Finance Musings

Special Studies Program (SSP)

2009-08-03T18:41:00.002+10:00

Clearly, one of the great perks of the academic lifestyle is sabbatical or study leave. At UQ, the official designation is Special Studies Program (SSP) -- and that's where I am this semester.

We left Brisbane on 1 July (my husband and I arranged our SSP at the same time and visiting in the same place). First stop was Hong Kong, where we met up with an academic colleague who had visited UQ a couple of years back. We had a great visit, and spent some time looking around Hong Kong for a few days. Next stop, Leeds, UK, where my husband had a conference to attend. Finally, on 10 July, we arrived at the University of Kent in Canterbury. We're both visiting academics here until the end of September. I've been using the time to catch up on research projects and refresh my knowledge of topics related to finance. While I'm near Europe, I'll be attending the European Finance Assn meetings in Bergen Norway later this month. I'll also be attending the FMA meeting in Reno in October, before we return to Australia in November.

More on Short Selling

2009-03-31T10:50:00.003+10:00

For students in my Financial Management class (FINM2401) - Alan Kohler has written an editorial on the current short sale restrictions here in Australia (The Blind Leading the Naked, on Business Spectator). In a nutshell: Short selling is an important part of price discovery in markets, but the securities lending business in Australia should be more transparent.

How NOT to make an IPO

2009-03-30T14:53:00.002+10:00

The ongoing saga of BrisConnections is coming to a head. There's a good background piece in the Sydney Morning Herald (here).

BrisConnections is a highly leveraged business, established to build a toll road out to Brisbane Airport. The business went public last year -- in fact, their ASX debut was on the day I did my IPO lecture last semester. The units (legally it appears to be a trust structure rather than a corporation) were issued at A$1 each, with an obligation to make two further A$1 payments per unit. The first of these payments is due 29 April 2009. The ASX code (BCSCA) hints at the additional payments as fully paid shares generally have a three letter code.

By the close of the first day of trading, the units had lost half their value. The 52 week high price is 79cents, so they never traded at anything near their issue price. Currently, they are listed at 0.1cents per unit -- the lowest price allowed by the ASX. Looking at the current Market Depth on Commsec (account required), shows that there are sell orders for 33million units at that price, and no buy orders. Today's volume is almost completely accounted for by the 31million+ units purchased by Macquarie Bank (ASX announcement here).

Estimates I've heard are that AFTER paying the next $1 installment, the units will be worth 60cents (or less). This explains why some of the major unitholders are trying to have the trust wound up BEFORE the installment is due.

The most worrying part of the whole saga is the stories of retail investors who have bought the units without realizing that there is an obligation to make the additional payments. These investors owe thousands or millions on units that cost them very little. At the current price, a $500 investment comes with a liability to make two additional payments of $500,000!

Index Funds 1, Active Managers 0

2009-03-09T10:27:00.002+10:00

I was catching up on podcasts this morning and my mp3 player served up this gem from NPR's Business Story of the Day podcast:

Despite Losses, Star Investor Trusts In Stocks

David Swensen, manager of Yale University's endowment, says that individuals should be investing in index funds:

... because most so-called actively managed mutual funds — the ones that pay managers to pick stocks — charge such high fees that the fees more than eat up the added returns they're able to achieve, he says. So, in effect, you're losing money by paying for this active management, Swensen says.
Swensen has done some research on this point. He and others have found the odds are 100 to 1 that you're better off in an index fund.

Swensen's track record isn't bad. Yale's endowment is down 25% in a market that's down 50% or more. But, he has a staff to help him with investment research. For individuals with less time to devote, an index fund is the way to go.

Managing Credit

2009-03-05T12:59:00.002+10:00

One of the topics in my personal finance course (FINM1401) is Managing Credit. Yesterday I finally got around to listening to the recent EconTalk podcast about credit and bankruptcy. Russ Roberts interviews law professor Todd Zywicki about the history of credit and bankruptcy law in the US. The first half of the interview, about credit, is very relevant; the parts about US bankruptcy law, while quite interesting, are not so relevant here in Australia.

