GalaTime

John Mauldin’s latest missive - Deep Inside The Dow contains advice from Richard Russell on ‘How to Succeed at Writing’:

“I’ve been asked a thousand times, ‘What’s the secret of success in the advisory business?’

(1) You’ve got to be an obsessive nut to start with.

(2) You have to be able to write in a way that people understand and like to read.

(3) You can’t come across as a phony who knows it all. Readers know that nobody knows it all.

(4) It helps if you have a long life and don’t want to retire.

(5) You need a wife who can put up with a husband whose head is full of the markets 24 hours, day and night.

(6) Woody Allen said the 90% of success in life is just showing up. If you can show up for the markets 250 days a year, you’re ready to start an advisory service (but I wouldn’t wish this business on my worst enemy — it’s the closest thing to absolute madness. No wonder nobody else has lasted in the business 50 years).

(7) This is a lonely business. So be prepared. Need a friend? Get a dog. Need two
friends? Get two dogs.

(8) One last thing — you must have thick skin, because no matter what you write, some
subscriber will send an e-mail calling you a moron or brain-damaged, and the scary thing
is, that makes you think, because they may be right.”

That’s as transparent as it gets from a financial advisor - not something that you see on CNBC every day. Now consider this second piece of rarity - from the mutual fund management world:

Report on Business: The manager who gave back his fees

Unhappy at the returns he has generated for clients, money manager Francis Chou is refunding almost all the management fees collected by his Chou Europe fund since it opened for business in September, 2003.

It’s not only unique for a fund company to give back fees it has collected, it’s also difficult because of the need for regulatory, legal and accounting advice. “When you go and give back money, you sometimes have to jump through hoops to get it done,” Mr. Chou said.

Mr. Chou’s take: “I look at it more that you have to earn that fee rather than have it given to you. If I feel I earned it, I take it.”

What ?!? Refund management fees? Because he didn’t perform upto expectations?

Can you even imagine something like this coming from mutual fund managers in India? The only thing most of them would be willing to jump through hoops for is to extract more blood fees from retail investors.

Let’s do so simple math - assets under management (AUM) for Indian mutual funds were ~ Rs 5 lakh crore durong 2008. Of those, equity mutual funds accounted for ~ Rs 1.5 lakh crore. Assume average management fees of 2% (this includes marketing fees, annual expense fees, marketing fees, and what not). That works out to management fee revenue of ~ Rs 3000 crore.

Given that the majority of funds usually trail the market indices, and given that almost all funds lost money in 2008, shouldn’t a big chunk of this Rs 3000 crore be clawed back?

What are the chances of a fund manager in Mumbai returning management fees for poor performance? About the same as the chances of me becoming the next Prime Minister of India.

• Economic Times: MFs on a volcano; using short-term funds for long-term lending

Mutual funds industry is sitting on a volcano as 75-80 per cent of its assets are short-term while it resorts to long-term lending to corporates, creating an asset-liability mismatch.

“This is a dangerous situation,” warns UTI MF’s Chairman, U K Sinha, highlighting the need to take corrective measures. Banking money with mutual funds in end-October was Rs 13,000-crore and it jumped up to Rs 90,000-crore by February, he said.

Though banks have long-term money, they are not lending but mutual funds which have banks’ short-term money parked with them are lending long-term to corporates. “This is not a healthy trend,” he said, adding this could lead to an asset-liability or maturity mismatch, that too, when banks can withdraw money parked with mutual funds within 24 hours.

• BCA Research: Disenchanted With The U.S. Dollar

• Business Standard: ISB extends placement season indefinitely

For the first time since its inception, the Indian School of Business (ISB) has extended its placement season indefinitely. Only 250 of the 440 students (around 57 per cent) in the class of 2009 have secured jobs in the placement drive that began in early January.

Placements should have been completed by the end of March, and the campus would have been readying for graduation day in the first week of April. However, the slowing economy appears to have taken a toll on this prestigious B-school, which ranked 15 in the 2009 global MBA rankings released by the Financial Times. Over the years, the placement trends were analysed and results announced by graduation day, scheduled for April 4. This year, that is unlikely to happen. There are already hints of a fall in the annual average salary offers from Rs 18-20 lakh to Rs 13-15 lakh.

#15 B-school worldwide can’t place half its students. How bad is it at Tier 2/3/4 schools?

• Financial Express: Why has India coped rather well with the decline in capital inflows?

. . . at a time when equity capital inflows have taken a hit of $6 billion a month compared with the peak, where debt flows have done badly, and exports have done badly, how is it that the rupee has found stability without much interference from RBI?

The decline in the price of crude oil of $89 per barrel gives a benefit of $5.5 billion a month or roughly $65 billion a year.

The benefits to India of this changed international environment extend beyond crude oil. India is largely a commodity importer or a commodity re-processor. Numerous commodity prices have dropped, including energy, metals, agriculturals, etc. Indian imports of capital goods, machinery, telecom equipment, computer equipment have all benefited from the global softness in prices. These changes have helped reduce the import bill.

• NY Times: When Consumers Cut Back: A Lesson From Japan

• Hindu Business Line: Equity funds sitting on Rs 20,000-cr cash chest

The proportion of cash to total equity assets has gone up from 10.1 to 20.5 per cent between January 2008 and now.

• Emanuel Derman: The Financial Modelers’ Manifesto

The Modelers’ Hippocratic Oath

~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations.

