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Attention shifts to credit funds
Friday 14th of March 2008
As I mentioned in today’s Weekly Wrap the indefinite closure of ING’s credit funds is likely to galvanise attention onto this sector of the market and away from finance companies (unless we have another big one fall over).
All these credit products have been having trouble for a while and what is possibly not recognised is the amount of money in these products, or the size of the hits being taken.
The list of firms who played in this space is lengthy and filled with some well-respected brands. Besides ING, there is Macquarie, NZ Funds, Absolute Capital, Forsyth Barr and Basis Capital. In total, there is many hundreds of millions of dollars.
Up until now the status of the listed funds such as Macquarie’s Fortress, Absolute Capital’s PINS funds and others, has been apparent. The ING announcement this week brings the unlisted offerings into the light.
One comment made to me yesterday was worrying. It was from someone with a quasi-finance company type product, and he said to the public all these things look the same. That is, the public doesn’t make much of a distinction between credit funds and finance companies.
That doesn’t surprise me as it had been clear for sometime than many of these credit funds were sold as alternatives to finance companies and in many cases term deposits.
In the early days many stories were told that ANZ had been selling credit funds to customers who wanted term deposits. This is a worrying story that has been sitting below the surface for some time now. In reading today’s Business Herald it is clear that the story will gain prominence.
Judging from the mainstream media reports, the credit fund issues maybe dealt with in the same manner as finance companies.
If there is a plus to this, this is it. I imagine most of the money that went into credit funds was adviser-directed. Consequently, the client should have a well-diversified portfolio and credit funds will only have a small allocation, as opposed to the horror stories we have heard of punters having all their money spread across three or four of the worst finance companies.
Let’s hope I’m right on that!
Comments (7)
Kevin Kevin
"I still have to understand how institutions could fall on the story that packaging under a giant umbrella a bunch of wobbly mortgage loans all together will make , all of a sudden, an AAA security."
It actually makes a lot of sense. Just as a rough example: If you have a portfolio of 100 assets and each of those assets has a 5% chance of failing, then you can assume that 5% will fail and the portoflio loses 5%.
Lets say the portfolio is paying 10%pa.
Now someone says to you that they will buy the bottom 20% of the portfolio, as in, they will absorb the first 20% of losses.
But they want to be paid 11% instead of 10%.
That sounds like a good deal for you, doesnt it? You give up 1% of your return but also give up the riskiest portion of your portfolio. For you to lose any of your capital over 20% of the total portfolio would have to default.
The person buying that bottom portion is shielding the upper portion from losses. So this improves the quality of the upper portion.
Of course you dont know which assets will default before the fact, but you dont need to, because if they default they are automatically included in the bottom 20%.
A big problem arose when the estimates of the default rates turned out to be well wrong. They may not have been paying much attention to what was going into the portfolio. Previously, it may have been pretty bad loans, but then (thanks to a range of factors) it started to be really, really bad loans.
You will find that the CDO's and CMO's are sometimes refered to as different vintages. For example, the 2005 CDO may be better than the 2006 CDO, because the loans that were going into the 2005 CDO were actually much better/sound.
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16 years ago
Kevin Kevin
If you WANT a portfolio focussed on absolute returns, if you want every fund to have an absolute return focus, or if you want to ignore the funds benchmark when deciding on the performance of the fund manager, then invest in absolute return funds.
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16 years ago
Kevin Kevin
"You should also be careful the absolute return fund does not give you exposure greater than the amount you invested."
Absolute return funds cannot give you exposure to more than you invest on the downside. You can never owe the fund money.
RD keeps going on about his international equity fund; that it has lost money and that it doesnt move into cash to avoid all downturns. Treating with contempt the managers and advisers who are, correctly, ignoring short term deviations.
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16 years ago
Kevin Kevin
The maths i used were just for the example to make it easier to understand. The concept behind asset backed securities isnt that difficult to comprehend.
