Tag Archives: Wall Street Journal

bond funds when interest rates are rising

September 21, 2015 By in bond market, Constructing a Portfolio, Current Market Thoughts, junk bonds, Portfolio management, securities markets Tags: , , , , , , , Leave a comment

This past weekend, the Wall Street Journal published an article in its Business and Finance section about what happens if interest rates rise and holders of bond mutual funds and ETFs start to sell in large amounts.  The article is based on a research report written by Barclays and co-authored by that firm’s co-head of fixed income research, Jeff Meli.  The article isn’t identified further.

Maybe that’s not so strange, since, as reported in the WSJ, I find the research itself to be weird.  Its conclusions seem to me to be either not that relevant or just plain wrong.  The article does, however, touch on a number of points that are important for bond fund holders to consider.

 

The report starts out by assuming what I guess the researchers think is a worst-case scenario:  the junk bond market drops 10% in a day, and a given mutual fund receives requests for redemptions equal to 20% of its assets.

It concludes that:

–the fund’s net asset value would fall by 12%

–the fund would sell its most liquid assets to meet redemptions

–the remaining assets would be mispriced at a value higher than the value they could be sold at

–therefore, the first investors to leave would receive more than fair value and would be the best off; later redeemers would get less than fair value for their shares

–ETFs don’t have these problems and should be preferred to mutual funds.

my thoughts

I think this is a very unlikely set of circumstances.  The most damning constraint would seem to be the “single day” provision, which is intended to give the junk bond manager in question the least possible time to raise funds to meet redemptions.  However, the other two conditions haven’t come anywhere close to being triggered on a single day, either in the downturn following the internet bubble or during the 2008-09 recession.  Some kind of gigantic external shock to the economy would seem to be necessary for either to happen– not something specific to a given type of asset.

In such a case, it’s not clear that any financial markets would be functioning normally.  It’s conceivable that trading in many/all financial instruments would be halted until calm was restored.  So the pricing of a given junk bond fund would be a moot point.

For at least the past quarter-century, junk bond funds have generally been priced by third parties at “fair value.”  I’ve seen them work for illiquid stocks or for NY pricing of stocks trading abroad.  My judgment is that they work incredible well.  So I don’t think fast redeemers get the best pricing.  The opposite may well be the case.

Fund families have lines of credit that they can use to meet unanticipated redemptions.

No portfolio manager worth his salt is going to sell only the most liquid assets first.  On the contrary, it’s better to sell illiquid ones while there are still buyers.

In the past, big investment companies have ended up buying the most illiquid assets from junk bond funds they manage at a price determined by a neutral third party, in order to make redemptions easier and shore up confidence in the fund.

In general, fund management companies have no incentive to price a fund too high.  If anything, they should want to price it too low.  That way, they can send the extra to redeemers once they find their error.  No one is going to send anything extra back.

I don’t get the ETF stuff at all.

More tomorrow.

 

hedge funds and investment research

January 29, 2015 By in Getting financial advice, hedge funds Tags: , , , , , , Leave a comment

On Monday, the Wall Street Journal ran an interesting article, “Hedge Funds Learn Secrets Not So Safe.”  It’s about brokerage house research reports on individual companies.

Brokers provide research to customers either by giving them access to a research website, which contains all a broker’s research reports, and/or by responding to requests for specific research items, including meetings with analysts.  The problem with this is that brokers collect and analyze all their points of contact for the information they contain.  Conclusions will certainly wind up on the firm’s sales desk and can easily end up on the firm’s proprietary trading desk, too.

The same written  information is also available to authorized customers through third-party information services like Bloomberg.  I can use my Bloomberg account not only to call up a chart of a company’s stock price, see summary financial statistics and find out who a company’s major suppliers and customers are.  I can also read brokerage research from the brokers I do business with.  Not having read the service agreements they’ve signed, hedge funds have apparently assumed that if they read brokerage house report on a given target investment using a third-party information service, the broker never finds out.  By doing so, they’ve outwitted the broker and avoided information leakage.

Not so.

