Malaysia's new economic model: Making choices
By Professor Dr Danny Quah Published: 2010/04/14
In June 2009, Malaysia's Prime Minister Datuk Seri Najib Razak asked if I would serve on his council of economic advisers, the National Economic Advisory Council (NEAC). This council was to come up with a New Economic Model for the country.
It would not be a group that got together every month to fine-tune the economy. This council was not to sift through the entrails of inventory reports, and propose economic policies to lean against the wind.
No, the task assigned by the NEAC was to put Malaysia back on a high-growth path, reinstating Vision 2020 that Malaysia would within these next 10 years achieve the status of a developed nation.
The council was to do this against a post-1997 background of annual economic growth having nearly halved; investment as a fraction of GDP having plummeted to 50 per cent of what it used to be (private investment, to one third); with the economy relying on a workforce of which four-fifths were educated only up to high-school level while over one quarter of the local public university graduates remained unemployed six months after graduation, and with the human capital brain-drain becoming freshly re-energised (350,000 Malaysians in 2008 lived and worked abroad, half of them with university education).
By 2007, Malaysia seemed as far from the World Bank's notion of a high-income economy as a decade earlier, in contrast to economies such as Slovakia, the Czech Republic, and Poland, all of whom had by 2008 broken through that high-income boundary but had earlier been roughly at level with Malaysia.
Yet, Malaysia had been previously identified by the Spence Commission on Growth and Development as one of only 13 countries in the world that had for more than 25 years grown at rates exceeding 7 per cent annually.
At different times since the 1960s, despite having a population not even one-third of the UK's, Malaysia had been the world's largest producer of tin, rubber, and palm oil.
Today, 40 per cent of Malaysia's households earn less than US$15 a day (RM1500 a month), two thirds the World Bank's low-income threshold.
With Malaysia's domestic income distribution what it is, only one million people pay income tax at the highest rate of 26 per cent; there is no goods and services tax.
Oil and gas revenues have, on occasion, provided up to nearly half the government's total revenues; although by 2014 Malaysia is expected to become a net importer of oil. As much as 20 per cent of the nation's public expenditures routinely get spent on subsidies that keep prices of basic goods low but distort reality for Malaysia's citizens.
Certain policy questions - for instance, monetary control and inflation; financial markets oversight, regulation, and development - are outside the NEAC's remit, and rightly so.
In Malaysia, all those issues were taken care of by others, and already attain world-class standards of performance.
The large facts I have just described seemed to me (and many other observers) precisely the ones raising the critical, first-order challenges for economic policy in Malaysia. The problem was how to organise them coherently and understand their resolution.
But there is, further, the other critical, first-order challenge unmentioned so far: namely, Malaysia's 40-year-old programme of affirmative action.
I say unmentioned but of course that is not how the outside world viewed this. The international press emphasised most of all this dimension to Malaysia's policy framework; I will bring this out further in the discussion that follows.
For now, however, I just note that some foreign financial houses I spoke to about NEAC work downplayed the significance of all the other problems I have mentioned. They said to me, "Malaysia needs to fix its affirmative-action programme; everything else follows."
That proposition, by itself, is almost surely demonstrably false. On the other hand, the perception is obviously one that colours the views of many market participants who actually shift significant financial resources.
Article 153 of Malaysia's Constitution, ratified in 1957, requires that the king protect the special position in Malaysia of the Bumiputeras (ethnic Malays and a small number of other indigenous groups). The Article allows the federal government to protect Bumiputera interests by establishing quotas for public scholarships, public education, and the civil service.
In 1971, following racial riots, declaration of a state of national emergency, and suspension of the parliament, the then-Prime Minister Tun Abdul Razak - father of the current Prime Minister - introduced the New Economic Policy (NEP). This policy sought to eradicate poverty regardless of race and to eliminate the identification of ethnicity with economic function.
The enabler for both these goals would be rapid economic growth, the speedy expansion of the economic pie to divide across all Malaysians, so that no subgroup would feel absolutely disadvantaged.
A key feature of the NEP was its effort to raise Bumiputera equity ownership from 2.4 per cent in 1971 up to 30 per cent within two decades.
What has the NEP's progress been? At a fixed absolute income threshold (its exact value holding no significance as long as it's fixed and applies across the board), poverty rates for Bumiputeras declined from 65 per cent in 1970 to 5 per cent in 2007, while that for Malaysians overall, from 49 per cent to 4 per cent; Chinese, 26 per cent to 1 per cent; Indians, 39 per cent to 2 per cent.
