HEADLINES [click on headline to view story]:

Money matters

Snap Shots

Modern Medicine

Learn to Live to Learn

Heart to Heart with Hillary

Psychological Perspectives

Money matters: Benchmarks - Beware!

Graham Macdonald
MBMG International Ltd.

Shortcuts can either be a quicker way to get where you’re going or a lazy way of doing what has to be done. Benchmarks were originally intended to be the former but have, sadly, become the latter.

Carol Loomis’ famous Fortune article that ‘discovered Alfred Winslow Jones’ Long/short investment methodology also gave a good deal of coverage to Gerald Tsai, who had just left the Fidelity Trend Fund and had raised $247 million from 150,000 investors to launch his new Manhattan Fund. The only similarity perhaps being that each manager deployed a far greater level of focus than was apparent in the markets at that time. Jones, however, was concerned to limit risk and volatility whereas Tsai almost embraced extra risk as a means of generating extra returns - which does work some of the time.

In its first full year, 1967, the Manhattan Fund returned 39.4%. In the late 1960s this risk-controlled approach had little prospect of outperforming Gerry Tsai’s narrow focus on momentum stocks, although true advocates of Jones would have accepted that this didn’t matter. Other dogs could have their day - but there would be plenty of dog days to come for Tsai. At the time, Barton Biggs was working at Fairfield Partners, itself a spin-off of A.W. Jones & Co.

“It was different then, we were all just leveraged long the new small capitalization growth stocks. Morgan Guaranty was buying the Nifty Fifty, hedge funds were buying the riskier new issues. Hedging market risk or any risk was no longer part of the equation.”

After a 39% gain in 1967-68, followed by a modest downturn in 1969-70, the S&P 500 was up 36% in 1971-72. For that six-year period the S&P 500 returned a total of 78%, but the Nifty Fifty and the velocity stocks had generated far higher returns. Isolating the highest available market risk was the winning strategy during this 6 year period. However, the bull market ended with OPEC’s 1973 embargo on crude oil supplies. In 1973-74 the S&P 500 dropped by nearly 40% - actually rather more when measured peak to trough. The Nifty Fifty stocks dropped on average 66% from their peak. Tsai’s Manhattan Fund lost nearly 80% of its value. Manhattan and its cohorts hadn’t been real hedge funds, but they hadn’t been traditional funds either. It was far better for the established Wall Street names to ascribe the worst losses and indeed some blame for all of the losses to hedge funds so that their own reputations wouldn’t attract unfavourable scrutiny. By the md-‘80s, the term “hedge fund” had became synonymous with an investment process that targeted high returns at great risk to the capital.

Whilst the right conclusion to draw would have been a return to the enhanced Alpha (more return for less risk) strategies of Jones, the market chased Beta (market-driven levels of return) instead. While a great deal of wealth was destroyed in 1973-74, a portion was in fact transferred to countries and organizations that either possessed or were involved in finding crude oil reserves. Within the financial markets, the most visible beneficiaries of this wealth transfer were a group of companies known as the seven sisters. These were the world’s largest oil companies; their stocks rose during the bear market. But not one of the seven sisters was in Kidder Peabody’s Nifty-Fifty, or among the velocity stocks, in 1973-74. Investors began to wonder how they could have been misled into owning only the Nifty Fifty and velocity stocks and none of the seven sisters.

It is no coincidence that index funds were born in 1976, when John Bogle opened First Index Investment Trust, now known as Vanguard. In such an environment, mediocrity could look attractive - especially with an influx of new money from first-time investors afraid of getting ‘burned’. In 1952 the number of mutual funds had just exceeded 100, and they counted a little more than one million investors as clients. By 1970 the number of mutual funds had grown to 269, with a total of $48.3 billion in assets. Congress then further helped accelerate the growth of mutual funds with the creation of Individual Retirement Accounts in 1981.

In the post 1974 environment, mutual funds increasingly managed their portfolios to closely follow market indices. One response was a wider use of benchmarks for managers. Benchmarks began as a kind of legal firewall for trustees, who had personal liability under ERISA.

Over time, the benchmarks came with increasingly restrictive allowable return variance, in the form of expected tracking error. Thus began a two-decade-long pilgrimage toward the benchmark dictating 90% or more of the specific securities a manager may own, regardless of their return or risk proposition. Institutional capital largely began to invest in the public markets through Beta basket allocations, a practice now referred to as “closet indexing.”

The institution and manager maintain the pretence that the assignment is active, keeping “in the closet” the fact that the portfolio’s risk-return characteristics very nearly mirror those of the index. This practice does not favour capital allocations that develop high-quality alpha, since most of the manager’s risk capital is not discretionary.

