Special Studies Program (SSP)

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

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

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

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

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.