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Posts Tagged ‘Bonds’

NEW BREED OF ETF

In ETFs, Financial competency on 27/03/2015 at 10:31 am

BLACKROCK’S NEW BREED OF E.T.F. Exchange-traded fund have been a hit with passive investors for years. Now, BlackRock is introducing a new type of bond E.T.F. that aims to “blend the best of active investing (security selection) with index investing (cost and consistency),” Landon Thomas Jr. writes in DealBook. Of the financial inventions in the history of Wall Street, few have been as successful as E.T.F.s, which hardly existed 15 years ago and now, at $2 trillion, make up close to 15 percent of the mutual fund industry.

BlackRock’s iShares division has become a crucial profit driver for the fund company, accounting for close to a quarter of its $4.6 trillion assets under management. “The rush into E.T.F.s has come at a time when the performance records of mutual fund portfolio managers, especially on the equity side, have been poor,” Mr. Thomas writes. According to Morningstar, 74 percent of equity mutual funds trailed their benchmark index last year. For that reason, the bulk of E.T.F. flows have been into large fundsthat track stock indexes. Bond E.T.F.s have also grown in size in recent years, though the numbers have been smaller.

BlackRock’s new fund, called United States Fixed Income Balanced Risk, will invest in an equal split of corporate bonds, which will benefit if rates spike upward, and Treasury securities, which will protect the fund if rates fall. “Because these funds target a specific area of demand in the market but follow an index, they are seen by their champions as joining the best aspects of active and passive fund management,” Mr. Thomas writes. “Yet because the cult of the bond manager still holds sway, there have been few if any quasi-active bond funds that have thrived.”

NYT Dealbook

The big picture: Two things to worry about in 2015

In Banks, Emerging markets on 19/12/2014 at 1:26 pm

TEST FOR POST-CRISIS BANKING SYSTEM The market turmoil this week will test Washington’s efforts over the last five years to bolster the financial system, Peter Eavis reports in DealBook. Investors are stampeding out of risky markets, dumping junk bonds issued by American energy companies that have borrowed heavily to exploit the shale oil boom. A steep slide in the price of oil could now cause some of the companies to default, analysts say. But the most dangerous pain is occurring abroad, particularly in Russia, which is dealing with a currency crisis.

“Such difficulties echo the crisis that buffeted markets in the developing world in 1998, when Russia actually defaulted on debt denominated in rubles,” Mr. Eavis writes. Back then, contagion made its way onto Wall Street through an enormous hedge fund called Long-Term Capital Management that nearly collapsed after making bets way beyond its means. “The parallels with 1998 have led investors and regulators to ask if any similarly dangerous weak points exist today. And if they do, the question is whether the big banks are sturdy enough to bear the shocks,” Mr. Eavis writes.

For the moment, many specialists say the system is sufficiently girded. For one, the big banks today rely less on borrowed money to finance their trading and lending. And the Wall Street banks are not lending as much money to hedge funds and other investors to make highly speculative bets. Still, the big banks continue to rely on billions of dollars in short-term loans that could dry up in a panic. And some investors are concerned about geopolitical risks undermining economic confidence. The plunging oil price, for instance, could create even harder economic times for countries like Russia and Iran. But low oil prices might also constrain governments that have stoked instability.

 

BOND INVESTORS SKITTISH OVER EMERGING MARKETS The biggest energy companies in some of the biggest emerging markets ‒ Petrobras in Brazil, Pemex in Mexico, Gazprom in Russia ‒ sold billions of dollars of bonds to investors eager to capitalize on the high interest rates. But as the price of oil tumbles and local currencies plunge in value, those bonds are looking shaky, Landon Thomas Jr. writes in DealBook. Concerns are now mounting that their troubles will unleash a new wave of market contagion as big funds unload their stocks, bonds and other investments in these countries, Mr. Thomas writes.

The steep slide in the Russian ruble ‒ and the collapse of the country’s bond and stock markets ‒ has already rattled investors, driving a sell-off in Mexico and Brazil. Like Russia, these countries also relied on cheap money to bankroll their energy investments and fund their growth. Economists have also warned of broader economic ripples if big, state-run companies like Petrobras and Gazprom are cut off from the bond market and lack alternative financing options. The bond yields of all three companies, which move in the opposite direction of their underlying price, have surged in recent days.

