Portfolio Construction - Part 14

Interesting data from Mellon Capital Management shows that the 64% of their managed portfolios that allow the money manager to use derivatives achieved average returns of 17.3 percent a year from 1989 to 2005 whereas the ones that didn’t managed returns of just 13.7%. We’ve long complained about ill-informed regulators whose well-intentioned actions increase risk and reduce returns for the public that they are paid to protect. We’d like them to study Mellon’s figures pretty closely and we’d be interested to know what their conclusions are. That’s not to say that the difference in returns is entirely due to the use of futures or even that these figures are completely representative but, as of the end of last year, Mellon’s tactical asset allocation portfolios comprised $32.9 billion so we can’t just ignore the data either (well the regulators probably will, but we’ll keep banging our head against this particular brick wall of bureaucracy).
William Hoskins, Mellon’s director of fixed-income explains that “Portable-alpha strategies have really made futures much more valuable than cash bonds, to the extent managers are doing more complex strategies that involve portable alpha, you’ll definitely see more use-of futures.”
Just by way of explanation, portable-alpha strategies typically involve using derivatives such as futures contracts to leverage exposure to a benchmark. For example, futures costing $450-$1,350 allow investors to capture price changes on $100,000 of underlying five-year to 30-year treasuries or $200,000 of two-year notes (ten-year U.S. note futures are the most frequently traded contract on the CBOT). Assets that would have been invested in cash bonds to get beta, or the return that derives from a benchmark, can thus be freed up to invest elsewhere in pursuit of alpha (additional return over and above that of the benchmark).
Last year Russell Investment Group, the largest adviser to U.S. pension funds, conducted a survey which found that 87 percent of its clients allow the use of derivatives. Jeff Hussey, head of U.S. fixed income at Russell, points out that while previously managers targeted to beat the fixed income benchmark by 1% per year, that has now, in many cases increased to 2% per year because of the extra opportunities afforded by these methodologies - “Fixed-income managers are catching up to what hedge funds have to offer.”
Partly this is a reflection of the increasingly sophisticated extent of economic markets and investment managers. Partly it also reflects the need to seek out yield and return. Low bond yields are encouraging pension funds and other investors to take more radical approaches to meet their targets for returns. The yield on the 4 1/2 percent Treasury note due in May 2017 was 4.67 percent on May 9. The price of the securities was 98 21/32. As of May 9, the yield on benchmark 10-year notes, which averaged 6.7 percent during the 1990s, hadn’t been higher than 6 percent since August 2000. Add to this the limited opportunities in the corporate bond market where yields also are low by historical standards.
Michael Materasso, a senior portfolio manager at Franklin Templeton Investments believes that treasury futures constitute “a very important portfolio management tool,” and admitted that he had increased his trading of Treasury futures by about 20% last year. Franklin Templeton, which manages $124 billion, uses futures as a hedge, selling them to reduce the interest rate risk in their corporate bond holdings. By selling the treasury futures and holding corporate bonds they aim to make and lose exactly the same amount whether interest rates rise or fall. By buying corporate bonds they have exposure to interest rates, by selling treasury futures they neutralise this and therefore they isolate the additional return achieved from holding corporate bonds (currently around 1% per year).
Components of MBMG’s global portfolios have been interest rate futures and derivative strategies to good effect for some time - Castlestone’s Sable fixed income Plus fund has generated returns of 8.4% per year since 1998 despite the fact that T-Bill rates fell as low as 1% during that time. As T-Bill yields are generally regarded as being risk-free returns or cash equivalents then anyone who’s been hoarding money in the bank during the period should have a look at this smarter alternative to keeping sums just held on deposit.
Offshore portfolio construction is a highly-specialised skill and having researched the matter extensively we believe that there are still only a handful of players dotted around the globe who can consistently add value to individual portfolios. It would be great if there were more, but there aren’t so we’ll continue to use the best available and be thankful that we can do this and not have to try and bumble our own way through the minefield, guided only by those who have the largest advertising budgets!

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 [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Stay away from cats and kids

At some stage in your photographic life, someone will ask you to take some shots of their child, or their cat. My sincere advice is to take all your cameras and lenses and start running. These are two very difficult subjects.

