartnett said.
Bears will win if China slows more than expected and banks disappoint.
Sentiment regarding bank stocks finally warmed, as 26% of managers said they are underweight. Underweights hit a record 48% in March.
"That has triggered a classic rotation out of defensive sectors like consumer staples, telcos, pharmas and utilities, into cyclical sectors like consumer discretionary, industrials and materials," Hartnett said.
Technology is now the most popular global sector, he added.
Another sign of growing appetite for risk: the percentage of managers overweight in cash fell to 24% from March's 38%.
Also, the average cash balance fell to 4.9% from 5.2%.
And the portion of managers underweight in equities fell to 17% vs. 41% in March.
Pessimism about corporate profits continued to fall. Only 12% of managers this month saw slower profit growth vs. 29% last month. Pessimism peaked at 74% in October.
A warmer outlook regarding GDP and corporate profit growth impacted views on inflation. The portion of managers expecting inflation to fall over the next 12 months slipped to a net 18%. Last month 42% expected lower inflation.
That was also reflected in the net 16% who expected higher short-term interest rates within 12 months vs. 17% expecting the opposite last month. April's was the first view for higher rates in 10 months.
The portion of managers who view stocks as undervalued dropped to 30% from March's 42%.
That hurt the outlook for bonds, with only 9% of managers overweight in April vs. March's 26%. In April, 37% saw bonds as overvalued, the same as March's view.
Managers boosted their stakes in emerging markets, with a net 26% overweight vs. 4% a month ago.
The U.S. was the only other region where managers were overweight, at 14% of managers.
http://finance.yahoo.com/news/Bears-Retreat-As-Bullish-Tilt-ibd-14952322.html?.v=1
Is This Rally for Real?
Is This Rally for Real?
by Mick Weinstein
Posted on Friday, April 17, 2009, 12:00AM
The S&P 500's rapid 26 percent rise since its March 9 low has investors wondering if stocks have put in a meaningful bottom. Has the time come to put new money to work in equities, or is this a mere bear market rally that will unwind shortly as indexes plumb new lows? Both cases rely on speculation regarding the macroeconomic picture, as traditionally the stock market has served as a leading indicator of broader economic recovery -- an indicator, that is, which one can only really observe in retrospect. Ben Bernanke, for one, sees "green shoots" of recovery sprouting up.
Here's one helpful starting place on the matter: a comparison chart of 4 Bad Bear Markets that DShort updates daily. Or in another (more humorous) framework, are we in Stage 13 or Stage 15 of this investor psychology chart? Econobloggers weigh in on both sides:
The 'This Rally's Got Legs' Camp
• Portfolio manager J.D. Steinhilber says this move should have staying power. Steinhilber cites "the sheer magnitude of the bear market declines in broad stock indexes (60%!) over the past 18 months" and believes "[t]he immensity of the government's stimulus efforts, both fiscal and monetary, which now total a mind-boggling $4 trillion, appear to be taking hold in the economy and markets." Steinhilber finds foreign stocks to be particularly attractive here.
• Doug Kass made a bold and timely market bottom call in March ("perhaps even a generational low") and remains bullish, but now names some "nontraditional headwinds" to be wary of.
• Both Scott Grannis and Bill Luby see a bullish sign in volatility falling back significantly of late. And Grannis notes that industrial metal prices have bounced: "Maybe it's the return of the speculators, but even if it is, it reflects a return of animal spirits and suggests that monetary policy is easy enough for people to start releveraging."
• Hedge fund manager Dennis Gartman also uses industrial metals as a leading indicator, and as Market Folly notes, Gartman uses the Baltic Dry Index and the Transports as signs we're exiting recession. In response to these all moving upward recently, Gartman "wants to be long copper and Alcoa, and short the Yen," as the Japanese are big importers of commodities.
• Octagon Capital technical analyst Leon Tuey sees extreme pessimism in the current CBOE put/call ratio and that, pushed along with massive new liquidity from the Fed, are signs "we are not witnessing a bear market rally, but a bull market, the magnitude and duration of which will surprise everyone."
