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
Saturday 18 April 2009
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
How to Start a Small Business Now
How to Start a Small Business Now
A tough economic climate can be the best time to become an entrepreneur
By Kimberly Palmer
Posted March 19, 2009
Ylisa Sanford Seymour, an Ameriprise financial advisor based in Santa Rosa, Calif., has seen people fail—and succeed—at executing their small business dreams. She says one of the most important first steps is making sure family members, who will be directly affected by the ups and downs of the new business, are on board and supportive. U.S. News spoke with Seymour about how to launch a small business in the current economic environment. Excerpts:
What are the pros and cons of starting a small business in this kind of economic environment?
It can be a really great time to start a business, which is antithetical to what people presume. The down market can provide lower costs of real estate in terms of leasing space and lower labor costs because people are willing to work for less or for deferred payments with the option of equity. Larger groups of people are open to taking that chance of being an entrepreneur, because being laid off is that kick in the butt to take their idea to the next level.
Things to consider include whether you have enough operating capital so if you have payables that haven't come in for 30, 60, or 90 days, you can still operate. For a lot of businesses, like a restaurant, you need to plan on not turning a profit for three years. So identifying your niche and having a well thought out strategic plan is paramount. Focusing on service, especially in a down market when people are less willing to part with their dollars, is the key to repeat clientele.
Are there types of businesses that are best to stay away from in a down market?
Some of the businesses that will be harder hit include more of the discretionary type of services, such as salons and spas. Certain franchises, such as large brand name ones that charge up to $20 million just to get the franchise license, are something you might want to stay away from. Something with a lower initial start-up cost, like an original idea, [could make more sense]. You also have to look at the overall environment. Sandwich shops are a good business model, but they're overly saturated.
What about good ideas?
Clients who have automotive repair shops are doing well because people right now are rehabbing or refurnishing things. Clients have seen revenues increase because people are fixing their cars, rather than replacing them. Some service industries related to what happens when people get laid off, such as job counseling, continuing education, or retraining schools continue to do well.
Do most small businesses fail, especially during a recession?
It's a high percentage that fail—upwards of 50 percent within the first three years. Some of the major issues are not having a well-thought out business plan, the inability to execute on an idea, and not having sufficient reserves and cash flow. They may not be able to get funding to start their business from traditional sources like the Small Business Administration, so they might be focused on their family or home to finance the business, which can be extremely risky.
In this kind of market, are friends and family a good source of loans?
That's a personal decision. If you lend money to [a friend or family member], you need to be willing to give with expectation that you'll never get it back. Money within families can sometimes change the nature of a relationship and very rarely do I see it paid back or paid back with the interest that is quoted.
If you have a good idea, you should be able to make a go of it from traditional sourcing of lending, such as micro-lending programs, different business associations, the Small Business Administration, and different angel investing sources. Family should be the last source. If your business fails, you still want to be able to go home for Thanksgiving.
What are the benefits of starting your own business in an industry that you've already been working in?
That will certainly help people, but I don't know if it's a requirement. Some of the most innovative businesses have been started by people who have no connection to what they're doing. One of my clients is a retired nuclear physicist, but she likes bookkeeping. Experience in the field is not a requirement.
Will the stimulus package help small business owners?
Business owners are looking at more attractive Small Business Administration loan rates. [Businesses that already have bank-issued loans will be able to take out interest-free loans of up to $35,000.] Clients who bought dental or medical practices are looking at refinancing some of their business loans, so they're thinking about expansion on a level they might not have before. That will help to create jobs.
http://www.usnews.com/articles/business/your-money/2009/03/19/how-to-start-a-small-business-now.html
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3 Mistakes First-Time Entrepreneurs Should Avoid 20183969
Starting a Small Business in a Bad Economy 20178191
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3 Ways to Get Start-up Cash During Tough Times 20175267
A tough economic climate can be the best time to become an entrepreneur
By Kimberly Palmer
Posted March 19, 2009
Ylisa Sanford Seymour, an Ameriprise financial advisor based in Santa Rosa, Calif., has seen people fail—and succeed—at executing their small business dreams. She says one of the most important first steps is making sure family members, who will be directly affected by the ups and downs of the new business, are on board and supportive. U.S. News spoke with Seymour about how to launch a small business in the current economic environment. Excerpts:
What are the pros and cons of starting a small business in this kind of economic environment?
It can be a really great time to start a business, which is antithetical to what people presume. The down market can provide lower costs of real estate in terms of leasing space and lower labor costs because people are willing to work for less or for deferred payments with the option of equity. Larger groups of people are open to taking that chance of being an entrepreneur, because being laid off is that kick in the butt to take their idea to the next level.
Things to consider include whether you have enough operating capital so if you have payables that haven't come in for 30, 60, or 90 days, you can still operate. For a lot of businesses, like a restaurant, you need to plan on not turning a profit for three years. So identifying your niche and having a well thought out strategic plan is paramount. Focusing on service, especially in a down market when people are less willing to part with their dollars, is the key to repeat clientele.
Are there types of businesses that are best to stay away from in a down market?
Some of the businesses that will be harder hit include more of the discretionary type of services, such as salons and spas. Certain franchises, such as large brand name ones that charge up to $20 million just to get the franchise license, are something you might want to stay away from. Something with a lower initial start-up cost, like an original idea, [could make more sense]. You also have to look at the overall environment. Sandwich shops are a good business model, but they're overly saturated.
What about good ideas?
Clients who have automotive repair shops are doing well because people right now are rehabbing or refurnishing things. Clients have seen revenues increase because people are fixing their cars, rather than replacing them. Some service industries related to what happens when people get laid off, such as job counseling, continuing education, or retraining schools continue to do well.
Do most small businesses fail, especially during a recession?
It's a high percentage that fail—upwards of 50 percent within the first three years. Some of the major issues are not having a well-thought out business plan, the inability to execute on an idea, and not having sufficient reserves and cash flow. They may not be able to get funding to start their business from traditional sources like the Small Business Administration, so they might be focused on their family or home to finance the business, which can be extremely risky.
In this kind of market, are friends and family a good source of loans?
That's a personal decision. If you lend money to [a friend or family member], you need to be willing to give with expectation that you'll never get it back. Money within families can sometimes change the nature of a relationship and very rarely do I see it paid back or paid back with the interest that is quoted.
If you have a good idea, you should be able to make a go of it from traditional sourcing of lending, such as micro-lending programs, different business associations, the Small Business Administration, and different angel investing sources. Family should be the last source. If your business fails, you still want to be able to go home for Thanksgiving.
What are the benefits of starting your own business in an industry that you've already been working in?
That will certainly help people, but I don't know if it's a requirement. Some of the most innovative businesses have been started by people who have no connection to what they're doing. One of my clients is a retired nuclear physicist, but she likes bookkeeping. Experience in the field is not a requirement.
Will the stimulus package help small business owners?
Business owners are looking at more attractive Small Business Administration loan rates. [Businesses that already have bank-issued loans will be able to take out interest-free loans of up to $35,000.] Clients who bought dental or medical practices are looking at refinancing some of their business loans, so they're thinking about expansion on a level they might not have before. That will help to create jobs.
http://www.usnews.com/articles/business/your-money/2009/03/19/how-to-start-a-small-business-now.html
People Who Read This Also Read
Best Small Businesses to Start: Export Manager 20178293
3 Mistakes First-Time Entrepreneurs Should Avoid 20183969
Starting a Small Business in a Bad Economy 20178191
Best Small Business to Start: Computer Services 20174431
3 Ways to Get Start-up Cash During Tough Times 20175267
Best Small Businesses to Start
Comments (18)
Best Small Businesses to Start
Learn from the examples of entrepreneurs who’ve succeeded in these hot start-up areas
By Matthew Bandyk
Posted November 13, 2008
America's economic future is uncertain. Unemployment is up sharply. Credit is tight. People are worried about their savings. So is it a great time to start a business? "Are you crazy?" might be the quick answer.
But it's not necessarily the right answer. Starting a business has always been a bold, risky move. Even in good economic times, the failure rate of new small businesses is high. But a well-conceived business can always catch on.
So how can a wannabe entrepreneur succeed? U.S. News's Best Small Businesses to Start springs from the idea that those who stand on the shoulders of giants can see the farthest. The entrepreneurs behind the types of start-ups we profile here have defied the odds, finding both profit and an enjoyable, independent lifestyle along the way.
We interviewed over a dozen experts, quizzing them about the economic trends that will most affect small businesses in the years ahead. Then we looked at where entrepreneurs can capitalize on these trends. The 15 start-up ideas here aren't about cashing in on hot fads. They're a way to help you be among the first to catch waves that won't crash down anytime soon.
"The first question you have to ask yourself [before you start a business] is which are the sectors where I have knowledge, skills, and contacts to operate in," says Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University. The 15 Best Small Businesses to Start include a variety of sectors.
Start with this economic trend: the millions of baby boomers who are beginning to retire now. Small businesses like Guava Home Care in Hockessin, Del., are filling the increasing demand for home healthcare, helping seniors stay in their homes and be more independent. Small businesses can offer the human touch and specialized service that larger ones may find hard to provide.
Another trend is globalization. More U.S. businesses than ever are connected with the world. There's a huge market out there for American entrepreneurs to sell to, and it's growing. "There's going to be an equivalent to the U.S. middle class created each year over the next decade" in the developing world, says Steve King of the Institute for the Future.