Cat pic by Ernie Kuehnelt

The problems are multiple. While every mother and pet owner wants wonderful photographs of their charges, it is very difficult to get one that you will be happy with, let alone the owner of kid/pooch/cat (delete those not applicable) is happy with.
The biggest problem is the short attention span demonstrated by children and pets. Something they can be interested in will last around two milliseconds if you are lucky. Hang about composing, focussing and fiddling will see the child turn round, the dog will start licking its nethers and the cat will just stalk off, tail in the air. Or all three.
The answer is to be forewarned and therefore fore armed. You have to visualize the shot first and make it happen second. It is not a case of following the child around and going snap, snap, snap and hoping one will turn out OK. It won’t, and you’ll get tired.
What does help is to look at photographs in magazines and books, and when you find a pose that you like, then work out how the photographer got the shot. By the way, this is not cheating or blatant copying, which I am totally opposed to, all you are doing is seeing how you can technically get a pleasing result.
Chances are, when you have found the shots you like, that you will find that to get the shot, the camera is on the same level as the subject. This goes for about 99 out of 100 shots of alert kids/pooches/cats. When they are asleep, then take from above – the 1 in a 100 shot! This is Rule Number 1.
It is for this reason that pro photographers have a couch they put kids on – just to bring them up to normal camera level. Likewise, those demented photographers who make their money by photographing animals do the same. After all, you look a right proper idiot crawling round on your belly taking shots in front of the startled owners!
OK, let’s get down to action with your kids and animals. Begin by setting the scene and you begin with the background. A dull mottled material background works well as it does not have fussy details to take your eyes away from the main subject. You should also position this background at least 1 meter away from where the subject will be placed. You can either paint this background yourself, or you can buy rolls of it from professional camera houses.
Now position something in front of the camera to represent Phido or Philip. Place it where you expect the subject to sit and pre-focus and set your exposure details (or just set the camera on Auto and let it do the work). Now look through the viewfinder and make sure you have all of the background material in the frame, as well as the child/animal sized dummy. A large stuffed toy can be used for this purpose. If you have a tripod, it is a good idea to use it here too.
Now get a favorite toy (for the humans) and some bacon fat for cats and a box of matches for dogs. Speed is now the name of the game. Position the child where the stuffed toy or whatever was seated and give it to the child. Start snapping NOW! If you are lucky, you will have caught that “magic moment” of childish glee. If you’re lucky.
With the cat, have the owner smear the bacon fat on its mouth and it will reward you with the tongue lick shot. With the dog, rattle the matches and it will prick its ears up for that “alert dog” look. That is just before it lunges at you from the table! Stay away from kids and animals. You have been warned.

Modern Medicine: by Dr. Iain Corness, Consultant

Be a wise consumer

As a patient, you are a consumer. A medical services consumer. As in all situations where you are a consumer, it is worthwhile being informed before anything is done. That is the same as for buying a new fridge, to being operated upon for cancer. The message is one of being informed, rather than being overly worried.
This is particularly true when looking at drugs you are being given. What are their names? What are they for? How long do you have to take them? Will they react badly with the medications you take regularly?
However, being fed pharmaceuticals is only part of the medical consumer picture. What about the ordering of tests? Now some will say, “How would I know what tests should be done? I’m not a doctor!” And of course, that is correct - but, never forget, gentle medical consumer, that you are the one that pays for the tests, not the doctor who orders them! Find out what and why. And by the way, the doctor does not get a ‘backhander’ for ordering the tests either.
As a consumer it is your right to be an informed one, so do not be embarrassed to ask the doctor why any particular test is being proposed. I should also point out that you should ask in a friendly and un-challenging way. Your doctor will be happy to tell you that the reason for a proposed Ultrasound examination, for example, could be to look for gall stones, but to challenge the doctor by saying “Is this test really necessary?” would be enough to put your doctor in a defensive mode, rather than an informative one.
The intelligent consumer is then one who has become involved in his or her own diagnosis, and is following the logical steps that the doctor is doing to come to a final diagnosis. Initially there are a number of possible reasons, and this is called the differential diagnosis stage. Finding which condition it could be gives the ‘definitive’ diagnosis.
After the tests to determine the definitive diagnosis, the next step is treatment. If this is done by medicines, make sure you know what and why, but if the next stage involves surgery, then again, as a wise consumer, you have to be informed. You should enquire as to what the operation entails. What part(s) of you do they intend to remove? What would happen if they don’t operate? What is the likelihood of success or a cure? Remember, however, that in Medicine we never give 100 percent guarantees, but we can say that there is a 99 percent chance that everything will be fine - but we need that leeway, even if it is only one percent.
Never forget the simple fact that you have the final say - no surgeon can operate on you against your will. But I say again, make sure you are fully informed. For example, if I were 90 years old and my doctor were to tell me I had some form of cancer that was going to entail horrendous operations which would have me in hospital for months to recover from the operation and then I would probably be unable to get around afterwards, then I would want to know some more details. Lots more details. If the operation was successful, how much longer would I live? Would I be able to do everything I do right now? What will happen if I don’t have the op?
On one hand you may live for another year but spend six months in hospital, while on the other live for six months and only spend one week in hospital with no operations. You make that choice! But make it an ‘informed’ choice.
Finally the ‘consent’ form that you sign is an ‘informed consent’ form. Have all your questions answered before signing. If you are unsure of some detail, ask the doctor to explain it again. It is your life, and your choice. If you need explanations in your own language, the better hospitals employ foreign coordinators to assist you. Ask for one if there is any doubt. Remembered to be an informed consumer.