Of particular interest were the following points:

Before the rise of the credit card in the 1960s, credit was extended by sellers of durable goods (white goods, cars, etc.) through installment loans which allow payments to be extended over a fixed period of time. Credit was also extended by pawn shops and payday lenders. Therefore, it is difficult to compare the level of household debt today with levels 50+ years ago.
The separation of credit provision from sales of durable goods made credit cheaper and allowed manufacturers to compete more transparently on price and features. Price is often obscured when credit is extended by the seller, as interest may not be explicitly stated.
With the current credit crisis we're seeing a resurgence of some of these older methods of finance -- pawn shops, payday lenders, buying goods on installment loans. These often cost much more than credit card debt. Lay-away (Lay-by), where customers pay over time before receiving the product, is also becoming more common.

The cost of financial advice

2009-03-02T11:55:00.002+10:00

Currently there's a big debate on whether financial advisors should be compensated using a fee-for-service model or a commission model. The Sydney Morning Herald chimes in with an article by Simon Hoyle. The conclusion, based on recent research:

...consumers pay 13 times more for commission-based advice than for fee-based advice.

Alan Kohler has argued that commission-based advice gives the planner the wrong incentives. That is, planners will recommend investments based on their commission structure rather than the return they will provide for their clients. (See his article "Too Little, Too Late" on the Business Spectator site). The new research cited by the SMH adds more ammunition to the fee-for-service side of the debate.

Asset Pricing 101

2009-02-27T13:41:00.002+10:00

Peter Wallison has an opinion piece about valuing bank assets in the Wall Street Journal. A quick summary:

Both taxpayers and banks could come out well -- and so would our economy -- if the government were to buy the assets at their "net realizable value," which is based on an assessment of their current cash flows, discounted by their expected credit losses over time.

The article is a real world confirmation of the basic principle underlying all introductory finance courses: assets are worth the present value of their expected cash flows. This is what market value should be if the market is functioning properly. Clearly, the market for mortgage-backed securities isn't functioning at the moment.

Replies

2009-02-27T11:04:00.005+10:00

Thanks for replying in the comments. It makes the blog more interesting to write, as well as more interesting to read.

Sheldrick -- enrollment is now up to 885. It's not that there's a shortage of lecturers, but that the model is a bit different here in Australia. Undergraduate classes are set up as large lectures with tutorials. My students attend one 2-hour lecture per week, and one 2-hour tutorial per week. The lectures are huge -- final year finance electives have 300+ students and my second year introductory course gets 700+ every semester. Our largest lecture theater seats 460 -- so I give the same lecture twice each week. Tutorials are smaller groups, run by grad students. Class size is limited to 25. Tutorial activities include going through the homework and working through questions in class.

Dave -- thanks for the link to Quiggin's post on Taleb. I found the comments on that post very informative. I quite agree with those commenters that Taleb can seem quite arrogant at times. I do try to follow John Quiggin's blog (after all, his office is just upstairs from mine), but generally through Google Reader, so I miss out on the comments.

Getting Ready

2009-02-24T15:20:00.004+10:00

Next week marks the beginning of a new academic year here at UQ. I'm teaching two courses this semester -- an introductory finance course for business majors (over 850 students), and a personal finance course with no pre-requisites (over 100 students). If any of my students find their way here, do say hello in the comments.

So, what have I been up to since my last post? Well, I've been reading a lot. As I stated last time, I'm working my way through Fooled by Randomness by N. Taleb. I'm finding this book a frustrating and interesting read all at the same time. Interesting because Taleb has a unique perspective on risk that is quite instructive. Frustrating because it doesn't really offer an alternative.

In finance we teach that expected risk and return is the basis for sound financial decisions, then usually measure that expected risk and return by looking at historical numbers. Taleb rightly points out that historical returns are just one realization of the possible random paths that returns might have taken, and therefore may not reflect the random paths that returns might take in the future.

Over at Portfolio.com, Felix Salmon has posted a link to his very interesting article in Wired Magzine about the credit crisis. It points out, in a clear and entertaining fashion, how important it is to understand the model outputs that you use to make investment decisions.

Back from Holiday

2009-01-15T14:21:00.003+10:00

Just got back from a 3 week trip to the States -- 2 weeks in California and a week near Seattle.

It was interesting to see the effects of the current recession first hand. It seemed like more than half the shops in downtown Berkeley were closed and available for lease. Telegraph Ave wasn't quite so bad, but it was clear that economic activity was down.