The debt issued by Petrobras, Pemex and Gazprom can be found in the portfolios of bond investors worldwide, including BlackRock, Pimco and Franklin Templeton. Now investors are realizing just how risky these bonds are. Pimco’s Emerging Market Corporate Bond Fund, for instance, has seen its performance sag and investors withdraw their cash. The fund’s assets now stand at $496 million, compared with $1.5 billion in late 2013, suggesting it can’t weather too much more.

Dealbook


Even rich face non-transparency when buying bonds

In CPF, Financial competency on 22/05/2014 at 4:18 am

(Yes, I’m taking a break from posting on FT-related topics. Normal FT ranting will resume tomorrow.)

ST recently pontificated on the need to make it easier for the “little people” to buy bonds (where in theory only $250,000 is needed for a minimum trade, though the usual dealing size is millions of $). Shortly thereafter, this letter appeared in Forum (BTW, I worked with him when we were both in the central bank. Glad to see that that he is still filthy rich. He went into stockbroking and ran into a rough patch here during the mid 1980s, but recouped his fortune in Perth, I was told).

But before I reproduce the letter, those anti-PAP paper activists who hate the CPF scheme (I’m thinking of you Half Heart Truths) should tell the truth on  CPF returns vis–a-vis govt bonds.  My Facebook Avatar posted this on Siow Kum Hong’s Facebook page (He had praised the 4% but not the 2.5% interest rate)

Don’t be greedy. 10 yr govt paper is less than 2.4%, while 15 yr is 2.7%. Of course investing in Reits a lot higher 5%+. But gd chance of having to retyrn it all via rights issue when there is a recession.

There was once a time when CPF acct holders were screwed (about the time Half Truths was saying rates were 7%). But now it’s a different story. GE coming )))

Now back to the problems very rich face when trying to buy S$ bonds:

Opaque fee structure for secondary bond market
Published on May 13, 2014

I recently bought a sizeable amount of Olam bonds and perpetual notes.

I discovered that bonds in Singapore and abroad are traded over the counter and was shocked by what I learnt about pricing in the secondary market.

While the direction of Olam bond prices was in line with my expectations, the quotations of bid and offer prices were extremely wide. Different banks and stockbroking houses also quoted different bid-offer spreads ranging from 0.75 per cent to 1.25 per cent over a 10-minute period.

Also, these institutions had opaque fee structures. Some banks incorporate their fees in the bid and offer prices, while others charge an additional fee of 0.25 per cent to 3 per cent over and above the spread.

Dealers told me of wealth management and advisory firms charging unsuspecting retail clients up to 3 per cent transaction fees on bonds.

Over one morning, I was given differing quotes from the various departments of a principal bank.

Comparing quotes between major investment banks is another nightmare.

If the Singapore Exchange and investment service practitioners wish to further develop the bond markets here and in Asia, they must come up with a more transparent system of secondary market pricing for retail investors.

The current structure lacks transparent guidelines and uniform fee structures.

Chua Wee Meng (Dr)

– See more at: http://www.straitstimes.com/archive/tuesday/premium/forum-letters/story/opaque-fee-structure-secondary-bond-market-20140513#sthash.ihCRqFWc.dpuf

Don’t buy bonds, buy stocks that pay gd dividends

In Financial competency on 05/05/2012 at 6:25 pm

Don’t buy bonds. Don’t focus solely on dividend yield, and avoid highly leveraged firms is the message that BlackRock gave investors a few weeks ago when it spooke to BT. Relevant exceprts from BT article from yonks ago I rediscovered.

Michael Steinhardt, whose hedge funds returned more than 20% a year for almost three decades, also doesn’t believe in bonds

“Bonds are no place to be,” Steinhardt, 71, who is now chairman of New York-based WisdomTree Investments Inc., said in an interview today on Bloomberg Television’s “Money Moves” with Carol Massar. “Equities are cheap by historic standards. Equities that pay high dividends relative to bonds, relative to the stock market, I think that’s a good place to be.”

http://www.bloomberg.com/news/2012-04-12/wisdomtree-s-steinhardt-says-bonds-are-no-place-to-be-.html

And so does Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs. In mid-April, she  said equities will give better returns than bonds in the mid-to-long term as companies look to emerging markets for growth.

“You need to go back to the late 1950s to see a situation which equities were priced as attractively as they are now relative to bonds,” she said in a Bloomberg Radio interview. “1958-1959 was a period in which investors were very concerned about the economy and the yields on many equities exceeded the yields on fixed income at that point and — as you know — we moved into a multidecade bull market in equities.”