Wealth figures are widely disputed but most sources give Bumiputera equity ownership of 2-4 per cent in 1971; official KL Stock Exchange statistics suggest Bumiputera shares of 29 per cent by 1990 and 37 per cent by 1996.
That was the background when in August 2009 Najib delivered his keynote speech at the NEAC's inaugural meeting, asking the council for ideas and direction to transform Malaysia into a developed nation by 2020.
Malaysia, having successfully drawn foreign investment as a low-cost producer was populated with businesses that, at the margin, had neither incentive nor vision to climb the quality ladder.
Infrastructure and expertise in key areas remained under-developed. For Malaysia as a small open economy, the global trading environment has already shown time and again how it could change suddenly, as it had just done during the 2008 global financial crisis, and further looked set to change even more dramatically but less suddenly from longer-term global carbon considerations.
Reforms started in Malaysia by the Central Bank, the Securities Commission, and others were already liberalising capital markets and taking forward expertise and comparative advantage in Islamic Finance. Government transformation work had already begun to introduce meritocracy and performance measurement in the public sector itself.
What could the council do to help Malaysia relocate its strategic position in the global economy?
The New Economic Model
In the ensuing six months, the council met four times in Kuala Lumpur. At these meetings, council members listened to presentations, mapped strategic visions, and debated subtle differences in emphases. Now and then, we would as a group takes such a big-picture perspective that we would form a collective blind spot over the single largest difficulty in whatever we were discussing, completely missing the key concern.
Now and then, we would micro-drill down and heatedly argue over whether the appropriate punctuation should be a comma or a semi-colon. But all of us remained energetic and enthusiastic and committed, and sometime during the 15 hours of meeting each day, or in seemingly interminable rounds of emails 24/7, we would correct course and converge on the right balance.
We agreed our report had to be in two steps: First, to identify, propose, and persuade on the over-arching framework and strategic vision; Second, to steer from that vision, its delivery to be led by the executive branch and implemented by the civil service.
Without successfully convincing on the first, the second would never be executed. Without successfully executing the second, the first would have been in vain.
The single big-picture vision was that Malaysia had to become an advanced economy by 2020. Sure that included the Malaysian economy generating sufficiently high income. But that vision also included a subtext of inclusiveness - so that the poorest and most vulnerable in society would be taken care of and one of sustainability, so that higher economic growth would continue into the future, not at the expense of degrading the environment for generations to follow.
The council concluded many of Malaysia's malperforming situations were inter-linked. Underperformance in one setting was the rational response to underperformance in the next: Why work hard in school if you're convinced it doesn't benefit you afterwards? Why work hard in your job if your productivity is held back by so many unskilled people around you? In these circumstances, what is needed is a big push to break out of that vicious circle of under-performance.
But disruption would be needed not just in your own circle of school-mates and colleagues, but everywhere in the economy. Hence, we emphasised the big push of economic transformation needed to break the logjam of entrenched, special interests. We sought to build momentum and confidence in the mindset of citizens that more positive changes would continue to emerge but all of us needed to keep pushing.
This economic transformation would come with reform along eight strategic initiatives - slightly more concrete but only slightly:
* Re-energise the private sector so it could lead the process of economic growth;
* Re-energise the private sector so it could lead the process of economic growth;* Develop a high-quality workforce;
* Develop a high-quality workforce;* Create a competitive domestic economy;
* Create a competitive domestic economy;* Streamline and make efficient the public sector as facilitator for private enterprise, when in the past large government-linked corporations (GLCs) had been viewed as competitors instead;
* Streamline and make efficient the public sector as facilitator for private enterprise, when in the past large government-linked corporations (GLCs) had been viewed as competitors instead;* Move to affirmative action that is (a) transparent, (b) market-friendly, (c) merit-based, and (d) conditioned on need ;
* Move to affirmative action that is (a) transparent, (b) market-friendly, (c) merit-based, and (d) conditioned on need ;* Build infrastructure for a knowledge base;
* Build infrastructure for a knowledge base;* Enhance the sources of growth; and
* Enhance the sources of growth; and * Ensure the sustainability of growth.
