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Money matters: Traditional or modern strategies?
Which should you use? (Part 2)
Graham Macdonald
MBMG International Ltd.
So what exactly is “Enhanced Indexing”? Enhanced
index strategies seek to outperform their benchmarks through active
management, yet differ from their more traditional active counterparts in
that they attempt to minimize the impacts of the ‘long only’
constraint and of uncompensated risks. Enhanced index strategies are thus
often appropriately referred to as risk adjusted active strategies. In
short, enhanced index strategies are designed to offers investors more
consistent results through better risk control and more active return per
unit of active risk.
This trade-off between active and passive management is
often based on a loose definition or perception of the efficiency in that
particular market segment. A more optimal and justifiable approach is to
consider the trade-off in risk/return terms as measured by the information
ratios (“IR”) of the respective strategies. This implies that the
decision on the composition of index, enhanced index and traditional
active managers should be optimized with the objective of improving not
absolute returns but risk adjusted returns.
The IR is defined as the ratio of the expected annual
excess return to the annual volatility of the excess return. As such, a
solution to the dilemma of how much of a portfolio should be apportioned
to the various strategies is to focus on the amount of excess return
earned for each unit of added risk.
Research using the Wilshire Mentor 2000 Database shows
the superior information ratio of enhanced index strategies versus that of
traditional active managers. This analysis demonstrates that whilst
traditional active managers may have a higher IR than that of enhanced
index managers over the shorter time period (i.e. 1 year) it is clear that
on a 5, 7 and 10 year basis, the consistency of enhanced indexing returns
on a risk adjusted basis, is far superior to that of traditional active
returns.
In other words - get a one year bull market and your
traditional fund manager will probably come out on top - however over the
course of a full cycle, then the money lost during negative years and the
relative underperformance in flat years will mean that enhanced indexing
can lead to superior portfolio characteristics and optimize the IR of the
overall manager mix.
But what is it about enhanced indexing that leads to
higher IR and superior performance results at the overall portfolio level?
At the heart of any enhanced index strategy is the goal to minimize
uncompensated risk. “Enhanced index managers are much more effective
than traditional active managers at avoiding the most significant impacts
of the long-only constraint. They are much more effective at managing
portfolios that fully reflect their insights. Traditional managers can
lose half of their information ratio to the long-only constraint,”
according to Ronald Kahn, head of BGIs US active equity strategies.
The following is a simple example to illustrate the
loss of efficiency arising from the long-only constraint. Assume that a
hypothetical manager only has investment insights into stock A and stock
B. Each of these stocks constitutes 10% of his overall investment
portfolio. The other 80% is made up of other benchmarked selected stocks
about which there is currently no significant market information flow. The
manager’s view on stock A becomes more positive while on stock B it
turns negative. The manager expresses his view by increasing holdings in
stock A by 10%, up to 20%, and selling the same amount of stock B, down
from 10% to zero, whilst at the same time remaining at index weights (80%)
for the portfolios other stocks. Up to this point, the process is
representative of a typical enhanced index manager where no uncompensated
risk is taken. When faced with further demands for higher returns, a
traditional active manager will continue to increase the position in stock
A (by another 30%). However, as he is unable to sell more of stock B (due
to the strategy’s ‘long-only’ constraint), he is forced to sell 30%
of the portfolios other holdings. The consequence is that the manager
immediately takes on uncompensated risk with respect to style, sector,
market capitalization and other risk characteristics as well as additional
stock-specific risk. These are all elements on which he has no opinion.
The result often leads to a lower information ratio.
This is why the MBMG approach is to identify the
appropriate level of risk for an investment portfolio and then construct
the most efficient portfolio around that. This is a more reliable approach
than asking what levels of return a client is seeking - you might as well
ask what kind of weather he would prefer today! Whereas with risk adjusted
portfolios you start from the appropriate level of risk and simply achieve
the best level of return every day, week, month or year that this can
yield. We don’t understand why all portfolios aren’t made like that
these days!