Some entrepreneurs—be they companies going global or outsourcing firms—educate and train businesses in the new game of globalization. Export managers link domestic buyers with foreign sellers.
The demand for energy efficiency and an environmentally friendly footprint is also spurring entrepreneurship. Energy auditors help businesses and homes save money by reducing energy costs.
In the increasingly competitive field of education, fledgling higher education services like New Mountain Ventures are finding ways to keep people in school.
Parents worried about their kids' development are willing to pay top dollar to athletic trainers in hopes of creating the next star athletes. They also will hire professional tutors who can give their kids the individualized attention that the major test-prep companies maybe cannot.
Today's struggling economy may itself present opportunities. Businesses slammed by the economic slowdown often look to cut back and focus on their most essential tasks. That can mean contracting out jobs once done in-house. Outsourcing does not have to mean moving American jobs overseas. Indeed, the demand for corporate outsourcing has created a profitable opportunity for smart, nimble entrepreneurs who can help bigger companies save. With her website virtualhires.com, Rosemary Zalewski of Cleveland, Ohio places virtual assistants who do freelance administrative work at big companies. Similarly, freelance Web writer Melissa Rudy of wordsbymelissa.com lands projects writing online content for companies that don't have the staff to do it themselves. She now makes more money self-employed than she did working as a technical writer.
Modern communication tools also make it easier for start-ups to get off the ground. Social networking sites and blogs help entrepreneurs, like career counselors and financial advisers, establish their expertise and credibility. And customers can find you today with a mouse click. Sellers of fresh produce are using the Internet to cater to the growing demand for organic food: You can place your order on online farmers' markets and have it delivered to your house.
Many of the Best Small Businesses to Start can be run from a home office, cutting start-up costs. Alex Chamandy of Arlington, Va., runs a computer repair business from his basement. An art dealer is at home today online as much as in a gallery.
It's not just old businesses that are being revolutionized. Some start-ups, like online consignment stores, are a brand-new type of business. Purely online businesses may be more recessionproof than traditional small businesses, as they're not "tied into any particular slowdowns in that local area," says Pamela Slim, author of the Escape from Cubicle Nation blog.
Best Small Businesses to Start shows you how you can make your start-up more likely to succeed. The businesses on our list are certainly not the only way for entrepreneurs to succeed in today's economy (please let us know about your ideas for great start-ups by sending a message to smallbizcenter@usnews.com). But we hope this will get you started.
http://www.usnews.com/articles/business/best-small-businesses/2008/11/13/best-small-businesses-to-start.html
15 Best Small Businesses to Start
USN.load('Loomia');
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The 7 Worst States To Start a Business 21563231
Best Small Business to Start: Manager, Online Farmers' Market 20181539
Athletic Trainer
Career Counselor or Coach
Computer Services
Energy Auditing
Export Manager
Financial Adviser
Freelance Web Writer
Going Global Firm
Higher Education Services
Home Healthcare
Online Art Dealer
Online Consignment
Online Farmers' Market
Outsourcing FirmTutor
Related News
Small Business Center
Outside Voices Blog: Small Business
Risky Business Blog
The Most Overrated Small Businesses to Start
Best Small Businesses to Start
Learn from the examples of entrepreneurs who’ve succeeded in these hot start-up areas
By Matthew Bandyk
Posted November 13, 2008
America's economic future is uncertain. Unemployment is up sharply. Credit is tight. People are worried about their savings. So is it a great time to start a business? "Are you crazy?" might be the quick answer.
But it's not necessarily the right answer. Starting a business has always been a bold, risky move. Even in good economic times, the failure rate of new small businesses is high. But a well-conceived business can always catch on.
So how can a wannabe entrepreneur succeed? U.S. News's Best Small Businesses to Start springs from the idea that those who stand on the shoulders of giants can see the farthest. The entrepreneurs behind the types of start-ups we profile here have defied the odds, finding both profit and an enjoyable, independent lifestyle along the way.
We interviewed over a dozen experts, quizzing them about the economic trends that will most affect small businesses in the years ahead. Then we looked at where entrepreneurs can capitalize on these trends. The 15 start-up ideas here aren't about cashing in on hot fads. They're a way to help you be among the first to catch waves that won't crash down anytime soon.
"The first question you have to ask yourself [before you start a business] is which are the sectors where I have knowledge, skills, and contacts to operate in," says Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University. The 15 Best Small Businesses to Start include a variety of sectors.
Start with this economic trend: the millions of baby boomers who are beginning to retire now. Small businesses like Guava Home Care in Hockessin, Del., are filling the increasing demand for home healthcare, helping seniors stay in their homes and be more independent. Small businesses can offer the human touch and specialized service that larger ones may find hard to provide.
Another trend is globalization. More U.S. businesses than ever are connected with the world. There's a huge market out there for American entrepreneurs to sell to, and it's growing. "There's going to be an equivalent to the U.S. middle class created each year over the next decade" in the developing world, says Steve King of the Institute for the Future.
Some entrepreneurs—be they companies going global or outsourcing firms—educate and train businesses in the new game of globalization. Export managers link domestic buyers with foreign sellers.
The demand for energy efficiency and an environmentally friendly footprint is also spurring entrepreneurship. Energy auditors help businesses and homes save money by reducing energy costs.
In the increasingly competitive field of education, fledgling higher education services like New Mountain Ventures are finding ways to keep people in school.
Parents worried about their kids' development are willing to pay top dollar to athletic trainers in hopes of creating the next star athletes. They also will hire professional tutors who can give their kids the individualized attention that the major test-prep companies maybe cannot.
Today's struggling economy may itself present opportunities. Businesses slammed by the economic slowdown often look to cut back and focus on their most essential tasks. That can mean contracting out jobs once done in-house. Outsourcing does not have to mean moving American jobs overseas. Indeed, the demand for corporate outsourcing has created a profitable opportunity for smart, nimble entrepreneurs who can help bigger companies save. With her website virtualhires.com, Rosemary Zalewski of Cleveland, Ohio places virtual assistants who do freelance administrative work at big companies. Similarly, freelance Web writer Melissa Rudy of wordsbymelissa.com lands projects writing online content for companies that don't have the staff to do it themselves. She now makes more money self-employed than she did working as a technical writer.
Modern communication tools also make it easier for start-ups to get off the ground. Social networking sites and blogs help entrepreneurs, like career counselors and financial advisers, establish their expertise and credibility. And customers can find you today with a mouse click. Sellers of fresh produce are using the Internet to cater to the growing demand for organic food: You can place your order on online farmers' markets and have it delivered to your house.
Many of the Best Small Businesses to Start can be run from a home office, cutting start-up costs. Alex Chamandy of Arlington, Va., runs a computer repair business from his basement. An art dealer is at home today online as much as in a gallery.
It's not just old businesses that are being revolutionized. Some start-ups, like online consignment stores, are a brand-new type of business. Purely online businesses may be more recessionproof than traditional small businesses, as they're not "tied into any particular slowdowns in that local area," says Pamela Slim, author of the Escape from Cubicle Nation blog.
Best Small Businesses to Start shows you how you can make your start-up more likely to succeed. The businesses on our list are certainly not the only way for entrepreneurs to succeed in today's economy (please let us know about your ideas for great start-ups by sending a message to smallbizcenter@usnews.com). But we hope this will get you started.
http://www.usnews.com/articles/business/best-small-businesses/2008/11/13/best-small-businesses-to-start.html
15 Best Small Businesses to Start
USN.load('Loomia');
People Who Read This Also Read
5 Most Overrated Small Businesses 20175793
The 7 Best States to Start a Business 20599873
Best Small Business to Start: Home Healthcare 20181235
The 7 Worst States To Start a Business 21563231
Best Small Business to Start: Manager, Online Farmers' Market 20181539
Athletic Trainer
Career Counselor or Coach
Computer Services
Energy Auditing
Export Manager
Financial Adviser
Freelance Web Writer
Going Global Firm
Higher Education Services
Home Healthcare
Online Art Dealer
Online Consignment
Online Farmers' Market
Outsourcing FirmTutor
Related News
Small Business Center
Outside Voices Blog: Small Business
Risky Business Blog
The Most Overrated Small Businesses to Start
Countless lessons learned from this severe downturn
A Bear Market to Remember
How it's sparking richer fund analysis.
By Karen Dolan, CFA 04-16-09 06:00 AM
Stock and bond markets around the world have perked up lately, but the gloom of the past 18 months still hangs like a low dark cloud. In the years to come, we investors will surely be working to rebuild the nest eggs we've seen fractured--certainly battered, but hopefully we'll emerge a bit wiser.
Individually and as a group, our mutual fund analysts have spent a lot of time reflecting about what has happened over the past 18 months. We didn't predict how deep and severe this current crisis would become, but we're okay with that. We've never attempted to be macroeconomists or market strategists who can tell you where the Dow is headed. Our goal is to guide investors to the industry's best funds, not by focusing solely on what happened in the past, but by understanding how a fund's manager, strategy, fees, portfolio, and stewardship come together to form an investment case. We think we've done a good job achieving our goal over the long haul, but there have been cases along the way where we failed to spot the risk or challenge our own assumptions, as well as those of our readers', about investing in funds.
We've taken countless lessons away from this downturn already and we're still in the middle of learning more. The following four points don't represent a complete list of everything we've learned, but these are among the most noteworthy.
