One to watch?

We recently came across an interesting quasi-quantitative investment approach designed to reduce volatility which has produced a 32 percent average annual return in the past five years. In 1994, David Stein of Seattle-based Parametric Portfolio Associates set out to devise a strategy for investing in emerging markets that would smooth out the price swings of individual markets such as Brazil or Malaysia. The $937 million Eaton Vance Tax-Managed Emerging Markets Fund that Parametric Manages is now ranked the third-best performer among the 99 U.S.-based funds that invest in emerging-markets stocks, according to data compiled by Bloomberg.
By way of background, Parametric Portfolio Associates manages more than $20 billion, most of which is in 9,000 segregated accounts. South African-born Stein, who holds a Ph.D. in applied mathematics from Harvard University, sought to develop a structured approach based around a mathematical rather than economic approach to investment. With emerging markets adopting a passive approach that slavishly follows indices is even more flawed than adopting such an approach to major markets because replicating a capitalization-weighted index such as the S&P/IFC Emerging Markets Investable Composite Index means investing as much as 70% into just a tiny handful of largest emerging countries. To his credit, Stein immediately recognised this and sought to create a method that increased the diversification of the portfolio by underweighting the big countries and overweighting the small countries relative to the index.
That’s fine in theory but if you’re not applying research driven economic principles in determining your individual country exposure and you’re eschewing market cap as the basis, then how exactly do you arrive at your portfolio weightings? From a qualitative point of view, assigning equal weighting to each emerging market is just as random as assigning values based on market cap. At the outset, the firm used two tiers of weighting which it has now increased to 4 - in short the largest markets, such as Brazil, China and Russia, receive twice the weighting or markets like Thailand, 4 times the weighting of markets the size of Morocco and 8 times the allocation of the smallest markets like Saudi. Therefore the target weightings become simply a mathematical reflection of the number of countries that the fund invests in and the relative tiering of these countries. As we write this, we’re looking at data that shows that the fund owns 1,265 stocks in 40 countries.
Although this doesn’t apply any qualitative criteria it does increase diversification and reduce the internal correlation of the fund - a massive run-up in the Botswana market doesn’t typically spill over into stocks in Romania. It does, however, allow the fund to use another risk monitoring technique, rebalancing the portfolio. If stocks in a particular country rise so that the market’s weight in the fund increases to 50 percent above the relevant tier allocation target, the fund reduces exposure back to the tier target percentage and use the proceeds to increase the exposure of a market that’s below target.
Saudi Arabia is a good example - in 2005, the Tadawul All Share Index rose 106 percent. As the Saudi market rose above 50%, the fund trimmed exposure. In 2006 the Tadawul All Share Index dropped 53 percent. Therefore holding the index over the entire two-year period would have earned a zero return albeit with a lot of volatility. By twice taking profits out at the 50% gain level, Parametric would only have had their target allocation suffer the fall back and would have already, in 2 stages, withdrawn an amount equivalent to the original stake for investment into other markets. This banking of profits would have turned a zero return into a 49.8% gain. One of our many criticisms of index funds is that by their inherent nature they are designed to buy high and sell low but this form of allocation goes some way to removing that problem - it adds what Stein calls a ‘rebalancing alpha’.
The approach isn’t only used in terms of country selection, it’s also used to select individual stocks within a country. The fund invests in five areas including materials, industrials, utilities and communications. Originally the fund weighted these sectors equally but it now applies a more contrarian approach, eking out value in the markets by buying less of sectors that predominate in a given country in favour of less-prominent areas. In Brazil 50 percent of the market is in basic materials (Stein cites the example of companies such as Rio de Janeiro-based Cia.Vale do Rio Doce, the world’s largest iron ore exporter) but within Parametric these companies account for a much smaller allocation - rather less than 20 percent of the fund’s Brazilian holdings.
Stein’s focus here is on finding a methodology for making good decisions amid uncertainty. He compares the markets to a game of bridge - a nondeterministic, in which you don’t know the outcomes of the cards you play.
We’d say that the value of this approach is that while in some markets (overall global portfolio allocation) there is no substitute for informed, active asset allocation, in global emerging markets, where real standout managers are hard to find and too much money is managed by closet bench markers then this approach is ironically more active, more adaptive and more impartial than many so called actively managed funds.
We’ll be watching this one carefully for inclusion within the portfolio when we feel that the next emerging market buying opportunity arises.