• Jeff Miller of NewArc Investments sees a lot of skepticism about any positive economic signs. But Miller uses a remarkable sportsman's model to suggest we really may be moving upwards.
The 'Sucker Rally, Don't Buy It' Camp
• Tim Iacono has his eye on unemployment data: "Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak... If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom. However, if either of those are untrue -- that this downturn will be different than previous recessions or that job losses have not yet reached their peak -- then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario."
• Tyler Durden believes quant funds drove up the market in March, in a "distortion rally" that lacked broad-based support: "Risk managers allocating capital to quants are prolonging and exacerbating the long-term bear markets in equities, creating an atmosphere of distrust and making markets unreliable tools of price discovery and playgrounds for rampant, Atlantic City-like speculation. In the words of both a NYSE chairman and a famous credit index trader, 'This will all end in tears.'"
• Peter Cooper says "the absurdness of this sucker's rally ought to be obvious to all... Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating."
• Likewise, Henry Blodget finds the "'suckers' rally' argument far more persuasive than the 'new bull market' one...About the best we can say is that, after 15+ years of overvaluation, stocks are finally priced to produce average returns over the next decade (9%-10% a year or so)."
• Investor Sajal has a nice roundup of how various market gurus (Marc Faber, George Soros, Jim Rogers, and more) see things here. Most believe that we're in for further downside, and that this rally is not to be trusted.
• Finally, James Picerno says the trend may now be our friend, but still: "Even if the recession has bottomed out, that's a long way from saying that a return to growth is imminent. It's likely that the economy will tread water for several quarters at the least once the economy stops contracting. And while the stock market appears inexpensive, or at least fairly priced, it's still too early to expect that profits are set to rebound any time soon."
http://finance.yahoo.com/expert/article/stockblogs/157195;_ylt=AtyB1.Ieu7cNm2kW0kHNNvO7YWsA
by Mick Weinstein
Posted on Friday, April 17, 2009, 12:00AM
The S&P 500's rapid 26 percent rise since its March 9 low has investors wondering if stocks have put in a meaningful bottom. Has the time come to put new money to work in equities, or is this a mere bear market rally that will unwind shortly as indexes plumb new lows? Both cases rely on speculation regarding the macroeconomic picture, as traditionally the stock market has served as a leading indicator of broader economic recovery -- an indicator, that is, which one can only really observe in retrospect. Ben Bernanke, for one, sees "green shoots" of recovery sprouting up.
Here's one helpful starting place on the matter: a comparison chart of 4 Bad Bear Markets that DShort updates daily. Or in another (more humorous) framework, are we in Stage 13 or Stage 15 of this investor psychology chart? Econobloggers weigh in on both sides:
The 'This Rally's Got Legs' Camp
• Portfolio manager J.D. Steinhilber says this move should have staying power. Steinhilber cites "the sheer magnitude of the bear market declines in broad stock indexes (60%!) over the past 18 months" and believes "[t]he immensity of the government's stimulus efforts, both fiscal and monetary, which now total a mind-boggling $4 trillion, appear to be taking hold in the economy and markets." Steinhilber finds foreign stocks to be particularly attractive here.
• Doug Kass made a bold and timely market bottom call in March ("perhaps even a generational low") and remains bullish, but now names some "nontraditional headwinds" to be wary of.
• Both Scott Grannis and Bill Luby see a bullish sign in volatility falling back significantly of late. And Grannis notes that industrial metal prices have bounced: "Maybe it's the return of the speculators, but even if it is, it reflects a return of animal spirits and suggests that monetary policy is easy enough for people to start releveraging."
• Hedge fund manager Dennis Gartman also uses industrial metals as a leading indicator, and as Market Folly notes, Gartman uses the Baltic Dry Index and the Transports as signs we're exiting recession. In response to these all moving upward recently, Gartman "wants to be long copper and Alcoa, and short the Yen," as the Japanese are big importers of commodities.
