2008 Great falls on the Asian purses

The sale of panic accelerated through the Asian purses yesterday while the investors emptied their wallets of actions in mass on fears which a recession in the USA would hammer the economies with fast growth of the area.

The shares in Hong Kong were the worst blow, with principal closing 8.6% of index of Seng of blow downwards as a larger loser of yesterday among the Asian purses. The index fell a total from the surplus the 14.1% two days of trade last this week in its two days more pointed decline in one decade. But in a movement of surprised before the bell of opening on Wall Street Tuesday, the federal reservation of the USA reduced interest rates of interest by 75 basic points to 3.5% in which analysts known as was an apparent offer to avoid a recession in the greatest economy of the world.

Taking the selection of the cut of rate, the European shares reversed their first losses, with stocks in Great Britain 2% of rise while the news burst. Earlier, the commercial feeling in Asia was continued by indications that stocks of the USA started for a great fall Tuesday, with the contracts in the long term on index of security prices moving to a dive 500-point for the industrial average of dow-Jones after one prolonged weekend.

In Japan, the index of Nikkei 225 broke down 5.6%, whereas Australian stocks descended 7% yesterday. None the open Asian stock exchange markets for the trade yesterday was saved, with the principal indices to the bottom at least of 1% of Seoul towards Sri Lanka. On before room, the index made up of kilolitre (KLCI) dégringolé with a bottom of intra-day of 1.340 points, but recovered slightly towards the end although it finished deeply in the negative territory.

The reference mark at the end of 54.12 points inferior, or swallows 3.8%, to 1.354.38, whereas the broader index of FBM Emas dropped 4% at the end at 9.179 points. "(the state of the market) necessarily does not translate into reduction in the economy. The KLCI has 6.3% fallen since the beginning the year, which was a relatively soft fall compared with the losses with two digits on other Asian markets, other than those Shenzhen, in Pakistan and Sri Lanka.

The index of Seng of the blow of Hong Kong was the worst interpreter, having the year-with-date fallen from 22%. "if the recession in the United States is serious, one binds to be negative effects on Asia, but Asia seems to be an area so robust that there are currently no danger or principal change of the economic growth.

The sad feeling on stocks also deviated at the market from the products, with gross prices of the oil of palm tree (CPO) prolonging losses at a third day in a line on derivatives of Bush. The contract in the long term for the delivery of April took blows, loser RM128 per ton, or almost 4%, with RM3,115 per ton. The contract reached high absolute RM3,420 per ton janv. 14. The majority of the analysts provided that CPO would make the average around RM2,800 per ton or moreover in 2008 after the prices increased last year 56%. The oil price crude also reprocessed yesterday, USS3 falls about it by barrel with USS87.60 in electronic hours of trade before the open market for the trade of New York.

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Funds -like you to know

ARE funds (forex/mutual/unit trust/actively managed funds) the way to go to invest for the long term?

There are numerous glossy and enticing advertisements by funds trumpeting excellent returns, but at the same time warning that past performance is no guarantee for future performance.

In the US, more than US$10 trillion is held by nearly 10,000 mutual funds. If you take out money market funds and bond funds, about US$5 trillion is in stocks.

Is funds investing safe and does it provide superior returns (relative to the relevant benchmark indices)?

Majority does not beat benchmark indices

Did your fund portfolio beat the benchmark? Congratulations, for you are in the minority.

In the book, Wall Street Versus America by Gary Weiss (formerly with Business Week), he said “if you had shares in an equity mutual fund on January 1, 1984, just as the bull market was taking off, and held on to it until December 31, 2003, the chances are better than 90% that your fund failed even to match the performance of S&P 500 stock index”.

Can you imagine – 90%? Even the betting tables at Genting Highlands offer better odds.

If you are going to put your money to work by investment pros, you should expect superior performance.

Isn't it difficult to believe that only 20% of funds have managed to beat the benchmark?

The fees charged put most funds on the back foot. Actively managed funds usually incur trading costs – front- and back-end loads, advisory fees, advertising campaigns, and commissions payable to sales and distribution channels. We are not even talking taxes yet.

The fees accruing to unit trust sales forces in Malaysia is a good example, hence it is very difficult to locate funds that actually provide superior returns from the personal EPF investing scheme.

Another issue affecting returns is churn rate, i.e. the number of times the total portfolio value was bought/sold in a year.

Some have a churn rate of less than 50% but some can register churn rates of more than 200%.

The higher the churn rate, the higher the fund's brokerage and related fees. On the other hand, a lower churn rate is no guarantee for better performance.

Scandals

In the US you have the late trading and market timing scandals in mutual funds. There have been many cases involving sales incentives for brokers to push in-house funds.

Some fund managers have been known to receive kickbacks in the form of a percentage of transaction orders given to certain brokers.

Front running by fund managers themselves ahead of placing big orders is also a problem (of course by using nominee accounts).