1. Value funds can lose more than you think.
Many, including us, have made the case for value-based investment strategies. Funds scrounging around the markets' bargain bin should offer better downside protection, because ignored and down-and-out stocks trading at discounts should be less susceptible to further declines. Numerous academic studies support the resiliency of value-based strategies, and some of the money managers with the best long-term records are practitioners of some flavor of value investing.
While the losses we've seen in the past 18 months have been deep, they are not the first for value funds. They got clocked by financials in 1990. The average large- and small-cap value fund lost by 6% and 14%, respectively, that year. And, although value funds looked like rock stars versus their punished growth rivals in the 2000-02 bear market, they still posted double-digit losses on average in 2002.
Any illusion of sturdiness for value funds was extinguished in this bear market, however. Value funds have posted steep losses, exceeding the slide experienced by their growth counterparts, the S&P 500 Index and value funds' own history.
I could go on for pages explaining why so many value strategies failed to preserve capital in this tough environment, but two key issues stand out. Most value funds focused too heavily on individual stocks without fully considering the bigger macroeconomic picture, and too many portfolio managers were caught holding companies with balance sheets they apparently didn't fully understand.
At the heart of the problem were the hefty financials-industry stakes in the value equity indexes and common to value funds. (Financial companies represented more than 30% of the Russell Value indexes at the market peak in October 2007.) Financials had been booming for years, so even though the stocks looked reasonably priced on common valuation metrics such as price/earnings and price/book ratios, they were indeed priced for perfection.
We gave a lot of credit (too much, in fact) to managers who were otherwise supposed to be research hounds and financial statement wizards, but who failed to recognize the embedded risks in their bank stock holdings--both in terms of overall leverage risk and asset quality. We're now spending more time finding new ways to stay on top of vulnerabilities that may be lurking in the portfolio and we're bringing an overall more skeptical mindset to our analysis of value strategies.
2. Expenses tell much of the story for bond funds, but not all of it.
Fractions of a percent have typically separated the bond-fund leaders' performance from the laggards'. Given the tight range of returns, we know that small differences in what a fund charges have proven to make a big difference in the end result for investors over the long haul.
In some cases, though, the analysis took that idea too far: cheap fund good, expensive fund bad. Our research has always been much more robust than that, but admittedly, we had a hard time seeing just how different the portfolios of fixed-income funds really were--in part because detailed bond portfolio data can be tough to come by. Until last year, an analysis of returns, interest-rate sensitivity, and sector compositions made bond funds look like they were more in line with each other than was really the case. Moreover, some bond managers really played down the risks of their strategies, often because they viewed them through the lens of some risk-management tool (which I'll tackle in greater detail in the next section).
The risks were there, though, and just waiting to blow some funds to shreds and severely hurt others. My colleague Eric Jacobson recently authored an illuminating article discussing these risks in greater details and highlighting some of the worst offenders.
The focus on expenses isn't wrong. Costs remain one of the most predictive nuggets of data we've studied. And, although expense ratios themselves didn't make or break a bond fund in 2008, there was a correlation between expenses and other behaviors that did make or break funds. The numbers confirm it. When you remove the effect of different expense ratios and look at 2008 gross returns, bond funds in the cheapest quartile ranked in the 47th percentile of their peer group while the most expensive quartile ranked in the 55th percentile. In other words, the cheapest funds got themselves into less trouble last year. This isn't a new finding. Morningstar's Don Phillips wrote a research piece about this phenomenon in 1995 called "A Deal with the Devil" where he found that bond funds with the added layer of 12b-1 fees were systematically taking on more risk, as measured by standard deviation.
Because managers are usually fighting over a couple hundredths of a percent to get ahead of their peers--something many managers are compensated for--funds operating at an expense disadvantage have a greater incentive to take "slightly" more risk to make up ground lost on expenses. When what seemed like slightly more risk turned into a lot more risk, those pricier funds were punished.
Expenses are thus still a cornerstone of our analysis, but we're taking a closer look at the bonds, derivatives, and even questioning the "so-called cash" in portfolios.
3. "Risk management" can and does fail.
Most firms use risk-management techniques. They employ sophisticated models to help summarize and quantify the risks they are taking. They package the output in fancy terms like tracking error and information ratio. However, it's all too easy to lose sight of the fact that risk management is a tool, not a panacea. Too much reliance on risk-measurement systems can and does hurt a fund if management relies on it too blindly. There is no way in which any risk-management system can appropriately account for every possible kind of outcome, especially those outcomes that have never happened in the past.
Firms known for industry-leading bond risk analytics, such as BlackRock and Fidelity, didn't dodge the big problem areas and posted some disappointing results. On the flip side, PIMCO, which also relies heavily on risk models, did much better because the firm has a well-oiled "gut-check" mechanism in place to run counter to what historical data may be signaling. It conducts an annual investment forum where the team of PIMCO investment professionals and invited guests shape their near- and long-term outlooks. Top-down considerations factor into their daily activities, too, leading to a mindset that opened the door for forward-looking inputs to make their way into the firm's risk models.
In a recent conversation about this topic, my colleague Eric Jacobson drew a comparison with a fighter pilot. Given the scads of electronics with which they now have to grapple, pilots often develop tunnel vision. A lot of training is therefore built around the need to maintain "situational awareness." At some point, it may become necessary to put the dogfight on hold to just look out the window and realize that you're flying upside down and toward a mountain.
We never gave risk models too much credence unless they were accompanied by a more fundamental and cultural aversion to risk. Yet, we've gained a greater appreciation for the danger risk models can introduce when they become a crutch for managers, leading them to believe they've accounted for the full extent of what could go wrong and not being as honest with shareholders or themselves about what may not be captured by the models.
4. There is a dear price attached to daily liquidity.
Liquidity has taken center stage in this environment. It is a big (and costly) consideration for banks, insurance companies, and corporations carrying debt--as well as for mutual funds. The underlying premise is simple and the same for all of them: If there's a mismatch between demands for money and the ability to supply it, there's vulnerability.
Daily liquidity is one of the best (and worst) things about mutual funds. There's real comfort and convenience in knowing you can cash in your shares on any given business day. But, it also introduces a big risk and one that doesn't often show its face, especially given that mutual funds have experienced money coming in more than they've had to deal with money going out--for decades. In the most extreme (and unlikely) case, all of a mutual fund's shareholders have the right to cash in all of their shares (all at once), but the fund is limited in its ability to turn around and sell its entire portfolio of securities in the open market. Some of the biggest problems have come from funds that were seeing investors flee at a faster clip than they could sell securities to meet those redemptions.
Because this had so rarely been a problem for mutual funds in the past, we did not adequately foresee just how serious a difficulty it could present to the mutual fund structure itself in a time of severe stress. Morningstar is calculating estimated fund flows now, which will help us flag funds facing outsized pressure from outflows. In addition, we plan to keep a more careful eye on portfolio changes from quarter to quarter and ask more about liquidity in manager interviews.
Conclusion
We're carrying all of these lessons into our analysis of mutual funds, but it's important to note that the key tenets of our approach remain the same. We always have and still do rely on a deep dive into a fund's manager, strategy, portfolio, stewardship, and fees to assess a fund's attractiveness for the long haul. We still believe that analysis of those factors leads to better results over long holding periods and that has proven to be the case with our Fund Analyst Picks. At the same time, we recognize there's always room for improvement and we're committed to staying on a continuous learning curve.
http://news.morningstar.com/articlenet/article.aspx?id=287023
How it's sparking richer fund analysis.
By Karen Dolan, CFA 04-16-09 06:00 AM
Stock and bond markets around the world have perked up lately, but the gloom of the past 18 months still hangs like a low dark cloud. In the years to come, we investors will surely be working to rebuild the nest eggs we've seen fractured--certainly battered, but hopefully we'll emerge a bit wiser.
Individually and as a group, our mutual fund analysts have spent a lot of time reflecting about what has happened over the past 18 months. We didn't predict how deep and severe this current crisis would become, but we're okay with that. We've never attempted to be macroeconomists or market strategists who can tell you where the Dow is headed. Our goal is to guide investors to the industry's best funds, not by focusing solely on what happened in the past, but by understanding how a fund's manager, strategy, fees, portfolio, and stewardship come together to form an investment case. We think we've done a good job achieving our goal over the long haul, but there have been cases along the way where we failed to spot the risk or challenge our own assumptions, as well as those of our readers', about investing in funds.
We've taken countless lessons away from this downturn already and we're still in the middle of learning more. The following four points don't represent a complete list of everything we've learned, but these are among the most noteworthy.
1. Value funds can lose more than you think.
Many, including us, have made the case for value-based investment strategies. Funds scrounging around the markets' bargain bin should offer better downside protection, because ignored and down-and-out stocks trading at discounts should be less susceptible to further declines. Numerous academic studies support the resiliency of value-based strategies, and some of the money managers with the best long-term records are practitioners of some flavor of value investing.
While the losses we've seen in the past 18 months have been deep, they are not the first for value funds. They got clocked by financials in 1990. The average large- and small-cap value fund lost by 6% and 14%, respectively, that year. And, although value funds looked like rock stars versus their punished growth rivals in the 2000-02 bear market, they still posted double-digit losses on average in 2002.
Any illusion of sturdiness for value funds was extinguished in this bear market, however. Value funds have posted steep losses, exceeding the slide experienced by their growth counterparts, the S&P 500 Index and value funds' own history.