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of
any actions taken or not taken as a consequence of reading the above
article. For more information please contact Graham Macdonald on
graham@mbmg-inter national.com
Snap Shots: Camera Maintenance for Dummies!
by Harry Flashman
We happily take our cars in for maintenance, and do so
because we know that eventually all mechanical things must fail, yet we
expect our expensive cameras to last forever. This represents a double
standard worse than double pricing, because we are fooling ourselves in
this matter.
 I
have been asked before about what people should do (or shouldn’t do)
regarding looking after their investment. With modern cameras costing many
thousands of baht, it’s not a bad plan to maintain as much as you can.
For those readers who have missed my sage counsel, the
first thing to remember is that cameras are very delicate pieces of
equipment. They have lots of moving parts (shutters, apertures, film
transport/wind on, etc.) plus expensive optical glass in the lenses,
mirror system and viewfinder, let alone all the fancy electronics,
batteries and such. The humble camera is not so humble these days.
Let’s start with the outside and clean it. Do not get
the kitchen universal “Spray ‘n Wipe” all purpose cleaner and spray
liberally. The family that sprays together doesn’t always stay together.
With a clean soft brush (like a child’s water colour paint brush, or a
lady’s make-up brush) gently wipe the nooks and crannies on the surface,
round the eyepiece and all the little edges, and under the knobs. Now
dampen a cloth with plain water and gently rub it all over the exterior of
the camera body. By now, the camera should be looking like new again - but
we’ve hardly started!
The next item to deal with is the lens. Unscrew the
lens and put the camera body aside somewhere safe. With your soft brush
gently dislodge any dirt and dust from the lens barrel. What is really
good here is one of the soft blower brushes available in most camera shops
for around 180 - 300 baht, depending on fancy packaging and a little
bottle of cleaner. Go for the brush only type - do not use commercial
camera cleaning fluid anywhere near your camera! Blow brush the lens
elements as well (front and rear).
Now with a very clean damp cloth exceptionally gently
clean both the front and rear surfaces of the lens. Use a spiral motion to
clean from the centre to the edges. Use a fresh piece of the cloth and
give it one last swipe. Put the cleaned lens aside safely.
Now let’s turn our attention to the camera body. This
is where you have to put in the majority of your time, and the ultimate
care and attention. There are certain things you must never do. Let’s
look and note these first. You must NEVER touch the mirror or the
focussing screen with your fingers. Even to change the focussing screen,
you will be supplied with special tweezers by the manufacturer.
The other part of the camera that should never be
touched with your fingers is the shutter. This is a very delicate part of
the workings and can be bent or twisted very easily. The other DO NOT is
oiling or spraying with CRC or other similar lubricating fluids. Leave
lubrication to the manufacturers agents or camera repair shop only.
Now open up the back of the camera and clean the
internals with the blower brush again, taking particular care with the
channels where the back fits in as it closes. You are quite likely to find
small particles of dust and dirt in the cassette holder area, as this is
the part you open up every time you change film. The pressure plate inside
the back has to be completely clean too, because the film emulsion runs
across it. Any dirt or grit there will leave a scratch on the negatives.
The last area to check is the battery compartment.
Again, a quick brush and blow should be enough. Do not use the damp cloth
in here. Finally, if you don’t know how old the battery is - then change
it for a new one.
That’s it. Your camera is now sparkling clean and ready for your next
roll of film this weekend.
Modern Medicine: Thoughts of Poxes
by Dr. Iain Corness, Consultant
Whilst Smallpox has been eradicated from the
earth (or until some idiot has a laboratory ‘accident’), Chickenpox is
certainly here to stay.
According to the latest news reports, Chickenpox (Varicella)
is also back here in Thailand again. 22,833 patients with the complaint between
January 1 and May 1 this year. This nasty condition never actually leaves the
community, lying quiet for a while and then attacking in epidemic proportions.
Make no mistake about this one, it is a most aggressive disease that sweeps
through schools and institutions and while generally a disease of children, it
can attack adults too with devastating results.
The culprit is a virus, known as the Varicella Zoster virus,
which produces the characteristic chickenpox lesions. These come out very
quickly after an initial period of vague symptoms such as fever and aches in
muscles and joints. The lesions (vesicles) are very superficial on the skin and
grow like a mini-Vesuvius, burst and then crust over. That cycle of events takes
around four days, but new crops of vesicles come up in waves in the first three
or four days, so you can have some vesicles growing bigger while earlier ones
are drying up and crusting over.