I attended the ASSA conference in San Francisco, and listened to several economists talking about the GFC (Global Financial Crisis). Kenneth Rogoff from Harvard gave an interesting talk on the history of financial crises and showed why the current crisis shouldn't have been too much of a surprise to students of economic history. (Rogoff's paper, titled "The Global Financial Crisis in Theory and Practice" can be downloaded at http://www.aeaweb.org/annual_mtg_papers/2009/ -- you'll have to search for the title). Another interesting talk was given by Frank Nothaft, chief economist at Freddie Mac. He made the interesting point that in 2007/8 volume in the mortgage backed securities market shifted from government guaranteed loans to subprime loans. Since the liquidity crisis, the subprime market has evaporated, so the share of government guaranteed loans has returned to it's previous level.

I'm probably talking to myself here -- only 4 people responded to my last post. If you have anything to add, please leave a comment. In response to the comments on the last post, I've picked up a copy of Nassim Taleb's "Fooled by Randomness" -- more later when I've finished reading it.

Understanding the Financial Crisis

2008-11-12T13:19:00.003+10:00

Haven't posted lately. To some extent this is because it didn't seem like anyone was reading the blog. So, if you read this post, please leave a comment to encourage me to continue posting (or ask a question, or agree/disagree, or whatever).

Thought I'd pass on this great resource for understanding the current world financial crisis: A Personal FAQ on the Financial Crisis of 2008 by Prof. Ivo Welch at Brown University. Another good resource for those without much economics background is the daily Planet Money podcast from NPR. As with most accounts of the crisis, these are both focused on the effect of the crisis in the US (after all, that's where it started).

Here in Australia we seem to be in better shape: sub-prime lending wasn't nearly so prevalent here; the banks appear to have been more conservative, leading to higher capital levels; mortgage loans are NOT non-recourse; and the Reserve Bank has more room to cut interest rates than the Fed.

Risk Disclosures

2008-05-08T12:51:00.002+10:00

I had a very interesting question from a student today. We're covering portfolio theory in Financial Management, and she was looking at some of her own personal investments from this "new" point of view. In reading through the PDS (Product Disclosure Statement -- the Australian lingo for a retail fund prospectus) she saw no mention of standard deviation, correlation or beta. So how do you figure out how risky a managed fund is, and how it will interact with your current investment portfolio?

If you look at the risk discussion in any PDS, you are likely to find an abstract discussion of market risk, political risk, sovereign risk, economic risk, and/or other risks. There are hardly ever any numbers in the risk discussion at all. From a Finance Theory point of view, the risks investors need to know are total risk (standard deviation) and more importantly sensitivity to market risk (beta). A historical average beta and/or target beta ought to be required disclosures, IMHO. Does anyone agree with me?

Short Selling

2008-04-29T08:31:00.003+10:00

Alan Kohler is one of my favorite Aussie finance commentators. Unfortunately, Business Spectator, where he writes regular columns, is available only through an email list and not through an rss feed. Today he has an interesting column on Short Selling.

Link Fest

2008-04-24T19:25:00.004+10:00

Several interesting entries have flowed through my Google Reader account in the past few days. In no particular order:

Is this a good time to invest? Should you be making extra year-end superannuation contributions given the current financial climate. Robin Bowerman at news.com's Smart Investing blog comments.
Felix Salmon over at Portfolio.com asks "Why do Investors Pay Fund-of-Funds managers?" This question is particularly interesting in light of the paper I recently found on SSRN: Wolf in Sheep's Clothing: The Active Investment Strategies Behind Index Performance recently published in European Financial Management.
And there are conflicting opinions about the attractiveness of Wesfarmer's rights issue. The Australian came out early in favor of the company, while Merrill Lynch recommends against investing.
In The Australian Michael Sainsbury wrote an analysis piece earlier this week that discusses the relative cheapness of equity in the current financial environment. This has major implications for capital structure decisions being made currently (as at Wesfarmers). Another example of equity raising is over at the Bank of Scotland.