I could go on for pages explaining why so many value strategies failed to preserve capital in this tough environment, but two key issues stand out. Most value funds focused too heavily on individual stocks without fully considering the bigger macroeconomic picture, and too many portfolio managers were caught holding companies with balance sheets they apparently didn't fully understand.
At the heart of the problem were the hefty financials-industry stakes in the value equity indexes and common to value funds. (Financial companies represented more than 30% of the Russell Value indexes at the market peak in October 2007.) Financials had been booming for years, so even though the stocks looked reasonably priced on common valuation metrics such as price/earnings and price/book ratios, they were indeed priced for perfection.
We gave a lot of credit (too much, in fact) to managers who were otherwise supposed to be research hounds and financial statement wizards, but who failed to recognize the embedded risks in their bank stock holdings--both in terms of overall leverage risk and asset quality. We're now spending more time finding new ways to stay on top of vulnerabilities that may be lurking in the portfolio and we're bringing an overall more skeptical mindset to our analysis of value strategies.
2. Expenses tell much of the story for bond funds, but not all of it.
Fractions of a percent have typically separated the bond-fund leaders' performance from the laggards'. Given the tight range of returns, we know that small differences in what a fund charges have proven to make a big difference in the end result for investors over the long haul.
In some cases, though, the analysis took that idea too far: cheap fund good, expensive fund bad. Our research has always been much more robust than that, but admittedly, we had a hard time seeing just how different the portfolios of fixed-income funds really were--in part because detailed bond portfolio data can be tough to come by. Until last year, an analysis of returns, interest-rate sensitivity, and sector compositions made bond funds look like they were more in line with each other than was really the case. Moreover, some bond managers really played down the risks of their strategies, often because they viewed them through the lens of some risk-management tool (which I'll tackle in greater detail in the next section).
The risks were there, though, and just waiting to blow some funds to shreds and severely hurt others. My colleague Eric Jacobson recently authored an illuminating article discussing these risks in greater details and highlighting some of the worst offenders.
The focus on expenses isn't wrong. Costs remain one of the most predictive nuggets of data we've studied. And, although expense ratios themselves didn't make or break a bond fund in 2008, there was a correlation between expenses and other behaviors that did make or break funds. The numbers confirm it. When you remove the effect of different expense ratios and look at 2008 gross returns, bond funds in the cheapest quartile ranked in the 47th percentile of their peer group while the most expensive quartile ranked in the 55th percentile. In other words, the cheapest funds got themselves into less trouble last year. This isn't a new finding. Morningstar's Don Phillips wrote a research piece about this phenomenon in 1995 called "A Deal with the Devil" where he found that bond funds with the added layer of 12b-1 fees were systematically taking on more risk, as measured by standard deviation.
Because managers are usually fighting over a couple hundredths of a percent to get ahead of their peers--something many managers are compensated for--funds operating at an expense disadvantage have a greater incentive to take "slightly" more risk to make up ground lost on expenses. When what seemed like slightly more risk turned into a lot more risk, those pricier funds were punished.
Expenses are thus still a cornerstone of our analysis, but we're taking a closer look at the bonds, derivatives, and even questioning the "so-called cash" in portfolios.
3. "Risk management" can and does fail.
Most firms use risk-management techniques. They employ sophisticated models to help summarize and quantify the risks they are taking. They package the output in fancy terms like tracking error and information ratio. However, it's all too easy to lose sight of the fact that risk management is a tool, not a panacea. Too much reliance on risk-measurement systems can and does hurt a fund if management relies on it too blindly. There is no way in which any risk-management system can appropriately account for every possible kind of outcome, especially those outcomes that have never happened in the past.
Firms known for industry-leading bond risk analytics, such as BlackRock and Fidelity, didn't dodge the big problem areas and posted some disappointing results. On the flip side, PIMCO, which also relies heavily on risk models, did much better because the firm has a well-oiled "gut-check" mechanism in place to run counter to what historical data may be signaling. It conducts an annual investment forum where the team of PIMCO investment professionals and invited guests shape their near- and long-term outlooks. Top-down considerations factor into their daily activities, too, leading to a mindset that opened the door for forward-looking inputs to make their way into the firm's risk models.
In a recent conversation about this topic, my colleague Eric Jacobson drew a comparison with a fighter pilot. Given the scads of electronics with which they now have to grapple, pilots often develop tunnel vision. A lot of training is therefore built around the need to maintain "situational awareness." At some point, it may become necessary to put the dogfight on hold to just look out the window and realize that you're flying upside down and toward a mountain.
We never gave risk models too much credence unless they were accompanied by a more fundamental and cultural aversion to risk. Yet, we've gained a greater appreciation for the danger risk models can introduce when they become a crutch for managers, leading them to believe they've accounted for the full extent of what could go wrong and not being as honest with shareholders or themselves about what may not be captured by the models.
4. There is a dear price attached to daily liquidity.
Liquidity has taken center stage in this environment. It is a big (and costly) consideration for banks, insurance companies, and corporations carrying debt--as well as for mutual funds. The underlying premise is simple and the same for all of them: If there's a mismatch between demands for money and the ability to supply it, there's vulnerability.
Daily liquidity is one of the best (and worst) things about mutual funds. There's real comfort and convenience in knowing you can cash in your shares on any given business day. But, it also introduces a big risk and one that doesn't often show its face, especially given that mutual funds have experienced money coming in more than they've had to deal with money going out--for decades. In the most extreme (and unlikely) case, all of a mutual fund's shareholders have the right to cash in all of their shares (all at once), but the fund is limited in its ability to turn around and sell its entire portfolio of securities in the open market. Some of the biggest problems have come from funds that were seeing investors flee at a faster clip than they could sell securities to meet those redemptions.
Because this had so rarely been a problem for mutual funds in the past, we did not adequately foresee just how serious a difficulty it could present to the mutual fund structure itself in a time of severe stress. Morningstar is calculating estimated fund flows now, which will help us flag funds facing outsized pressure from outflows. In addition, we plan to keep a more careful eye on portfolio changes from quarter to quarter and ask more about liquidity in manager interviews.
Conclusion
We're carrying all of these lessons into our analysis of mutual funds, but it's important to note that the key tenets of our approach remain the same. We always have and still do rely on a deep dive into a fund's manager, strategy, portfolio, stewardship, and fees to assess a fund's attractiveness for the long haul. We still believe that analysis of those factors leads to better results over long holding periods and that has proven to be the case with our Fund Analyst Picks. At the same time, we recognize there's always room for improvement and we're committed to staying on a continuous learning curve.
http://news.morningstar.com/articlenet/article.aspx?id=287023
Thursday 16 April 2009
7 Myths About Marriage and Retirement
7 Myths About Marriage and Retirement
by Kimberly Palmer
Wednesday, April 15, 2009
Think married couples have it easy? Or that you should get your pension policy to pay out as much as possible, as soon as possible? Well, think again. Predicting that you'll die too early--or too late--can leave you and your spouse in a financial crunch. New research upends these 7 common myths about marriage and retirement:
Single people need less money. It's true that that single people spend less money each year than couples, but at all ages over 65, they spend more of their income than couples do, according to research by Michael Hurd, senior economist at Rand. Then, after age 65, single people's income goes down by three percent a year until it dwindles to 20 percent of its starting value at age 95. (For those at age 65, the probability of surviving to age 95 is around 11 percent.) Couples, meanwhile, maintain their income until the oldest member reaches age 79, when wealth starts to decline at around 3 percent a year. (On average, couples start out with three times the wealth of single people.) So while single people may need less money, they also tend to be less prepared for retirement and spend down their savings much more quickly. (Hurd's calculations are based on data from the University of Michigan Health and Retirement Study.)
Married couples have less to worry about. While married couples do tend to enter retirement with greater resources than their single peers, there is a small chance that both members of the couple will survive to old age. According to Hurd, at age 65, the chances that both survive to age 77 is less than half. Once one spouse dies, the surviving spouse tends to spend down their joint wealth much more quickly. By age 95, on average the surviving spouse has just 32 percent of the couple's initial level of wealth.
The worst case scenario is unlikely to happen. A recent survey by AARP Financial found that many people find themselves financially unprepared when the worst case scenario does strike, which compounds the tragedy. The survey, which focused on adults between ages 40 and 79, found that most (57 percent) had already experienced such a crisis, including long-term job loss, divorce, and death of a spouse or partner. Of those who lost a spouse, 63 percent said it had a significant impact on their finances.
Women are especially likely to be widowed, and to run into money problems once they are. According to the Census Bureau, more than 1 in 4 women over age 55 are widows; the proportion rises to two in three for women who are 75 and older. Divorce is another risk factor: While 12 percent of all women over age 65 live in poverty, the rate for divorced women is 21 percent, according to the Government Accountability Office.
Thinking you'll die young--or live forever. Deciding how much to save and spend depends partly on how long you plan to live, a prediction many people get wrong. According to Hurd's research, between ages 65 and 69, people tend to think they'll die sooner than they actually will, which puts them at risk for over-spending. Then, over age 75, people tend to think they'll live longer than they will, which means they may be overly frugal. Women tend to underestimate their chances of living longer compared to men. Between ages 65 to 69, women tend to underestimate their chances of survival by 12 percentage points compared to men's four, Hurd says.