The vesicles generally come out on the trunk and face first,
but can spread to all over the body and even inside the mouth and on the tongue.
Now while scarring is always a worry for the Mums of this world, there are far
worse effects from this little virus. There is a distinct possibility of an
encephalitis in older children and adults can actually develop a Varicella
pneumonia. Pregnant women who get Chickenpox also run the risk of infecting the
unborn child, and this can run as high as 10%. Very often, especially if the
child scratches the lesions, there can be an extra infection by an opportunistic
bacterium on top of the viral lesions, so you get a double problem.
So what do you do when Chickenpox is doing the rounds? The
first thing is to keep away from those who have the disease. It is highly
contagious and is spread by inhalation of micro droplets in the air, or by
direct contact with weeping vesicles. In a family, this means that little Johnny
gets his own towel that no one else must use and a bed-time kiss is strictly
forbidden.
Calomine lotion does help with itchy and weeping vesicles and
trim the fingernails in young children to lessen the chances of scratching. With
very little ones, I even suggest putting their hands in socks, just as you do
with little babies.
If the temperature is raised (more than 37.5) then a little
paracetamol will help (but not aspirin as this drug should not be used with
children), and if there is the “super-infection” by a bacterium it will be
necessary for your doctor to prescribe an appropriate antibiotic.
The other important duty that you have as a parent, is do not
send little Johnny back to school until the very last vesicle has dried up. This
is generally around a week to ten days, but is so important in trying to stop
the epidemic.
The other nasty part of this virus is that it lies dormant in
your system and can strike back many years later as Shingles, or as we doctors
refer to it, Herpes Zoster. No, Chickenpox is not fun, and to those of you who
are struggling with it right now, you have my sympathies.
 Heart to Heart with Hillary
Dear Hillary,
Do these men who claim to have lost money on motorcycles, cars, houses, gold
chains, broken legged brothers and terminally ill buffaloes, really exist? Every
week there seems to be another tale of woe. Do they never learn from reading
about the others who went before them? Surely there are not that many? Tell me
that you make those letters up each week?
Disbelieving Dennis
Dear Disbelieving Dennis,
The sad fact is, my disbelieving Petal, is that these people do exist. They come
over in lemming-like swarms every year, with the sick buffaloes lining up in the
stalls, waiting for financial fodder. Why don’t they learn by reading what has
gone before? Because I think they can’t read.
Dear Hillary,
The story I am writing you is true and I think everyone needs to know there is
good and bad everywhere in the world. Not just bad here. I get sick of all the
moans and groans that come from all your writers and how they have been ripped
off or left in the lurch by some Thai girl. Perhaps they should be more careful.
I met a Thai lady when I was on holidays a couple of years back and she asked me
for a loan of several thousand baht. I looked into her background and why she
was in debt and how she was going to pay me back. She promised that she would
give me all the money when I returned to Thailand six months later. I came back
and guess what? She repaid me, plus interest that I didn’t ask for. I think a
lot of the people who get ripped off ask for it.
Financial Freddie
Dear Financial Freddie,
First off, I do appreciate letters that show the other side of the coin. As you
correctly point out, there is good and bad everywhere and Thailand is no
different from anywhere else as far as that is concerned. The difference here
seems to be that the foreigners come here and forget all good business sense,
such as a few checks as to how the girl in question is going to repay the loan
just for starters. Perhaps they are all blinded by the bevy of beauty that
surrounds them? Checking one’s brain in at the immigration counter in Bangkok
seems to be a very real situation. I often wonder if they remember to pick it up
again when they leave.
Dear Hillary,
What can you do about your husband when he is drinking too much? He has a drink
after work every day, drinks with dinner and then drinks after dinner at home,
or goes out to the pub with his mates, where they spend the evening drinking. On
Sundays it is drinking from 12 to 12. I believe this is too much. He only has a
few beers and he is not violent or anything, but I just worry that he can’t be
doing himself much good with all this drinking. Please don’t suggest I go
drinking with him as I do not drink.