Learn to Live to Learn: with Andrew Watson

Tall Orders

I hope you are enjoying your breakfast. I trust that what follows is digestible and I certainly hope it doesn’t cause you indigestion!
An articulated purpose of education needs to manifest itself in, and be in synergy with, the conversations and interactions that pedagogy engages with. There exists a dialectical interplay of opposing forces when a purpose that includes pluralism, inclusion and equality, is translated through uses of manipulation, hierarchies of power and subversive agendas in order to accomplish what passes for ‘learning’ and the nurturing of values of cooperation and justice. It may be difficult to teach social justice at all in an institutional structure that subordinates educational integrity to communal tendencies. Quite a mouthful, I appreciate.
If learning is social and largely originates from our experience of participating in daily life, of which one is the education process, then an obvious purpose of that education would be to provide opportunities, whether formal or informal, that provide relevant contexts for learning, those that allow for the development of skills, knowledge, cognitive processes and conceptual structures required to participate in a community. But ‘development’ does not mean just getting something ‘in and out of the mind’. Surely, to quote John Dewey (in Hickman, 1990), it is “the development of experience into experience” that is really wanted.
So what are the experiences that we make students want, which are the ones that we make them covet, and which are the ones that we force them into accepting? The wider purpose of education, one that subsumes the stated obvious one, could be said to be to provide opportunities for contexts that inspire within students the desire to seek experiences that are meaningful to themselves and their wider community; experiences that influence the pursuit of their enterprise and the attendant social relationships with an informed consciousness and above all, a moral and intellectual integrity that is exemplified by the ‘translators’. To this definition of the purpose of education, I would add the Vygotskian idea of challenge and the “Zone of Proximal Development” - pushing the learner to a new level with a little expert support.
I hope that it is stating the obvious to say that it is only after we have identified the purpose of education that we can plan for it. But meat needs to be added to the bones. So whilst it is perhaps easy to agree that education should enable “people to lead fuller and more meaningful lives in their individual capacities and as contributing members of society…” and that it should do things like help create identity and self worth, critical thinking faculties to challenge dogma, moral fibre, the ability to maximize one’s potential, social and communication skills to enable collaborative work and cultural understanding, can we honestly say that the ideals above can be achieved?
I’m a Manchester United fan. Aesthetics first for me; bold courageous play, risk taking in its purest form. Lose 4-3 rather than win 1-0. So one of my greatest disappointments over the last ten years is to have witnessed the “dreaded Arse” transformed from the moribund epitome of tedium to a silky, swashbuckling machine. Moreover, I can no longer call my respect for Arsene Wenger “grudging”. He really is the most tremendous fellow and what he says resonates far beyond the sometimes narrow and parochial world of football. “Being alive as human beings means that we are constantly engaged in the pursuit of enterprises of all kinds, from ensuring our physical survival to seeking the most lofty pleasures. As we define these enterprises and engage in their pursuit together, we interact with each other and with the world and we tune our relations with each other and with the world accordingly. In other words, we learn.” (Wenger, 1998).
McDermott (in Murphy, 1999) would appear to agree; “Learning is in the conditions that bring people together and organize a point of contact that allows for particular pieces of information to take on a relevance; without the points of contact, without the system of relevancies, there is not learning, and there is little memory. Learning does not belong to individual persons, but to the various conversations of which they are a part.”
That all sounds very egalitarian and democratic, but it also creates something of a paradox for schools, a point acknowledged by Macedo in Zinn (2005); “While schools are charged with promoting democracy, they often put structures in place that undermine the substantive democratic principles they claim to teach. As a result, schools are necessarily engaged in a pedagogy of lies that are shaped and supported by the interplay of the media, business interests, and the academic enterprise and, believe it or not, by organized labour as well.”
Whilst schools often seem to teach young people that we live in democracies where there exists equality and justice for all, they don’t give students the analytical tools to enable them look at society today and see what the discrepancy is between the ideals and the reality (Zinn, 2005). In The Moral Imperative of School Leadership (2003), Fullan examines the power of context and asserts that if you change the context, then you can change behaviour and to do this one must create a community within which new behaviours and values are nurtured.
This bring us back to Hargreaves and Fullan’s (1998) calls for the tall order of balancing different requirements of “building community, protecting democracy, making education a public good as well as a private one, using new technologies to deepen learning, creating high quality education in contexts of great diversity.”
So much for the rhetoric, what about the reality? In the end, it all seems to come down to the individual and how we as individuals, choose to live our daily lives. Only ourselves and our conscience know if we have truly displayed integrity. Yet self-delusion can be a powerful poison. A simple example; could you bathe in the success of another and claim it as one’s own? Could you smile like a monkey for a camera if you knew it was all a lie?
Next week: Another year, another dollar