Getting as much money as possible, as early as possible, is best. Many people make the mistake of opting for higher payments from pension or other benefits payments during their lifetimes, which means their surviving spouses are left with less later. Mary McGrath, executive vice president at Cozad Asset Management, a financial planning firm in Champaign, Ill., says even couples with other assets should consider selecting an option that allows benefit payments to the surviving spouse after death, because suddenly losing all income adds unnecessary stress to the grieving process. "It's too upsetting to the survivor to have all of the income cease when you die," she says.
High-earners have less to worry about. While people who earn above-average income during their working lives tend to have acquired more resources than those who earn less, they also need more money in retirement in order to maintain their lifestyle. Hurd adds that another challenge for wealthier individuals is that they pay much heftier taxes, a factor many people forget to take into account.
Retirees should maintain their wealth until age 100. You can't go wrong saving too much, but Hurd says it's reasonable to look at more realistic survival rates. He defines a household as "adequately prepared" for retirement if it has a five percent or less chance of outliving its resources if it reduced its initial spending by 15 percent. By that definition, 83 percent of couples and 70 percent of single people are prepared.
Annuities are too expensive. Hurd says that more people should consider annuities as a way to ensure they maintain their wealth as they age. Annuities, or contracts with insurance companies that allow consumers to purchase a guaranteed income stream, tend to be under-used because people hesitate to pay a large lump sum now for a payout much later. "In my view, individuals are likely distrustful that the annuity will be there in 25 or 30 years when it is needed," says Hurd. But, he adds, "even partial annuitization would reduce the burden of managing the level of spending and the portfolio."
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/106918/7-Myths-About-Marriage-and-Retirement?mod=fidelity-startingout
More from USNews.com: •
Smart Money Savings Tips You Need Now •
TwentySomething Finanancial Survival Guide •
How to Plan for Your Financial Future
Focus on Lifelong Investing
View more stories
by Kimberly Palmer
Wednesday, April 15, 2009
Think married couples have it easy? Or that you should get your pension policy to pay out as much as possible, as soon as possible? Well, think again. Predicting that you'll die too early--or too late--can leave you and your spouse in a financial crunch. New research upends these 7 common myths about marriage and retirement:
Single people need less money. It's true that that single people spend less money each year than couples, but at all ages over 65, they spend more of their income than couples do, according to research by Michael Hurd, senior economist at Rand. Then, after age 65, single people's income goes down by three percent a year until it dwindles to 20 percent of its starting value at age 95. (For those at age 65, the probability of surviving to age 95 is around 11 percent.) Couples, meanwhile, maintain their income until the oldest member reaches age 79, when wealth starts to decline at around 3 percent a year. (On average, couples start out with three times the wealth of single people.) So while single people may need less money, they also tend to be less prepared for retirement and spend down their savings much more quickly. (Hurd's calculations are based on data from the University of Michigan Health and Retirement Study.)
Married couples have less to worry about. While married couples do tend to enter retirement with greater resources than their single peers, there is a small chance that both members of the couple will survive to old age. According to Hurd, at age 65, the chances that both survive to age 77 is less than half. Once one spouse dies, the surviving spouse tends to spend down their joint wealth much more quickly. By age 95, on average the surviving spouse has just 32 percent of the couple's initial level of wealth.
The worst case scenario is unlikely to happen. A recent survey by AARP Financial found that many people find themselves financially unprepared when the worst case scenario does strike, which compounds the tragedy. The survey, which focused on adults between ages 40 and 79, found that most (57 percent) had already experienced such a crisis, including long-term job loss, divorce, and death of a spouse or partner. Of those who lost a spouse, 63 percent said it had a significant impact on their finances.
Women are especially likely to be widowed, and to run into money problems once they are. According to the Census Bureau, more than 1 in 4 women over age 55 are widows; the proportion rises to two in three for women who are 75 and older. Divorce is another risk factor: While 12 percent of all women over age 65 live in poverty, the rate for divorced women is 21 percent, according to the Government Accountability Office.
Thinking you'll die young--or live forever. Deciding how much to save and spend depends partly on how long you plan to live, a prediction many people get wrong. According to Hurd's research, between ages 65 and 69, people tend to think they'll die sooner than they actually will, which puts them at risk for over-spending. Then, over age 75, people tend to think they'll live longer than they will, which means they may be overly frugal. Women tend to underestimate their chances of living longer compared to men. Between ages 65 to 69, women tend to underestimate their chances of survival by 12 percentage points compared to men's four, Hurd says.
Getting as much money as possible, as early as possible, is best. Many people make the mistake of opting for higher payments from pension or other benefits payments during their lifetimes, which means their surviving spouses are left with less later. Mary McGrath, executive vice president at Cozad Asset Management, a financial planning firm in Champaign, Ill., says even couples with other assets should consider selecting an option that allows benefit payments to the surviving spouse after death, because suddenly losing all income adds unnecessary stress to the grieving process. "It's too upsetting to the survivor to have all of the income cease when you die," she says.
High-earners have less to worry about. While people who earn above-average income during their working lives tend to have acquired more resources than those who earn less, they also need more money in retirement in order to maintain their lifestyle. Hurd adds that another challenge for wealthier individuals is that they pay much heftier taxes, a factor many people forget to take into account.
Retirees should maintain their wealth until age 100. You can't go wrong saving too much, but Hurd says it's reasonable to look at more realistic survival rates. He defines a household as "adequately prepared" for retirement if it has a five percent or less chance of outliving its resources if it reduced its initial spending by 15 percent. By that definition, 83 percent of couples and 70 percent of single people are prepared.
Annuities are too expensive. Hurd says that more people should consider annuities as a way to ensure they maintain their wealth as they age. Annuities, or contracts with insurance companies that allow consumers to purchase a guaranteed income stream, tend to be under-used because people hesitate to pay a large lump sum now for a payout much later. "In my view, individuals are likely distrustful that the annuity will be there in 25 or 30 years when it is needed," says Hurd. But, he adds, "even partial annuitization would reduce the burden of managing the level of spending and the portfolio."
Copyrighted, U.S.News & World Report, L.P. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/106918/7-Myths-About-Marriage-and-Retirement?mod=fidelity-startingout
More from USNews.com: •
Smart Money Savings Tips You Need Now •
TwentySomething Finanancial Survival Guide •
How to Plan for Your Financial Future
Focus on Lifelong Investing
View more stories
Wednesday 15 April 2009
Has the bubble finally burst for capitalism? What may lie ahead?
The Sunday Times
April 12, 2009
Has the bubble finally burst for capitalism?
Global capitalism has been rescued from the brink of collapse by huge state bailouts.
Newsnight’s economics editor looks at what may lie ahead
Paul Mason
Hyman Minsky was an economics professor at Washington University, St Louis, who died in 1996. He was ignored by the political establishment and treated as crazy. Once you understand his theory, you can see why. He warned: “The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence – in short . . . financially complex capitalism is inherently flawed.”
Minsky showed that speculative bubbles, and the financial collapses that follow them, are an integral part of modern capitalism. That is, they are not the result of accidents or poor decision-making, but a fundamental and recurrent feature of economic life once you deregulate the financial system.
He pointed out that, given sustained economic growth, there was a tendency for the finance system to move from a situation where everything is under control, to a speculative situation, which is precarious.
Minsky’s proposed solution to financial crisis was state intervention on two fronts:
the government should run a big budget deficit and
the central bank should pump money into the economy.
It will be noted, despite Minsky’s pariah status in economics, that his remedy is exactly what has been adopted – in America, Britain, the eurozone and much of the developed world. The problem is, it has not so far worked. Trillions of dollars of ready money, tax cuts and state spending were shovelled into the world economy to stop the credit crunch producing another Great Depression. Yet all these trillions are up against a collapse in the real economy.
Fortunately, Minsky had spent his time musing on a more permanent solution: the socialisation of the banking system. This he conceived not as an anticapitalist measure, but as the only possible form of a high-consumption, stable capitalism in the future. Minsky argued: “As socialisation of the towering heights is fully compatible with a large, growing and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure.”
Minsky never spelled out the details of how it might be done. But there is no need to do so now. Stumbling through the underground passageways of Downing Street on the morning of October 8, 2008, I saw it happen. Tetchy and bleary-eyed, fuelled by stale coffee and take-away food, British civil servants had designed and executed it in the space of 48 hours. Within 10 days, much of the western world’s banking system had been stabilised by massive injections of state credit and state capital.
The state takeover of large parts of the banking sector was seen – like the tax cuts and liquidity injections – as a way of speeding the return to the “normality” of the past decade. It is also clear, on the basis of conversations with senior UK policymakers, that the consensus by the time of the Washington G20 summit last November was that the recession would be a blur, a sharp V-shape, over by mid 2009.
In reality, the world is facing a much more strategic problem: its growth model is in crisis, and the banking business model is in crisis.
“A VORACIOUS APPETITE for economic growth lies at the heart of the boom that has now gone bust,” wrote Morgan Stanley economist Stephen Roach on the eve of the meltdown. It is worth reiterating just how spectacular that growth has been, and how spectacularly uneven. In 2007 global GDP growth was 5% – well above its historic trend – for the fourth year in a row. Growth in the developing world averaged 8%; and in Asia it was 10%. Across the G7 countries it was 2.6% – slightly below the average for the 1990s. Roach summed up the problem: “An income-short US economy rejected a slower pace of domestic demand. It turned, instead, to an asset-and debt-financed growth binge . . . For the developing world, rapid growth was a powerful antidote to a legacy of wrenching poverty. And the hyper-growth that was realised in regions like developing Asia became the end that justified all means – including . . . inflation, pollution, environmental degradation, widening income disparities, and periodic asset bubbles. The world’s body politic wanted – and still wants – growth at all costs.”
