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Thursday, May 28, 2015

Those Go Anywhere Bond Funds...You REALLY Don't Know What You Own

I have written before that "go anywhere" or "unconstrained" bond funds are essetially bets on the "genius" manager. Bill Gross once manager of the (then) world's largest bond fund Pimco Total Return Fund ran into a period of poor returns which (predicatbly) let to outflows from the fund and his subsequent departure from the firm.

He landed at Janus Capital with a new fund. And he continued his style of making many bold statements which seemed to indicate how he was positioning his fund.

In April with the yield on 10 Year German Government Bonds (BUNDS) trading at the rock bottom yield of .10% Gross tweeted and spread the word all over the media that going short Bunds was the trade of a lifetime". Such a short would profit from a rise in German rates (fall in price). Sure enought rates on the bonds rose to .64% over the next month.

Following those pronouncements by Gross investors in his Janus Global Unconstrained Bond Fund would likely have been expecting the fund to rack up some nice gains as a "short position in the Bunds would have been quite profitable.

It didnt turn out that way. As Bloomberg reports

Bill Gross acknowledges doing a poor job of implementing his recommendation to bet against German government bonds.
“My famous (infamous?) ‘short of a lifetime’ trade on the German bund market was well-timed but not necessarily well-executed,” Gross wrote in his June investment outlook for Janus Capital Group Inc. “Still, it was a prime example of opportunities hatched by the excess of global monetary policy.”
Gross, who runs the $1.52 billion Janus Global Unconstrained Bond Fund, advised selling short the 10-year German bund on April 21, when it yielded about 10 basis points, or 0.1 percent. Over the next month, yields climbed to 64 basis points as prices fell, vindicating Gross’s prediction. Yet his Unconstrained fund lost 2.5 percent in that period as he wagered German bunds would trade in a narrow range instead of betting all-out against the debt, data posted on Janus’s website show.
Looking at the graph below one can only imagine the frustration of an investor who invested in the Janus fund based on faith in Gross' portfolio management skills. The public market call he made was nearly perfect...yet he didnt make money on the trade. "Poorly executed" is  perhaps an understatement
10 Year German Government Bond (Bund) Yield
Gross explains his trade and his view on the markets in an interview here

Performance Chasing in Emerging Markets ...Again ?

. Last week, EM equity exchange traded funds garnered $1.2 billion in investor assets.

Chart of IEMG Ishares emerging markets ETF:

Wednesday, May 27, 2015

Market Capitalization vs. "Economic Footprint"

Yesterday's blog entry on the larger weighting in the future for Chinese stocks points out one example of the disconnect between country weightings in the major indices and what I call the "economic footprint" of countries: their weight in the world economy.

China is the most extreme example of the disconnect between the capitalization weighting and economic footprint but there are others. Since the capital markets of emerging market countries are less developed the number of their companies that are publicly held and thus included in equity indices is small.

Here is an example here are the weights in the MSCI all world capitalization index

And here is the list of countries based on % of world GDP

United States
United Kingdom
Russian Federation
Korea, Rep.

And here is one estimate of what the world economy will look like in 2030

Looking at these numbers one would not be surprised in the future to see a growing share of the worlds market capitalization coming from China and India and other emerging markets and less for the developed markets of Europe as the world stock market weightings more closely match the "economic footprint" of countries.

I came across this chart which although a bit difficult to follow at first gives a very interesting perspective on past and possible future

Another Positive For Chinese Stocks for Overshore Investors

Should the strengthening trend of the Remimbi continue of accelerate any investments in Chinese stocks will gain in local currency value even if the stock market is unchanged or falls less than the exchange rate goes up. Such would be the case for US investors invested in a US Etf of Chinese stocks.


May 26, 2015 6:07 pm

China currency is ‘no longer undervalued’, say


The International Monetary Fund has declared that China’s currency is “no longer undervalued”, marking a significant shift after more than a decade of criticism of Beijing’s tight management of the renminbi.
The move amounts to a major vote of confidence in Beijing and the renminbi at a critical time. It also puts the IMF at odds with its biggest shareholder, the US, which insists that China continues to draw an unfair trade advantage from a renminbi that it considers “significantly undervalued”.

This a further step towards the Chinese currency becoming part of the IMFs SDR  giving it the status of a reserve currency, 
This article explains the implications in more detail.

A rough comparison in terms of market impact would be similar to the changes described in my earlier post on the changes in the weighting of Chinese stocks in major indices.....multiplied by hundreds of millions measured in $.

With the remimbi part of the SDR(think of it as an "index of reserve currencies" and its status as a reserve currency Central Banks around the world will need to hold Remimbi in their currency reserves ...reducing their weighting in Yen $ and Euros. It would be hard to see this as not increasing the value of the Remimbi. Another positive trend for foreign investors in Chinese stocks.

Tuesday, May 26, 2015

Major Changes Coming for Chinese stocks

I wrote in November about the major changes in the structure of the Chinese capital markets. The “stock connect” made Chinese onshore “A shares” more accessible to investors and opened up a new flow of demand.  Since then the ETF which invests in A shares ASHR has risen since then and Chinese stocks have had a huge rally this year.