Soft-dollaring

Some funds have a high churn rate because it keeps the brokers/dealers happy, and some would get “soft-dollaring” arrangements if their transaction volume reaches certain predetermined levels (e.g. free terminals, research, online subscription services, computers, monitors, cables, network support, printers, maintenance agreements, etc.)

Depending on the country they are operating in, some of these soft-dollaring are not shown as savings to the actual fund but rather to the fund company's operational revenue and expense columns.

(Soft-dollaring is a new fangled way of referring to kickbacks. While “hard-dollars” refer to expenses coming out of the fund company's pockets, “soft-dollaring” involves using client's cash to pay for things.).

Certain funds even allow their broker to charge “higher commissions” (especially through OTC trades or off-market trades where prices can be negotiated) to get better soft-dollaring deals from the brokers.


Attrition of funds

A large fund management company will launch many funds, sometimes in the same sector or country exposure.

If they launch three country funds in Year 1, and another three similar funds in Year 2, and so on, the savvier funds companies will put different stocks into each of these funds.

Hence, you may notice that some funds provide superior performance while others do not. As a result, the company may close out the underperforming funds and let the “superior funds” run.

After a few years, these big funds management companies will always be able to tout “superior funds” for advertising purposes. Nobody will bring up funds that have been closed down.

The Journal of Finance (March 1997) reports a comprehensive study by Mark Carhart on mutual funds over the period from 1962 to 1993. He states that “by 1993 fully one-third of all mutual funds had disappeared.”

If you were to take into account the attrition, then the 90% under-performance figure by funds cited earlier might have even been worse.

Corporate governance

A fund's board of directors is supposed to look after investors' best interests. Still, some of these fund boards operate too much like an old-boys network.

We need stricter oversight. We need the chairman and at least 3 out of 4 members of the board not to be affiliated in any way to the fund management company.

This needs to be strictly enforced. A strong board is possibly the best hope for those who invest in these funds to ensure that these fund management companies “go the right way”.

In many cases, a fund's quick growth can hinder performance.

The bigger the fund, the harder it is for a portfolio to move assets effectively.

For example, a small-cap fund, which started with RM300mil may register superior performance in the first couple of years.

The company will advertise this fact to lure more investors into the fund. If the fund size expands to RM1bil, it will become increasingly difficult to match the returns of the past as locating decent sized exposure will be more difficult and the fund manager would have to hit more “home runs” now than previously.

Random walk

Many investors have wised up to most of the factors that I've mentioned above, hence the proliferation of indexed-funds over the last 5 years.

Most of them would rather just trail the index performance as they do not want to be slugged with exorbitant fees. Indexed funds have a much lower fee structure, hence their popularity.

But the fact that 90% fail to outperform their benchmarks lends a lot of weight to the random walk theory which imputes that you cannot consistently outperform the market over the long run.

That being the case, instead of active management (which is deemed eventually to be futile under random walk theory) the best way is to track the index.

With that, perhaps one should not rule out too hastily the pros of self-investing as long as they read up adequately and understand the market dynamics and investing fundamentals.

It's either that, or choosing wisely which fund management company to go with.

Individuals or committee?

At the risk of sounding like a broken record, investors need to ask insightful questions before deciding which funds to plough their hard-earned money into.

Needless to say, the merry go-round performance of fund managers affects their long-term performance.

Many funds say that investment decisions are deliberated and made by a committee, thus reducing the dependence on any individual.

Truth is, there are individual fund managers who outperform but it wouldn't serve the fund management company's interest to emphasise that fact, for what if he/she leaves the company?

Your query as an investor is – who are the fund managers at the company? How long have they been with the company?

You should even ask for their bio-data and resume. A fund management company with fund managers on short tenures may indicate a general failure to lure and keep good staff.

It's a realistic business. To chalk up superior and consistent performance, the company needs a dedicated team led by proven fund managers for a prolonged period.

Otherwise, investors may find that they have forked out their savings for some 20 year-olds to play and experiment with!

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Worlds News

JBIC in talks on environmental funds

TOKYO: The Japan Bank for International Cooperation (JBIC) is in talks with Mizuho Financial Group Inc and other financial institutions to set up environmental funds aimed at investing in projects to cut greenhouse gas emissions in Asia.

The total size of the funds could top US$2bil in five years, a JBIC spokesman said yesterday.

The government-owned bank has earmarked 15 billion yen (US$137.3mil) for investment in such funds in the initial year, starting in April, as it plans to contribute about 10 to 20% of the total, he said.

Gold an copper futures surge

SINGAPORE: Gold stormed to a fresh record high and copper futures hit a two-month peak yesterday as investors sought to hedge against inflation or to find alternatives to depressed equity markets.

Spot gold hit a record US$891.40 an ounce, surpassing the previous high of US$881.10 reached on Tuesday.