• Octagon Capital technical analyst Leon Tuey sees extreme pessimism in the current CBOE put/call ratio and that, pushed along with massive new liquidity from the Fed, are signs "we are not witnessing a bear market rally, but a bull market, the magnitude and duration of which will surprise everyone."
• Jeff Miller of NewArc Investments sees a lot of skepticism about any positive economic signs. But Miller uses a remarkable sportsman's model to suggest we really may be moving upwards.
The 'Sucker Rally, Don't Buy It' Camp
• Tim Iacono has his eye on unemployment data: "Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak... If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom. However, if either of those are untrue -- that this downturn will be different than previous recessions or that job losses have not yet reached their peak -- then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario."
• Tyler Durden believes quant funds drove up the market in March, in a "distortion rally" that lacked broad-based support: "Risk managers allocating capital to quants are prolonging and exacerbating the long-term bear markets in equities, creating an atmosphere of distrust and making markets unreliable tools of price discovery and playgrounds for rampant, Atlantic City-like speculation. In the words of both a NYSE chairman and a famous credit index trader, 'This will all end in tears.'"
• Peter Cooper says "the absurdness of this sucker's rally ought to be obvious to all... Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating."
• Likewise, Henry Blodget finds the "'suckers' rally' argument far more persuasive than the 'new bull market' one...About the best we can say is that, after 15+ years of overvaluation, stocks are finally priced to produce average returns over the next decade (9%-10% a year or so)."
• Investor Sajal has a nice roundup of how various market gurus (Marc Faber, George Soros, Jim Rogers, and more) see things here. Most believe that we're in for further downside, and that this rally is not to be trusted.
• Finally, James Picerno says the trend may now be our friend, but still: "Even if the recession has bottomed out, that's a long way from saying that a return to growth is imminent. It's likely that the economy will tread water for several quarters at the least once the economy stops contracting. And while the stock market appears inexpensive, or at least fairly priced, it's still too early to expect that profits are set to rebound any time soon."
http://finance.yahoo.com/expert/article/stockblogs/157195;_ylt=AtyB1.Ieu7cNm2kW0kHNNvO7YWsA
Friday, 17 April 2009
Morningstar's Approach to Analyzing Mutual Funds
Morningstar's Approach to Analyzing Mutual Funds
The five key questions we ask.
By Karen Dolan, CFA 03-13-08 06:00 AM
If you're a regular reader of Morningstar's fund analyst reports or if you're wondering why you should care about what we have to say about a mutual fund, it may help to understand how we approach fund analysis.
First, a Priority Check
"Investors First" is one of Morningstar's five core values and it is of utmost importance to our team of mutual fund analysts. This is reflected in the priorities we bring to our fund analysis. We are independent thinkers and put individual investors' interests first. In addition, we strive to be opinionated, letting investors know whether a particular fund is worth owning and why. We base that opinion on rigorous analysis, not just past performance. We do our best to keep investors up to date on changes affecting their fund investments. And, we keep a long-term time horizon.
These goals are top of mind as we analyze the nearly 2,000 funds on our coverage list. Our research combines qualitative and quantitative factors. In other words, we do not screen funds and base our recommendations solely on easy-to-measure backward-looking figures. To really get at the heart of what makes a fund a good or bad investment, our research process incorporates a wide variety of information including regular interviews with fund managers and on-site fund company visits, as well as comprehensive reviews of a fund's strategy, fees, portfolio positioning, and risk profile. We also look at a fund's record, but in detail, evaluating how it performed in various market conditions and considering if it had different managers or strategies in different periods. That's a lot, but it can all be grouped in the following five questions:
How good are the fund's managers and analysts?
When purchasing a mutual fund, you are hiring a management team to pick securities for you. That's why we pay extra close attention to the people contributing to the research process. We place a great deal of emphasis on getting to know the manager who is making the calls in the portfolio, but our research doesn't end there. We also key in on everyone integral to the process --from the research staff to the firm's chief executive and chief investment officers. That background helps us spot potential weaknesses and determine whether a manager's departure is a dealbreaker for shareholders.