He concluded: “This crisis is a strong signal that these strategies are not sustainable.” But if the old growth model has reached a dead end, what can follow it?
There are three rational options for the developed world. The first is to revive the high-debt / low-wage model under more controlled conditions; the second is to abandon high growth as an objective altogether; the third is to find a radically different basis for high growth, with a return to higher wages, redistribution and a highly regulated finance system.
The first course of action is implicit in the approach agreed last November at the Washington G20 summit. In the summit communiqu̩, globalised markets and free trade are treated as hallowed principles, as is the national basis of regulation. Regulation would be more coordinated, there would be more information sharing, governments would commit to do better next time Рbut the only concrete measures to reregulate the system remained disputed. Even within the EU there was strong resistance to a single banking regulator, as London, Frankfurt and Milan vied with each other to become global banking centres on the basis of different regulatory systems.
The second solution embraces the end of a high-growth, high-consumption economy: if it can’t be driven by wages, debt or public spending, then it can’t exist. And if it can’t exist in the West, then Asia’s model of high exports and high savings does not work either. In previous eras, any proposal to revert to a low-growth economy would have been regarded as barbarism and regression. Yet there is a strong sentiment among the antiglobalisation and green movements in favour of this solution. And it has found echoes in mass consciousness as the world has come to understand the dangers of global warming. The problem is that it is only an option for the developed world: every slum-dweller and roadside migrant labourer I have ever met south of the equator had electricity and a flush toilet high on their wish list, which will need high growth for at least another couple of decades – possibly half a century.
As for the third option – a high-growth economy that transcends the limitations of both Keynesian and neoliberal models– it was Minsky who spelled out how it could be achieved: nationalise the banking and insurance system; place strict limits on speculative finance; change the tax structure to decrease inequality so that the bottom half of the income scale benefits from growth, and growth itself sustains consumer demand rather than debt. Finally, limit the power of huge companies so that you create permanently benign conditions for entrepreneurs.
This, it should be stressed, was Minsky’s prescription to rescue capitalism, not to destroy it, though the outcome would seem highly “anticapitalist” to anybody who defines capitalism as being essentially about free markets.
Surreally, as this book goes to press, large parts of the Western financial system are either semi-nationalised or on life-support with taxpayers’ money. New laws to limit speculation are being formulated. A blunt form of the Minsky solution has been improvised as a crisis measure, but it leaves many questions unanswered.
It is uncharted territory for the bankers, but actually we have long experience of what happens when companies cannot make money, form a monopoly through mergers and acquisitions, and are essential to the functioning of the rest of business. They are called utilities. Many believe banking is now about to become just like a utility: heavily regulated, low-profit, orientated by law to achieve a social aim rather thana financial one. This prospect has already got some in the banking industry so depressed that they are predicting the mass departure of the teams engaged in the high-risk parts of the banking business into the hedge-fund and consultancy businesses.
With low-profit, utility-style commercial banking, the question then arises: if banks are being asked to meet social objectives, like avoiding home repossessions or continued lending to small businesses, and are already supported by vast quantities of state finance, would it not be more efficient for the state to own key parts of the banking sector? One senior figure in the industry told me: “Once they become low-profit utilities, I don’t really care whether they stay in the private sector or are nationalised – they’re just doing the same thing.”
In short, reality is pushing the banking industry towards a utility-style solution. The result could be some form of “mixed economy” in banking, with a base layer provided by a state-owned lender, large utility banks on top, and then a big gap between this world and a slimmed-down speculative sector.
As the crisis worsens, it is becoming common for pundits to observe that, although capitalism is collapsing, nobody has thought of an alternative. This is not true. The Minsky alternative – a socialised banking system plus wealth redistribution – is, I believe, the ground on which the most radical of the capitalist reregulators will coalesce with social-justice activists. And it may even go mainstream if the only alternative is low growth, decades of debt-imposed stagnation, or another rerun of this crisis a few years down the line.
© Paul Mason 2009 Extracted from Meltdown: The End of the Age of Greed, to be published by Verso on April 27 at £7.99. Available from The Sunday Times Books First at £7.59 (including postage and packaging) on 0845 271 2135 or at timesonline.co.uk/booksfirst
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6078127.ece
April 12, 2009
Has the bubble finally burst for capitalism?
Global capitalism has been rescued from the brink of collapse by huge state bailouts.
Newsnight’s economics editor looks at what may lie ahead
Paul Mason
Hyman Minsky was an economics professor at Washington University, St Louis, who died in 1996. He was ignored by the political establishment and treated as crazy. Once you understand his theory, you can see why. He warned: “The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence – in short . . . financially complex capitalism is inherently flawed.”
Minsky showed that speculative bubbles, and the financial collapses that follow them, are an integral part of modern capitalism. That is, they are not the result of accidents or poor decision-making, but a fundamental and recurrent feature of economic life once you deregulate the financial system.
He pointed out that, given sustained economic growth, there was a tendency for the finance system to move from a situation where everything is under control, to a speculative situation, which is precarious.
Minsky’s proposed solution to financial crisis was state intervention on two fronts:
the government should run a big budget deficit and
the central bank should pump money into the economy.
It will be noted, despite Minsky’s pariah status in economics, that his remedy is exactly what has been adopted – in America, Britain, the eurozone and much of the developed world. The problem is, it has not so far worked. Trillions of dollars of ready money, tax cuts and state spending were shovelled into the world economy to stop the credit crunch producing another Great Depression. Yet all these trillions are up against a collapse in the real economy.
Fortunately, Minsky had spent his time musing on a more permanent solution: the socialisation of the banking system. This he conceived not as an anticapitalist measure, but as the only possible form of a high-consumption, stable capitalism in the future. Minsky argued: “As socialisation of the towering heights is fully compatible with a large, growing and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure.”
Minsky never spelled out the details of how it might be done. But there is no need to do so now. Stumbling through the underground passageways of Downing Street on the morning of October 8, 2008, I saw it happen. Tetchy and bleary-eyed, fuelled by stale coffee and take-away food, British civil servants had designed and executed it in the space of 48 hours. Within 10 days, much of the western world’s banking system had been stabilised by massive injections of state credit and state capital.
The state takeover of large parts of the banking sector was seen – like the tax cuts and liquidity injections – as a way of speeding the return to the “normality” of the past decade. It is also clear, on the basis of conversations with senior UK policymakers, that the consensus by the time of the Washington G20 summit last November was that the recession would be a blur, a sharp V-shape, over by mid 2009.
In reality, the world is facing a much more strategic problem: its growth model is in crisis, and the banking business model is in crisis.
“A VORACIOUS APPETITE for economic growth lies at the heart of the boom that has now gone bust,” wrote Morgan Stanley economist Stephen Roach on the eve of the meltdown. It is worth reiterating just how spectacular that growth has been, and how spectacularly uneven. In 2007 global GDP growth was 5% – well above its historic trend – for the fourth year in a row. Growth in the developing world averaged 8%; and in Asia it was 10%. Across the G7 countries it was 2.6% – slightly below the average for the 1990s. Roach summed up the problem: “An income-short US economy rejected a slower pace of domestic demand. It turned, instead, to an asset-and debt-financed growth binge . . . For the developing world, rapid growth was a powerful antidote to a legacy of wrenching poverty. And the hyper-growth that was realised in regions like developing Asia became the end that justified all means – including . . . inflation, pollution, environmental degradation, widening income disparities, and periodic asset bubbles. The world’s body politic wanted – and still wants – growth at all costs.”
He concluded: “This crisis is a strong signal that these strategies are not sustainable.” But if the old growth model has reached a dead end, what can follow it?
There are three rational options for the developed world. The first is to revive the high-debt / low-wage model under more controlled conditions; the second is to abandon high growth as an objective altogether; the third is to find a radically different basis for high growth, with a return to higher wages, redistribution and a highly regulated finance system.
The first course of action is implicit in the approach agreed last November at the Washington G20 summit. In the summit communiqu̩, globalised markets and free trade are treated as hallowed principles, as is the national basis of regulation. Regulation would be more coordinated, there would be more information sharing, governments would commit to do better next time Рbut the only concrete measures to reregulate the system remained disputed. Even within the EU there was strong resistance to a single banking regulator, as London, Frankfurt and Milan vied with each other to become global banking centres on the basis of different regulatory systems.
The second solution embraces the end of a high-growth, high-consumption economy: if it can’t be driven by wages, debt or public spending, then it can’t exist. And if it can’t exist in the West, then Asia’s model of high exports and high savings does not work either. In previous eras, any proposal to revert to a low-growth economy would have been regarded as barbarism and regression. Yet there is a strong sentiment among the antiglobalisation and green movements in favour of this solution. And it has found echoes in mass consciousness as the world has come to understand the dangers of global warming. The problem is that it is only an option for the developed world: every slum-dweller and roadside migrant labourer I have ever met south of the equator had electricity and a flush toilet high on their wish list, which will need high growth for at least another couple of decades – possibly half a century.
As for the third option – a high-growth economy that transcends the limitations of both Keynesian and neoliberal models– it was Minsky who spelled out how it could be achieved: nationalise the banking and insurance system; place strict limits on speculative finance; change the tax structure to decrease inequality so that the bottom half of the income scale benefits from growth, and growth itself sustains consumer demand rather than debt. Finally, limit the power of huge companies so that you create permanently benign conditions for entrepreneurs.
