Mutual Funds News and Articles: An Examination - Assignment Example

MUTUAL FUNDS NEWS AND ARTICLES: SUMMARIES AND CRITIQUES I. INVESTING September 18, 2008, Pros See Crisis Opportunities in Equities and Debt by AaronPressman Summary The sharp fall in the stock market prices on September 15, 2008 reminded one of the 1987 and 1974 crises which may tempt investors to pick up low-priced stocks, but fund managers and investment analysts advise caution because of high risks. Instead, they have recommended US government Treasury bills, particularly the index-linked Treasury Inflation-Protected Securities (TIPS), some investment-grade corporate bonds and municipal bonds, as well as emerging markets debt mostly through exchange-traded funds (ETFs). Some advise against Treasury bonds which are vulnerable to interest-rate risks, closed-end funds which are trading at a discount or below their real asset values, the financial sector whose turmoil was still continuing; and the housing which is at the center of the financial crisis. Energy, heavily hit by the current crisis, is highly uncertain and risky, as well as materials companies, and should be avoided at this juncture. Stock market indexes are also risky because they have yet to touch bottom before a turnaround. With emotions running high, one fund manager has turned defensive by converting into cash half of his big portfolio $15 billion. My Comments. No doubt these fund analysts and managers are using sound judgment and have learned from experience in both bull and bear markets. They are also aware that opportunities can be found in the midst of crisis and adversity, and they are keen on seizing these opportunities when they can be found. However, the situation is still confused and murky at best, and even with the experience of many individuals who in the past invested when "blood was on the streets," and subsequently made substantial gains, they are still advising caution. A contrarian approach of buying when the overwhelming majority are selling may not be timely. Also, it needs considerable amount of capital to enter the market as the market is sliding down because the bottom is not yet in sight. A lot of investors sell when they panic even when fundamentals are good, but a contrarian strategy needs huge capital and can sometimes be very costly even for the institutional investors with huge resources. I agree that the best strategy right now is to stay liquid and put more money in safe investment vehicles such as money market funds and US Treasury bills. Some mutual fund families provide the facility and convenience of switching from risky equity funds to money market funds with minimal cost. == II. MARKET SNAPSHOT September 18, 2008 Stocks Soar on Regulatory Hopes Summary The stock market moved tentatively in and out of negativity before settling down to show positive gain, which was 3.86 per cent for the Dow Jones followed by similar positive reaction worldwide. This was buoyed up by hopes that regulatory authorities may be able to control the financial crisis. First there was hope that Treasury Secretary Henry Paulson was going to apply the measures employed to resolve the savings and loan crisis in the 1980s - the Resolution Trust Corporation (RTC) type of intervention. Secondly, on Thursday, concerted action by global central banks to pump in $150 billion into the banking system provided some semblance of optimism. Thirdly, the decision by UK regulators to ban illegal short selling and US government’s new tough attitude towards short sellers in the United States could be good for the market. Short sellers were blamed for the rapid declines in the shares of Morgan Stanley and Goldman Sachs in the past few days. There was also a good chance that Wachovia could be rescued from trouble, what with the on-going negotiations with Citigroup and foreign banks. Washington Mutual shares moved higher, and AIG was downgraded by credit rating agencies. Economic indicators showed negative figures. Various developments in the futures market (gold and crude oil) showed contrasting results, with gold on the positive side. But bonds dropped in response to the news of an RTC-type solution to the crisis. My Comments. The "correction" in the market was merely an immediate response to what the market perceived as favorable government and multi-governmental action to confront the financial crisis. The coordinated infusion of $180 billion by various central banks certainly encouraged belief that governments were actively tackling the problem and that they could succeed. The possibility of restraining, in some way, the injurious practice of short selling would provide some measure of sanity to the market and prevent the contagion to other markets worldwide. The response of the market to the planned use of the RTC-type of intervention caused concern in the corporate bond market, and if I had some of my mutual fund investment funds in corporate bonds, I would certainly be concerned too. Some approaches to solving financial crises such as this one can affect different parties in divergent ways. However, if my fund manager had shifted to 50 per cent or more cash, my fears might be unfounded. The situation is still very much uncertain despite the recent one-day surge (correction might be the more correct term), and I would continue to monitor my investments from day to day and would take appropriate action as required by the situation. === III. MARKET SNAPSHOT September 16, 2008, 4:47PM EST Stocks Climb After Fed Holds Steady Summary The stock market rallied last Tuesday with the Dow Jones rising 1.4 per cent followed by the other indices. This followed a sharp drop the day before with the Dow fell 4.42 per cent. The rise occurred despite the fact that the Federal Reserve stood pat on its policy not to reduce interest rates as the market hoped. Policy makers were worried about the impact of an interest rate adjustment on inflation and the economic slowdown. The Fed saw that the economy had slowed as indicated by reduced export growth, housing contraction, and tight credit but held back on easing of credit through reduction of interest rates. It noted that inflation was high because of energy prices and increases in the price of some commodities. By not reducing the Fed rates, it was trying to prevent further inflation. The market was also reeling from the bankruptcy filing of Lehman and Bank of America’s purchase of Merrill Lynch; the AIG’s liquidity problems, the downgrading of Washington Mutual, among other problems. A hodgepodge of other international news pointed to a gloomy picture of the financial and equity markets as European and Asian indices dropped. Energy and gold futures were also down. My Comment. The slight correction in the US stock market after a significant drop the previous day occurred despite the fact that the Fed did not reduce the interest rate that the market expected. Such a move usually serves to stimulate the stock market. I believe that if such an interest rate cut had been decreed, the stock market would have rebounded to a more significant degree. The