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

Flashing can be digital fun

This week’s topic is good for anyone with a digital SLR, or even a digital compact with a manual mode. Instant gratification is just around the corner. Those still persevering with a film SLR can also use the techniques; however, you have to wait till the photo-processor gives you the results. It is not ‘instant’.
Just about every camera these days comes with its own built-in flash, and fewer and fewer ‘hot-shoe’ flashes are used. To see someone with a flash mounted on the camera almost always spells pro-shooter, so such technical items as ‘guide numbers’ don’t seem to matter any more. The camera does it all for you. But there is always a downside to just letting the camera do all the work. And that is you get what the camera thinks you want – not what you might want.
Take the example where you are shooting indoors at night (always a good time to use extra lighting), but you still want some of the background to show up. Shooting people in a pub is a good example. You want more than just ‘heads’, you want to show just what kind of a place it really was.
To do this is tricky, but there are several ways. You can use more than one flash (sometimes called ‘slaves’) and they fire when they detect the flash burst from the primary flash, or you can even link them all up with flash cables triggered by the shutter on the camera. You set the slaves to light up the background, while the main flash illuminates the subject. Unfortunately, you have to lug around all the extra gear, and people trip over the cables. That’s Option One.
Option Two is to use a tripod and the time exposure setting to record the background and then pop the main flash to record the subject in the foreground. Difficult, but possible.
Option Three is the simplest. Set the camera’s aperture to around f5.6 and the shutter speed to 1/15th of a second. You can even hand-hold at this slow shutter speed, as long as you lean on something. The slow shutter and wide open aperture gives enough light to get the background to show up on film, and the flash burst is enough to record the subject. Try it. It works!
Of course, to do this you have to take the camera out of Auto mode and into manual. In fact, if you want to try something, go down to the pub and shoot the likely lads at 1/8th, 1/15th and a 1/30th and see the differences you will get. The subject will be OK in each, as the lighting for the foreground depends only on the flash power, while the background depends on the ambient light, and the longer the shutter is held open, the more background details you will get.
Another trick you can do with any camera that has a flash, be that built in or bolted to the top of it, is to throw colour at your subject. The important item of equipment is coloured celophane paper (sometimes called ‘gels’ in the industry). Put a blue gel over the flash head and you will get a very ‘cold’ photograph, especially if you are taking pictures of people. Conversely, put an orange gel over the flash and you will get a wonderfully warm person in the foreground.
For an even wilder result, if you can take the flash off the camera, shoot the subject side lit with a coloured gel over the major flash. Experiment with blue, red, green, orange, yellow - we are not looking to reproduce reality here, we (that’s you) are trying to produce an artistic effect.
Most keen amateur photographers will have heard of the term “Fill-in Flash”. This refers to a reduced output flash burst, used to lighten shadows in harsh daylight, or to illuminate the front of a back-lit subject.
With many of the modern cameras, fill-in flash is simple, because the camera is programmed to do this automatically. Try setting your digital SLR on fill-in flash at night. You might just find that you get the background and the foreground. Try it.

Modern Medicine: by Dr. Iain Corness, Consultant

Dx and DDx

Have you got a Dx or a DDx? It is important to know. In ‘medico speak’ where we just love acronyms, Dx and DDx are written to represent Diagnosis and Differential Diagnosis, probably because we are too lazy to write the whole words. Whilst the Differential Diagnosis concept may look obvious, it is often misunderstood by patients.
One reason why doctors have not been supplanted by computers is because we are more clever and quicker at getting to the Dx than a computer is. Honestly, man beats machine.
Many years ago I was involved in a trial of computer medicine. The patient came in and was given a list of presenting complaints and had to click the correct one. All very general like “cough” or “diarrhea” and the computer took over from there with questions with multiple answers and click on the most appropriate, like “How long?” and then 1 day, 1 week, 1 month, 1 year. Taking “cough” as the example, it would then go into whether you had any phlegm, click yes/no, and then color, quality, etc. After around 10 minutes or so of read and click, read and click, the computer would spit out a Differential Diagnosis DDx such as URTI, pneumonia, sinusitis, bronchitis, lung cancer, etc., etc., etc. Along with the DDx would come a list of tests, examinations, procedures to be done so that the computerized doctor could order the tests and then pick the best diagnosis according to the results.
Quite frankly, it was pathetically slow, the patients did not like it, and what I disliked most of all was the fact that the computer asked for batteries of tests which were not necessary, as a good doctor has an ability called ‘clinical acumen’ that allows him to pinpoint the correct Dx much more quickly. After a careful history (written as Hx) and listening to the chest, using the old-fashioned stethoscope (and still an important diagnostic tool today, I might add) the switched on doctor would already have been able to rule out URTI and sinusitis without a CT scan of the nasal sinuses, and through knowledge of the history would be very close to making the final Dx. A chest X-Ray and a Complete Blood Count would most likely be enough. Dx pneumonia.
However, what you have to understand is that although your doctor is not a computer, he or she still needs information to work on to narrow down the DDx field. It is in your own best interest to give your doctor as full a description as you can. Presenting with words like “Gotta cough” and leave the doctor to drag further information from you is not as good as “Gotta cough, had it for three days and I’m bringing up green stuff, and I’m allergic to penicillin.” The more information your doctor gets, the quicker the DDx, the fewer the tests, the quicker the Dx, and the less it costs you in the end. And you are put on the correct definitive appropriate treatment much quicker.
So that is the message this week. Your doctor goes through a series of go/no go concepts with your signs and symptoms to come up with the list of diseases (the DDx) that could produce that profile. To work out which is the correct one (the Dx) will usually mean some investigations or tests. These are not designed as a time-wasting, or wallet emptying, procedure, but as the way to sort out what could be the cause.
Dx and its fore-runner DDx can be lifesavers - just remember to give a full Hx!

