Global Industries experience with the then Pension Fund Manager - Essay Example

Global Industries experience with the then Pension Fund Manager According to the report submitted about Global Industries experience with the then Pension Fund Manager about his fund allocation there had been continued loss in the investments made by him in various funds. It appears he always took a wrong decision about fund allocation or about entering and exiting the funds. He placed his bets on emerging market bonds and equities, which incurred steep losses in 1997 and 1998. Surprisingly, the Emerging market Bond Mutual funds did well in the long run and yielded very handsome return as evident from the report by Sirapat Polwitoon Susquehanna University Oranee Tawatnuntachai Penn State University at Harrisburg. According to his analysis the funds represent a small fraction of the U.S.-managed fund industry, but despite this their net assets grew by 262% from 1998 to 2005, compared to a 10.8% increase in U.S. high-yield bond funds. There was significant public attention but academic research did not give much attention to the emerging market bond funds. So did the Pension Fund Manager who also did not pay proper attention to this fund. I would have gone deeper in my research as Pension Fund Manager and would take correct and patient decision before shifting from the fund. I would also for a diversified fund investment rather than concentrating on single fund and suffering. Similarly if we study carefully the Lazard’s Emerging Market Equity Market Returns annually from 1993 to 2008 we can note of certain emerging markets doing very well. In 1997 Turkey, Hungry and Mexico returned more that 50% from the equity market. In 1998 Korea and Greece returned more than 50%; in 1999 Russia and Turkey returned more than 200% % and Indonesia, India and Korea returned more than 75% from this market. 2000 was a poor market but from 2001 the equity market again started looking up. By 2002 the return was very lucrative: Pakistan returning 150% and Check Republic and Indonesia returning about 40% and above. Minimum five important emerging markets continued yielding sound returns till 2007 The main problem concerns about reading the market trends correctly and selecting the target market with the help of proven experts in the market. Perhaps the Pension Manager could not foresee the correct trends in the market and his decision about investment yielded losses. In 2003 the loss incurred was due to wrong reshuffling of his portfolio to US Treasury Bills for two years and Treasury notes yielding only 1% to 3% return. This is period when many of emerging markets Equity funds in Thailand, China, India, Colombia, Egypt, Argentina, Brazil equities funds achieved fabulous results with more than 70% to 140% returns. Wonderfully his decision to go back to equities again was taken in 2007, which was the marginal year for the financial markets. From 2008 the world financial market collapsed and caused losses to each and every one including the emerging markets. Emerging Market Equity Returns 2008 The new Pension fund manager obviously has a great responsibility to earn minimum 7-8% on the investment and satisfy the employee representative on the board who is risk averse and very much concerned that the pension will have enough funds available for retirees. 1. What is your position on future growth of the US over the next 5 years, 10 years and 20 years? America's Wall Street has been the financial center of the world for decades. "When Wall Street sneezes, the rest of the world catches a cold." In such a financial scenario there is need to examine the American financial market and its future. The current market is already depressed and the depression has been rated by most of experts equal to or more than the depression of the 1930s. 30s depression lasted for about a decade with intermittent recovery for brief period. The recession of 2008 also is likely to extend for a decade at least. US Recession The dollar slumped to a 15 year low against 6 of its most actively traded peers. Overseas investors hold more than 4 trillion US debts in the form of bonds and securities. US current account deficit is $800 billion. Interest rate in US economy was kept low as 1%. Low interest credit of trillion dollars is pumped that created massive equity bubble in housing sector which is on the brink of collapse. Sub prime lending which was provided without control surged into $1.5 trillion. It could prove to be as doomsday machine for US economy for years. Even if they sell only 25% of the 4 trillion debts, the US would feel the pinch of hyper-inflation. The GDP of the country has run down to negative. Unemployment is growing to eat away everybody’s confidence. With such a grim picture no one expect US economy to lift up positively for a long period before the first five years. The second five years may have positive changes that might improve America’s economy and start putting reversals upside. But the scenario may not be that of 1980s when US economy thrived. It is because of the fundamental changes in the world economies. According to studies conducted the worldwide wealth is likely to soar from $118 trillion to more than $200 trillion - with the newly capitalist markets of Asia and