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Archive for October, 2013


Posted On 23  Oct  2013  

Time for South Korean Stocks

Overseas ownership hits six-year high for S Korean stocks according to Song Jung-a and Josh Noble reporting in the FT today (Oct 23, 2013)   “Overseas investors account for 33.14 per cent of the $1.1tn market, according to the Korea Exchange, the most since July 2007.    Last week alone, foreign investors put $1.1bn into Korean funds, more than double the inflows into Indian funds, while Indonesian and Philippines funds had small net outflows, according to EPFR.” The article highlights the investment case for S Korea. Its strong exports, stable currency. Please have a look at the Algoam South Korea Equity Strategy It is designed to monitor risks and switches out of equities into Korean Bonds when the equity signals are negative.   “In spite of the rise in foreign buying, the market, with its “Korea discount”, is still seen as cheap by many. The Korean market trades at a price-to-2013-earnings


Posted On 22  Oct  2013  

Emerging Market Currency Risks

Mark Haefele in the FT of today (Oct 22, 2013) says that ..”pressure on EM currencies can easily reoccur, or worsen, during the next few years. That is because, over the past decade, these economies have increasingly pinned their economic hopes to foreign capital flows.” He continues, “The numbers speak for themselves; portfolio flows to emerging markets have grown 400 per cent during the past 10 years, compared with nominal GDP growth of 200 per cent. The same is true of the broader private capital measure, which also includes bank lending and direct investment. That has increased by 5.5 times during the same period.” Algoam Comment: There is not and should not be a tangible relationship between portfolio flows and growth in GDP. In general one can reason that there should be impact, but this will differ from country to country. In most EM small rises in GDP often mean big increases


Posted On 21  Oct  2013  

A strong case for short term risk management in the context of long term investing

Neil Woodford has quit Invesco Perpetual amid complaints that modern investments has become too short term (FT, Oct 19, 2013). The article is headed, “Woodford gives no quarter to short term.” Apparently Prince Charles has weighed in saying  that the “current focus on quarterly capitalism is unfit for purpose”. “The issue is not confined to the UK. In the US, organisations such as the CTA Institute and the Aspen Institute have put together coalitions of investors and business leaders as august as John Bogle of Vanguard and Warren Buffett to bemoan short-termism and proffer potential solutions. Quantifying the growth in short-termism is tricky, though the average duration of equity holdings is sometimes used. From 1940 until the mid-1960s this was about seven years in the US. By 2007 it had fallen as low as seven months, though it has since crept up again and now stands at almost two years. Algoam


Posted On 18  Oct  2013  

Why ‘dark pools’ are a curse on the public markets?

Philip Stafford reports in the FT today (Oct 18, 2013) that trading in European ‘dark pool’ trading has surged and that regulators are worried about transparency. “Share trading on off-exchange venues in Europe has risen 45 per cent in the past six months, underlining the growing popularity of so-called dark pools with the region’s institutional investors. The growing popularity of these venues, operated by companies such as UBS, Liquidnet, Turquoise and Chi-X Europe, comes as European policy makers look to clamp down on them.” Algoam Comment: While institutional investors want to obtain the best execution prices, the use of dark pools does distort the orderly functioning of public markets and agreeing trading prices away from the established markets is not any different to Libor fixing or the current FX price rigging scandals. There is so much room for abuse and introduction of new risks for the average user of the public


Posted On 16  Oct  2013  

Majority of empirical studies on market efficiency are wrong

Following the recognition of Eugene Fama by the Nobel Prize Committee, Prof Ole Risager letter in the FT today (Oct 16, 2013) leaves room for thought. Prof Risager says: “The testable implication of Eugene Fama’s efficient market theory is that stock prices are unpredictable because all information is already embodied in prices. As a majority of empirical studies show that there is a lot to this theory, the Nobel Prize Committee decided to make Professor Fama one of the joint winners of the prize in economics this year.” Algoam Comment: Just because a majority of empirical studies shows that there is a lot to this theory doesn’t make it correct. We believe that the majority of the work has been done with the aim of supporting the theory and not contesting it.  “In spite of the difficulty in predicting stocks we should not conclude that markets always price stocks in


