27 May 2011

Libyan Investment Authority - How not to structure a portfolio

This revealing snapshot demonstrates that all investors - however (un)sophisticated they may be - should pay more attention to the importance of designing a portfolio that is consistent and not just a random collection of holdings that are the result of uncoordinated input received from news or financial product salespeople. Any investor employing more than one money manager has the problem that he may harbour holdings that are in essence based on contradictory assumptions and therefore expensive and inefficient. At the same time the Libyan holdings also underline the riskiness of 'structured investments' that are at best only understood by those who sell them (and sometimes not even by these mathematical wizards themselves). Anyone without a PhD in Mathematics would do well to give these 'structures' a wide berth.

Media and misinformation in the markets

How to deal with information overflow in the investment world - By Robert Shiller

24 May 2011

Today's War: Savers versus Speculators

When the manager of the world's largest bond fund says that people are facing 'financial repression' it highlights the battle between the ordinary citizen-savers and the speculators who caused a near-collapse of the financial system and the ensuing artificial depression of real interest rates. Despite this deplorable consequence of poor financial regulation investors should not be tempted into risky investments in order to make up for the low interest rates they receive at the moment. While a return of 1 percent a year may be hurting in the pocket it is nothing compared to a much larger loss in ill-conceived gamble in speculative shares or 'investment products' marketed by aggressive salesmen that are only out to cash in on fat sales commissions. It would take years to make of for a loss of only 10 percent of principal and the risk for much higher losses cannot be excluded.

23 May 2011

Trust is good, control is better

Slippage in its most basic form means the difference between the expected price of a trade, and the price the trade actually executes at. This can be due to fast moving markets and is caused by the delay between the placing of an order and the time it reaches the market. Slippage can also be due to mishandling or even abuse by the broker that is entrusted with executing the order. So investors should regularly scrutinise the handling and execution of their investment transactions. An ongoing controversy between major participants in the financial markets illustrates that not even sophisticated investors are immune from becoming victims of poor order handling.

17 May 2011

Nine out of ten clients get bad advice

While a survey conducted by a consumer organisation in Germany may at first appear to be of little relevance on a wider global scale it offers a useful insight into problems faced by clients of banks, investment advisers and insurance companies. They are usually at an information disadvantage compared to their adviser/salesperson and we suspect that a survey conducted on a more international basis would produce similar results. Getting advice that is not influenced by any monetary incentive such as commissions, transaction fees etc is more important as products continuously become more complex and more difficult to analyse for the laymen - including businesspeople who may be used to dealing with sophisticated financial product in their 'day job' running often quite substantial businesses.

15 May 2011

How safe are state pensions?

Ireland and Argentina are two examples of a new trend where governments that have run out of ideas how to finance their uncontrolled spending will treat money that is supposed to pay for citizens that retire. They blatantly steal from present and future pensioners that rely on a secure retirement after having believed the promises of politicians for most of their lives. Locking up investments in saving schemes that are ultimately controlled by greedy and unaccountable politicians may not be a good idea despite the carrot of tax incentives dangled by governments and providers of pension schemes.

12 May 2011

'Rent-a-President' - with your money!

A report that ex-Presidents George W. Bush and Bill Clinton attended a closely-guarded meeting for private clients of a major wealth management bank demonstrates that investors should closely scrutinise the fees they pay to their financial advisers. One may or may not have a view on the policies of these ex-politicians but it is difficult to see what they can add to the performance of the client portfolios supervised by the bank. There may be a certain entertainment value but as we have never seen proof that either Bush Jr. or Clinton possess outstanding investment acumen.

10 May 2011

Bonds- Certificates of Confiscation again?

A controversy about the value of bonds as investment vehicles between respected investors highlights the risks investors face when locking in today's record low interest rates. Even if one can make some adjustment for the likely returns one still has to account for the negative impact of inflation and income tax as well as the fees charged by investment managers or mutual funds.

6 May 2011

Synthetic ETF's - Do they pose a risk? and for whom?

Discussion about the potential risks that may or may not be created for global financial markets by the proliferation of increasingly complicated Exchange Traded Funds (ETF's) that rely on derivatives to achieve their investment objective also highlights the fact that the ETF investors on their part may also be unaware of risks that synthetic ETF structures may pose for their financial security. While ETF's were initially viewed as a simple method to achieve performance targets at little cost and with little risk they turn more and more into instruments that can only be properly scrutinised by experienced investment professionals. Investors should not rely on glossy marketing brochures and sales patter by advisers who are trying to promote the funds.

Hedge Fund-lite UCITS Fund Warning

The bureaucrats trying to protect the investing public from costly failures in the fund management industry may have good intentions but the outcome of their deliberations more often than not adds additional complexity to the rules governing the investment industry. When seasoned industry figures warn of potential blow-ups of certain types of UCITS-III complaint 'hedge fund-lite' vehicles the investment public - whether it is ordinary investors or 'sophisticated' investors - should wake up to the fact that it would do well to consult unbiased advisers before committing their funds to any investment product.

Germany: last vestiges of individual freedom supressed

One should have thought that the political and bureaucratic establishment that holds Germany in an iron grip should at least have learned the lessons of history after decades under national-socialist or communist totalitarian regimes. But quite the contrary is happening. The tendency to control everything that the citizen does is so ingrained in the national psyche that the state has no problem extending its reach into ever-more absurd niches of the citizen's lives. Now a new law is proposed that would have banks automatically document the content of safe-keeping boxes that are rented out. In addition these reports would have to be passed on to the 'authorities'. This ludicrous encroachment into individual freedom is just in addition to supervision of all bank accounts, courier services (!), telecommunication and postal services as well as transportation companies. In addition the state's functionaries would not need prior agreement from any court to obtain their information. Citizen-Investors need to be more vigilant than ever to protect their assets from an all-devouring state that exists only to divert their assets to pet projects favoured by politicians and those well-connected to them.