Learn to Live to Learn: with Andrew Watson

For the camera

I’m all for celebrating success. It’s a very important part of the education cycle, bringing a natural and high close to a piece of work or a period of a student’s life. Emblazoned on our memories forever, captured by the camera, are those moments of reward for honest endeavour. Through an emotional haze, darker moments are banished to the dustbin of history and the past is immediately flavoured with the sweetness of nostalgia.
In one school I worked in, we put on a massive fanfare for the graduating class; fairer to say perhaps, that they put it on themselves. Bedecked in gowns and mortar boards, they emerged on to the stage in front of an ancient, austere façade to the sound of Elgar’s “Pomp and Circumstance”. A valedictorian speech followed that was a truly moving and honest account by the elected spokesperson of the class. It was a brave move by the school to encourage this speech, because the students were no longer bound by institutional protocol, save for the sanctity of the occasion. But they had been encouraged during their time at the school to become “critical thinkers” and purveyors of social justice, so it would perhaps have been strange to have expected anything other than an open, honest and inevitably humorous account of their experiences.
I can imagine that other schools might wish to manufacture a specific kind of student response, or simply arrange a smile for the camera, rather than listen to a perspective that might not match the official dogma of the school. Fear of honest criticism simply didn’t feature in this school and that fact was recognised by the students, who responded as one, with great generosity of spirit. Looking back at the brilliance of these occasions, it is wonderful to reflect upon how those who had contributed most were celebrated accordingly. There were no impostors, or hangers-on, seeking to bathe in the glory of others.
What this school had managed to achieve embodied what I believe is an ephemeral essence of education; difficult to measure but through experience, difficult to teach except through personal example. The students displayed a balance of self-assertion sufficient to safeguard personal autonomy and self-control sufficient to protect the autonomy of others. The objective of developing in young people “not just the power to think, but the will to act” (Hahn in Peterson, 1987) had been undeniably and successfully achieved. In many ways it was all about balance, where the 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” (Hargreaves and Fullan, 1998) were evident in everyday school life. The students, by their example, taught a great lesson to their teachers, by showing them how they could function together in a society.
In retrospect, whatever the rhetoric might have been, the challenge really lay in how it all got done. It wasn’t just the school. It wasn’t just down to the students; it wasn’t just down to the parents. It was a partnership between all three. Thinking about this partnership in detail can be quite illuminating.
Cognitive ability versus contextual factors: which plays a greater role in learning? This may not be a conflicting, measurable relationship. Cognitive ability develops in contexts. “Ability” for instance, is a sum of genetic inheritance, school environment (pedagogy, peer group) and emotional and educational exposure through home and society. Having said that, emotional resilience or unexplained factors can counteract low cognitive ability in unsupportive contexts.
Home learning versus school learning: can home learning substitute school? Probably not. At best, there should be a relationship characterised by good communication, shared goals and philosophy which creates a healthy school-parent-community collaborative model. Ideally, home should provide an emotional base but obviously, psychological and social variances occur. The school’s role as a learning community offers experts (or should, it’s by no means guaranteed!), peer interaction, material and intellectual resources (we hope!).
Learning versus traditional: can “E” (technological, internet based) learning take over the traditional methods? “E” learning offers accessibility, lowered costs and personalized potential. However, it is deficient on provision of mental processes and social, emotional relationships. It cannot be a substitute but is a necessary additional dimension to current learning.
Universal international education in diverse cultures: is it possible to define a universal international approach to learning? Learning and pedagogy is extremely “culture specific” and there is evidence to suggest that adaptable skills, attitudes and understandings may be as well, as far as commonality goes.
Content, context and learner: in understanding and developing this relationship, I visualise a triangular, spiralling relationship at the centre of which is the importance of understanding “concepts” in the content to provide meaningful and transferable knowledge.
Encouraging learning and the centrality of the teacher: if other contexts are unsupportive, how can the teacher make the difference? Within the limitations of curriculum design and examination focus, we might very well think that the difference is made by a thoughtful, reflective teacher, a positive teacher attitude and by encouraging teacher independence. Methods which promote these objectives include effective planning, setting high expectations, choice and guidance, provision of differentiated learning, assessing learning outcomes, rewards, fun (entertainment - once famously banned in a school!) and motivation.
Cultural stresses and emotional problems: how can a teacher handle cultural stresses and social and emotional problems and still effectively communicate with parents? Well, it’s probably a truism to say that solutions vary with contexts. However, it’s probably best if the suggestions towards finding solutions are teacher-led, whilst effort is expended in developing understanding of the range of cultural diversity and potential emotional problems. This is particularly true of teachers arriving to work in a foreign land for the first time.
Clearly, it is important to encourage parent-student communication, which might reasonably be assumed to be enhanced by the idea of teachers as a role model. By their setting of behaviour expectation and standards (such as time-keeping!) and by active involvement in community service, for example. At least if we set an example, the smile for the camera will be genuine.
Next week: Pedagogy and Classroom Management