Posted On 11  Oct  2013  

Predicting the future using economic data

The Lex column in the FT writes about economic data (Oct 11, 2013) and says that lack of data due to US government shutdown may impede the work of speculating classes. But..the article say, “the really embarrassing possibility is that the number-crunchers lose their numbers, and then nothing happens.” Algoam Comment: We’ve looked at nearly all economic data outputs to see if there are sustainable relationships between data and ability to predict future outcomes. What we find is: (a) using conventional data analysis, we find that most data is indeed noise (b) often data with good information is diluted with predictions from poor data (c) how data is analysed is key to what can be extracted out of it and (d)..(c) tells us that noise may be converted into useful data if methods of analysis can be improved.   Lex asks: “What if the data drought did not diminish the


Posted On 10  Oct  2013  

Record flows into hedge funds come at a big price to society

In today’s FT John Authers SMART MONEY writes about records flows into hedge funds at a time when performance has been so poor. Institutions are pouring money into the sector. John says that hedge funds explain poor performance by saying “…that the conditions of the past five years have been almost uniquely bad for them. Equities have had a great five years. Simply buying an index fund and holding it has turned out to be a great strategy. Hedge funds grew up as an asset class that could offer some kind of a hedge against bad times for equities. They can defend a period of underperformance.” Algoam Comment: This doesn’t make any sense, as the article further down suggests that hedge funds make large directional bets. The likely reasons are that that the structure of the market itself has changed. There are now hedge funds that do the opposite of what traditional hedge


Posted On 08  Oct  2013  

The US pensions hole and the problems with prediction

We live in the hills of Zurich. On a clear sunny day in summer and winter we can see the far horizons way beyond a distance of 20 to 30 miles. The snow capped mountains are a sight to behold. But on a day such as today, when the sky is gray and the clouds descend one cannot even the see the calm water of the lake.  When experts start to make prognosis about long term investing or make long term projections, I am always reminded of the clouds. Our markets are inefficient and are often thrown into turmoil because our regulations are ineffective, we allow concentration of wealth into fewer and fewer hands (big banks, big insurance companies, very big asset managers, big hedge funds, big corporations means big risks). We encourage leverage and we make the playing field uneven for market participants. The central banks can influence or


Posted On 05  Oct  2013  

The cost of high fees and poor performance of Closet Indexers

John Authers writes in the FT today about closet indexing – the practice of running an “active” fund, charging active management fees but, in practice, offering an investment that merely hugs the index (FT, October 5, 2013). John says that: “This is, in effect, a tax on millions of investors, for no economic benefit and helps pump up asset bubbles. It impedes capitalism and the efficient allocation of capital,” John says. John’s article is based on a report published by SCM Private, a London-based investment adviser. It points out the conclusions of SCM Private: “After analysing £120bn in UK funds, it alleged that investors could have saved £1.86bn in fees if they had switched from underperforming UK equity funds to alternative cheaper index funds and accuses the UK fund industry of “systematic abuse of the public” and alleged it had failed to behave with integrity,” according to the article. Algoam Comment: First


Posted On 02  Oct  2013  

High-frequency trading

In the Lex column today there is a section on HFT. Lex says that policy makers and users of HFT are reaching compromise in order to “deliver general benefits” to both for the regulators and practitioners of HFT and that a smooth template may be the result of these compromises. Yesterday, Eurex, Europe’s largest derivatives exchange, brought in new rules on order-to-trade ratios, together with an “excessive usage fee”. In essence, these requirements will penalise anyone submitting a particularly large number of orders in relation to completed transactions. lex goes on to say that the “Eurex measures are not causing traders huge grief.” Supporters of HFT argue that the the added liquidity is a good thing and critics say that such liquidity is not there when it is required the most and may even adversely impact market. We are more in the critics camp when it comes to HFT. The reasons are