——————-

HIGH dividend yields should not be the sole focus in assessing equity returns over time, said Stuart Reeve, managing director and portfolio manager at BlackRock.

According to Mr Reeve, data collated over the last 31 years has indicated that more than 90 per cent of long-term equity returns can be jointly attributed to both dividend yield and dividend growth drive.

Generating long-term equity returns successfully thus requires identifying companies with attractive yields that are competitively advantaged and have the ability to sustain business growth.

To ensure a company is able to invest and grow its business, Mr Reeve stressed the need to factor in cost and cash available to a company to fund these developments.

‘That is so often a question that people do not ask in this space. What is the cost of growth? In different industries, it is different,’ he emphasised.

‘In a more stable industry, where the rate of change of the industry dynamic is not significant and not very fast, and you are competitively advantaged, your cost of growth tends to be relatively low.’

Identifying a company with low growth costs has its merits as it enables the company to reinvest and grow its business, with the company better positioned to commit some of that cash back to shareholders in the form of a dividend stream.

Investors should also exercise patience in order for results to materialise.

‘You must be willing to buy these investments at fair value and let the yield and growth compound for you and deliver great returns with lower volatility over medium to long-term horizons,’ said Mr Reeve.

Investors should also steer clear from companies which are leveraged to the tilt, he cautioned, citing the significant correlation between high leverage and cuts to dividends.

The focus on equity investment comes on the back of BlackRock chief executive Larry Fink’s message urging investors to scrap the inadequate 60/40 portfolio mix of stocks and bonds.

Mr Fink personally advocated a 100 per cent investment in equities owing to valuations and higher returns than bonds.

‘Virtually every investor has to find ways to achieve better returns than they’ll get in cash or government bonds for the foreseeable future,’ said Mr Fink. [ BTW, Kapito, a co-founder and president of the firm, told CNN Money last month that he has about 70% of his investment portfolio in dividend-paying global stocks. ]

BlackRock, the world’s largest asset manager with assets under management totalling US$3.51 trillion as at Dec 31, 2011, has increasingly set its sights on growing in Asia.

Bond funds are not BONDS

In Investments on 01/11/2011 at 6:43 am

There is an ad from a very reputable fund manager advertising its Asian bond fund. If you find the idea of buying into a bond fund attractive, read u/m which I posted some time ago on the difference between buying a bond fund and a bond.

————————————————————–

In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

Bond funds are not BONDS

In Investments on 30/08/2010 at 5:43 am

In search of safe and non-volatile returns, retail investors globally have invested heavily in bond funds, often thinking they are as safe as investing in individual bonds: with the added advantages of diversification (of interest rates, maturities, and default risks); and lower investment costs.

Sadly, they are not the same.

When you invest in a bond, you know the interest rate and the duration (maturity date) of the bond. When interest rates go up, the value of a bond goes down. But you will  get the promised interest and if you  hold the bond until it matures, you will  get your principal back. Bit like a fixed deposit.

You will only lose your principal if you decide to sell it before it matures.

But a bond fund doesn’t work that way because it invests in many bonds, hundreds, possibly thousands. There are many different interest rates and maturities (durations).  So you don’t have a defined interest rate or a maturity date. You have an average interest rate and average duration for all the bonds in the fund.

This may seem an esoteric difference, but believe me, when interest rates rise you will regret not knowing the difference earlier.

You could lose serious money because for any percentage point change in interest rates, the value of the fund will change by the amount of the duration. This sounds complicated but the following illustration will make clear the inconvenient truth.

If the fund holds bonds with an average duration of 10 years, and 10-yr interest rates go up by one percentage point in the capital markets, the value of your fund will drop by 10%. If the fund before the interest rate rise was worth $100m, after the rise, the fund is only worth $90m. BTW, the longer the average duration in the fund, the bigger should be the loss. If the average duration was 40 yrs, the loss would be 40%. Buying shares is safer neh?

Going online to complain to Tan Kin Lian or protesting at Hong Lim Green claiming that you have been cheated is a waste of time. It’s yr fault.

So think twice about investing in a bond fund, if you want safe, steady returns. It may not work out that way.

Finally, came across this interesting quote. “People would rather overpay for bonds than underpay for stocks,” says David Kelly, a strategist for J. P. Morgan Funds. “It’s a function of years of very miserable stock returns. And just a general fog of gloom over the country right now.”

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