%
45
30
15
-15
-30
0
The ConTrarian risk-based asseTs
-45
Nov ’05 May ’06 Nov
Source: Morningstar
3 mths 1 year 3 yrs 5 yrs 10 yrs
Financial funds -24.7 -40.98 -10.4 -2.06 -0.06
FTSE 100 -19.12 -34.88 -6.28 0.42 -2.15
FTSE All Share financials -29.72 -51.4 -16.54 -7.92 -3.41
FTSE All Shr non-fin’cials -17.5 -31.09 -2.6 3.75 -0.53
Source: Morningstar
Financial funds
FTSE 100
FTSE All-Share non-financials
FTSE All-Share Financials
Financial funds vs indices – 10 years
%
Risk-based assets
Financial funds vs indices – 3 years
80
60
40
20
-20
0
FTSE All-Share
non-financials FTSE All-Share
Financials
-40
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05
1 Nov ’98 – 1 Nov ’08. Source: Morningstar
Financial funds performance vs indices
May ’07
Financial funds
Nov
May ’08
FTSE 100
’06
’07
Nov
’08
From chaos good
things come
Risk-based assets performed appallingly in 2008
and there is little sign that the macro or stock market
environment is going to change this outlook soon. Yet
such short-term chaos brings long-term opportunities,
particularly in long-only equities and high-yield bonds
by GAry rEynoldS,
dirEcTor And chiEF
invESTMEnT oFFicEr,
courTiErS
In over 30 years of working
in the financial sector,
I do not remember a worse
period than October – it
was simply horrible.
The dismal results from
risk-based assets (equities,
real estate and bonds)
throughout the year can be
entirely attributed to the
uncertainty of the credit
crunch. The simple fact is
that the market is beginning
to realise that no one,
possibly not even the
banks themselves, have
been able to accurately
quantify their positions in
asset-backed securities
(ABSs) and the various collateralised
debt obligations
(CDOs) that were derived,
and issued, from them.
In its October 2007
42 PORTFOLIO ADVISER [www.portfolio-adviser.com] DEcEmbER 2008
‘Global Financial Stability
Report’, the International
Monetary Fund (IMF) estimated
cash flow losses
from non-performing ABSs
and CDOs of up to $170bn,
with a potential further
$200bn losses arising from
mark-to-market writedowns.
At the beginning of
November 2008, the banks
alone (that is, excluding
other holders such as
investment groups and
hedge funds) have written
off $690bn.
In its October 2008
report, the IMF revised
its estimates to losses of
$425bn on write-downs
(i.e. cash-flow losses) with
a further $500bn of losses
on ABSs and ABS CDOs.
It also included estimates
from other related securities
(such as consumer
ABSs, high-grade corporate
debt and so on) that take
the total estimated markto-market
losses to $980bn
which, together with the
write-downs, is a staggering
total of $1.4trn.
l Been here before
Banking crises are nothing
new. Sweden worked
its way out of a banking
crisis at the start of the
’90s, and Japan eventually
resolved its banking
crisis in 2002-03. That one
involved the then-prime
minister Koizumi bullying
the Japanese banks into
quantifying and declaring
their non-performing assets
so that the amount could
be made clear. Before the
exercise began, the official
assumption was that nonperforming
assets/loans
were around $400bn.
Goldman Sachs then published
a study that suggested
the extent of Japanese
non-performing loans could
be some five times higher
than the estimate at around
$2trn. Needless to say,
this spooked markets and
Japanese bank shares in
particular, which declined
nearly 50% between April
2002 and April 2003.
Eventually, the figures
were confirmed at the
original estimate of around
$400bn, and by mid-
October 2003, Japanese
bank share prices rose by
over 150% from their low
point of April 2003.
l Double-edged sword
The most helpful action
to stabilise markets in the
short to medium term
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