Teetotal Tina
Dear Teetotal Tina,
You’ve got it all wrong, my Petal! Hillary doesn’t have a husband, so I
don’t have to do anything! I sent the last one packing years ago - but it
wasn’t for drinking after dinner. It was for drinking instead of dinner! If
you’re worried about hubby’s health, then get him to go for a check-up. If
you’re worried about what he’s doing while out drinking, then go with him.
Nobody said you have to drink alcohol. All of the pubs I will have the
occasional tipple in also sell orange juice and soft drinks. I think you are the
one with the problem, my love. Time to lighten up and look at your own
attitudes, darling.
Dear Hillary,
One of my colleagues at my work, who seems to be a reasonable sort, keeps on
suggesting I go out with him one night. He says we will just go for a few drinks
at some nice bars. When I asked which bars he wanted to visit, he was very vague
and I think he was trying to fudge the issue. What do you think he is trying to
do? He would be around 50 years old and has a Thai wife. I am 30 and unmarried.
Susie
Dear Susie,
I think it is fairly obvious what this man is after, and it’s not just another
beer. But the simple fact is that you are in charge of your own destiny and if
you don’t like the bar, or the way things are moving, then you move on. If you
think he is trying to seduce you, then again you are in charge of the situation.
Nobody is going to throw you flat on your back on the bar counter, are they? (Or
if they are, let me know the name of the bar too!) My suggestion is that you
should tell him it would be a great idea to go out and for him to bring his Thai
wife with him. His next move will show his hand, I am quite sure. Unless his
wife wants to seduce you as well!
Personal Directions: Self esteem and a little bit more …
by Christina Dodd
I want to thank Sue Betts – who tells me
that the weather in UK is still terrible! – who sent me this short piece
on self-confidence and dressing for success. I believe from Sue that it is
authored by, or adapted from a longer piece by Helen Johnson.
“Self-esteem is developed by feedback from other people
but clearly it is within ourselves. We know this because all the compliments
in the world will not increase our self-esteem if we think we don’t
deserve it.
We will reject the compliment or laugh it off as a
mistake. People with low self-esteem distort negative aspects of their body,
this is a way of projecting their negative feelings more externally. One
part of us begins to dominate and we begin to think things like ‘you know
I would be handsome / attractive if it were not for this gigantic nose or
this horrible chin’.
People with poor self-image tend to project those
feelings on one part of their body more than others.
It is what is referred to as the ‘deforming mirror’.
All of us see ourselves in a deforming mirror where we
don’t see ourselves as we truly are. Very few people have an accurate
image of their body and women in particular see themselves as larger and
fatter than they actually look.
Men see themselves more realistically.
Why would women be more negative about their bodies?
In this instance at least it seems that it is because
women rate their bodies almost exclusively in terms of its attractiveness
whereas men are able to rate their bodies on its attractiveness and its
function - so if you looked like Brad Pitt it would be wonderful but if not,
at least its strong - its almost as if men look at their bodies as an
instrument and women look at their bodies as an ornament.
Research does indicate that women are more critical of
their bodies than men - perhaps the influence of the media has something to
do with this - if we were only to realise that the products being marketed
to reduce wrinkles and help us lose weight are selling hope to all who buy.
The industries generate the need for hope, manufacture the product and sell
the hope.
There are a number of important changes we can make to
change our body image.
1. Dress for physical pleasure.
Stop scarring your body by wearing clothes that are too
small – ‘I’m going to fit into this size 12 even if it kills me’
and when you remove the size 12 your body is scarred.
Wear clothes that are comfortable - if you feel good you
will feel better about yourself, hold yourself more confidently and feel
confident.
Try dressing differently - if you usually dress
casually, dress formal one day - show yourself that there are many ways to
look and feel good about yourself.
2. Look at the whole of your body and not just a
collection of parts.
Don’t reduce your identity to just one part –
‘I’m fine if it were not for my ears’.
Focus on how you feel rather than on how you want to
look. Instead of I want to be thinner think ‘I want to be more energetic
or more mobile’.
Thinking I want to be thin is focussing on an ornament -
I want to be more energetic is focussing on an instrument which is there to
do something for us.