* Ensure the sustainability of growth. Early on, the council decided it couldn't be swayed by arguments about whether it was doing something truly novel or new or different. The only thing that mattered should be whether a proposal for implementation was likely to succeed and whether it would bring the highest benefits to the greatest number. Good ideas are hard enough to come by generally; why straitjacket oneself to not look at certain of them? This isn't an exam: why not copy good ideas however and wherever you find them?
Nonetheless, having come to the end of putting in place the over-arching vision, we nonetheless could see several ways where our approach differed from earlier ones.
First, we focused on growth through enhancements in productivity, not the sheer brute force of capital accumulation. It's not that we ignored the latter - if we had, we wouldn't have expressed concern about the sharp fall off in Malaysia's investment.
Instead, it is that we figured it would be innovative processes and cutting-edge technologies that would provide the surest platform for Malaysia's producing high value-added goods and services in the future.
Second, we envisioned economic growth being private sector-led and market-driven, no longer dominated by large public investment through GLCs in selected economic sectors.
Third, we described the benefits of the government moving towards local autonomy in decision-making. State and local authorities needed to be empowered to develop and support more of their own growth initiatives - without unnecessarily duplicating function or project. While flat-out competition to produce identical public goods, over and over, would be obviously wasteful, a little competition between local authorities is healthy.
Fourth, we wanted to encourage local geographies to emerge - whether in clusters or corridors - as long as they exploited economies of scale and concentration, and thus raised productivity over the long term.
Fifth, we saw the need for continuing government support of private industry, as long as that support was geared towards innovation, entrepreneurial risk-taking, and high value-added goods and services. It would be those general principles that guided support, not past principles of picking winners.
Sixth, we welcomed talent and skills from everywhere: as long as anyone, local or foreign, is able to contribute to Malaysia's transformation to an innovative, high-value added economy, they would be accepted and welcomed.
Finally, we emphasised how the global economy was changing, and we figured Malaysia's strategic position within it needed to re-orient as well. For the entire 20th century, the world's strongest economic powers have been the US, Western Europe, and Japan.
Malaysia, like many others, tuned production and supply networks to service those markets. While we weren't arguing that policy should be based on the economic centre of the world suddenly shifting tens of thousands of kilometers east, we felt that it was reasonable to acknowledge the change in that global landscape, and to develop further new regional networks centred on the fast-growing, Asia-focused emerging economies.
In a nutshell, that's it. That's the New Economic Model (NEM).
After, for now
For a relatively technocratic problem and solution, the NEM announcement on March 30 by Najib attracted unexpectedly heavy attention from the international press. All the major world press worked in discussion of Malaysia's affirmative action programme, both historical and prospective.
The New York Times (March 30 2010) described the revision of Malaysia's policy to focus on need, not race.
The Wall Street Journal ran articles on two successive days (March 30 and April 1 2010), talking about the recalibration of Malaysia's decades-old affirmative action and asserting how "the New Economic Policy has hindered Malaysia's competitiveness in recent years. The US and European Union have singled out Malaysia's insistence on maintaining preferences for ethnic Malay-owned businesses in government procurement contracts for stalling the development of free-trade pacts".
The Journal's Opinion Asia column (April 1 2010) contextualised Najib's speech by observing how "A few years ago it was inconceivable that a Malaysian premier would express dissatisfaction with the 'rent-seeking and patronage' inherent in the country's four-decade-old affirmative action policies and call for a more 'transparent' system based on merit and need. Former Prime Minister Tun Mahathir Mohamad used to label people with such ideas 'extremists'."
Great cynicism continues to be expressed by some of my friends, Malaysian and otherwise, who say they have seen over the years many politician promises made only to be broken subsequently.
Personally, however, I see great optimism instead. Why? I contrast Najib's March 30 speech with what I imagine someone wanting an easy ride through life might have said, in light of both the general scepticism and fervent fear-mongering in the run-up to the event.
Two days before the NEM announcement, Kevin Brown wrote in the Financial Times (March 28 2010) how there was "widespread doubt" that Najib would take any political risk at all of dismantling Bumiputera special privileges, not least in a new economic model that might greatly dilute that historical affirmative action.
James Hookway's Wall Street Journal article of March 22 2010 gave considerable space to Datuk Ibrahim Ali, a right-wing Malay MP, and to Perkasa, the NGO that he founded devoted to defending Malay rights, reporting how "Ibrahim reckons Najib is misreading the depth of anger many Malays feel towards any change in a policy that has given many a leg up and helped to build a large middle class."