Look, if you are investing for retirement or another long-term goal then it means nothing if you lose money with a particular manager in the short term. Nothing. It doesnt mean that manager is bad, and it certainly doesnt mean that another manager that made money in the same period is better and will protect you from downturns in the future.
If you are going to abandon ship every time a manager doesnt beat benchmark for the quarter you will end up needlessly turning over your portfolio at a stupid rate.
I am always going to be naturally wary of people that claim to have a perfect investing system, expecially if they claim that the system should be obvious to anyone truly wanting to be proper fiduciaries. Usually, if someone has a system that will generate higher returns with lower risk, it will be copied, exploited and the advantage/signal will disappear.
"I repeat again, the 94 years average return of the shares, in US$ is about 6.4%..."
Where are you getting this from? The S&P500 has returned around 10% since inception.
"if the Fund manager is only required to pick a portfolio, buy and hold it, in the 90% of the cases it will do worse than the index"
The score isnt much better for active managers.
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16 years ago
Kevin Kevin
As I said, I only used the maths to explain the idea behind asset backed securities like CDOs and CMOs.
I was not offering any method to calculating their specific risk, I never said they were safe, I never said the rating was correct, I was just explaining the concept. So I dont know what you are going on about.
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16 years ago
Kevin Kevin
Dude, you are losing it. You seem to think I am making the argument for a certain type of asset management, when I am really not. Or that I am arguing against shorting the market or adjusting a portfolio, which again, I am not.
Look back over what I have said. I gave a simple explanation for asset backed securities, made the case for absolute return funds, and complained that RD was being too short term in his thinking, and was in a fund that obviously didnt suit him.
I dont know who it is you are arguing here, but it aint me. Now you have just pissed me off.
"No one has EVER mentioned to you the frequency of change, and the frequency of changing a manager every quarter is a rethoric expedient you use"
It was simply to emphasise my point that short term fluctuations dont mean that much, and making decisions based on them would have you jumping ship every quarter. But even changing managers each year is probably too much. You said it yourself, it takes 5 years to see if a manager has added value through skill.
"the numerical evidence is conducted on groups of funds styles and methodologies therefore taking in the good and the bad…"
So you are controlling for survivorship bias, backfill bias, and the smoothing of returns that many hedge funds do thereby reducing their apparant volatility. Otherwise, big surprise, an index which probably has upward biased returns and downward biased volatility manages to look appealing on a risk-return basis.
"discretional ones that still think that meeting the management is an important component of picking a stock"
These managers are obvioulsy buying COMPANIES not stocks. Dont you think it takes a leap of faith to assume that everything that needs to be known about a company is contained within a single piece of data: the price.
"The S&P 500 index is just too short."
82 years is too short. There must be some really important stuff that went on in 1914-1926, that has so much relevance to investment markets in the future.
Oh and the return I have is 10.2% from Jan 1926. Which, last time I checked, and bear in mind this is without the benefit of a magical numerical telescope, is more than 10%.
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16 years ago
Kevin Kevin
"(like the one I have illustrated and you choose to ignore…Oh…sorry, I should have known that looking in a telescope, being an empirical instrument that endangers your conception of a Tolemaic universe governed by Aristotelic theories; showing you the truth..is not contemplated!)"
Did you ever stop to think the reason I "choose to ignore" your illustration is because I dont have an issue with it? Where have I said that quant management doesnt work? Where did I say that there is only one correct style of management? I am not the one making sweeping generalisations about fund management styles.
You say Red Dog is right, and that I am wrong in asserting that short term fluctuations oughtn't be driving long term investment decisions. But you have demonstrated that you completely misunderstand what I was saying.
In fact you go on to tell me that what I call "short terms deviations ... are bear markets lasting years and wiping out ALL the benefits accumulated in bull market times…"
Wow, I didn't realise that by short term I meant MULTI YEAR BEAR MARKETS. Gosh. Thanks for clearing that up for me.
In fact I will sign off now because you are able to provide all my arguments, including the ones I never gave a hint of making.
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16 years ago
2 min read
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