Archive for August, 2009

Time to Take Action? (BusinessWeek)

Friday, August 28th, 2009 | Finance News

After the bear market wreaked havoc on your investments, did you kick any loser funds to the curb in favor of a simplified portfolio? If so, you're not alone. The trend to eschew actively managed mutual funds in favor of low-cost index funds has intensified during the recession, with investors adding more than $253 billion in funds with "passive" investing strategies since the end of 2007, vs. $72 billion taken out of active funds. In the first half of 2009, almost $22 billion in new cash was added to equity index funds, vs. $20 billion in net outflows for active stock funds. At the current rate, index funds will have amassed nearly 55% of all fund assets by June 30, 2019, up from 18% a decade earlier, according to data from Financial Research Corp.

The shift is understandable -- actively managed funds lost more than index funds in 2008. But the timing is poor: Right now, there's a surprisingly strong case to be made for buying into actively managed funds.

The main argument is simply that the bargains are better than ever -- even with the Standard & Poor's 500-stock index up 52% from its March low. Research published in May by Boston Company Asset Management, a subsidiary of BNY Mellon (NYSE:BK - News), found the downturn that dragged the S&P 500 near a 13-year low also had a big effect on valuation spreads, or the difference between where the cheapest companies in the index trade relative to the overall average.

Across most sectors, these spreads widened to levels not seen since 1952, presenting once-in-a-lifetime buying opportunities for active fund managers to load up on high-quality, heavily discounted stocks. Lately, some valuation spreads are looking even more attractive. And historically, active managers have most consistently outperformed following periods such as this, according to the report.

At the market bottom this past March, the average price-earnings ratio of companies in the S&P 500 was 10.0, vs. 3.9 for the 100 cheapest stocks in the index -- a spread of 6.1. The spread currently tops 9.6 as disappointing earnings reports, coupled with rising stock prices, widened the range between the cheapest and most expensive S&P 500 companies. The p-e's for some S&P companies, including Abbott Laboratories, Apollo Group, and Dean Foods, have actually fallen since March.

The steepest discounts remain in what Robert Arnott, chairman of Research Affiliates in Newport Beach, Calif., calls the "loathed and unloved" sectors, including financial and consumer discretionary stocks. Active managers moving into these stocks are "buying greater long-term earnings potential," he says, because survivors will have less competition, and more pricing power and profits as a result.

Outside of the S&P 500, alluring discounts also may be found among small- and mid-cap companies, where market prices don't necessarily reflect a company's fundamentals as well as they do with better-known companies, says William Droms, finance professor at Georgetown University's McDonough School of Business. Here, active managers are often able to add more value than their large-cap peers. That's because information about small companies is less readily available, so original research pays off. The same goes for international and emerging-market stocks, says Droms.

George Feiger, CEO of Contango Capital Advisors in Berkeley, Calif., believes the real plus of active management now lies in being able to avoid countries -- and companies -- still mired in debt. "As the economy recovers, those with low debt will grow, while the others will still be struggling," explains Feiger. (He favors China, Taiwan, and Singapore over debt-ridden countries in Eastern Europe and South America.)

A Hard Sell

But even though actively managed domestic equity funds have outperformed their benchmark indexes by about two percentage points on average so far this year, the fact remains that active investing largely failed to protect shareholders on the downside last year. In 2008, actives fell by an average of 40%, vs. a 37% loss for the S&P 500. A report written by Francis Kinniry Jr., a principal in Vanguard's Investment Strategy Group, found that over long periods, active funds trail index funds on account of their higher expenses. Research shows that "the No. 1 predictor of future outperformance is cost," he says. The average expense ratio of an actively managed equity fund in Morningstar's (MORN) database is 1.13; among Morningstar's universe of top-ranked funds, it's 1.09.

Vanguard is known for its low costs, but it isn't betting against active funds. "We believe and are committed to both (index and actively managed funds)," says Kinniry. Still, 55% of assets under management (excluding money market funds) are in index funds, up from 47% five years ago.

Vanguard founder Jack Bogle, passive investing's most ardent fan, is "more convinced than ever that indexing works." He has perhaps the best advice on how to choose an active fund: "Look for a management company that is in the business of managing money and not making money." He suggests examining a fund shop's "stewardship." Morningstar assigns letter grades to each fund as a measure of how responsibly the parent firm treats investors. The rating is scored across five categories: regulatory issues, manager incentives, board quality, corporate culture, and fees.

Whether you go the active or passive route, Bogle reminds investors that, above all, the concept of buy and hold is most important. "When we lose, we get out (of the market). And when we win, we get in," he says, meaning that investors tend to sell low and buy high. "We are our own worst enemy."


Germany says talks with GM on Opel far from over (Reuters)

Friday, August 28th, 2009 | Finance News

The German government said on Friday its talks with General Motors on the sale of carmaker Opel would take some time yet and made clear it still favored a bid from Canadian supplier Magna.

Months of talks on the future ownership of Opel between GM, which holds 35 percent of Opel shares, and Germany, which is providing state aid for the carmaker, have reached an impasse.

Merkel's government, facing an election in one month's time, has strongly made the case for Magna's bid but GM has so far expressed no preference. The two sides have to reach agreement for a deal to proceed.