The Economist (March 11 2010) extrapolated from their interview with Najib and with others to sub-lead their article, "Najib wavers over undoing affirmative-action policies".
Not least, of course, there is the now-infamous interview Ibrahim Ali granted Al-Jazeera on March 29 2010, the eve of the launch of the NEM, where he gets bleeped three times speaking, with some vitriol, on the position of other races in Malaysia.
Domestic reporting too emphasised the emerging political tensions.
Now, contrast what Najib actually said with what all these observers predicted he would say. Think of the political onslaught, the wavering, the self-protection going on around him.
If Najib had wanted an easy way out, he could have taken it and no one would have been surprised. He didn't. He continues along that difficult but worthwhile path.
One final comment. In this international reporting, by far the greatest attention has gone towards Malaysia's New Economic Policy and its possible adjustment. In the council's work, we knew this was important, but so too were all other seven strategic initiatives.
Affirmative action matters. No significant advanced country in the world gets by without affirmative action programmes of some kind - it is in human nature to take care of the weakest and most vulnerable in our society.
So too for the members of council, where that bottom 40 per cent of the Malaysian population is targeted to receive significant help and attention. But fixing all the other problems matters too: it's one big push for all of them.
The council has now finished Step 1. Step 2 starts. Everyone likes to say, Now the hard work begins - as if I've never heard that one before. But I am energised. I continue to do this work (and, for the record, for practically no pay compared to outside options) because I think things actually are looking up in Malaysia.
The writer is an NEAC council member & professor of Economics at Department Of Economics, London School Of Economics & Political Science.
Read more: Malaysia's new economic model: Making choices http://www.btimes.com.my/Current_News/BTIMES/articles/quah/Article/index_html#ixzz0wiV5vMIT
Monday, 16 August 2010
Sunday, 15 August 2010
An exclusive conversation with the CEO of Berkshire Hathaway, Warren Buffett
Charlie Rose - Warren Buffett
54:48 - 1 year ago
Warren Buffett on Charlie Rosehttp://video.google.com/videoplay?docid=515260011274566220&hl=en&emb=1#docid=4537231419795681197
Charlie Rose - Warren Buffett
56:40 - 3 years ago
An exclusive conversation with the CEO of Berkshire Hathaway, Warren Buffetthttp://video.google.com/videoplay?docid=-4116868880636414751&hl=en&emb=1#
Warren Buffett Talks Business
http://video.google.com/videoplay?docid=79141131942029098&hl=en&emb=1#
Warren Buffett Talks Business
56:03 - 2 years ago
Amazing video of the Oracle of Omaha
Saturday, 14 August 2010
MBA - Managerial Economics
MBA - Managerial Economics 01
54:37 - 1 year ago
MBA Course in Managerial Economics at Prince Sultan University. Lecture 1 covers introductory overview to economics - choice, economic decisions, scarcity, trade-offs, opprtunity cost, marginal analysis, efficiency, resources, utility, modeling.http://video.google.com/videoplay?docid=3236390700554076825#docid=-408690692811744650
MBA - Managerial Economics 02
30:40 - 1 year ago
Lecture 2 of MBA course in Managerial Economics at Prince Sultan University. Discusses some fallacies and myths on global issues related to the U.S dollar, US economy, gold, oil, and other important and current global economic issueshttp://video.google.com/videoplay?docid=-3712587726439038583#
MBA - Managerial Economics 03
02:31 - 1 year ago
Lecture 3 from an MBA course in Managerial Economics.http://video.google.com/videoplay?docid=-3712587726439038583#docid=-3524750524862699535
MBA - Managerial Economics 04
33:06 - 1 year ago
Covers the first half of the first chapter of the textbook "Managerial Economics" by Maurice & Thomas.http://video.google.com/videoplay?docid=-3712587726439038583#docid=8361401330998686750
MBA - Managerial Economics 22
1:11:56 - 1 year ago
Long run cost and production. Isoquant curves. Marginal rate of technical substitution. Isocost curves. Optimal combination of inputs. Cost optimization. Expansion path. Returns to scale; economies of scale; economies of scope.http://video.google.com/videoplay?docid=-3712587726439038583#docid=6029229602533143315
Thursday, 12 August 2010
Investment In Gold Seminar by Krassimir Petrov
Krassimir Petrov - Investment Analysis (part 1)
29:14 - 2 years ago
Tavex Investment Gold Seminar in Stockholm April 9, 2008http://video.google.com/videoplay?docid=3236390700554076825#docid=-4020393826410739752
Krassimir Petrov - Investment Analysis (part 2)
28:52 - 2 years ago
Tavex Investment Gold Seminar in Stockholm April 9, 2008http://video.google.com/videoplay?docid=3227070987190450403#
Krassimir Petrov - Investment Analysis (part 3)
32:33 - 2 years ago
Tavex Investment Gold Seminar in Stockholm April 9, 2008http://video.google.com/videoplay?docid=976700141486118374#
Krassimir Petrov - Investment Analysis (part 4)
13:30 - 2 years ago
Tavex Investment Gold Seminar in Stockholm April 9, 2008http://video.google.com/videoplay?docid=1383332369012611726#
21 Evils of Inflation (Video)
http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#
21 Evils of Inflation - Prof. Krassimir Petrov
59:42 - 3 years ago
A 60 minute lecture by Prof. Krassimir Petrov at the American University in Bulgaria explaining 21 negative effects from inflation.