More recently there has been tremendous growth in Exchange Traded Funds (ETFs), which, like index funds, are out of the closet. These allow investors to buy and sell a single exchange-listed Beta basket. ETFs are available today on hundreds of sub-indices and compete with mutual funds for investors’ capital. A 2003 Goldman Sachs study across many large U.S. pension plans determined that these plans “had 84% of their risk in equity market Beta, 15% in interest rate risk, and 1% allocated to active or alpha risk.” 1% - you’re paying your pension fund manager to manage just 1% of the money (admittedly these are US stats but the UK isn’t much better).

Admittedly, acquiring pure market Beta does reduce the number of decisions required, streamlining the process and thus lowering explicit costs. The benchmarks and tracking error largely eliminate the need for specific securities decisions on the part of the wealth owner or manager. Risk management is a relatively passive afterthought, based on historical assumptions about risk and return within the “optimization process.”

But then again - as we’ve noted in the past, expensive does not always mean quality, but cheap hardly ever does.

It has taken the post-millennium market events for researchers like Michael Litt of FrontPoint Partners to realize what a dangerous strategy such passive indexing can be, but sadly his warnings are likely to fall on mainly deaf ears until it is too late and the great crash of 05 or 06 or 07 is upon us.

There have been increasing exceptions over the years, with more alternative managers, and the likes of the large university endowments, including Harvard and Yale, who have successfully integrated hedge fund, private equity, and real asset holdings into their portfolio compositions, with the goal of achieving expanded real diversification and efficiency. Despite the huge growth in this kind of thinking, it remains a tiny proportion of the investment universe. Institutions and individuals who have moved away from passive Beta over the last few years will be glad that they did so at some point in the future. However, there will be many more horror stories of those who will come to wish that they had but didn’t know enough to act decisively enough in a timely enough fashion.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]

Snap Shots: Action shots sitting still

by Harry Flashman

Normally one thinks that to get great action shots you need a camera with a very fast shutter speed (in the thousandths of a second range), an ability to focus quicker than the proverbial speeding bullet, and the ability to compose the shot in half a twinkling of one eye. All that still holds good and true, but there is another way of capturing action. And this way requires no fancy, expensive hi-tech equipment, and in fact can be done with the simplest point and shoot compact.

This way all depends on the Theory of Relativity, but don’t let that rather grand title drive you away! It is so easy to understand, and the results are so good, you will use this trick forever!

Getting down to basics - when you are standing at the side of the road and want to photograph a motorcycle going past at 80 kph, you will need a fast shutter speed, as the subject matter (the motorcycle) is going past you at 22 meters per second. To stop that kind of action will need 1/1000th of a second, which you will find will stop all the action, but you get a photograph of a ‘stopped’ motorcycle in front of a stopped background.

The other way to photograph this motorcycle requires the ability to ‘pan’, following it through with the movement in the camera. Not such an easy concept, and one that can deliver disappointing shots. If you are lucky, you do get a stopped motorcycle in front of a blurred background, but I repeat, these are not easy shots.

However, there is the easy way, using the Theory of Relativity. Let us imagine that the motor car or cycle is going along at 80 kph, and you are also going along at 80 kph in the same direction, then the relative speed differential between you and the subject is zero! You are doing the identical speed, so it is almost as if both of you are standing still. This kind of shot does not need a fast shutter speed, in fact 1/30th or even 1/15th can be safely used. But then you are moving at 80 kph relative to the background, so it is being blurred, which gives the impression of speed. Perfectly sharply focused subject against a moving background, no fast shutter speeds and no need to pan. Perfect!

In practice, this is not difficult. Get someone to drive your car and synchronize your road speed with that of the subject (in our example, I have used 80 kph). Wind the window down, fill the frame by using your zoom lens (or move away or closer if using a fixed lens) and then focus the shot. Since you are at the same speed, and the same distance apart, focusing is easy and you can take your time. Finally, pop the shutter.

Try different shutter speeds too. The slower the shutter speed, the more blurred the background. Don’t spoil the effect by using a fast shutter speed (125th or faster) as you do not need it. Your shot will show the fluttering movement in clothes and hair, which will give you a new viewpoint and perspective, and one that you may not have thought of before. The shot here was taken with a standard 50 mm lens, at 1/30th second, and shows the movement in the passenger’s hair quite well. With the background moving, there is no doubt that this shot was taken ‘on the run’. The camera was run on ‘auto’ and no attempt was made to correct or modify the aperture. The camera’s electronic eye could handle that very well.