Debt and Corporate Control

2008-04-15T14:12:00.003+10:00

Robert Gottliebson has an interesting article over at Business Spectator about Centro. For those of you who haven't been following it, Centro is a high profile Australian casualty of the US credit crisis. Centro Properties (ASX:CNP) manages retail properties in Australia and the US. The properties themselves are owned by various trusts, the largest of which is Centro Retail Trust (ASX:CER). In December it became clear that Centro was going to have trouble re-financing a large portion of its debt, and the price plummeted. Clearly the underlying assets (management contracts for CNP and real estate for CER) have not dropped nearly as much in value as the share prices have. Gottliebson points out that the way the debt is structured (unsecured loans to CNP) makes it difficult for the banks to foreclose because CNP's management contracts are written to require shareholder approval in the event of a change in control. The banks will collect much more if they work with Centro to re-finance the debt rather than force Centro into administration.

For my students, this is a good illustration of the effects of debt on corporate control, and how clever structuring can change the usual dynamics between debtholders and shareholders.

(Disclosure: the author has a small financial interest in CER)

Financial Mayhem

2008-04-14T19:49:00.002+10:00

I don't know if you've been following the Opes Prime saga, but I think it points out some weaknesses in the current Australian financial system. Alan Kohler, over at Business Spectator has been following this closely, and I recommend his columns. In particular this one about ANZ and how it ended up with more than 20% of several small caps. Students in my corporate finance class (last semester or next semester) will note that a 20% interest requires a shareholder to make a takeover bid under Australian securities law. Obviously, ANZ wasn't considering this when it took title to securities under lending agreements. Another important point for future investors is the importance of reading the actual document you are signing. It appears that many Opes Prime customers did not realise that they were signing over beneficial ownership of their shares rather than just pledging the shares as collateral. While there may be a case for arguing that the disclosures made by Opes Prime brokers to customers did not properly disclose the lending arrangements, prevention is always the best cure.

Portfolio Construction

2008-01-23T12:20:00.000+10:00

The Australian Stock Exchange provides a podcast for investors. The latest item to show up in the feed (though not listed on the ASX podcast page) is a talk on Portfolio Construction by Dale Gillham, Chief Analyst at Wealth Within.

I listened to the podcast the other day while commuting and found it quite interesting. Mr Gillham makes some good points about diversification, but also seems to confuse some of the basic theory taught in finance courses. The basic Capital Asset Pricing Model (CAPM) assumes that market prices are efficient -- that is, that you can't consistently beat the market by choosing individual securities. If this is true, then your best course of action is to replicate the market portfolio. And the cheapest way for individual investors to replicate the market portfolio is to buy index funds or ETFs.

Any investment strategy designed to beat the market is implicitly assuming that the market is NOT efficient (probably not a bad assumption in smaller markets like Australia's). These strategies will beat the market to the extent that they are able to consistently identify undervalued investments. Such a strategy requires assuming a reasonable amount of company-specific risk -- the more you diversify, the closer your portfolio is to the overall market and the closer your return is to the market return.

So, when constructing your portfolio you need to be clear about your assumptions. Do you believe the market is efficient? Then go with index funds. Do you believe the market is inefficient? Then you need to decide whether you can consistently select undervalued companies. If you can't (or if you don't have the time), then index funds are still your best bet.

Welcome to a new academic year

2008-01-18T09:05:00.000+10:00

Don't know if anyone is still checking this feed -- it's been months since I last posted.

Down here, January means school holidays and summer vacation. Most of my non-academic friends assume that means I'm on holidays too, but this is not the case. I did take the first two weeks of January off to pursue my creative hobbies, but now it's back to work. I have two research papers to revise and resubmit, and I need to get ready for semester 1, which starts on 25 February.

This semester I'm teaching half of three courses (I've divided my teaching load with a colleague so we can pick and choose topics that we are interested in). FINM1401 is an introduction to personal financial planning for non-business students. No finance background is assumed. FINM2401 is the introductory finance course for business undergrads. Many of the students will not take another finance course, but others will major in finance. It's a huge course with 600 students each semester. We break that into two lecture streams (and countless tutorial streams). FINM7065 is introductory finance for MBAs. The content is similar to FINM2401 with a more applied/managerial slant.

I've set up some shared tags in Google Reader so I can tag new items relevant to these courses. For FINM1401 you'll find the shared items here. For FINM2401/7065 they are here.