Exotic plays for brave investors
Tired of considering the same old investments? We look at some of the more unconventional choices.
Vietnam is 'one of the most promising countries in the world', according to one analyst
Investors who are fed up with dismal returns from traditional markets are making steps to invest in more adventurous areas. Popular funds include those that invest in Latin America, Russia, India, gold and commodities.
Rebecca O'Keeffe, at Interactive Investor, said: "Our investors continue to look for more aggressive growth opportunities."
Selftrade, the broker, said its clients were now investing more "adventurously" in gold and silver exchange-traded funds (ETFs).
So if you are in an adventurous mood and are prepared to lose the shirt off your back if it all goes pear-shaped, then check out these four areas attracting interest from seasoned investors. Wealth warning: the usual caveats of getting advice apply.
VIETNAM
Three years ago, Vietnam was one of the best-performing stock markets in the world and numerous funds were launched to provide access for foreign investors.
However, the euphoria proved short-lived and in 2008 Vietnam was hit by a double crisis. Firstly, it was forced to raise interest rates sharply to choke off a surge in inflation and this was followed by the global credit crunch, which hit exports and foreign investment. Unsurprisingly, the country's stock market fell sharply and investors suffered.
Charles Cade, an analyst at Numis, said: "There was a bounce-back during 2009, helped by a domestic economic stimulus package. However, foreign investors have been reluctant to venture back into the market and have focused their attention on China instead. In our view, though, it is time to take another look. Vietnam remains one of the most promising countries in the world."
Mr Cade sites low labour costs and a young, growing workforce, a growing entrepreneurial culture, and significant natural resources – including agriculture, timber and oil – as reasons to be bullish.
While Vietnam is not on the radar of many financial advisers, Mick Gilligan, from stockbroker Killik, is a fan. He reckons that Vietnam is like a smaller version of China in that it has a centralist government keen to embrace a capital market approach.
"The equity market is still in its early stages of maturity, but it has exciting prospects. Our favoured routes would be FTSE Vietnam ETF [db-X Tracker] for those looking for market exposure and liquidity. VinaCapital Vietnam Opportunity fund also looks interesting and it currently trades on a 40pc discount to net asset value," he said.
MIDDLE EAST
These so-called frontier markets are the BRICs of the future, with burgeoning industry and a population with a thirst to better themselves through education and Western-style material acquisitions.
Sam Vecht, co-manager of BlackRock's Global Emerging Markets fund, considers Panama, Saudi Arabia and Qatar to have just as much investment potential as their better-known peers. "These countries are often ignored, but this is because of a lack of analyst and media coverage, rather than a lack of opportunities," he said.
However, before you rush to sign on the dotted line for a frontier fund, be warned. With great returns come great risks. Three years ago, New Star launched its Heart of Africa fund with the hope of making the most of the untapped potential of the likes of Zimbabwe and the Democratic Republic of Congo. Liquidity issues forced the fund to close in 2008 with investors losing 66pc of their money.
Many frontier markets are fraught with political unrest, while corporate governance, although it is improving, is another concern.
In March, Barings launched its Middle East and North Africa (MENA) fund to tap into its resource-rich economy.
But Hugo Shaw at Bestinvest, the financial adviser, issued a word of warning. "Returns may be high, but you should only invest in frontier markets if you are able to stomach a roller-coaster ride in price movements," he said.
