October 30, 2011

NJY - Unparalleled Visionary


An innocuous looking email a few days ago shattered me completely. Sanjeev, my good friend, informed me about the untimely demise of Shri N.J.Yasaswy-the icon that built an institution called ICFAI. He was only 62. In my 23 years career, he was my boss and mentor for 5 years.

He changed many lives, including mine. He challenged conventional wisdom. He displayed and infused confidence. He took wild risks and never feared consequences. He personified knowledge and commanded respect for only this reason. He shared his knowledge constantly. He generously offered his advice. He valued time and was obsessed with punctuality. And he did all of this with a smiling face.

Personally he taught me several important lessons in life. There was the time when we were setting up a new concept and it involved dealing with several institutions. It was then that he said "there is nothing called an institution. Everything boils down to an individual. Identify that individual and talk to him/her and you can get your way". He also said, "if you are looking to recruit someone to assist you, make sure he is smarter than you. This is the only way you can build a great institution"

On another occasion when a colleague said that it would be difficult to do the thing he suggested, he retorted saying "we are here to do difficult things not easy ones". Then when the same gentlemen countered saying it would take time, he retorted again by saying, “a busy man always finds time; only a lazy man complains!" He pushed each one of us all the time and you now see the result- a gigantic institution, ICFAI, built with not a penny of assistance from banks or financial institutions, but with only internal accruals.

The man had a great personal side too. There were many instances where he would exhibit a phenomenal sense of humor ,so much so that on one occasion, i needed to walk out of the room since i could not control my laughter. He was humane and did not fear to show it. While we were traveling for business to Mumbai in Indian Airlines, NJY was sitting on the aisle and diagonally opposite the aisle was a young lady with a toddler. Obviously the toddler was giving the lady a hard time due to which her tea spilt down. The air hostess, instead of trying to be helpful, started reprimanding her for the act. Though we were engrossed in a discussion, NJY did not fail to miss the predicament of the young lady due to the unhelpful air hostess. In a fit of anger, he asked the air hostess to place her tea tray in front of him and said to her "you will not serve tea to any passenger till you apologize to that young lady" -and he meant it! This then brought the inflight cabin manager to the scene to whom he objected her behavior and reminded her that her salary was being paid for by all the passengers. Normal service resumed after an apology by the air hostess to the young lady. We encounter such scenes in our daily lives but largely choose to ignore them- but not NJY.

We shared many dais together and have lectured several programs. I will deeply miss him, as will the huge ICFAI family that he built. May his soul rest in real good peace.

M R Raghu

October 19, 2011

Investors mull alternatives to cap-weighted index

 Original article published in Arab Times

Index strategies that deliver passive market exposure — or beta — have long attracted investor interest. But the bursting of the tech bubble in 2000 and the more recent global financial crisis have helped galvanise investors into exploring alternatives to the traditional approach of weighting indices by market capitalization. However, the same is yet to catch up in the GCC for two important reasons. Due to market inefficiency, generating alpha is still easy and possible. Empirical research suggests that GCC fund managers are reasonably efficient in generating alpha though not consistently. The second and perhaps the most important reason for the lack of passive investment vehicles is the relative lack of institutional investment. Institutional investors are generally strong users of such products (including hedge funds). Gulf based institutional investors are either mandated not to invest in local markets (like Sovereign wealth funds) or regulatorily prohibited from taking large positions in stock markets (like banks). With gradual easing of these limitations, GCC offers immense potential and therefore scope for index based investment products. Following an earlier article in the Financial Times (FTfm supplement) Raghu Mandagolathur, president of CFA Kuwait and Samuel Lum, Director of Private Wealth and Capital Markets at CFA Institute provide an overview of recent innovations in indexing.



How has beta investing evolved over the years?

Beta investing generally involves passively capturing exposure to the market by replicating an index. This style of investing, first pioneered in the early 1970s following the development of the Capital Asset Pricing Model and the Efficient Market Hypothesis, typically requires minimal application of manager skills and is not capital or labour-intensive. These characteristics result in much lower fees compared to active management. As measuring manager performance against a market benchmark became standard practice, and investors increasingly came to recognize the challenges of picking active managers who are consistently skilful or lucky enough to outperform over the long term, beta investing gradually gained ground, bolstered by lower due diligence costs and lower manager capacity constraints. Today many investors apply a beta investing approach to their core portfolios, which they may complement with smaller allocations to satellite portfolios overseen by active managers. The expanding range of vehicles commonly used to capture beta exposure includes mutual funds, exchange-traded funds, futures, total-return swaps, and separately-managed portfolios.



Why have most beta investing mandates and index funds traditionally been based on capitalization-weighted indices?