While Morningstar analysts value experience, we also are always on the prowl for promising managers who may not have reached investing-legend status. Usually, these managers are running far smaller sums and are thus more flexible than today's stars, so there's a lot of room for upside if we can discover them early on. We like to see managers with a solid investment philosophy and an investing temperament that resembles the great investors'. We also look for managers practicing a consistent, repeatable process.
What is the strategy and how well is it executed?
Very rarely do we come across a strategy that sounds downright awful. There are too many smart consultants and marketers out there for that to happen. Yet, there's a big difference between having an investment strategy that could add value and one that actually does.
Morningstar analysts consider a fund's strategy and assess management's chances in using it to deliver peer-beating returns over the long term. Investing is a competitive sport. In order for a fund to do well over a long time horizon, we firmly believe that some combination of its strategy, process, execution, people and fees have to give it a lasting edge over rivals.
Because we talk to most portfolio managers at least twice a year, we can keep tabs on how they're implementing their strategy. We can compare the actions we see in the portfolio with the strategy they claim to follow. We're looking for managers who can stick with their approach and have conviction in their research, rather than those who abandon their strategy when the market disagrees or those who show a lack of confidence in their process.
Our understanding of the strategy also helps us put performance into context and set investors' expectations regarding the risks associated with it. Is it a deep-value fund or an aggressive-growth fund? Does it specialize in a small market niche or cover a broad swath of the universe? Does the fund focus more on relative returns versus a benchmark, or does it value absolute returns and capital preservation? The answers to those questions help us gauge how a fund might fare in different environments and how it might be used in a portfolio.
Is the fund a good value proposition?
We've conducted a number of studies on expenses and our findings have been loud and clear: Expenses are one of the most reliable predictors of future performance. So, Morningstar analysts focus on them and have a hard time pounding the table for funds that charge prices too far above their average peer. We take a holistic approach and look at a fund's costs and factors that can affect fees, such as asset size. But in general, we think there's a lot of fat in mutual fund expense ratios and there are many funds of all sizes with low fees.
The expense ratio isn't the only cost to keep an eye on, though. Transaction costs, including brokerage commissions and the market impact of large or illiquid trades can also chip away at a fund's returns. And, investors in taxable accounts need to be wary of the tax costs of owning a mutual fund. Some managers' strategies and trading methods are very tax-aware, while others ignore that factor altogether. Where there are hidden costs, we point them out and incorporate them into our overall opinion of a fund.
The expense ratio, transaction costs, and tax consequences make up the overall hurdle that fund managers must clear before any gains are passed on to investors. If the overall hurdle rate is high, we're likely to have less confidence in the fund's ability to overcome those impediments and deliver a good end result for shareholders.
Have the fund and its advisor been shareholder-friendly?
When investing hard-earned money, trust is paramount, and we've found the interests of fund companies are not always in line with the interests of fund investors. High fees and more assets can be good for the fund company, but they're not good for fund shareholders, for example. To get behind the question of trust and ascertain how well the fund treats its shareholders, we issue Stewardship Grades to roughly 1,000 funds. A fund's Stewardship Grade is based on our fund analysts' evaluation of five main components: corporate culture, fund board independence, fund manager incentives, fees, and regulatory history. We don't suggest that investors choose their investments solely on our Stewardship Grades, but we've found that strong stewardship and investment merit often go hand in hand.
Why has the fund performed the way it has?
We all know that past performance isn't predictive of future results, but it's still tempting to focus on a fund's recent past. We pay attention to performance, but we analyze the drivers of long-term performance and put a fund's record in context. For example, we look at results during discrete stretches of market stress to add some clarity about the fund's downside risks. In addition, some funds harbor sector-specific or market-cap biases that can cause them to perform differently from peers at times.
Rather than rely exclusively on the standard three- and five-year measures of performance, we also consider performance over more meaningful time periods, such as a manager's tenure on the fund, extreme swings in market returns, or a full market cycle. In addition, we value consistency. Strong trailing returns, even over the past three or five years, could stem from a short stretch of hot performance. More consistent performance tends to lead to better long-term results that are easier for investors to handle.
