atans1

Posts Tagged ‘indexation’

Value in China stocks: Indexation guru

In ETFs, Investments on 03/04/2010 at 3:53 am

Princeton University economist Burton Malkiel, the author of  “A Random Walk Down Wall Street”, a book that introduced many to the idea of investing via indexed-linked funds, sees value in Chinese shares, he tells the FT.

The FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares) is different [from the Shanghai "A" shares which he thinks overvalued], he says. This year, while the Shanghai has gained 53.8 per cent, the FTSE Xinhua is up 6.8 per cent – less than the S&P 500.

A “matched pair” study – comparing oil company CNOOC with ExxonMobil, its equivalent in the S&P, and so on – shows that FTSE-Xinhua price/earnings multiples are higher than in the S&P. But their rate of earnings growth is also higher. Crucially, their “PEG ratio” (the earnings multiple divided by the growth rate) is actually lower. So, Malkiel says, Chinese “H” shares are “moderately priced” compared to the S&P.

That is why he is buying China. But Malkiel is not selling his principles. He recommends investing in “H” shares via exchange-traded funds tied to the index – and not backing anyone who says they can beat the market. (Note there is an ETF traded here that tracks  the FTSE-Xinhua index of the 25 largest Chinese stocks quoted in Hong Kong (”H” shares): DBXT FTChina25.)

Bubble or collapse in China?

He would not be surprised if China took a near-term hit. But long term, he believes it is the place to be … He is concerned about asset bubbles forming in real estate, banking, and in the stock market. “This is bound to occur wherever economies grow fast, and China’s expansion over the past decade has been unprecedented in the history of industrialisation.”

But will the economy collapse if any of these asset bubbles burst? “Absolutely not,” says Mr Malkiel. “They will correct, and restart because of the strength of the underlying story and the country’s extraordinary balance sheet.”

He does not think the country can continue to rely on export-led growth for both geopolitical and economic reasons.

“China potentially has the largest consumer market in the world, but its consumption is less than 40 per cent of GDP, a ratio that has not changed over the past decade. In the US, the ratio is about 70 per cent.”

But key reasons for low consumption remain extant: people need to save because there are virtually no government safety nets; and the one-child policy makes it difficult for children to adequately care for their parents.

The divide between the Haves and the Have Nots is what most worries Mr Malkiel. “There are seismic gaps in China between rich and poor, especially seen in the affluent east versus the impoverished central and western regions.”

This has already led to some unrest. Potential instability is a great danger. “But that’s why the government is developing infrastructure, education and a nascent social safety net,” he says.

He contends that a purchasing power-adjusted gross domestic product weighting, which adjusts for the renminbi’s significant undervaluation by this measure, suggests equity exposure of between 6 and 12 per cent.

So how does he (and his clients) invest in China?

As chief investment officer of China-focused AlphaShares, he is certainly helping investors find their way into the mainland. He has crafted a series of indices, some of which are trading as ETFs, that provide specific sector exposure (infrastructure, consumer, technology and real estate) and market exposure (all cap and small cap).

But his firm has also developed a set of private actively managed funds. These include a China-linked fund, which invests in non-Chinese companies that are directly benefiting from China’s growth, and an enhanced index fund – a broad-market fund with an enhanced weighting of small and value stocks. A buy-write fund aims to exploit Chinese market equity volatility by going long the highly liquid FTSE Xinhua 25 Index and writing options against it to pick up premium income. AlphaShares may take these funds public.

Mr Malkiel squares this active management with his long-term embrace of passive investing by citing the inherent inefficiencies in the way the Chinese market functions and is tracked. He believes unprecedented growth, trifurcated shares [mainland, Hong Kong and foreign classes], and volatility present special opportunities that cannot be captured through traditional indices.

Finally, it should be no surprise, he is a bull on emerging markets, and equities in general.

For a 40-something US investor with a family, he is recommending a portfolio with 80 per cent equity exposure. And he thinks half of that should be foreign stocks. He believes long-term investors will be best served with half of this international exposure being in emerging markets such as Brazil, India, and China.

He remains a believer that passive exchange traded funds are the most efficient means of gaining market exposure around the globe. His recommended 50 per cent US exposure is close to the MSCI All-Country World Index weighting of 44 per cent. However, he deviates significantly in his exposure to so-called EAFE countries, the developed world ex-US and Canada. He recommends 25 per cent EAFE exposure versus the global weighting of almost 41 per cent, in the belief that Europe and Japan will not experience significant growth in the coming years.

He departs from market-cap benchmarking even more materially in recommending 25 per cent equity exposure to emerging markets, twice the All-World Index’s weighting.

Mr Malkiel justifies this by citing a perceived fundamental shift in growth away from developed to emerging markets. “My portfolio strategy remains passive, I’m not picking stocks,” he says. “I’m adjusting for economic realities. And we see the need for such investment modification in China where a low free float [on which most indices are based] undercounts China by at least a factor of four.”

Connected post

http://atans1.wordpress.com/2009/12/08/bull-in-a-china-shop-but-will-he-find-value-in-s-chips/




Our SWFs: What our MPs are not asking

In GIC, Temasek on 15/03/2010 at 4:35 am

In the US, there is growing concern that public pension funds are taking excessive risk to meet their targeted returns. –NYT article.

Our MPs should be asking ministers about the risks our SWFs are taking relative to their returns, not easily batted away questions on losses. In the context of the portfolios, the losses are as Mrs SM could have said (but didn’t),”Peanuts”, and as any CFAer could tell you, “Look at total portfolio return, not individual items”.

And asking if they are aware that Norway’s SWF commissioned a report by three business-school academics—Andrew Ang, William Goetzmann and Stephen Schaefer from Columbia, Yale and London respectively – that found that taking the recent crash into account, the fund’s performance was essentially indistinguishable from that of a passively managed index fund.

And what is the experience of Temasek and GIC in this passive versus active debate.

I don’t expect PAP MPs (hey they can be disciplined for being difficult and anyway there is such a thing as loyalty) or Chiam (he is sick) to make life difficult for ministers. But where is Low (Waiting for pension?), or Sylvia (Waiting to be given Low’s seat?);  and NMPs for?

Or for that matter the SDP? I don’t incude RP or KJ  because to do the economic analysis they are doing (and put it into understandable language)  is not easy, so let’s cut them some slack.

Miss Siew Kum Hong. His ideas of human rights did not only encompass gay and feminist issues like “anal sex is OK”, but also, what the Chinese Communist Party rightly includes as a human right, “economic rights”.  He gave a great speech on CPF and asked the right qns on our SWFs.

The Perils of Indexation

In Investments on 25/12/2009 at 9:34 am

This writer believes that indexation is the way to go when investing in equities. http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But I think  this is going too far: “What can retirees do? They have to invest in equities to earn a higher return. Although equities have a higher level of risk, it can be mitigated by investing in a low cost fund, such as an exchange traded fund. The return on equities is likely to be around 5% to 7%, which is much better than 2% on government bonds.”

Err what about the principal? Remember oldies may need their capital sums in a hurry.

The return of the Dow to 10,000 (10520 on X’mas eve) serves as a sad reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.

Likewise the STI. The STI started 2000 at around 2000. Went to a high of just below 4000 and on 24 Dec was at 2837 Just in March 2009, it was at  1455.

Fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds.

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter.  Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demotalise you.

Follow

Get every new post delivered to your Inbox.

Join 210 other followers