Oil prices were also firm, moving back towards US$100 a barrel as concern about equity markets persisted following a 1.9% drop on Wall Street on Tuesday.

"The speed of gold's rise is very fast but the market is focusing on taking gold towards US$900 in the near term," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.

Bear Stearns chief exec to step down

NEW YORK: Bear Stearns Cos Inc leader James Cayne, under fire for the collapse of two hedge funds, will step down as chief executive and hand that role to the company's star investment banker, Alan Schwartz, the company said on Tuesday.

Cayne will remain as chairman of the fifth largest US investment bank, which suffered its first loss ever in the fourth quarter because of subprime mortgages.

SIA not giving up on China Eastern bid

HONG KONG/SINGAPORE: Singapore Airlines (SIA) said yesterday it would not walk away from a bid to buy a stake in China's third biggest airline, but called for a cooling off period as China Eastern considers its future.

Loss-making China Eastern's minority shareholders on Tuesday rejected the agreed sale of a 24% stake to SIA, the world's most profitable carrier, and its parent, state investment agency Temasek for US$920mil.

"China Eastern has some issues to work through with the supposed Air China offer. So we have to let them deal with it in time. There will be a little cooling off period," SIA spokesman Stephen Forshaw told reporters. But he insisted SIA would not get into a bidding war.

JBIC in talks on environmental funds

TOKYO: The Japan Bank for International Cooperation (JBIC) is in talks with Mizuho Financial Group Inc and other financial institutions to set up environmental funds aimed at investing in projects to cut greenhouse gas emissions in Asia.

The total size of the funds could top US$2bil in five years, a JBIC spokesman said yesterday.

The government-owned bank has earmarked 15 billion yen (US$137.3mil) for investment in such funds in the initial year, starting in April, as it plans to contribute about 10 to 20% of the total, he said.

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Oil prices extend decline on worries about US economy

Oil prices fell Monday as a report of growing unemployment in the United States raised concerns of an economic downturn there that could curb demand for oil.

The U.S. Labor Department said the unemployment rate jumped to 5 percent in December _ its highest level in more than two years _ from 4.7 percent in November. Analysts had expected December unemployment at 4.8 percent.

"Many economists in the U.S. have talked about the potential of the U.S. getting into a recession,'' said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "This latest government report ... has added to the concerns about the economy.''

Light, sweet crude for February delivery dropped 65 cents to US$97.26 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract fell US$1.27 to settle at US$97.91 a barrel on Friday.

The government also said in the report that employers created just 18,000 jobs last month, less than the 70,000 analysts had expected and the smallest increase since August 2003.

Traders are becoming more concerned that record high energy prices are helping to push the economy into recession.

"If the U.S. goes into a significant downturn, that will impact oil demand there. If it goes into recession, that may also affect other economies, for example, demand in high-growth China could also slow down,'' Shum said.

Any slowdown in the U.S. economy would hurt exporters in Asia that rely heavily on American consumer demand for sales and growth. Energy traders could have interpreted the jobs data positively _ in recent months, oil prices have often moved higher after the government reported dismal economic data because traders believe signs of economic weakness raise the chances that the Fed will cut interest rates. Lower interest rates weaken the dollar, whose decline has contributed to more expensive oil.

But analysts say a recession is seen as much more important to long-term energy prices than the easy money that is a byproduct of lower interest rates.

In London, Brent crude futures fell 50 cents to US$96.29 a barrel on the ICE Futures exchange.

Heating oil futures fell 1.16 cents to US$2.6719 a gallon (3.8 liters) while gasoline prices dropped 1.1 cents to US$2.5 a gallon. Natural gas futures added 0.4 cents to US$7.845 per 1,000 cubic feet.

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Japanese stocks start new year down amid US jitters, high oil prices

TOKYO (AP): Japanese stock prices plunged Friday, losing ground in early transactions after jittery trade on Wall Street amid concerns about the U.S. economy and rising oil prices.

Japan's benchmark Nikkei stock index lost 430.13 points, or 2.81 percent, to 14,877.65 points on the Tokyo Stock Exchange shortly after opening Friday for a half-day session.

The TSE had been closed since Monday for the New Year's holidays. The exchange resumes full-day trading Monday.

Wall Street closed narrowly mixed Thursday after share prices plunged the previous day on weaker-than-expected data for the U.S. manufacturing sector and record oil prices. The Dow Jones industrial average rose 12.76, or 0.10 percent, to 13,056.72 Thursday, as oil set a fresh trading record of US$100.09 a barrel.

Tokyo's broader Topix index, which includes all shares on the exchange's first section, lost 38.90 points, or 2.64 percent, to 1,436.78.

In currencies, the U.S. dollar was trading at 109.54 yen at 8:50 a.m. Friday (2350 GMT Thursday), up from 109.33 yen late Thursday in New York. The euro fell to US$1.4738 from US$1.4744.

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