We look for portfolio risks that could, but haven't yet, materialized. Sometimes that will lead us to favor a fund that is more conservative over a fund that has higher returns but may be headed for a big fall. We think this is important because we've found that investors haven't owned volatile funds very successfully. Investors often buy bumpy funds when they're high and sell when they're low. In addition, it's hard for investors to recover from losses. Funds that are prone to large, extended losses have to gain that much more to get back to even.
Keeping our Own Discipline
Just as we require strong investment philosophies and consistency from mutual fund managers, we demand the same level of discipline from ourselves. Our goal is to help guide investors toward the industry's best funds. Doing so sometimes means standing behind an underperforming manager when we believe in his or her talent, strategy, and process. It also helps us avoid the latest hot trend that looks great today, but could have devastating consequences for investors down the road. Our calls are sometimes unpopular with readers and fund companies, but we stand behind our approach because we firmly believe it helps investors over the long haul.
http://news.morningstar.com/articlenet/article.aspx?id=231481
The five key questions we ask.
By Karen Dolan, CFA 03-13-08 06:00 AM
If you're a regular reader of Morningstar's fund analyst reports or if you're wondering why you should care about what we have to say about a mutual fund, it may help to understand how we approach fund analysis.
First, a Priority Check
"Investors First" is one of Morningstar's five core values and it is of utmost importance to our team of mutual fund analysts. This is reflected in the priorities we bring to our fund analysis. We are independent thinkers and put individual investors' interests first. In addition, we strive to be opinionated, letting investors know whether a particular fund is worth owning and why. We base that opinion on rigorous analysis, not just past performance. We do our best to keep investors up to date on changes affecting their fund investments. And, we keep a long-term time horizon.
These goals are top of mind as we analyze the nearly 2,000 funds on our coverage list. Our research combines qualitative and quantitative factors. In other words, we do not screen funds and base our recommendations solely on easy-to-measure backward-looking figures. To really get at the heart of what makes a fund a good or bad investment, our research process incorporates a wide variety of information including regular interviews with fund managers and on-site fund company visits, as well as comprehensive reviews of a fund's strategy, fees, portfolio positioning, and risk profile. We also look at a fund's record, but in detail, evaluating how it performed in various market conditions and considering if it had different managers or strategies in different periods. That's a lot, but it can all be grouped in the following five questions:
How good are the fund's managers and analysts?
When purchasing a mutual fund, you are hiring a management team to pick securities for you. That's why we pay extra close attention to the people contributing to the research process. We place a great deal of emphasis on getting to know the manager who is making the calls in the portfolio, but our research doesn't end there. We also key in on everyone integral to the process --from the research staff to the firm's chief executive and chief investment officers. That background helps us spot potential weaknesses and determine whether a manager's departure is a dealbreaker for shareholders.
While Morningstar analysts value experience, we also are always on the prowl for promising managers who may not have reached investing-legend status. Usually, these managers are running far smaller sums and are thus more flexible than today's stars, so there's a lot of room for upside if we can discover them early on. We like to see managers with a solid investment philosophy and an investing temperament that resembles the great investors'. We also look for managers practicing a consistent, repeatable process.
What is the strategy and how well is it executed?
Very rarely do we come across a strategy that sounds downright awful. There are too many smart consultants and marketers out there for that to happen. Yet, there's a big difference between having an investment strategy that could add value and one that actually does.
Morningstar analysts consider a fund's strategy and assess management's chances in using it to deliver peer-beating returns over the long term. Investing is a competitive sport. In order for a fund to do well over a long time horizon, we firmly believe that some combination of its strategy, process, execution, people and fees have to give it a lasting edge over rivals.
Because we talk to most portfolio managers at least twice a year, we can keep tabs on how they're implementing their strategy. We can compare the actions we see in the portfolio with the strategy they claim to follow. We're looking for managers who can stick with their approach and have conviction in their research, rather than those who abandon their strategy when the market disagrees or those who show a lack of confidence in their process.