Mr Shaw advised investors to consider investment trusts as a safer way to get exposure to frontier markets. They are better suited to less-liquid markets because the manager is not a forced seller or buyer. "Closed-ended investments, such as investment trusts, are better placed to deal with such issues, and Advance Developing Markets and Genesis Emerging Markets are two good examples," he said.
PLATINUM AND PALLADIUM
All talk of metal investing in recent months has focused on the haven and inflation hedge of gold. Yet other metals, notably platinum and palladium, are gaining interest from investors.
Two main factors drive these metals to premium prices: demand from the Asian market and their use in catalytic converters. Half of all cars need these converters, ensuring that demand remains strong.
Prices of these white metals has been falling of late, leaving analysts wondering whether a buying opportunity is around the corner. The reason for falling prices is the slowdown in the auto industry. Car sales in the US are down 11pc and plunged 25pc in Japan, while car production in China is down 6.9pc.
However, many analysts anticipate a strong resurgence in platinum and palladium prices towards the end of the year – buoyed by an anticipated recovery in sales in China.
"Prices have recovered from the 2008 trough, but by no means as far as they could rise as the wheels of the global economy begin to turn again and I think platinum has a greater upside potential than gold," said James Cook, product manager at Fidelity International.
"Long-term demand is assured by developing nations who will become the biggest new car buyers in the world, 2009 marked the sales of new cars in China outstripping those in the US. The now unstoppable drive to cleaner technology in cars means whatever size the Chinese car fleet grows to, it will need to be powered by cleaner cars with platinum a key raw material."
Adventurous investors can get exposure to platinum via an exchange-traded fund.
AGRICULTURE
Several fund groups are beginning to promote agriculture as an alternative to traditional equity funds.
One of the most notable recent launches is BlackRock's BGF World Agriculture fund, managed by Desmond Cheung and Richard Davis. The company outlines investment opportunities in the move in emerging markets farming away from pastoral to arable and a growing global population.
The sector has delivered positive returns over the past year. The average return for agriculture funds, based on £1,000 invested 12 months ago, is £1,150. The best performer is Allianz RCM Global Agricultural Trends, which has risen 20pc in the past year. The fund is almost entirely invested, having less than 1pc in cash, with the majority of the fund in North America. The fund is also invested in Singapore, Malaysia and Chile.
Meera Patel, of Hargreaves Lansdown, recommended investors do their homework when investing in agriculture, as one fund can differ very much from the next. Sarasin's AgriSar fund invests in the entire agricultural supply chain, from grain to supermarkets. This means that although you may miss out on large surges, there will be a much smoother growth.
"We would recommend Sarasin's fund to someone just looking to invest in agriculture for the first time," she said.
Fund charges: low-cost funds outperform high-cost rivals – every time
Fund charges: low-cost funds outperform high-cost rivals – every time
New research from America supports Telegraph's disclosures of excessive charges paid by investors in funds.
New research from America supports Telegraph's disclosures of excessive charges paid by investors in funds.
If there's anything in the whole world of fund investing that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.
Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile (the 20pc of funds with the lowest charges) produced higher total returns than the most expensive quintile.
For example, the cheapest quintile from 2005 in American equities returned an annualised 3.35pc, versus 2.02pc for the most expensive quintile over the ensuing five years.
The gap was similar in other categories such as bonds, where cheap funds returned 5.11pc versus 3.82pc for pricey funds. That same relationship held up dependably in the other time periods we measured. For 2008, the cheapest quintile of balanced funds lost 0.04pc over the next two years, while the most expensive shed 1.13pc.
The gap was also impressive as measured by the success ratio because high-cost funds are much more likely to have poor performance and be liquidated or merged away.
For the 2005 group, we found that 48pc of US equity funds in the cheapest quintile survived and outperformed versus 24pc in the priciest quintile. Put another way, funds in the cheapest quintile of US equity were twice as likely to succeed as those in the priciest quintile.
It was a similar story in other categories, although in munis [municipal bonds, a popular US investment] the advantage was greater than 6 to 1. The same basic relationship held up for the other years we looked at. Although I think of expense advantages as taking a long time to compound to your advantage, even the 2008 group saw low-cost funds with nearly a 2 to 1 success advantage.
Given that performance edge, you won't be surprised to hear that low-cost funds also produced better risk- and load-adjusted performance as measured by the star rating.
For example, the 2005 group enjoyed a subsequent 3.23 average star rating, compared with 2.66 for the priciest quintile in domestic equity. The edge grew in bonds to 3.34 versus 2.3. The edge held up for predicting three-year ratings for the 2006 and 2007 groups.
Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance. Start by focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success
UK: It's good news that house prices are falling
Low interest rates are the key for first-time buyers and struggling home-owners, says Tracy Corrigan.
Falling prices will be good for the economy Photo: Alamy
Oh dear, oh dear – house prices are falling again. According to a survey of chartered surveyors, the housing market weakened in July for the first time in a year, and Lloyds HBOS now expects prices to be flat this year.
But is this really such bad news? First of all, the recent weakness follows a surprisingly strong recovery in the second half of last year. As the RICS housing market survey noted, last year's firmer prices were the result, at least in part, of a dearth of supply. When prices improved and the hated Home Information Packs were scrapped by the new Government, more sellers put their properties up for sale… and, lo and behold, prices weakened a bit. Such ebbs and flows are typical of the erratic and seasonal UK property market, which is why it doesn't make sense to worry too much about these short-term movements.
And in fact, if one looks beyond the monthly gyrations, what surprises me about the housing market is not how far it has fallen, but how well it has held up, following the financial crisis. According to Halifax data, house prices dropped 23 per cent from their peak in August 2007 to the recent trough in April 2009, but following last year's second-half recovery, are now just 16 per cent below what were widely acknowledged to be ludicrously inflated levels.
Furthermore, this necessary correction in house prices has been achieved without the pain of widespread arrears and defaults suffered in the 1990s. That is because, thanks to low interest rates, most borrowers have been able to continue to service the interest on their mortgages and even to pay down their debt. It is true that, compared with the bank rate of 0.5 per cent, mortgage rates don't look particularly cheap these days, due to the expanding margins charged by banks. Nevertheless, mortgage rates are low by historical standards, allowing most borrowers to hang on, even in shakier areas of the market such as buy-to-let.
But, some economists warn, the weakness in the housing market is a worrying symptom that confidence in the economy is faltering. Well, up to a point. It is true that people are nervous about taking on new or bigger mortgages at a time when the economy remains weak and their jobs may not be secure. But I can't seem to persuade myself that this is a bad thing. Of course, it would be better all round if the economic future looked dazzling, but since it doesn't, surely it's a rather good sign that consumers are no longer rushing to borrow money they may not be able to repay. This was, after all, one of the root causes of the current economic malaise.
The Bank of England's Inflation Report today is expected to show that the economic outlook remains grim. This means that even if there are mounting inflationary pressures, they are likely to be short-lived. But if the continuing weakness of the economy stops any concerted property market rally in its tracks, it also makes it much less likely that interest rates will rise sharply any time soon, despite worries about inflation; and continuing low interest rates are vital to forestall a sharp downturn in house prices.
There may, then, be a period of flat or slightly weaker house prices. This is surely preferable to a sharp rally. Since the credit crunch, banks have tightened their mortgage-lending criteria, mainly by requiring bigger deposits and cracking down on self-certification mortgages. The Government is imposing tighter rules in these areas to prevent a return to previous patterns of behaviour once recent lessons are forgotten. If, in these circumstances, house prices were to rise significantly, it would become even more difficult for first-time buyers to enter the market. Inevitably, that would mean, in due course, that the new bubble would burst.
In fact, mortgage affordability has already improved as a result of lower prices. Repayments as a percentage of earnings fell to 30 per cent in the second quarter of this year, down from 48 per cent in August 2007, but still some way from 25 per cent at the end of the last decade.
It is to be hoped that the UK property market will become more stable, but if this doesn't happen, the next best thing is to pretend that it has. Unless you are in the uncomfortable position of being a first-time buyer or a forced seller, price fluctuations really don't matter all that much. In the long-term, prices tend to go up, because Britons like to own their own homes and we live in a small island with tight building restrictions.
Neither the current Government's plans to shift planning powers to local communities nor any other policy change is likely to alter this state of affairs fundamentally. I bought my first property just before the peak of the housing market in 1988, yet it is undoubtedly the best financial decision I ever made. When I sold it 12 years later, it had more than doubled in value. The value of the house I now own – and love – has fallen quite a bit in the past couple of years, I imagine, but since I'm planning to live in it for at least another 20, this doesn't worry me either.
The problem with the British housing market is not that we all aspire to own property. That is perfectly sensible. The problem is that we sometimes forget why we want to own our own homes
Subscribe to:
Posts (Atom)