~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

~ I will never sacrifice reality for elegance without explaining why I have done so.

~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

• Barrons: A Bearish Call on Bullion

Unfortunately for gold, the editors of gold timing newsletters are even more bullish now than they were this summer. In fact, they currently are more bullish than they have been in three and one-half years. Contrarians do not consider this to be a good sign at all.

As of Tuesday night of this week, the HGNSI stood at 75.2%. To put this into perspective, consider that the HGNSI this summer never got higher than 64.3%, even though bullion in July was a lot higher — within shouting distance of the $1,000 level, in fact.

The inverse correlation between HGNSI levels and the gold market’s direction over the subsequent several months is statistically significant at the 95% confidence level.

• Wall Street Journal: One Fund in 1,700 Made Money in ‘08

• Wall Street Journal: The China Growth Fantasy

Ask a professional economist how many provinces China has and you are likely to draw a blank stare. But ask him what the GDP growth of China has been and he’ll quickly be able to tell you that China has grown at a double-digit rate for 30 years and that at this rate China will overtake the U.S. by 2035 (or some other date). GDP-centrism is endemic, and often comes at the expense of deeper analysis.

Fixed asset investment, heavily controlled by the government, has risen to nearly 45% today, from a level of 30-35% during the 1980s. Much of the GDP growth since the mid-1990s has been a result of government-organized massive investment drives — in infrastructure, urban construction and urbanization.

• DNA: Port cargo traffic fall continues in Nov

November was the second consecutive month where the 12 major ports of India, which handle 70% of the country’s import-export traffic, saw their cargo traffic drop and missed their targets. The ports handled 42.55 million tonne in November, which was 5.1% less compared with the same month last year.

Even Jawaharlal Nehru Port (JNP), which handles 60% of the country’s container traffic, saw volumes drop 4.38% against the targeted traffic.

Iron ore still remains the worst hit, being the only cargo to see a 6.62% decline y-o-y due to lower demand from China.

• Economic Times: MFs offer extra fee, upfront pay to lure agents

Among a host of measures adopted, fund marketers are promising higher commission on schemes sold. In addition to the 2.25% as entry load and 0.5% trail commission, distributors are being offered 0.5% extra commission for every tax saver fund sold. Instead of annual commission, which was the case until some time ago, fund houses are now offering an upfront commission of 1% for selling gilt and income funds.

“The mandate for us now is to make a killing with tax-saver schemes. Though our commission on gilt and income funds are higher, it’ll be easier for us to sell ELSS. We’re advising debt schemes to rich investors only,” the distributor said.  

Here is the latest gimmick to extract more fees from investors: Economic Times - Broking firms offer PMS in MFs to retain HNI clients

Known widely as ‘managed mutual fund portfolio’, this product works on the same principles of highly-customised PMS schemes, exclusively for HNI clients. Under ‘managed MF portfolio’, the broking firm accepts a sizeable investment (generally ranging between Rs 30 lakh and Rs 50 lakh) from the investor, to be deployed in an array of schemes.

The broking firm charges anywhere between 1% and 2% of net investment, as annualised management charges. Some broking firms also stake claim to a small portion of
profits derived from investments.

“The application is placed directly with the fund house, there by eliminating a 2.25% entry load. The idea is to generate 30- 40% returns from investing in mutual funds; though it is a bit difficult at this point, it is possible by strategic churning of portfolios.”

The majority of mutual funds are correlated in terms of performance and never beet the market indices over the longer term. Add to that their high entry/exit loads and management fees, and you’re always a few steps behind. Now with this PMS non-sense, the brokers are trying to line their pockets even more. It’s all about sales & marketing, not about creating economic value for investors.

• Business Standard: Mutual funds keen to buy FCCBs

Mutual funds are considering buying Foreign Currency Convertible Bonds (FCCBs) of Indian companies that are trading at discounts of 30 to 40 per cent to their face value on the assumption that these bonds can deliver good returns in two to three years, when they mature.

AMCs can invest $7 billion abroad, and $300 million per AMC, but investments are way below these levels. Most equity schemes can invest 35 per cent of their assets abroad and there are schemes that invest only in overseas equity.

“If mutual funds need to invest in only AAA-rated instruments, there may be no Indian company with an ‘AAA’ foreign currency rating overseas,’’

Heck, just call up Moody’s. Don’t they offer a special fee-based arrangement to certify anything (including cow dung) as ‘AAA’?

• Morgan Stanley: 2009 Growth Outlook: Still in a Coupled World

We have always argued that the most important driver of India’s growth cycle over the last four years has been global risk appetite and capital inflows. With the duration of risk-aversion in global financial markets likely to be longer than what we estimated earlier, we are cutting our GDP growth estimate for 2009 for India to 5.3% from 5.8%. We are also cutting our F2010 (year-end March) estimate for GDP growth in India to 5.3% from 5.7%.

India’s export growth averaged 24.8% over the last three years . . . exports are likely to be unusually weak over the next six months. We now expect exports to decline by 5.3%Y in 2009 compared with 12.7% in 2008 (estimated) and 23.1% in 2007.

• Cassandra: Bernie Comes Out of the Closet

. . . it seemed to me that the “split-strike conversions” were profit shifting bookeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied “yield” equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were “phontom” positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything.

He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coiiup d’etats in Africa. or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!

What is too good to be true usually is.