Europe accounting for the biggest share during the 2005-2010 periods. America's share of the worldwide economic pie is likely to slip down from 28% to 24% over the next 25 years. During the same period Asia's share of the global market will almost double - meaning it will account for a 55% of the global economy by 2030. In this changing economic scenario America may not be able to hold the financial leadership over the world as it kept before. American Investment has to be considered keeping these facts in the view. 3. What is the long-term impact of the housing market decline in the US and abroad? The devastation in real estate housing market is too vast to comprehend. The mortgage bubble is estimated to be roughly $5.5 trillion. Housing prices have gone up enormously. Two million homeowners are likely to lose their homes. 151 mortgage lenders have already gone bankrupt. Foreclosure of houses has gone up many folds. Most of the hedge funds—which are loaded with billions of dollars in “mortgage-backed” securities are struggling to stay float. Home markets started falling down. This will further kill the builders and promoters. New home-sales figures confirm falling market of existing house sales in July to the lowest level in two and a half years. The report from the National Association of Realtors also shows the biggest declines in the West and parts of the Midwest. According to many experts believe that the market might fall up to 50%. The effects of these developments on the US economy would be considerable. Coupled with other factors such as stock market crash and a subsequent period of deflation the situation may worsen in which housing prices might descend 90% as they did between 1928 and 1933. Irony of the fact is that housing bubbles deflate very slowly, may be over a period of 5 to 10 years and this might prolong the problem to become worse. The sub prime ghost has spread to all loan categories affecting the banking system. This had resulted in accelerated decline in the financial market and the economy. Even credits worthy applicants are not entertained for new mortgages. At the same time, nearly half of borrowers with adjustable rate mortgages have not given opportunity to refinance their loans. The result is a sagging real estate market with unattended houses for long. This is a major concern for policymakers. The direct result is the rising interest rates charged by banks and financial institutions and aggrieved borrowers. 3. What is your recommended investment strategy for the company’s pension fund? Provide an approximate idea of how you would initially allocate the pension fund’s assets We noted about the changing face of the US economy and the new strength of the global economy. China and India are two heavy weights that are emerging fast to compete for the global capital, business contracts and jobs from the US companies who have been enjoying monopolistic treatments before. Global corporations can now shift labor and capital wherever it's needed around the world thanks to the boundary-less global economy made possible by technologies in every field. The acute rise in commodity and energy prices along with weak dollar is causing inflationary forces to look up and hold American markets for the first time. There is today an impending global credit crisis that will continue to damage the US dollar and US economy. In such economic and financial scenario I as a Pension Fund Manager will have to gather more and more market intelligence about the various funds operating and their performance for long before investing at all. The best of market forecasters will be hired to get their expertise on the future developments in the market. I will capitalize on the entire global capital and find out the best avenues that can yield better returns on my investment. 1. Among the emerging economies the BRIC countries are important" (Brazil, Russia, India and China)." These are the destinations where the global investment is shifting for much higher returns. Economic Intelligence Unit recently reported that worldwide investments are expected to double. 60% of growth is coming from new global markets-more than twice that of mature, developed markets like US or Japan. China has shown one of the most consistent rates of growth with more than 10 percent for the period between 2003 and 2007. Even as this growth reduces because of the recession global crisis it to maintain in average 7.5% by 2018(Caulkin2009) I would prefer Global industries to look at both Africa and the Latin American regions as possible areas for investing in the future because these economies have shown greater stability when the rest of the world was engulfed with the global financial crisis I would also explore the energy segment to invest some of the pension funds since energy particularly crude oil is going to be recurrent theme as leading segment to earn profits in the future. Investment in corporate Bonds of a crude company may help. Green energy investments or in other alternative energy opportunities such as Uranium whose soaring prices for conventional energy source will benefit the investment allocation from my fund. Investment in Biotech companies who are trying to solve world’s food problems and fuel shortages with certain success and have big