3. Listen to someone else’s opinion of you.
It is difficult to like your whole self as long as you
are going around criticising one part of yourself constantly. Very few of
us have an accurate picture of ourselves and it is difficult to see a true
picture.”
On another note …
This week I had the great (dis) pleasure to have to
suffer a monologue from a dinner guest who decided to take it upon herself
to tell all and everything about all and everything … ad infinitum, ad
nauseum an add great irritation to everyone else at the table.
Being from California she is more likely to be liberal
– or so I thought – of the faults and quirks of people. But this sadly
was not the case. The grand finale came with a commentary and dissertation
upon the American political system and an in depth, first hand Fox News
style analysis of the merits of the various candidates, their wives,
parties, associates, war records and all … ad infinitum, ad nauseum (and
again) add great irritation to everyone else at the table.
During this discourse we all politely chuckled, ummed,
aahed, oohed, squirmed and generally wished that we were elsewhere. But,
despite all attempts to change the subject, the litany went on and on. As a
side note, I did find it rather amusing, however, that the “incumbent”
sounded distinctly as if he was secretly North Korean and was covertly The
Great Leader!
After about half an hour I suggested - during a
prolonged pause for breath on the “lecturer’s” part - that I had just
received an email from a friend in the US, containing a “quiz” by
Justin Ford. I suggested that maybe it would be an interesting little
discussion piece and reasoning test for everyone at the table.
Surprisingly everyone agreed to the challenge! Here it
is exactly as was sent to me …
Question:
It is time to elect a new world leader, and only your
vote counts. Here are the only known facts about the three candidates. This
is the only information that we are allowed to know about those who are
vying to be Numero Uno:
Candidate A: Associates with crooked politicians and
consults with astrologists. He’s had two mistresses. He also chain-smokes
and drinks 10 to 12 martinis a day.
Candidate B: Was kicked out of office twice, sleeps
until noon, used opium in college, and drinks a quart of whiskey every
evening.
Candidate C: Is a decorated war hero. He’s a
vegetarian, doesn’t smoke, drinks an occasional beer, and never cheated
on his wife.
Which of these candidates would be your choice?
As can be imagined this brought good and vigorous debate
with many varied opinions plus a great deal of highly animated
conversation. Some debated the merits of the various leaders, some looked
at their flaws as “life experience character building exercises” and
others thought that they all sounded better than the present lot and should
be signed up immediately!
But when the final vote came down it was fairly well
unanimous.
I shall refrain from saying anything else, save that
there is a trouble with taking things on first appearances or on the basis
of inadequate or strictly massaged and limited information. his is
evidenced by the revelation that:
Candidate A is Franklin D. Roosevelt. Candidate B is
Winston Churchill. Candidate C is Adolph Hitler.
Is there a moral here … at any rate immediately after
the results were announced conversation for the rest of the party returned
to normal!
If you would like to write to me or contact me further
about any of our life coaching, personal development or business skills
programs, then please email me at christina.
[email protected] I’d be very happy to hear from you.
Have a great week!
Social Commentary by Khai Khem:
Why our roads are flooded
The answer to all problems in Thailand
can be found when you complain to Thais about why things don’t work.
Blame it on the weather. Too hot? Raining? Not enough rain? Blimey! It
gets hot in other countries, and in some it rains more often and dumps
more inches of water in less time than a one-hour tropical rainstorm.
Singapore for example gets more rain than we do. So why are Pattaya and
its adjacent districts flooded every time it rains? Because this city is
filthy. That’s why.
The garbage, trash, construction rubble, plastic
bottles and bags clog the drains. And how do they get there? Anyone who
has driven around the city when it rains will see the filth and rubbish
flowing out of Thai shops, houses, businesses and markets. The streets
swim with trash and it floats right out into the street, over the curbs,
roads, and sois and ends up clogging the drain covers. Where there are no
drains, the junk is washed onto the roads because the roads are lower than
the shop houses and privately owned land.
City officials should get out in the rain and take a
good look at the waterfall of trash that all the rest of us observe. Get
Thais to clean up their personal space, and most of our flooding problems
will ease until more technical solutions and money come on the scene.
