The Stingy News Weekly (07/17/2011)
Fund Facts risk and suitability get thumbs-down
"A new regulatory initiative – i.e. Mutual Fund Point of Sale – was launched this year in an attempt to better inform investors about the investment funds in which they invest. The key feature of this Point of Sale initiative was to provide an investor-friendly 2-4 page document called Fund Facts summarizing each fund’s most important information. The idea was based on the observation that only a tiny minority of investors ever read a fund’s simplified prospectus (i.e. the document that lays out all of a fund’s details). There was no shortage of opinions on this Point of Sale initiative – a collaboration of various financial regulators – while it was in the planning stages. (Including one from yours truly.) But now the first stream of Fund Facts documents have been rolled out and a central repository has been set up at www.fundfacts.com to house some documents. Unfortunately, Fund Facts continues to suffer weaknesses in the two most important areas for investors and their financial advisors."
Misvalued Chinese land
"In the little-known Chinese city of Loudi — which is home to 4m people – there is a 1.2bn yuan ($185m) leisure project currently being developed, money for which was raised through bonds guaranteed by land valued at $1.5m an acre. Those prices, says Bloomberg, are comparable to acreage values in one of Chicago’s plushest suburban neighbourhoods."
The AAA bubble
"The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more. It’s one reason why the sovereign crisis is well and truly painful."
Debt endangers growth
"Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP."
Depleted Pension Fund Rattles Rhode Island
"The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled. Just over one square mile, Central Falls has a tightly packed population, filled mostly with immigrant families, that struggles on a median household income of less than $33,520 a year, according to the Census Bureau’s 2005-9 American Community Survey. The typical single-family house, after a recent revaluation, is worth about $130,000. It is hard to see how anyone thought such an impoverished tax base could come up with an additional $80 million for retirement benefits. If the city were contributing the recommended amount to the plan each year, it would take 57 percent of local property tax revenue."
How to make college cheaper
"Derek Bok, a former president of Harvard, once observed that “universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.” This is a bit hard on compulsive gamblers and exiled royals. America’s universities have raised their fees five times as fast as inflation over the past 30 years. Student debt in America exceeds credit-card debt. Yet still the universities keep sending begging letters to alumni and philanthropists. This insatiable appetite for money was bad enough during the boom years. It is truly irritating now that middle-class incomes are stagnant and students are struggling to find good jobs. Hence a flurry of new thinking about higher education. Are universities inevitably expensive? Vance Fried, of Oklahoma State University, recently conducted a fascinating thought experiment, backed up by detailed calculations. Is it possible to provide a first-class undergraduate education for $6,700 a year rather than the $25,900 charged by public research universities or the $51,500 charged by their private peers? He concluded that it is."
Legend aims to strike pay dirt in Ontario
"Seth Klarman is considered one of the world’s money managing impresarios, a superb value investor whose record of outsized returns has given him cult status on Wall Street. What interests him now might be a surprise: rocks and spuds in a rural Ontario backwater."
Everyone else is biased
"Yet he forgets the most profound behavioral bias in this literature that is delightfully recursive: We think we are better than average at not being biased in thinking that we're better than average."
If you pay peanuts for ETFs ...
"Having crunched the numbers, Chris Flood over at FTfm points out that ETF providers may be generating profit margins that are more than four times higher than the traditional mutual funds industry — even despite the products being marketed as “low cost”."
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