Inside Business

2007-09-02T15:11:00.000+10:00

Last week I showed a video from the ABC show Inside Business. Alan Kohler interviewed Chip Goodyear and Marius Kloppers from BHP Billiton. I thought the interview was a good demonstration of how "real world" business people thought about dividend payout ratios, mergers, and corporate finance in general. This week's show featured an interview with Grant King from Origin Energy. Much of the interview covers the financial incentives required to reduce carbon emissions, but one part of the discussion was quite relevant to corporate finance. When asked whether Origin would be investing directly in alternative energy sources, Mr King responded:

You tend to find these assets are geared up essentially in a sort of financial manner, much more highly geared than our balance sheet, so whether we put them on our balance sheet or they sit on someone else's balance sheet is a capital structure issue and efficiency of capital issue...

How does this statement compare to the conclusions on capital structure made by Modigliani and Miller? And what M&M assumption violations would lead to this statement being a correct statement on capital structure?

Merger Mania

2007-08-01T11:04:00.000+10:00

This week we're talking about mergers and acquisitions in class. Talk about good timing!! For the Tuesday night group -- it now looks like the News/Dow Jones deal will go through. There was a lot of last minute horsetrading, but both boards have now approved the deal. The Wall Street Journal has a short video explaining the deal that I'm going to try to play in class Wednesday and Thursday. Here's a link. The WSJ coverage of the deal is pretty extensive. Here are some articles to check out for more info:

Dow Jones Deal Gets Closer (31 July) (UQ Library Link)
News Corp is Poised to Win Dow Jones (1 August)

The other deal I discussed in last night's class was Wesfarmer's proposed takeover of Coles. You can read more about that deal at the Sydney Morning Herald website.

Fictional IPO

2007-07-26T10:23:00.000+10:00

If you want to learn a bit about the process (at least in the US) of taking a company public, check out the "podiobook" hackoff.com. The description is a bit long-winded (I must admit that I only made it halfway through myself), but seems very realistic. The book is essentially a murder mystery set in a company that has just gone public. It discusses the whole process of selecting the underwriter, writing up the prospectus, and all the way up to trading on the market. While most of the book focuses on the deal, be aware that some chapters are R-rated -- I guess the author thought that some racy scenes were necessary to "sell" the book.

Ready, Set, Go!

2007-07-23T19:29:00.000+10:00

Semester has started. My first class is tomorrow night. I thought I'd start the week out with a post on some news items that are relevant to this week's lecture topic -- Initial Public Offerings (IPOs).

First, while IPOs tend to be under-priced on average, there are some dogs out there. The Wall Street Journal recently reported on two financial IPOs that performed poorly on their first day of trading (Financial IPOs Want for Love - subscription required. [UQ Library users can get the full text here]). I suppose this isn't really surprising with the turmoil in US credit markets due to the sub-prime mortage meltdown (ABC news article here).
And, the New York Times reports that some Italian luxury designers are considering public offerings.

For students who want some study tips, check out Diablo Valley College's Learning Styles Survey (hat tip: Lifehacker)

I'm Back

2007-06-28T20:00:00.000+10:00

Last semester I had Long Service Leave -- 13 weeks of holidays, so no teaching. And, since I doubled up my load first semester 06, I haven't taught for 12 months. That all changes on 23 July when the new semester starts. I have one prep, but 3 deliveries. Until then I'm planning my course outline and working on research.

Links

2006-12-05T08:03:00.000+10:00

Several interesting posts have passed through my Google Reader account over the last few days. I've been noting them in the sidebar (automatically created by Google Reader), but without a new post you have no reason to come here and see them.

Surveys show that the public is sceptical about recent changes to tax on superannuation. (from Robin Bowerman over at News.com.au Smart Investing Blog). For non-Australian readers -- superannuation is our tax-advantaged retirement scheme. Employers are required to contribute 9% of employee wages, but unlike US Social Security the contributions go into individual accounts. Most Australians are now on defined contribution plans. Contributions are taxed at 15% on the way in (the top personal tax rate is 48.5%). Income accumulates tax-free. Withdrawals were previously taxed as ordinary income (with a credit of 15% for amounts taxed on the way in). Employees can 'salary-sacrifice' additional contributions (basically you tell your employer to reduce your taxable income and put the difference into your superannuation account), or make after-tax contributions. The recent change was to make withdrawals tax-free after age 60 (you can start making withdrawals at 55), and change the contribution limits (both pre-tax and after-tax) to reduce the amount contributed in the few years immediately before retirement. The old limits were age-based and increased with age. The new limits are the same for everyone.
Goldman Sachs is now cloning hedge funds. They've put together an index that replicates hedge fund returns.
From the Smart Investing Blog again, Terrence Odean and Brad Barber have written a paper showing that women investors are less overconfident and therefore less likely to make the mistakes that overconfident investors make. This is one I'll have to download and read.
And on a lighter note, The Onion has a story titled "Brash Young Floor Trader Trying to Rally Dow All By Self."