Federal Reserve was in a dilemma over the likely impact of an interest rate cut, citing both the economic slowdown and inflation. While an interest rate reduction may serve to ease credit and money supply, it can also exacerbate the ongoing inflation, and the Fed decided not to take action at this time. Despite the fact that a major catastrophe in the financial markets had occurred with the bankruptcy of Lehman and the takeover of Merrill Lynch by Bank of America, still the market maintains some ray of hope that the government can find a solution to the problem. == IV. INVESTING September 15, 2008 ETFs: Index Funds Are Still a Good Idea. Summary This an article about an investment vehicle called Exchange-Traded Funds, Exchange-traded funds (or ETFs) are open-ended investment companies that can be traded at any time throughout the course of the day. ETFs try to mimic a stock market index such as the S&P500. The writer maintains that ETFs, contrary to common belief among investment advisers, is a good way to invest by using an active approach. This defies the data that shows that about 80 per cent of actively managed funds do not beat the market. There is a discussion about passive strategy versus active strategy, use of different ways of weighting the stocks, whether equal weighting, or weighting according to size of market capitalization, and how frequently the porfolio should be rebalanced to ensure proper asset allocation, that the policies or rules of the fund are followed to the letter, without the involvement of emotions. The main objection to active trading strategy, such as the use of a quantitative model, is its complexity in implementation. A distinct advantage of ETFs is diversification that somehow eliminates risks characteristic of companies that are individually chosen. My Comment Diversification and liquidity are the two important features of exchange-traded funds, which accounts for its current popularity among investors. By tracking a particular index, it eliminates the unique risks that specific companies are subject to. However, when the whole market is experiencing a downturn, it is not possible for an ETF to escape unaffected. The investor has to find a way to hedge his position when there is a market downturn, or else his investment goes down along with the market. This writer believes that stock market indices are a good way to trade and invest in the stock market, but some kind of active monitoring and decision making – instead of passively watching – is recommended. There are some hedging vehicles such as index options and futures that he can use when the situation becomes uncomfortable for the investor. He may also track the turning points in the market indices by using technical indicators. --- V. BANKING September 16, 2008 Is Washington Mutual the Next to Fall? Summary Washington Mutual, an erstwhile prestigious bank based in Seattle was one of the financial institutions hardest hit by the consequences of the subprime mortgage crisis. Its losses could reach $28 billion. It may also need some $5 billion in new capital, after having raised $10 billion last year, in order to survive. On September 15, its shares fell 27 per cent following news that Lehman and Merrill Lynch had succumbed to the mortgage meltdown. The following day its price rose 16 percent after rumor circulated that JPMorgan Chase was likely to make an offer for the company. A WAMU bankruptcy was likely to be very costly to taxpayers. In addition to new infusion of capital, the company also needed to find a merger partner. Supposedly it should attract suitors because it is a federally insured institution . Also, during the S&L crisis in the late 1980s and early 1990s, financial institutions in the same plight the company has found itself were able to survive. My Comment Washington Mutual is the country’s largest savings and loan bank and the repercussions of its failure are incalculable. Its survival is necessary to the continued health of the financial services industry. Both the private sector, consisting of companies with enough liquidity, and investors, should find it in their best interest and in the best interest of the economy to support the company. The government also needs to look into seeking means to provide direct assistance to the distressed financial institution. If one were to adopt a systems view of the situation, the failure of Washington Mutual would affect other parts of the system and thus potentially can create trouble for the whole industry. The impact of such a failure will affect investors too and can help accelerate the downturn of the economy. -- VII. THE OUTLOOK August 15, 2008 Looking for Distressed Mortgage Opportunities Summary In the midst of the subprime mortgage crisis, some hedge funds and private equity funds have begun to raise money to be used to purchase distressed mortgage assets. This would be done in anticipation of a rebound in the industry in the medium to long term. Some participants in the industry point to some assets that may not be distressed for credit reasons but are categorized as such because of the structure they are in, such as collateralized debt obligations (CDOs). According to the Banking Dictionary, CDOs are diversified, multiclass security similar to collateralized mortgaged obligations, bonds, bank loans, or other assets. A CDO may own corporate bonds, commercial loans, asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and emerging market debt. Distressed asset funds raised $28.7 billion in the second quarter of 2008, to be deployed in the next few months precisely for the purpose of buying distressed mortgaged assets. This kind of positioning is obviously good for the market but bears considerable risk for the players. There is lack of information and the strategy can be complex and dangerous. Vehicles can be open-ended funds as well as closed–end funds that contain distressed assets. My Comment. If given enough time, extreme situations tend to reverse themselves. The move by some adventurous investors to buy distressed assets securities in the next few months would doubtless help reverse a negative situation. It can be tricky, however, because the task of determining which assets to buy can be difficult for lack of accurate information. It is also uncertain when the strategy can pay off. The length of time the industry may take to recover and make an investment profitable is subject to mere speculation. Risk takers have to have the willingness to be patient before positive results can emerge. One of the investment vehicles is investment companies – whether open-ended mutual funds or closed-end funds. The article points out the disadvantage of a closed-end funds - that they often trade outside of their true values – either at a discount or at a premium. An open-ended fund is preferable in terms of correct valuation and liquidity for the investor. REFERENCES Hirt, G.A. & Block, S.B. 1986, Fundamentals of Investment Management, Irwin: Homewood, ILL Jones, CP 1991, Investments: Analysis and Management, 3rd edn, John Wiley & Sons, New York. Read More