A cap-weighted index (or its free-float-adjusted refinement) is generally considered to be the best representation of the “opportunity set” available to investors in an underlying market, and is, in effect, the portfolio which all investors in aggregate can own simultaneously. From a practical perspective, cap-weighted indices such as the FTSE 100, the TOPIX, and the S&P 500 also provide the benefit of substantial investment capacity and are highly tax efficient because little rebalancing is required. For these reasons, many investors are of the view that beta investing should by definition involve indices that are cap-weighted.



What are the problems with cap-weighting?

Beginning in the early 1990s, academic studies have shown that cap-weighted equity indices may be substantially less risk-return efficient. Cap-weighted indices also tend to be concentrated in large-cap stocks. As a highly favoured stock grows in market capitalisation relative to less favoured stocks, it increasingly occupies a disproportionately large share of the index. When stock prices move into bubble territory, therefore, investors in cap-weighted indices will hold proportionally more momentum stocks—that is, stocks that have the highest gains and are likely more overvalued—only to suffer added misery when the crash comes.



Cap-weighted bond indices can also be problematic. A sovereign bond index, for example, may have a disproportionately high weighting in bonds of a heavily indebted (and thus riskier) country simply because that country’s government has issued more debt relative to peers with healthy balance sheets.  To illustrate, prior to the European debt crisis, Greece would have had about three times the weighting of Australia in a global developed markets sovereign bond index because it had three times more debt outstanding; yet its GDP was only a third of Australia’s. Many investors would have been rightly concerned about the relatively high weighting of Greek bonds in the index portfolio, especially given that Greek bond yields had stayed relatively low compared to Australia bond yields for many years prior to the crisis.



What alternatives to cap-weighting have been explored by investors?

Researchers, index providers, and asset managers have proposed or implemented a number of alternative weighting schemes, including equal-weighting, enhanced-cap-weighting, and weighting based on fundamental economic attributes such as GDP or sales. Weighting schemes designed to minimize volatility or to manage risk have also been tested. These approaches are often called ‘enhanced index’ or ‘smart beta’ products. Still, some are of the view that these are best described as active management strategies with typically higher fee structures and lower investment capacity than cap-weighted index strategies.  Some of these alternative approaches require relatively high rebalancing turnover, and any moves by the managers to minimize transaction costs may need to be weighed against the reduced ability to precisely track the index.  



What other approaches to beta investing are attracting attention?

‘Exotic beta’ strategies seek passive exposure to commodities, collectibles, default risk, catastrophic insurance or other non-traditional asset classes.   Investors need to evaluate whether they are being adequately rewarded with a risk premium for the volatility, downside ‘fat tail’ exposure, or the liquidity they are providing to hedgers. Another approach, ‘active beta’ investing, is based on research showing that stocks with ‘value’ and ‘momentum’ attributes outperform over long periods. While these anomalies can be exploited in a systematic and transparent manner, and with relatively low fees compared to active management, it is not clear that they will persist across significantly different market environments in the future.