This, it should be stressed, was Minsky’s prescription to rescue capitalism, not to destroy it, though the outcome would seem highly “anticapitalist” to anybody who defines capitalism as being essentially about free markets.
Surreally, as this book goes to press, large parts of the Western financial system are either semi-nationalised or on life-support with taxpayers’ money. New laws to limit speculation are being formulated. A blunt form of the Minsky solution has been improvised as a crisis measure, but it leaves many questions unanswered.
It is uncharted territory for the bankers, but actually we have long experience of what happens when companies cannot make money, form a monopoly through mergers and acquisitions, and are essential to the functioning of the rest of business. They are called utilities. Many believe banking is now about to become just like a utility: heavily regulated, low-profit, orientated by law to achieve a social aim rather thana financial one. This prospect has already got some in the banking industry so depressed that they are predicting the mass departure of the teams engaged in the high-risk parts of the banking business into the hedge-fund and consultancy businesses.
With low-profit, utility-style commercial banking, the question then arises: if banks are being asked to meet social objectives, like avoiding home repossessions or continued lending to small businesses, and are already supported by vast quantities of state finance, would it not be more efficient for the state to own key parts of the banking sector? One senior figure in the industry told me: “Once they become low-profit utilities, I don’t really care whether they stay in the private sector or are nationalised – they’re just doing the same thing.”
In short, reality is pushing the banking industry towards a utility-style solution. The result could be some form of “mixed economy” in banking, with a base layer provided by a state-owned lender, large utility banks on top, and then a big gap between this world and a slimmed-down speculative sector.
As the crisis worsens, it is becoming common for pundits to observe that, although capitalism is collapsing, nobody has thought of an alternative. This is not true. The Minsky alternative – a socialised banking system plus wealth redistribution – is, I believe, the ground on which the most radical of the capitalist reregulators will coalesce with social-justice activists. And it may even go mainstream if the only alternative is low growth, decades of debt-imposed stagnation, or another rerun of this crisis a few years down the line.
© Paul Mason 2009 Extracted from Meltdown: The End of the Age of Greed, to be published by Verso on April 27 at £7.99. Available from The Sunday Times Books First at £7.59 (including postage and packaging) on 0845 271 2135 or at timesonline.co.uk/booksfirst
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6078127.ece
What will happen in more politically unstable Asian countries
From The TimesApril 15, 2009
And if it can happen in Singapore...
With more bad economic news out of the city state, the worry is what will happen in more politically unstable Asian countries
David Wighton: Business editor's commentary
They are not talking about green shoots in Singapore, at least not economic ones.
The city state's central bank effectively devalued its currency yesterday as figures showed that the economy shrank by an extraordinary 11.5 per cent in the first quarter compared with a year earlier.
The Government revised its forecast for the full year to a slump of between 6 and 9 per cent.
So successful for so long, Singapore is heavily exposed to sectors hardest hit in the current downturn - finance, shipping and manufacturing. Exports were down 17 per cent in the first quarter.
The very modest devaluation will not help much - at least until export markets pick up - and the authorities will be wary of a bigger depreciation of the currency in case it undermines the confidence of international investors.
Analysts believe the downturn may prompt an exodus of expatriate workers undermining the efforts to encourage immigration and turn Singapore into a finance hub for South East Asia.
The worry is that where Singapore goes, other less politically stable Asian countries may follow.
http://business.timesonline.co.uk/tol/business/columnists/article6094612.ece
And if it can happen in Singapore...
With more bad economic news out of the city state, the worry is what will happen in more politically unstable Asian countries
David Wighton: Business editor's commentary
They are not talking about green shoots in Singapore, at least not economic ones.
The city state's central bank effectively devalued its currency yesterday as figures showed that the economy shrank by an extraordinary 11.5 per cent in the first quarter compared with a year earlier.
The Government revised its forecast for the full year to a slump of between 6 and 9 per cent.
So successful for so long, Singapore is heavily exposed to sectors hardest hit in the current downturn - finance, shipping and manufacturing. Exports were down 17 per cent in the first quarter.
The very modest devaluation will not help much - at least until export markets pick up - and the authorities will be wary of a bigger depreciation of the currency in case it undermines the confidence of international investors.
Analysts believe the downturn may prompt an exodus of expatriate workers undermining the efforts to encourage immigration and turn Singapore into a finance hub for South East Asia.
The worry is that where Singapore goes, other less politically stable Asian countries may follow.
http://business.timesonline.co.uk/tol/business/columnists/article6094612.ece
Survivors of crisis find a silver lining
From The TimesApril 15, 2009
Survivors of crisis find a silver lining
David Wighton: Business editor's commentary
For a moment, it looked just like the good old days. Goldman Sachs' profits soar way above forecasts to $1.8billion in the first quarter as it plans for a 20 per cent pay rise for staff. Crisis, what crisis?
Except, of course, the crisis has had a big impact on Goldman. It is just that the impact on Goldman - and rivals such as Barclays Capital - has not been all bad.
The reason that Goldman's huge fixed income, currency and commodities arm generated record revenues of $6.56 billion was not that its customers did record business, although volumes were healthy enough.
It was because half of its competitors have blown themselves up and many of the others are wandering around in a daze. As a result, customers are having to pay up to get trades done.
The spread between the buying and selling prices for everything from sterling to silver has widened dramatically, fattening up Goldman's margins a treat.
These trading profits absorbed continued losses in credit products, including about $800 million before hedges on commercial mortgage loans and securities.
Elsewhere things were not so pretty. Equities trading, the advisory businesses and asset management were all down and there were further losses from property and other investments.
The returns to shareholders have been diluted by the big increase in Goldman's capital, which is now being expanded by another $5billion, which may be used to pay off the $10 billion owed to the US Government.
But Goldman still managed to generate a return on equity of 14 per cent.
The speed with which the underlying business of the surviving investment banks seems to be bouncing back must make companies in other stricken sectors look on with incredulity.
Boston Consulting Group has constructed a “bull” case that has global investment banking net revenues before writedowns reaching $374billion next year.
That is 15 per cent higher than the record level of 2007. Even its “bear” case of $258billion is not far off the level of 2006. Returns will not be as high, because of lower leverage, but then the cake will be shared out between fewer mouths.
The Goldman figures looked particularly encouraging for Barclays.
Thanks partly to its rescue of Lehman Brothers' US business last year, Barclays Capital is strong in all those areas where Goldman reported good results - particularly debt, currencies and commodities - and smaller in those areas that struggled.
London investors took note and Barclays shares jumped another 10per cent to 195.5p yesterday, four times their low in January.
A lot could still go wrong. But the history of previous banking crises shows that the survivors not only live but live well. Those that double up at the bottom, like Barclays, can live very well indeed.
http://www.timesonline.co.uk/tol/comment/columnists/article6094574.ece
Related Links
Another 'triumph' for the PPI industry
And if it can happen in Singapore...
Survivors of crisis find a silver lining
David Wighton: Business editor's commentary
For a moment, it looked just like the good old days. Goldman Sachs' profits soar way above forecasts to $1.8billion in the first quarter as it plans for a 20 per cent pay rise for staff. Crisis, what crisis?
Except, of course, the crisis has had a big impact on Goldman. It is just that the impact on Goldman - and rivals such as Barclays Capital - has not been all bad.
The reason that Goldman's huge fixed income, currency and commodities arm generated record revenues of $6.56 billion was not that its customers did record business, although volumes were healthy enough.
It was because half of its competitors have blown themselves up and many of the others are wandering around in a daze. As a result, customers are having to pay up to get trades done.
The spread between the buying and selling prices for everything from sterling to silver has widened dramatically, fattening up Goldman's margins a treat.
These trading profits absorbed continued losses in credit products, including about $800 million before hedges on commercial mortgage loans and securities.
Elsewhere things were not so pretty. Equities trading, the advisory businesses and asset management were all down and there were further losses from property and other investments.
The returns to shareholders have been diluted by the big increase in Goldman's capital, which is now being expanded by another $5billion, which may be used to pay off the $10 billion owed to the US Government.
But Goldman still managed to generate a return on equity of 14 per cent.
The speed with which the underlying business of the surviving investment banks seems to be bouncing back must make companies in other stricken sectors look on with incredulity.
Boston Consulting Group has constructed a “bull” case that has global investment banking net revenues before writedowns reaching $374billion next year.
That is 15 per cent higher than the record level of 2007. Even its “bear” case of $258billion is not far off the level of 2006. Returns will not be as high, because of lower leverage, but then the cake will be shared out between fewer mouths.
The Goldman figures looked particularly encouraging for Barclays.
Thanks partly to its rescue of Lehman Brothers' US business last year, Barclays Capital is strong in all those areas where Goldman reported good results - particularly debt, currencies and commodities - and smaller in those areas that struggled.
London investors took note and Barclays shares jumped another 10per cent to 195.5p yesterday, four times their low in January.
A lot could still go wrong. But the history of previous banking crises shows that the survivors not only live but live well. Those that double up at the bottom, like Barclays, can live very well indeed.
http://www.timesonline.co.uk/tol/comment/columnists/article6094574.ece
Related Links
Another 'triumph' for the PPI industry
And if it can happen in Singapore...