profits and returns will be the right strategy at present. Yellow metal has shown record run and even today is stable at medium price level. With global demand for gold going up in this uncertain period of recession reshuffling portfolio for gold would be the right return making investment. In case inflation escalates as per expectation of many experts gold will provide the best portfolio hedge. What is your investment strategy and style? Will you manage the fund actively or passively? Will you run this fund like a hedge fund or more like a mutual fund or index fund? Mutual funds are big pools of money that investment managers use to purchase stocks or bonds. This is a regulated fund. Index mutual funds are based on the performance of underlying indices, but actively managed mutual funds typically encompass a broad range of investments. Most mutual funds aim to beat the index. Hedge funds are largely unregulated and meant for very high Worth individual who are ready to take any risk. Since Pension fund of the Global industries is not in a position to take a lot of risk because of the pensioners’ fund I would like to invest part of the fund in regulate Index mutual fund. I will try to actively manage the fund and look for reshuffling the portfolio if warranted. 5. What are the main risks associated with your investment strategy? How would you deal with these risks? The main risk involved with my investment strategy is the most volatile nature of financial market today. It is difficult to rely on economic fundamental. Pension fund concerns the employee and workers of the company and they want secured return in the right time. In case of investment meeting losses they are going to be affected badly. In this circumstance the only way out is to diversify the investment in so many baskets and go on reshuffling when and if demanded. 6. In your view, what or where are the main risks in global financial markets during the next couple of years? What or where are the main opportunities? US financial markets are the most risky during the next couple of years. Emerging markets are the least risk bearer. India and china are the proven markets. In India the safety level is more because of the democratic system prevailing and all investments are professionally managed. 7. What is your view on emerging markets? Which emerging markets present the best investment opportunities and why? Which should we avoid or should we avoid them all? China market has already heated up quite a lot till now. Though there are prospects of growth still there but risk is growing more. The present best emerging market is Africa and prospecting this region for safer investment will be the right strategy. 8. What is your view of the currency market, especially the dollar continues to fall? Will Europe or Asia or somewhere else be an attractive place for U.S. investor in coming years? What impact will currencies movement have on our investment? The troubles facing the dollar are serious. Lowering of interest rates in the US will have adverse repercussion on the greenback. Gold is soaring to new highs (above $770 per Ounce). That's an indication of dollar-weakness. If Federal Reserve lowers rates, Dollar will nosedive.   In determining exchange rates Interest rate differentials have a key role. Since the ECB (European Central Bank) began its rate hike campaign in December 2005, the US dollar's interest rate advantage over the Euro has narrowed down. Thus, the Fed Reserve can not afford a big rate cut to bail out Wall Street bankers trapped into sub-prime debt. Thus it can’t avoid let the dollar into a free-fall. Americans investments in overseas stock market did better last year than those who invested in domestic market Emerging markets had good performance. Twelve emerging markets were in the black for the year in dollar terms, while all but 2 of the 22 developed markets abroad were in the red, according to Morgan Stanley Capital International's stock indexes. Czech Republic, Colombia, India, Indonesia, Hungary and Pakistan were the top performers. The dollar's weakness reduced losses of American investment abroad which had a decline of 25.4 percent in local currencies improved to just 16.5 percent in dollars. The market fell 24 percent in United States. References 1. Sirapat Polwitoon Susquehanna University Oranee Tawatnuntachai Penn State University at Harrisburg.http: //www.thefinancialreview.org/PDF/Polwitoon-Tawatnuntachai. 2. Emerging-Market-Bondfund -A comprehensive analysis GN02220 Emerging Market Equity Returns 2008: Return Table.qxd http://www.lazardnet.com/lam/us/tpd/pdfs/EM_Equity_Returns.pdf, visited on 6th May 09 3. A Bull in China, http://www.oxfonline.com/MMR/ROGO108mm.html visited on 6th May 09 4. Jack Speer Where Is the Housing Market Headed? : NPR 22 Aug 2006 ... http://www.npr.org/templates/story/story.php visited on 15th June 09 5. JONATHAN, FUERBRINGER, Falling Dollar Cushions Americans Investing Abroad By,Published: Friday, January 3, 2003 New York Times Business http:// www.query.nytimes.com/gst/fullpage.html visited on 7th May 09 5. Robert M. White Jr., president, Real Capital Analytics Financial Ground Has Shifted Under a Record Deal (NY Times, Nov. 7th): www.nytimes.com2007/11/07": http://www.nytimes.com2007 visited on 7.05 09 Read More