Wednesday, August 23, 2006

Odds and Ends

I've been recovering from a cold, and plowing through the papers over the last couple of days and have accumulated several interesting articles to post.

As a Coles Myer shareholder, I've been watching the latest news (SMH article, for example) with great interest. The rumoured takeover by KKR has even made the Wall Street Journal (subscription required). As I write this, the Coles board has not announced whether it will co-operate with the KKR bid. However, Coles Myer has already split off the Myer department store chain, leaving the Australian Target and K-Mart chains (yes, both are owned by Coles Myer), Officeworks, liquor stores and the supermarkets. Coles' board released their own strategy statement on 31 July, which saw the share price plummet in early August. The takeover rumour, thankfully, has more than made up that decline. So, it appears "the market" was not overly impressed by the strategy statement, and thinks KKR will bid more than the roughly $10.70 price the stock hit on 1 August. The stock is currently hovering around $13.25. But, will the board (and the shareholders) be content to have KKR reap the profits from splitting the business up? The Wall Street Journal recently had an article about VNU (subscription required), a recent KKR target where shareholders demanded (and got) a larger premium than KKR's initial bid. Perhaps the takeover bid will serve as a message to the board that their 31 July strategy was not bold enough.

I should also point out an article from today's SMH about legendary finance academic Burton Malkiel. Apparently, Prof Malkiel is currently in Australia (unfortunately, he doesn't appear to be anywhere near Queensland), talking about investment, index funds, and beating the market (or not).

Finally, I'd like to mention a piece from Online Opinion about education as a consumer good. It talks about a legal settlement between a secondary school in Melbourne and the parents of a student who did not learn to read properly.

Those in the know have warned that this case could result in an education system burdened by increased litigation by parents against schools, with schools having to be very careful about how they promote their standard of teaching to parents of future students. Not only does the case highlight that education is becoming an area of focus in an increasingly litigious society, but that on a broader level education - at whatever level - has become little more than a product for sale in the market for knowledge and training.

While the case at hand involved a secondary school, I can easily see it applied to tertiary institutions; especially in the case of full fee paying students. Some students already seem to think that attendance should guarantee a passing grade. While I believe that certain pedagogical standards must be met, students must participate in their own education. Those who are not willing to work toward understanding and learning should not be handed a degree.

Monday, August 21, 2006

Active or Passive?

From the Wall Street Journal:

Professors Shine a Light
Into 'Closet Indexes'
Measurement May Help Investors
See How Much of Their Holdings
Are Actively Managed -- And Not
By TOM LAURICELLA
August 18, 2006; Page C1
Are your mutual-fund managers earning their keep?
A complaint lodged against many managers of funds that invest in stocks is that they collect big fees for doing little more than basing their stock picks on the market index -- say, the Standard & Poor's 500-stock index -- against which their fund's performance is measured. There's even a term for this behavior: closet indexing.
....

You can read the whole article here (subscription required).

The upshot is that these two Yale professors have devised this dead simple way to tell how active your fund is -- and whether the managers are earning their fees. They just take the holdings (as disclosed to the SEC for US funds) and subtract from the percentage held in each stock the percentage that stock is of the index. If the fund holds two stocks (A & B) equally weighted and A constitutes 4% of the benchmark index and B constitutes 3% of the index, the active percentage would be calculated as (50%-4%)+(50%-3%)=93%. It would be interesting to see if this measure has any correlation with return or idiosyncratic risk of the portfolio. If anyone knows of any academic papers on this measure, let me know in the comments. A quick search of SSRN turned up nothing.

UPDATE: Here's a link to the original paper on the Yale site.

Wednesday, August 09, 2006

Water and Politics

I have to say I agree with this point from Online Opinion:

Plebiscite plethora adds up to democratic deficit
....The reality is that most Australians probably already drink recycled sewage to a greater or lesser degree. Turnbull himself has made the point that Adelaide's Murray-derived water probably passes through many a kidney before reaching the kitchen tap.

Carving up small issues like this and having the public vote on them just ensures that the policies that are enacted are not part of a cohesive package. Every atom/molecule on the surface of the planet has probably been through some animal's gut at some time or another. The key is to make sure that the organic molecules have been broken down into their safe components. After all, H2O is H2O.

UPDATE: Water vote will ripple across Australia

Thursday, August 03, 2006

Credit Stories

I hope this film makes it to Australia:

Maxed Out shows how the modern financial industry really works, explains the true definition of "preferred customer" and tells us why the poor are getting poorer and the rich getting richer. By turns hilarious and profoundly disturbing, Maxed Out paints a picture of a national nightmare which is all too real for most of us.

From the clips on the site, it looks to be a well constructed documentary.

Another credit story I ran across in the blogosphere today was at fivecentnickel.com where he posted about The Danger of No-Interest, Same-as-Cash Purchases.

The point here is that these are really dangerous transactions if you don’t know what you’re doing. In our case, it didn’t really matter. We had the money, just not in the right place, and we were planning on paying it off immediately upon receiving our first bill. But when the bill came I noticed something interesting… (Maybe I’m just thick, but this was news to me.) Even though you’re not paying interest for the first 12 months, interest is in fact accruing. So not only do you have to start paying interest after 12 months if you haven’t paid off the balance, but you also have to pay back interest for the first 12 months.

It is essential that you read the fine print if you want to avoid credit mistakes! Interest-free isn't free!