Sources involved in the talks have said a rival bid from Brusssels-listed investment firm RHJ International would grant GM a right of first refusal to re-acquire control of Opel at a later date, which would appeal to the U.S. carmaker.

A government spokesman told reporters that contact between government and GM officials was ongoing.

"Chancellor Merkel has made clear she wants speedy talks on Opel but also -- and this is a decisive point -- that the talks must (end) well. In other words, the talks will take some time," said government spokesman Klaus Vater.

GM negotiator John Smith is due to speak by telephone to German officials later on Friday and sources close to the negotiations said there were some signs of progress. Vater said no face-to-face meeting was expected on Friday.

To further complicate matters, Opel parent GM may now try to raise the $4 billion it needs to keep Opel instead of selling it, sources told Reuters earlier this week.


In an interview with financial daily Handelsblatt, Merkel declined to speculate on whether a deal would be wrapped up before the September 27 election and defended herself from criticism that it had not been wise to come out so strongly in favor of Magna so early.

"It was not a mistake. If the German government did not know and say what it wants, it could not hold its ground in talks with GM," she told the paper, reiterating her support for Magna.

"We need a sustainable concept for the future of Opel... Magna comes from the auto sector and offers, together with GM, prospects in new markets. We think that is sensible."

Merkel's conservatives and her Social Democrat coalition partners and main rivals in the vote have been united in their backing for Magna but cracks are starting to show.

Guenther Oettinger, the state premier of Baden-Wuerttemberg and a leading figure in Merkel's party, said on Thursday Magna was not the only option. And Fred Irwin, head of the Opel Trust, which has been responsible for Opel since GM entered bankruptcy in June and which must approve any investor, said the government had played its hand too early.

Berlin's support for Magna, bidding with Russian partner Sberbank, is rooted in hopes it would limit German job cuts and reduce GM's involvement to a non-controlling one.

The U.S. carmaker collapsed after years of mismanagement, finally forcing it to seek salvation in a U.S. government-backed restructuring under bankruptcy law pushed through in a whirlwind 40 days.

(Additional reporting by Maria Sheahan)

(Writing by Madeline Chambers; editing by Dan Lalor, John Stonestreet)


European stocks rally as British recession eases (AFP)

Friday, August 28th, 2009 | Finance News

European equities rallied on Friday, boosted by strong gains on Wall Street as investors digested news that the British recession was not as deep as expected in the second quarter.

London's benchmark FTSE 100 index of leading shares was up 1.15 percent to 4,925.18 points approaching midday.

Frankfurt's DAX 30 added 1.58 percent to 5,556.62 points while in Paris the CAC 40 gained 1.50 percent to 3,704.05 points approaching the half-way stage.

The DJ Euro Stoxx 50 index of leading eurozone shares jumped 1.43 percent to 2,817.23 points.

On the foreign exchange market, the European single currency stood at 1.4359 dollars.

British gross domestic product (GDP) shrank 0.7 percent in the second quarter of 2009 compared with the first three months of the year, official data showed on Friday.

That was a modest improvement on the previous estimate of a 0.8-percent contraction.

The Office for National Statistics said the economy shrank 5.5 percent in the second quarter on a year-on-year basis, which was also a slight upgrade, but remained the biggest drop since records began in 1955.

"UK second-quarter GDP (was) pretty much in line with expectations, which will provide some relief to the market," said trader Arifa Sheikh-Usmani at betting firm Spreadex.

"Looking ahead to this afternoon, Personal Income and Michigan sentiment figures in the US will be key to setting the tone ahead of the weekend."

London's mining sector was also lifted on Friday by broker upgrades for Kazakhmys and Xstrata, which rallied 5.66 percent and 4.55 percent, to stand at 990 pence and 828 pence respectively.

In Paris, French supermarket giant Carrefour, ranked world number two, said Friday it had slipped into the red for the first half in difficult times but still confirmed its 2009 earnings targets.

The company, second only to Wal-Mart of the United States, posted a net loss of 58 million euros (83 million dollars) in the six months to June after taking exceptional charges of 511 million euros.

However, investors set aside the news, sending the group's share price 4.64 percent higher at 33.125 euros.

Wall Street recovered Thursday from a weak opening to hit fresh year highs as data showed the economy remaining on the path to recovery from recession with modest improvement in the labor market.

The blue-chip Dow Jones Industrial Average rebounded to add 0.39 percent to 9,580.63 points, ending higher for the eighth straight session and extending its longest winning streak in 28 months.

In Asia on Friday, Tokyo shares rose 0.57 percent, tracking US gains as investors looked beyond a jump in Japan's unemployment rate to a record high, dealers said.

Japan announced Friday its jobless rate hit a record high last month, raising doubts about prospects for an economic recovery and dealing a blow to Prime Minister Taro Aso ahead of a weekend election.

Worries about deflation also deepened after consumer prices fell at the steepest ever pace and consumer spending declined, highlighting the economy's fragile state despite its return to positive growth in the second quarter.

The jobless rate rose to a worse than expected 5.7 percent in July, up from 5.4 percent in June, the government said.