October 05, 2011

How safe are we in the UAE from another global recession?-MR comments

Gulf may witness collateral damage in terms of lower oil prices, say experts



Global recession is more likely today than an extended period of sluggish growth and high unemployment rates, Bill Gross, founder of Pimco, the world’s largest bond fund, wrote yesterday in his comments sent to 'Emirates24|7'.
Since 2009, Gross has said the US and other developed economies were entering a period of what he terms “new normal,” a period marked by lackluster economic performance but still one of growth. Now, he says things might have taken a turn for the worse but assures that we’re still not past the point of no-return. “…[S]overeign balance sheets resemble an overweight diabetic on the verge of a heart attack. Still, if global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible,” Gross wrote in his monthly investment outlook.
The UAE may not (yet) be faced with the prospects of a second recession, but most residents in the country seem unsure about their future prospects given the turmoil in the Eurozone and the crises that a Greek default can trigger. Many believe that property demand may dampen further and their jobs may not be safe again. Two in five (44 per cent) employees working in the UAE fear losing their job with increased stress levels as a result of the economic downturn, according to a poll run by this website, indicating that consumer confidence may be dwindling.
However, economists and experts believe that the situation in the region may not be a repeat of what we’ve seen in 2008.
Recently, Sheikh Ahmed bin Saeed Al Maktoum, Chairman of Dubai’s Supreme Fiscal Committee, said local banks have sufficient liquidity to weather a global downturn. “[Local banks] have lots of cash and lots of liquidity as well,” Sheikh Ahmed told reporters on Monday. “We’re not directly affected [by Europe] but I'm sure some [foreign] banks which are here could have certain issues. But the world will never be with no crisis,” he was quoted as saying.
“Another recession has not begun yet. But there is a fear that there is one round the corner,” MR Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz) told this website. “There is no doubt that the global economy is already slowing down, but the degree of the slowdown will depend on how events come to unfold in the Eurozone,” said Giyas Gokkent, Group Chief Economist at National Bank of Abu Dhabi (NBAD).
“The Gulf is well positioned to meet challenges in the sense that bank capital buffers are very high and fundamentals of the sovereigns are quite strong. There has already been significant price adjustment in the real estate sector. Citing the reasons behind his outlook, he added: “We do not currently have contraction in regional economic activity in our basecase forecasts, but this is reviewed monthly depending on the oil price outlook in particular. The long term outlook for commodities is positive. The pattern for slowdowns tends to be a dip and subsequent bounce as a result of a number of factors such as built-in automatic stabilizers in the global economy such as a reduced burden of taxation and energy price movements.
“I do not see a 1930s style depression at this time because widespread bank failures, closures, and money/deposit destruction would have to occur for that type of scenario. Central Banks and governments will do everything in their power to avert a systemic banking sector failure.”
But there are many ways in which the troubles in the West can affect us. According to Gokkent, “there are multiple channels through which GCC economies could be affected.”
“One direct linkage is through the price of oil. Dubai spot is now at $97.9 per barrel, significantly off from its highs earlier in the year. Lower oil prices impact trade and fiscal balances adversely in the region. While the current level for the price of oil is still fine for regional economies, the fiscal breakeven oil price is higher across the region. For example, IMF estimate for fiscal breakeven in Saudi Arabia in 2011 is $80 per barrel. In the event that oil prices soften sharply, then OPEC would presumably cut production to support prices; i.e; a double impact with lower oil price and lower output.
“The financial sector is another channel through which there would be an impact. Banking sector liquidity would tighten with repercussions on economic activity; cost and availability of credit would be affected.
“Declines in asset prices would create a negative wealth effect discouraging expenditures by households. Uncertainty about the job market would further weigh on household expenditure. Firms would rein in expansion plans given uncertain demand growth. Overall economic activity would therefore suffer,” he explained.
Last is the exchange rate which could impact the economy in the region. “Exchange rate is another channel through which there would be an impact. Dollar strength appears to go hand in hand with rising global risk aversion. A stronger dollar is negative for commodity prices and this is one element explaining a lower oil price. A stronger dollar, and therefore local currencies, is generally negative for non-oil economic activity,” added the NBAD economist.
Raghu believes that even though we may not be in a recession but globally the revision of growth numbers is a worrying factor. “The recent World Economic Outlook report by IMF expects global growth to moderate to about 4 per cent through 2012, from over 5 per cent in 2010. Real GDP in the advanced economies is projected to expand by about 1.9 per cent in 2012 and emerging markets to grow by 6 per cent in 2012. Hence, technically we are not seeing another recession yet,” he stressed.
“However, what should be noted here is the sharp revisions to the growth numbers by IMF in a space of three months. Within three months, the growth outlook for US has come down by 1 per cent. The main problem is the lack of private demand due to tight bank lending, a phenomenon that we can easily notice even in GCC,” he added.
According to him the problem lies in the two biggest economies of the world. “Recovery will not happen unless two important things happen. The locomotive of world economy, i.e., US should learn to depend less on domestic consumption as a single most important factor for growth and depend more on exports backed by increasing productivity. On the other hand the lion of all emerging markets, i.e., China should learn to depend less on exports and take measures to grow by stimulating domestic demand. And both are very much possible. If the US and China adopts this course, they can easily remove the imbalance that is log jamming the growth today.
“Recessions are part of business cycles and hence they need not be feared. But the governments should anticipate them wisely and provide policy measures that can reduce the pain. The collateral damage to the Gulf will be via lower oil prices. Job losses may not be a big issue here,” he added.
In the run-up, though, we have seen gold prices plummet 15 per cent last month as confused investors look for safe havens to preserve their wealth in these troubled times. “The trouble is that, as investors search for safe havens, no one is immune,” said Gerard Lyons, Chief Economist and Group Head of Global Research at Standard Chartered Bank.
“In an era of globalisation, problems in one part of the world soon spread elsewhere. Before the crisis in 2007, Asia and other regions such as Latin America and the Middle East were not decoupled from events in the West, but they were better insulated. This allowed them to rebound strongly, helped by high reserves and sound fiscal positions. Now, they are still not decoupled from the crisis hitting the West, but they are more diversified and better able to cope,” he said.http://www.emirates247.com/news/emirates/how-safe-are-we-in-the-uae-from-another-global-recession-2011-10-05-1.421975