If you want to change the angle of the photograph, you can do that as well. Try taking a head-on shot of a car, by travelling at the same speed, while it follows you. Shoot out of the back window and again the following car and yourself are doing the same speed. Relative difference in speeds? Zero! But the road is flashing past underneath you, and you have that action component again.

Modern Medicine: Physician heal thyself

by Dr. Iain Corness, Consultant

I still manage to get a chuckle out of all the people who have said over the years, “You can’t be sick, you’re a doctor!” or when I have had a miserable cold, from all those who have delighted in saying, “Have you seen a doctor for that cough?” My usual reply is that I saw one that morning, while I looked in the mirror to shave.

Before launching off, I should point out that in my experience, doctors come in two types - those who instantly take some medication for any perceived ailment (just in case it gets worse) and those who treat personal afflictions with large doses of disregard. I come in the latter group.

A couple of weeks ago I noticed a pain in the left side of my chest, which I knew was a ‘pleuritic’ pain, coming from the covering of the lung. I was also getting fairly tired, but put this down to our new baby at home and working long hours. But the final symptom, which I chose to ignore totally, was that my urine was very much darker than normal.

During my morning consultation with myself in the shaving mirror, each day I resolved I would wait another day before actually doing anything, as I and the physician mirror agreed that I would probably be much better tomorrow. However, after cajoling from my wife, I finally decided to talk to one of my colleagues. The fact that I was puffed out just walking from the hospital car park to my office did add to that resolve!

I spoke to Dr. Prasit who quickly arranged chest X-Ray and blood and urine tests. A pleural effusion was confirmed, as were 4 +’s of blood in the urine and a blood count dangerously close to transfusion levels. Joking time was over. I exchanged my white doctor’s coat for the pale blue hospital pyjamas.

With the major symptoms being lung and kidney, Dr. Ong-Ard (respiratory physician) and Dr. Bupha (nephrologist) were brought in, and a battery of tests ensued, including MRI to exclude a pulmonary embolism. MRI’s are not fun, lying in the cramped noisy tunnel, but very accurate. With the lung condition appearing as secondary to the kidney problems, the next step was a renal biopsy.

If I thought the MRI wasn’t fun, it paled into insignificance compared to the renal biopsy! Lying on your stomach with a rolled up towel pushing your kidneys into your back, while kindly Dr. Bupha inserted a large bore needle through my back, under ultrasound display, and on the count of three, and “Hold your breath, Doctor,” speared my kidney and withdrew a ‘core’ sample for examination by the pathologists. Of course, you cannot rely on one sample, so this procedure happens three times. You are then nursed lying on your back, with something like a wrapped up house-brick pushing your back muscles up onto the kidney surface to attempt to prevent excessive bleeding. “You must stay this way for six hours,” said Dr. Bupha, after sheathing her medical boring bar!

While awaiting the results, I was started on large dose of steroids. However, after checking, I still do not have a Schwarzenegger physique, but the urine has miraculously returned to its normal straw yellow. Dr’s Prasit and Bupha looked pleased. Their treatment appeared to be working.

But the shaving mirror doctor was not to be denied. Pascal Schnyder, of Casa Pascal, heard I was ill and sent up a platter of salmon and cheeses, and a bottle of champagne. My wife enquired as to whether Dr. Bupha had had agreed to any champagne. I replied that I hadn’t asked her, but Dr. Corness felt that half a bottle would be beneficial. The next morning the urine was, as mentioned above, returned to the clear straw colour. The steroids might have helped, but the champagne made all the difference, the shaving mirror physician assures me!

After five days I was fit enough to leave the ward, to return to my consulting office downstairs. The physician is healing himself, with help from Dr’s Prasit, Bupha, and honorary physician Pascal Schnyder. But it’s been a long hard row. I hope it doesn’t happen to you!

Learn to Live to Learn: Postcard from Manila

with Andrew Watson

You’ve got to love living in Thailand. A short hop from some genuinely brilliant countries and a world of adventure within. I guess you notice it most when a holiday turns up (I have to admit I don’t even notice them coming). There you are with a few days to spare, thinking to yourself, “Where shall I go?” when you are gently overcome by euphoria as you realise, “Hey! I’m in Thailand! I must be on holiday already!”

Tim Knight.
The Vanilla in Manila.