Intel claims PC market has 'bottomed out'
From Times Online
April 15, 2009
Intel claims PC market has 'bottomed out'
Alexi Mostrous
Intel claimed today that the downturn in the personal computer sector had bottomed out, even as its shares slid nearly 6 per cent after economic uncertainty prevented it from offering financial forecasts for the rest of 2009.
The chip-making giant said that personal computer sales hit a trough in the first quarter but there was still too much market and economic turbulence to allow a precise projection for the second quarter.
However, Paul Otellini, president and chief executive of Intel, said: “We believe PC sales bottomed out during the first quarter and the industry is returning to normal seasonal patterns.” Stacy Smith, Intel's chief financial officer, added: “I believe the worst is now behind us.”
Intel reported a net profit in the three months ending March 28 of $647 million (£436 million) down 55 per cent from $1.44 billion, a year ago but above analysts' expectations.
Although earnings per share were more than three times the average Wall Street forecast, they were helped by a drastically lower effective tax rate of one per cent in the quarter, versus internal expectations of 27 per cent, analysts said.
Intel said its revenues in the first quarter of 2009 had slumped to $7.1 billion or 26 per cent lower than a year before, as chip demand hit a low point. Operating income was down 68 per cent at $670 million compared to the same period the year before.
Shares of the chip giant, a bellwether for the market and the global PC industry, fell during after-hours trading to $15.20 from a close of $16.01. Before yesterday, Intel stock had leapt 32 per cent from a 2009 low point of $12.01.
Gross margins at the company came to 45.6 per cent in the first quarter, compared to 53.1 per cent in the fourth quarter of 2008 but higher than analysts’ expectations.
“I would have liked to see higher gross margin guidance,” Edward Jones analyst Bill Kreher told Reuters. “The stock has had heck of a run in recent weeks, so it may be time for a breather here given that visibility does remain limited.”
Intel executives said that the timing of the eventual recovery was uncertain. “The company is currently planning for revenue [in Q2] approximately flat to the first quarter,” the company said.
Intel admitted that the “current uncertainty in global economic conditions makes it particularly difficult to predict product demand.”
In a statement, Intel also identified possible effects of the credit crisis on its business, including “insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products, customer insolvencies; counterparty failures negatively impacting our treasury operations and increased expense or inability to obtain short term financing of Intel’s operations.”
Intel, which controls 80 per cent of the microprocessor market and is larger than rival Advanced Micro Devices, is a barometer of overall IT industry health.
The corporation had put out successive revenue warnings since late 2008 and cautioned it would be shutting or scaling down plants across Asia and the US and trimming jobs. On Tuesday, executives said the company had rid itself of 1,400 employees since the fourth quarter.
Speaking of the personal computer sector in general, Nathan Brookwood, a research fellow at Insight 64, said: “Things are no longer looking completely dark. There is light at the end of the tunnel. It would be even better if people were feeling good enough about it that they could put stakes in the ground ... (with) a revenue estimate.”
http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6096192.ece
April 15, 2009
Intel claims PC market has 'bottomed out'
Alexi Mostrous
Intel claimed today that the downturn in the personal computer sector had bottomed out, even as its shares slid nearly 6 per cent after economic uncertainty prevented it from offering financial forecasts for the rest of 2009.
The chip-making giant said that personal computer sales hit a trough in the first quarter but there was still too much market and economic turbulence to allow a precise projection for the second quarter.
However, Paul Otellini, president and chief executive of Intel, said: “We believe PC sales bottomed out during the first quarter and the industry is returning to normal seasonal patterns.” Stacy Smith, Intel's chief financial officer, added: “I believe the worst is now behind us.”
Intel reported a net profit in the three months ending March 28 of $647 million (£436 million) down 55 per cent from $1.44 billion, a year ago but above analysts' expectations.
Although earnings per share were more than three times the average Wall Street forecast, they were helped by a drastically lower effective tax rate of one per cent in the quarter, versus internal expectations of 27 per cent, analysts said.
Intel said its revenues in the first quarter of 2009 had slumped to $7.1 billion or 26 per cent lower than a year before, as chip demand hit a low point. Operating income was down 68 per cent at $670 million compared to the same period the year before.
Shares of the chip giant, a bellwether for the market and the global PC industry, fell during after-hours trading to $15.20 from a close of $16.01. Before yesterday, Intel stock had leapt 32 per cent from a 2009 low point of $12.01.
Gross margins at the company came to 45.6 per cent in the first quarter, compared to 53.1 per cent in the fourth quarter of 2008 but higher than analysts’ expectations.
“I would have liked to see higher gross margin guidance,” Edward Jones analyst Bill Kreher told Reuters. “The stock has had heck of a run in recent weeks, so it may be time for a breather here given that visibility does remain limited.”
Intel executives said that the timing of the eventual recovery was uncertain. “The company is currently planning for revenue [in Q2] approximately flat to the first quarter,” the company said.
Intel admitted that the “current uncertainty in global economic conditions makes it particularly difficult to predict product demand.”
In a statement, Intel also identified possible effects of the credit crisis on its business, including “insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products, customer insolvencies; counterparty failures negatively impacting our treasury operations and increased expense or inability to obtain short term financing of Intel’s operations.”
Intel, which controls 80 per cent of the microprocessor market and is larger than rival Advanced Micro Devices, is a barometer of overall IT industry health.
The corporation had put out successive revenue warnings since late 2008 and cautioned it would be shutting or scaling down plants across Asia and the US and trimming jobs. On Tuesday, executives said the company had rid itself of 1,400 employees since the fourth quarter.
Speaking of the personal computer sector in general, Nathan Brookwood, a research fellow at Insight 64, said: “Things are no longer looking completely dark. There is light at the end of the tunnel. It would be even better if people were feeling good enough about it that they could put stakes in the ground ... (with) a revenue estimate.”
http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6096192.ece
Singapore devalues currency after GDP plunge
From The TimesApril 15, 2009
Singapore devalues currency after GDP plunge
Leo Lewis
Singapore’s central bank effectively devalued the city state’s currency yesterday as its Government warned that the global economic crisis would bring the worst economic plunge on record.
Singapore’s unprecedented contraction between January and March was described by analysts as “horrendous”. First-quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.
But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. Previous forecasts of a 5 per cent contraction were revised to one of between 6 per cent and 9 per cent. It was the third time forecasts have been adjusted in the past five months.
Economists rushed to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.
The Trade Ministry said that recent, tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”. That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.
The Singapore dollar moves within a trade-weighted band, which is set by the MAS. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation.
Singapore’s dollar advanced as much as 1.2 per cent to S$1.4965 against the US dollar, the strongest level in two months, after the MAS recentered the trading band. It said it does not plan to seek either appreciation or depreciation.
http://business.timesonline.co.uk/tol/business/economics/article6094207.ece
Related Links
Singapore faces devastating exodus of foreigners
Asian central banks step in as turbulence hits
Singapore devalues currency after GDP plunge
Leo Lewis
Singapore’s central bank effectively devalued the city state’s currency yesterday as its Government warned that the global economic crisis would bring the worst economic plunge on record.
Singapore’s unprecedented contraction between January and March was described by analysts as “horrendous”. First-quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.
But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. Previous forecasts of a 5 per cent contraction were revised to one of between 6 per cent and 9 per cent. It was the third time forecasts have been adjusted in the past five months.
Economists rushed to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.
The Trade Ministry said that recent, tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”. That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.
The Singapore dollar moves within a trade-weighted band, which is set by the MAS. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation.
Singapore’s dollar advanced as much as 1.2 per cent to S$1.4965 against the US dollar, the strongest level in two months, after the MAS recentered the trading band. It said it does not plan to seek either appreciation or depreciation.
http://business.timesonline.co.uk/tol/business/economics/article6094207.ece
Related Links
Singapore faces devastating exodus of foreigners
Asian central banks step in as turbulence hits
Tuesday 14 April 2009
Buffett queried on 'buy and hold' on CNBC
"Buy and hold" strategy. Is this strategy dead?
In a recent CNBC interview, Warren Buffett was asked by a sender of email regarding buy and hold strategy. His reply was a short one. This strategy works for certain selected stocks. He added other strategies can be profitable for some too.
My comments:
Stock selection is of course very important. This can be achieved through applying the right investing knowledge, diligent study of the company and hard work.
Over the short-term, you will probably be right (positive returns) 50% of the time. However, over the long-term, you are more likely to be right most of the time.
Be sure to ride the winners, add more to the winners for big gains. If one has made a mistake, cut the losers early to keep the losses small.
In my experience, long term buy and hold investing has been rewarding. It has been safe (safety of principal) and has also generated good return for the given reward/risk ratio.
Always buy the stock at a bargain (margin of safety). This minimises the downside risk and provides potentially a higher return.
In a recent CNBC interview, Warren Buffett was asked by a sender of email regarding buy and hold strategy. His reply was a short one. This strategy works for certain selected stocks. He added other strategies can be profitable for some too.
My comments:
Stock selection is of course very important. This can be achieved through applying the right investing knowledge, diligent study of the company and hard work.
Over the short-term, you will probably be right (positive returns) 50% of the time. However, over the long-term, you are more likely to be right most of the time.
Be sure to ride the winners, add more to the winners for big gains. If one has made a mistake, cut the losers early to keep the losses small.
In my experience, long term buy and hold investing has been rewarding. It has been safe (safety of principal) and has also generated good return for the given reward/risk ratio.
Always buy the stock at a bargain (margin of safety). This minimises the downside risk and provides potentially a higher return.
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