Technorati Tags: finance, superannuation, Australia

Where have I been????

2006-11-05T18:32:00.000+10:00

I haven't been teaching this semester, and, like Angry Professor over at A Gentleman's C, this means less impetus for blogging here (but I have been reasonably active on the Craft Blog) . I had hoped to blog more research related stuff this semester, but that just hasn't happened.

Over the past week we've been giving our 17 year-old son a lesson in personal finance. He will graduate from high school in two weeks (we're in the southern hemisphere, the school year is synchronized with the calendar year). He's a computer geek (he was on the Australian team for the International Olympiad in Informatics), so he wants to build himself a computer to use once he's in uni studying software engineering. We were willing to contribute a modest sum in the form of gifts and an outright grant, but not enough to fund the entire project. He had a bit in savings (from vacation jobs, etc) plus a few US Savings Bonds received as gifts over the years. We'll loan him the balance (only about A$400) . He did all the research, and ordered the parts online. He just got his first debit/ATM card, so he'll use that to pay (the place he ordered from is local, so he can pay when he picks everything up). Now I just have to find out if I can redeem the US Savings Bonds here in Brisbane. It will be a real pain if I have to go to Sydney to do it.

A Hit!

2006-10-12T11:29:00.000+10:00

I'm one of five researchers on a project that has just been funded by the Australian Research Council:

Title: Superannuation Funds: Ensuring the Financial Health of Australians in Retirement (DP0773662)
Scheme: Discovery Projects
ARC funding: $349,000 over three years
Summary:
Superannuation is relevant to all Australians, providing a foundation for their lifestyle in retirement. The protection and enhancement of superannuation savings have been high priorities of both government and regulatory agencies. Recent legislative changes include mandated choice of superannuation fund and increased disclosure requirements. Regulators have also flagged the need for increased corporate governance among superannuation funds. This project assesses the impact of these developments through an assessment of competition, performance and accountability within the superannuation industry. Monitoring the industry in this way will strongly contribute to the financial and economic health of Australians in retirement.

Here in Australia, an ARC grant is almost as good as a top-tier journal hit. The project proposal was submitted way back in January or February. Now we have to go back and remember what we promised to do so we can start on the research next January (when the funding becomes available).

Technorati Tags: superannuation, Australia

Trading Tips

2006-10-11T17:03:00.000+10:00

The Australian Stock Exchange has just posted an article on using stop loss orders. For many beginning investors the big trick is learning when to get out, especially when the stock is falling.

Technorati Tags: investment

Google Reader, and other ways to procrastinate

2006-09-30T20:54:00.000+10:00

Google's new Reader is a vast improvement. I think I may give up on Bloglines. I particularly like the ability to flag things I've read to show up in the box on the left (below my profile). I can even set up different sharing lists for each blog (if you're here, you probably don't care about the latest in knitting). What's missing is the ability to search your feeds. And, if you run out of things to read you end up here.

Yesterday I read this post over at Financial Rounds. Of course, I had to check out the Piled Higher and Deeper archives -- great stuff! Here's one of my favorites. And another.

Are you Rich or Tasteful?

2006-09-12T18:25:00.000+10:00

While driving between appointments last week, I heard the first half of The Conversation Hour on ABC Radio. I caught most of the interview with Andrew West about his book Inside the Lifestyles of the Rich and Tasteful. The book looks at upper middle class Australia and the division between the materialists and the culturists.

When it comes to defining the upper middle class, they're still only a small sub-group of the Australian population. The broad group that we're talking about represents 10 -15 per cent of the Australian population. This book is not about celebrities; in fact, a lot of Australian listeners and viewers will see themselves in this book. I'd say they're probably earning between 75 and 400 thousand dollars a year. But the tension is a question of taste and consumption. The culturists crave authenticity in everything... the materialists crave the newest and the biggest and the shiniest.