The third-party information providers supply such usage data to brokers, sometimes being as specific as what person at a given firm has accessed a report.  In fact, the article cites an instance of an unnamed analyst finding out his research wasn’t as stealthy as he’d thought when the broker whose report he’d been reading called him up and offered to arrange a meeting with the target company.

 

What I find odd is that there’s an obvious way to prevent information leakage–do the research yourself.  There’s a ton of relevent information available from the SEC’s Edgar site, as well as from government agencies and industry trade associations.  There are also suppliers and customers to talk to.  There’s gossip on the internet, too.

In my experience, except for a narrow set of highly technical areas (where you can always hire a consultant), the picture you create yourself will be more accurate, relevant and in-depth than anything a brokerage report can provide.  Yes, the brokerage analyst may be willing to say things on the phone or in person that he wouldn’t care to commit to paper, but that’s another issue.

Two issues:  compiling a thorough analysis of a company may take a week or two, as opposed to taking an hour to read someone else’s work.  Also, the analyst has to have the skill and experience to do independent work.

I can’t imagine that taking an extra week is the crucial variable.  That leaves the possibility that the firms the WSJ is writing about are so weak they don’t know how to do research themselves.  Hard to fathom.  I guess they’re just great marketers.

 

 

 

 

Moffett Research, Vodafone’s financials, Wall Street’s security analysts

July 15, 2013 By in Industry Analysis, Technology, Wireless Tags: , , , , , , , Leave a comment

The “Heard on the Street” column of today’s Wall Street Journal talks about the purchase commitment Verizon Wireless had to make to Apple in order to be able to offer the iPhone on its network.

a footnote in the Vodafone financial statements

The information comes from newly-formed Moffett Research LLC, a venture headed by Craig Moffett, the truly excellent (former) telecoms analyst at Bernstein.  Mr. Moffett points to a footnote in the financial statements of  Vodafone plc, a Verizon Wireless co-owner, that implies Verizon Wireless has committed to buy a minimum of $44.7 billion worth of iPhones during 2011-2013.  The company spent only $18.5 billion on iPhones through the end of last year, however, and still had $2 billion worth (Mr. Moffett’s number) in inventory.

That leaves $26.2 billion worth of iPhones to be bought this year (my arithmetic–HotS says the shortfall is $23.5 billion).

I find three aspects of this story interesting:

1.  Neither Verizon Wireless nor Verizon disclose this information.  It took a sharp-eyed telecom specialist combing through the back pages of a UK company’s financials to spot the figures and realize their significance.

This example illustrates what security analysts do for a living, as well as the depth of information that traditionally has been at the fingertips of any professional investor who does business with the major brokerage firms who employ these analysts and furnish their research to customers.  In other words, no matter how dull-witted the pro and how smart we as individual investors are, the pro has a huge information advantage starting out.

2.  Mr. Moffett started up his new firm two months ago.  It may be that he’s decided he can make more money as an independent than as an employee of Bernstein.  More likely, if past Wall Street form follows true, is that Bernstein has started to dismantle its high-powered equity research effort.  Why do so?  Wall Street believes that research is a money losing business.

3.  What happens if/when Verizon Wireless falls short of its $44.7 billion purchase commitment?

HotS doesn’t say.

Using (very) round numbers, the shortfall will likely be $10 billion or so.  In contracts of this type that I’m familiar with, Verizon Wireless would have to pay that amount to Apple shortly after the end of the year.  Verizon Wireless would, however, get a credit against future purchases of a gradually declining percentage of the shortfall payment.

Given the popularity of the competing Samsung Galaxy phone line, I imagine the shortfall payment will be a prominent element in negotiations over supply arrangements in 2014.

On another note,  I wonder how Apple and Verizon have been accounting for the minimum purchase contract.   HotS says the minimums for 2011-13 are:  $13.7 billion, $14 billion, $17 billion, respectively.  The actual purchases have been $8.4 billion and $10.2 billion in 2011 and 2012.

Both firms are most likely using the actuals, not the contracted minimum amounts.  Might be a little awkward for Apple, though, if it isn’t.