 The A shares  ETF ASHR is up 83% since the initiating of stock connect last November (chart below) MCHI the ETF based on the current MSCI china index is up 26.6%

I have observed in the past that the “economic footprint” of many countries is far larger (% of world GDP) than their weight in market capitalization indices. This is because the indices reflect the number of publicly traded companies in those markets. China is currently 15.4% of world GDP but only 2.95% of the MSCI global stock index.

 Further complicating the weighting of Chines stocks in indices is the different classes of Chinese shares. Among them A shares which trade on the mainland (and became more widely available through stock connect.) H shares traded in Hong Kong and N shares traded in the US market (like the recently publicly issued Alibaba).

Up until now the most widely used indices for emerging markets the MSCI index and the FTSE Russell indicess have not included N or A shares.

The same is the case for ETF MCHI based on the MSCI China index.

This change can potentially produce significant increase in demand. The reconstruction of most indices impacts market prices although usually before the actual date when the reconstruction takes place.

One of the 2 major index providers FTSE Russell has just announced a transitional index to include Chinese A shares. which will make up 5% of the index 

As the article notes:
When and how to include China A shares - yuan-denominated shares listed on the Shanghai and Shenzhen stock markets - has been a major challenge facing global index providers. Inclusion in benchmark indexes could pour billions of dollars into China stocks over time.

Over time the impact of the changes in the index will be dramatic:
The indexes will be called FTSE Emerging inclusion indexes, and will have an initial weighting of 5 percent for China A shares. That will rise to 32 percent when the shares become fully available to international investors.

When taken together with other types of China shares including those listed in Hong Kong, Chinese shares would then account for 50 percent of the emerging markets index, FTSE Russelll said.

The much larger index provider.. MSCI is making changes in its treatment of Chinese stocks as well. Currently only Chinese shares traded in Hong Kong (H shares) are included in the index.

The inclusion of the N shares will take place in 2015. An announcement on the inclusion of A shares will take place on June 9 and would likely take place in 2016. Either of these changes will be implemented gradually to lessen the impact on trading.

The addition of A shares to the other categories of Chinese shares in the index will increase the China weighting in the emerging markets index from 19% to 28%. It will also impact the overall world and world ex US indices (to a lesser extent) and the Asia Pacific and Asia Pacific ex China (to greater extent ) compared to the emerging market overall index.

From an article that initially appeared in the Hong Kong Economic Journal May 18

MSCI index is a widely-used index for global money managers. More than 90 percent of global institutional asset managers use the index in North America and Asia. There are 5,719 funds tracking MSCI index, with total assets of US$3.7 trillion.
Given this situation, inclusion of A-shares will lead to substantial capital flow into Chinese stocks.
According to some analysts, the capital inflow effect will remain pronounced even if the A-shares inclusion takes place in 2016. By mid-2017, Chinese equities will account for 30 percent of MSCI Emerging Markets Index plus existing Chinese stocks in the US market. That would bring additional US$30 billion capital for Chinese equities, and US$17 billion capital inflow for A-shares.
The most conservative case would bring in over US$1 billion for A-shares. Capital flows could get a further boost as Dow Jones & Co. is also said to be mulling an inclusion of A-shares in some indexes.
In fact, many global institutional investors are seeking to adjust their portfolios, with some shifting from zero allocation to balanced allocation for Chinese stocks.
There is half chance for inclusion of A-shares this June, but the inclusion may actually take place next year. This is prompting global investors to take a fresh look at A-shares.
Of course there is no way to precisely gauge the future impact. But the change is significant and should affect markets for a considerable time in the future. For those that own international and particularly emerging markets ETFs it is definitely something important to monitor.
I have noted before that I don’t think emerging markets as an asset class make sense as a way to look at the financial markets and asset allocation. I have noted that in my view the prospects for emerging Asia look more positive than those for other countries in the index. This move will shift the country weightings in the overall emerging markets into the higher weighting in emerging Asia.

ASHR the Chinese A shares ETF is up over 9% since May 15 through May 22 and up another 4.5% as of mid morning May 26...could that be related to the news items cited above ?

I Always Find This One Interesting Stocks Get Far Less Risky as The Holding Period Increases

Although many academics use standard deviation as a measure of is pretty much useless for most investors. The first question they want answered is how much can I lose ? and the second far less important one is how much can I make ?

I run this graph periodically and it almost always surprises people. The risk of owning stocks based on historical data dramatically drops as the time frame lengthens as can be seen in the data below.
There has not been a 15 year period in which stocks generated a negative return and there has not been a ten year period in which a simple blend of 60% S+P 500 and 40% total US bond market has generated a negative return

Data below expressed in annualized return

Friday, May 22, 2015

Are BRICs an Asset Class...Do They Have Anything in Common ?

I have argued many times that BRICs (Brazil,Russia, India, China) is not a useful asset class for investment allocations due to the great diversity in their economies. I have argued the same for Emerging Markets overall as Latin American countries and Russia have little in coming with Emerging Asia particularly the largest countries in that group: India and China.

I cam across this first chart on growth forecasts from the they say pictures speak louder than words.

Interestingly Emerging Asia has significantly outperformed the overall emerging markets index since 2011 (second graph below)