I'd be interested in reading a copy of this book. I'm not sure it's so black and white. I think I see a bit of both in my lifestyle -- I like new tech gadgets, but otherwise I'm fairly frugal and not into conspicuous consumption.

Ethical Investment

2006-09-11T15:55:00.000+10:00

Socially responsible investing has been in the news lately -- or maybe I'm just more sensitive to it because a colleague is working in this area.

NPR did a piece on whether you should own stock in a company you despise. Many finance professionals will tell you that socially responsible investing implies a lower return. This is because eliminating "sin" stocks from your portfolio reduces the set of companies you can choose from, thereby limiting the diversification you can achieve and making your portfolio inefficient. Last week the Wall Street Journal reported that Pax, a large socially responsible mutual fund family, is asking shareholders to allow them to eliminate the zero-tolerance policy toward alcohol and gambling stocks.

For Pax, the move comes after it had to sell a lucrative stake in Starbucks Corp. last year when the company set up a deal to launch a coffee liqueur with whiskey maker Jim Beam. The funds' 375,000 shares were valued at $23.4 million at the time, and had to be relinquished even though some SRI researchers estimate liquor-related sales contributed less than 1% to Starbucks's revenue.

Pax is employing what's known as a 'negative screen.' This method eliminates entire industries from the investment choice set, and will make it difficult to construct an efficient portfolio. Another approach to SRI is the best-of-sector approach where you rank firms based on their level of social responsibility and choose the highest ranked firms in each industry or sector. The Dow Jones Sustainability Index is based on this best-of-sector approach.

For an academic take on SRI see Lee, Darren David and Faff, Robert W., "The Corporate Sustainability Discount Puzzle" (July 2006). Available at SSRN: http://ssrn.com/abstract=921501

Odds and Ends

2006-08-23T22:46:00.000+10:00

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.

Active or Passive?

2006-08-21T22:21:00.000+10:00

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.

Water and Politics

2006-08-09T10:34:00.000+10:00

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

Credit Stories

2006-08-03T22:31:00.000+10:00

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!

Research Semester

2006-07-31T16:31:00.000+10:00

Well, teaching is done -- had to mark deferred exams last week (50 of them) -- and now it's time to get stuck into my research.

So, what am I working on this semester?

Project 1: Disclosure -- do the recent changes to disclosure requirements for investments make any difference? Do consumers understand the new "Product Disclosure Statements"? And, do they make any difference to the quantity of funds invested.

Project 2: Clean up the papers from my PhD and get them published.

Plus a few ideas for new projects on the horizon: tax motivated share buybacks, tax-effective managed funds, tax-deferred savings v. accelerated mortgage payments under Australian tax rules.

And supervising research students: one honours student and 1/2 masters student (jointly supervised).

Finally, just to inject a bit of humor into this blog -- check out this story from The Onion: Professor Pressured To Sleep With Student For Good Course Evaluation.

The Dark Side of Teaching

2006-06-13T13:17:00.000+10:00

I'm in the midst of marking group assignments. It's a bit of a pain because none of them are the same. I need to give grades based on the process rather than the actual numbers, so I can't just go tick, tick, tick. I've spent 6+ hours already and am not done with part 1A (worth 19%). At least there are only 50 assignments to mark -- if I had made it an individual assignment I would have 150.

So there's a trade-off here. The more realistic the assignment the more students will get out of it, and the harder it will be to mark.

Anyways, just needed to get that rant off my chest. Back to the grindstone....

Another podcast

2006-06-05T18:38:00.000+10:00

This one is about the Changing Face of Retirement -- did you know that 2/3 of the people who have EVER lived past the age of 65 are alive now.

NYSE Merger

2006-06-05T17:15:00.000+10:00

Just heard this on NPR's Business Story of the Day podcast.

Superannuation Lecture

2006-05-15T20:06:00.000+10:00

Well, this week I get to give a lecture on superannuation, and Peter Costello changed all the rules last week. So, what should I teach my students? The old rules in the textbook (copyright 2006), or the new proposals that aren't yet law (but most likely will be long before students apply anything they learn this semester)?