Our understanding of the strategy also helps us put performance into context and set investors' expectations regarding the risks associated with it. Is it a deep-value fund or an aggressive-growth fund? Does it specialize in a small market niche or cover a broad swath of the universe? Does the fund focus more on relative returns versus a benchmark, or does it value absolute returns and capital preservation? The answers to those questions help us gauge how a fund might fare in different environments and how it might be used in a portfolio.
Is the fund a good value proposition?
We've conducted a number of studies on expenses and our findings have been loud and clear: Expenses are one of the most reliable predictors of future performance. So, Morningstar analysts focus on them and have a hard time pounding the table for funds that charge prices too far above their average peer. We take a holistic approach and look at a fund's costs and factors that can affect fees, such as asset size. But in general, we think there's a lot of fat in mutual fund expense ratios and there are many funds of all sizes with low fees.
The expense ratio isn't the only cost to keep an eye on, though. Transaction costs, including brokerage commissions and the market impact of large or illiquid trades can also chip away at a fund's returns. And, investors in taxable accounts need to be wary of the tax costs of owning a mutual fund. Some managers' strategies and trading methods are very tax-aware, while others ignore that factor altogether. Where there are hidden costs, we point them out and incorporate them into our overall opinion of a fund.
The expense ratio, transaction costs, and tax consequences make up the overall hurdle that fund managers must clear before any gains are passed on to investors. If the overall hurdle rate is high, we're likely to have less confidence in the fund's ability to overcome those impediments and deliver a good end result for shareholders.
Have the fund and its advisor been shareholder-friendly?
When investing hard-earned money, trust is paramount, and we've found the interests of fund companies are not always in line with the interests of fund investors. High fees and more assets can be good for the fund company, but they're not good for fund shareholders, for example. To get behind the question of trust and ascertain how well the fund treats its shareholders, we issue Stewardship Grades to roughly 1,000 funds. A fund's Stewardship Grade is based on our fund analysts' evaluation of five main components: corporate culture, fund board independence, fund manager incentives, fees, and regulatory history. We don't suggest that investors choose their investments solely on our Stewardship Grades, but we've found that strong stewardship and investment merit often go hand in hand.
Why has the fund performed the way it has?
We all know that past performance isn't predictive of future results, but it's still tempting to focus on a fund's recent past. We pay attention to performance, but we analyze the drivers of long-term performance and put a fund's record in context. For example, we look at results during discrete stretches of market stress to add some clarity about the fund's downside risks. In addition, some funds harbor sector-specific or market-cap biases that can cause them to perform differently from peers at times.
Rather than rely exclusively on the standard three- and five-year measures of performance, we also consider performance over more meaningful time periods, such as a manager's tenure on the fund, extreme swings in market returns, or a full market cycle. In addition, we value consistency. Strong trailing returns, even over the past three or five years, could stem from a short stretch of hot performance. More consistent performance tends to lead to better long-term results that are easier for investors to handle.
We look for portfolio risks that could, but haven't yet, materialized. Sometimes that will lead us to favor a fund that is more conservative over a fund that has higher returns but may be headed for a big fall. We think this is important because we've found that investors haven't owned volatile funds very successfully. Investors often buy bumpy funds when they're high and sell when they're low. In addition, it's hard for investors to recover from losses. Funds that are prone to large, extended losses have to gain that much more to get back to even.
Keeping our Own Discipline
Just as we require strong investment philosophies and consistency from mutual fund managers, we demand the same level of discipline from ourselves. Our goal is to help guide investors toward the industry's best funds. Doing so sometimes means standing behind an underperforming manager when we believe in his or her talent, strategy, and process. It also helps us avoid the latest hot trend that looks great today, but could have devastating consequences for investors down the road. Our calls are sometimes unpopular with readers and fund companies, but we stand behind our approach because we firmly believe it helps investors over the long haul.
http://news.morningstar.com/articlenet/article.aspx?id=231481
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