I wish I had a quick fix or catchy slogan to motivate
Thais to respect and take care of their environment. Magic Eyes once
worked. It implied people are watching, so be careful how you conduct
yourself in public and that neighbors and community would judge Thais who
are careless and dirty in their place of business and at home. For Eyes to
work, the majority of our peers must set an example. Take a good luck
around Banglamung and judge whether or not the majority example is
admirable, or disgraceful.
I mention Singapore only because I recently met a group
of young Singaporean women who were here on an extended holiday. They were
enjoying themselves in Thailand and were delighted with their month in
Pattaya. The only complaint they had, except the unintelligible English,
was the filth and shoddiness of the city. They couldn’t get over the
fact it was practically a brand new city and it looked like it had been
neglected for five or six generations.
I laughed and told them they would have to ignore the
dirt and concentrate on the ‘sanuk’. Two of the ladies spoke Thai and
were acting as translators for the other three. So they were not totally
“fresh off the boat” and had been here before.
I did appreciate their particular taboo about dirty
places, but admitted we would never be as squeaky clean as our southern
cousins. Even if we adapted some of their government slogans and
campaigns, they agreed that to be clean and present a singular image of
class and high standards, we would all have to begin to care about things
we presently accept without question and change our behavior from wild and
free to disciplined citizens. Of course an important section of the
populace in Chonburi are not citizens, but foreign residents and tourists.
So where did we leave the subject? They agreed that we
were having more fun being dirty than they were being squeaky clean. We
cut a deal. I told them I would separate my trash into 6 different bags
for recycling and take the “killer litter” off my balconies (potted
plants) if the next time I visited Singapore, I didn’t smoke, but could
import a six week’s supply of anti-social contraband, like chewing gum
and firearms.
We parted on good terms and they went off to shop at
“half the price” and I spat my gum onto the footpath as I hailed a
rattling baht bus.
I made a mental note about how courteous and friendly
they had been to me; even as I was taking the Mickey out of their
homeland, which prompted me to go back and retrieve my gum and toss it
into the nearest trashcan. I walked 100 meters before I found one. The
impatient songtaew driver flicked a burning butt out his window into the
helmet of a passing motorcyclist and sped off without me. Standing in the
hot sun did nothing for my temper and I mumbled an unprintable comment on
his family heritage.
Hailing another taxi, I jumped in the back and just happened to spy my
new friends. They were trotting down Second Road gobbling street snacks
and - ooops. Did that lady drop her plastic bag in the street, or did the
wind blow it away. I wonder if their animated conversation included the
fact that I had been less than polite in Thai terms (which in some cases
is nothing more than inverted kevetching) and did they notice I’d gone
back to clean the sidewalk and protect other people’s shoes? Don’t you
just love cultural exchange?
PC Blues - News and Views: Viruses, and the latest Worms
by Monitor
Frequent users of email, and businesses that rely on
Micro$oft software, will have noticed a recent surge in the number of worms
in the system. (Worms are a special variety of virus) The Sasser worm is
the latest trouble maker.
This worm attacks Windows NT, Server and XP Professional
through a hole that has persisted since 1996, for which Micro$oft published
a fix only a few weeks ago. I’m told up to 12.5 million servers are
affected, and a further 200 million PCs.
The curious logic of this is that, if Micro$oft
publishes a fix to a problem (which is known as a patch), the people who
create viruses know where to attack. They have a good chance of releasing a
virus before the innocent system users have patched their systems.
‘Patching’ is applying the repair. A ‘patch’ is
a fragment of software which does the repair. Now think of a bicycle inner
tube, with lots and lots of patches, and you have my image of a Micro$oft
system.
What does this cost? Allow an hour of IT professional
staff time to patch each system, and multiply this by the 212.5 million
computers, and it becomes very expensive.
Look at news.com.com/2100-7349-5142144.html. I’m told
it cost US$55 billion in 2003.
Viruses and worms do hit Linux systems, but the effect
is much less. The cost of the technical support staff is much less, and
they tend to be happier. The Linux world is actively seeking to make the
system more robust, while the Micro$ost world is just scrabbling to catch
up with the latest disaster.
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