My approach is to ignore or minimise the provisions that will soon be obsolete, talk a bit about the history of the legislation, and discuss the budget proposals (noting that they are not yet law). Fortunately, the budget came out a day before I had to submit my final exam -- I was able to remove questions about provisions that will become obsolete (such as RBLs).

I'm not sure if anyone ever reads this blog. But if you are reading this, could you let me know how you would handle this situation? I'm glad I didn't write all the lectures up at the beginning of the semester and have them printed for students (like I do in my intro finance class). The laws change too fast in personal finance.

Interesting podcast

2006-04-23T12:34:00.000+10:00

This one's actually a week old, but I just had a chance to listen to it this morning. It's from ABC Radio's 774 Lifestyle:Money podcast, as originally broadcast in Melbourne on 15 April. The show discusses budgeting and how to make it work for you.
link to mp3 file
link to podcast feed

Teaching Notes

2006-04-19T09:50:00.000+10:00

I have been quite busy this semester with class preparation. It's amazing how much more work it is the first time you teach something new. I'm enjoying the personal finance course (FINM1401) . I had lots of fun writing up the assignment -- a case study featuring a young professional with the types of financial problems/goals that students might have 4 to 5 years after graduating. Between the two classes I have over 700 students, so answering email can be time consuming. I try to train them to use the online discussion board so everyone can see the question and answer -- usually there are several with the same question.

Finance Podcasts

2006-03-20T21:57:00.000+10:00

There are lots of finance podcasts listed in iTunes, PodcastAlley and PodcastPickle, and I only want to recommend those where I've actually listened to at least one episode. On the Finance News front, the most comprehensive local (Australian) daily podcast is Alan Kohler's Market Report, published by the Sydney Morning Herald.

For more general advice, I was impressed with Gannon on Investing. He starts most episodes with a "rant" on some area of investing theory or philosophy, then talks about an unknown US company. While the company specifics would be hard to act on from Australia, the rant is quite interesting. In his Diversification podcast he made the excellent point that your approach to diversification will depend on your view about whether you are able to pick stocks that consistently out-perform the market. If you don't have the time or energy to devote to careful stock picking, then you might as well buy an index fund and be fully diversified. If you're going to pick stocks to out-perform the market, then too much diversification will drag your returns down to the level of market returns.

Getting into the swing of things

2006-03-15T22:10:00.000+10:00

The semester is well and truly started, and I think I'm getting back into the routine. This semester I'm teaching a new course -- Personal Wealth Management. This class is a first year level course with no pre-requisites. The basic idea is to cover personal financial planning: the various investments available, how to look at risk and return, tax planning and retirement planning. It's a lot of fun to teach because it's an elective, so everyone is there because they are interested in the subject. There's also a wide range of background among the students -- from first year psych students who want to be able to manage their credit card to third year commerce students who know the theory behind everything and want more practical details. Since it's a first year subject, I have to pitch it at the rank beginner in investing while still throwing out something of interest for the more experienced students.

If you're one of my students and you've found your way to this blog, please leave me a comment -- I'd be interested to see how many students make it over here without any publicity in class.

For the rest of the semester I'll try to post here a couple of times each week and will discuss current financial news as well as resources on the web for learning more about finance. My next post (probably Friday) will start with an annotated list of finance related podcasts.

Preparing for next semester

2005-12-02T09:04:00.000+10:00

Well, marking is well and truly done for semester 2, results were released on Wednesday, and I'm starting to prepare for next semester. I've decided to front load all my teaching for the year into first semester next year, so I have three different courses to teach. Two are courses I've taught before -- intro financial management at undergrad and postgrad level -- so they'll be pretty easy. The third, Personal Financial Management, is new to me. It's been taught twice before, each time with a different lecturer, and the materials are becoming dated. So, I've decided to adopt a new textbook rather than spend my summer researching and updating the current set of teaching materials. It would be easy enough to spend the whole summer working on teaching, but what I really need to be doing is finishing up my research projects. So, a professionally prepared textbook, just published with web updates and full instructor support including test bank, seems like the smart way to go. Now I just have to decide what topics to cover and to what depth. This is a first year course with no pre-requisites, so I need to be careful about what background I'm assuming.

Welcome

2005-10-30T04:56:00.000+10:00

Just trying this out. The idea is to have a place to post work related ramblings. I had tried White Page, but didn't like the formatting options.