The New Companies Act (2008) looks like it will actually be in force from 1 May 2011. The regulations that provide much of the detail around how the Act will be implemented in practice are now also available.
When companies value pension obligations and required contribution rates, they make assumptions about the expected future investment returns. (Accounting standards require market-based rates reflecting fixed interest returns, but that’s a separate point).
So what assumptions are pension funds making? The WSJ has an interesting article showing that the average US pension fund is assuming future returns of approximately 8%. To put that in perspective, yields on 30 year T-bonds in the US are about 3.9%, 10-year yields are below 3% and inflation is currently about nothing. This is a huge real return and suggests that many of these pension funds may be underfunded.
It’s also interesting to work out what Equity Risk Premiums these valuation assumptions imply. FinanceClippings makes some educated guesses at likely portfolio construction, and estimates assumed ERPs of nearly 8%. For reasons I’ve described before, an 8% ERP is madness.
FinanceClippings assumes a simple portfolio mix of 50% equities and 50% government bonds in this calculation, and assumes the average yield will be consistent with 30-year assumptions. I would differ slightly here. If we are looking at an overall portfolio, I would expect some investment grade corporate bonds and property in the mix too. These assets could be expected to earn 1% to 2% over risk-free over time (after adjusting for expected default loss on the corporate bonds). These return assumptions may seem low to some, but this is another area where it’s easy to overestimate the possible returns based on inappropriate periods of data. Continue reading
Decreasing interconnect fees was supposed to lower telecoms costs, promote competition and create world peace.
It’s done none of these because the logic underlying it was flawed. Analysts focused on interconnect as an expense, happily ignoring the revenue side (since it was a fee paid to another company within the industry). Never has a telecoms issue been so badly hijacked by lack of understanding.
Now, in a press release that is a little vague, BMI TechKnowledge reflect concerns that telecoms growth rates may be lower as a result of falling mobile termination rates.
According to a Fin24 story this morning, the FSB is probing smaller unit trusts.
The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.
Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.
The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.
It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.
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Lightstone have a trick up their sleeves. Their raison d’être is collecting, analysing, understanding and packaging data for themselves and others to use to understand past, current and future property valuations.
Their housing price index is more robust (and more independent) than those of the banks based off their own data and target markets. Rather than consider only the average price of houses sold in that particular month (which is a function of house price growth / decline but also how the type, condition, size and location of the houses sold that month differ from the prior month and year) they consider repeat sales where the same property has been bought and sold more than once.
This data is combined or “chain-linked” to provide a continuous measure of house price inflation over time.
House Price Inflation 2010 source: lightstone.co.za
The result of all of this data, best-in-class methodology and analysis? When Lightstone says “opportunities abound in local market” I actually listen. Since their business model is to sell information, I’m more likely to trust what they say.
I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.
Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.
Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. Continue reading
Ok, so that is an unfair title. But you’ll understand what I mean:
Zurich joins HSBC, Nationwide and Norwich Union in the club of companies fined by the FSA now.
In fairness, the fine wasn’t so much for losing the data, but rather for:
The FSA’s seriousness about these issues is mirrored in our looming Protection of Personal Information Bill. This is not the same as the disturbing proposals for a Protection of Information Bill which covers public or government information. Continue reading
I blogged recently about why I park on the fourth floor of the Cape Town airport parkade, and also about understanding and utilising unlikely but extreme events to your advantage. There is actually a link between these two posts.
Parking on the top floor does have a cost. It takes longer to drive up all the ramps and does, perhaps, on average take longer than parking on the most convenient floor every time. This extra time is a premium I pay to reduce the potential for really bad outcomes and thus optimising the parking problem. For example:
I get no value out of successfully memorising my car location, but gain from removing this risk and this worry from my routine.
If your company has a foreign currency exposure due to imported input components, this is a risk and a worry over which you have no control. Your energies are better expended elsewhere, on the operational and sales issues that you can effectively change. Get rid of these risks and get on with your real business.