I’ve been lucky enough to travel extensively in the region either for business or pleasure (is there a difference?) but I’d never been to Manila before. I was looking forward to it hugely. I was meeting a number of teachers and administrators involved with the Council of International Schools (CIS) and having a good look at some local international schools. A busman’s holiday of course, the kind that has on occasions brought a weary sigh from my wife. In Melbourne Australia, for instance, a few years ago, we were on summer vacation and having a great time. But, I must have missed the school atmosphere, so I “took in a couple”. Sensational schools they were too. Methodist Ladies College (where there are very few obviously Methodist Ladies) and Carey Baptist Grammar school, just down the road. Brilliantly high achieving schools they were too, in every sense. As it transpired, Manila was the first time since Melbourne that I had come across high quality schools in such close proximity to one another.

In an area of the city purposely devoted to schools, there are almost no other constructions of any kind in the immediate vicinity. On one side of the road there is the impressive British School of Manila, a well established school (1976) of eight hundred students representing almost forty nationalities, studying the English National Curriculum up until Year 11, then the IB diploma in years 12 and 13. Literally next door is the Japanese school, attached to the Embassy of Japan and also highly successful in offering the Japanese curriculum. Across the road, dwarfing both these excellent schools, is the International School of Manila (ISM) offering the American curriculum with the IB diploma in the last two years alongside the Advanced Placement (AP) Programme. Founded in 1920, ISM moved to its current home, a 70,000 square foot state-of-the-art facility on 7 hectares in Global City, Fort Bonifacio, in August 2002. Since then, the progress has been spectacular and I’ll wager you’ll have to travel far and wide to see a better equipped, managed or higher achieving school, epitomised by their IB diploma programme and its coordinator, Tim Knight.

Knight could be described as an unusual combination. He’s an Oxonian Burnley fan, married to a wonderful French woman with two lovely young children. As always, I was curious as to what had drawn him into teaching. “Well, it wasn’t to save the world. I wanted to be involved in the development of something. It wasn’t an altruistic impulse. Actually, it seemed quite sexy, if you know what I mean?” Actually, I do. This travel with work thing is just the best. A chance to drink it all in.

Tim and family seem to have a great life. Beautiful house with a pool, brilliant work environment. I wondered whether teaching was all that he had envisaged when he started out on the path? “I suppose it took about three years before I felt it had turned into a profession, then a career. Then, I became a teacher.”

I know what he means. There’s an art to it that seems to creep up on you, then one day your professional persuasion and your personal life appear to coincide. A happy moment indeed. “Probably, when you start to develop your expertise, you begin liking things you do well. There’s a kind of symbiotic relationship between doing something well and enjoying it - developing an element of mastery of the teaching process. Maybe it’s a bit egocentric at first, but the period I’m talking about I was still in my twenties, so there’s an element of maturity involved.”

Well, there’s nothing like travel to broaden the mind, I proposed, swinging in Tim’s hammock. You get to see the world bigger. “That’s right. This was what was lacking in my education. I’m quite good at specific things, like pedagogy, the Maths, but it took me five years before I saw the evolution out of pedagogy into education. Fast forward six or seven years and experiencing the IB diploma (IBDP), I realize that previously there was something lacking within me. The IBDP has shown me a much broader education which deals with that bigger world, rather than just individual subjects”.

Looking at the recent contributions to Mailbag, I threw a rather vogue George Bernard Shaw line at Tim. “He who can, does, He who cannot, teaches? I think some teachers are in that situation. What would I do if I wasn’t teaching? Well I’m not a Maths researcher. I’m not a saint, I’m not a priest. I see teachers like doctors or lawyers, as professionals, with expertise, experience and ways of doing things. But sure, it’s a job. Do doctors go home and forget their jobs? I don’t know. There’s a feeling that teaching is a 24/7 job.”

Not on this occasion, though. When travelling, I think it is absolutely essential to “get out”, usually to the “Latin Quarter”. (I had a bit of trouble finding the Latin Quarter in Shanghai). In Manila, rebuilt after an apocalyptic World War II experience, there’s plenty to see and do. In “Havana” we came across a band whose rhythm is still coursing through my veins. I haven’t danced, laughed or had such fun in a long time. Now that’s what travel is all about.

[email protected]
Next week: Why not teaching?

Heart to Heart with Hillary

Dear Hillary,
I was warned by many but I didn’t listen. I said to myself “not me, it won’t happen to me”. But I was wrong and I paid a dear price for it. You see Hillary, I’m one of those thousands of lonely old fools who came to Thailand to enjoy the companionship of younger women. Few years back, I met “Noi” at a bar and I thought she was the girl of my dreams. We hit it off well and it seemed everything was fine in the beginning. I asked her to move-in to my condo and she did as long as she got her “stipend” of 10,000 baht per month. After few months she got pregnant so we decided to get married. She was 26 and I was 60. I knew the age difference would shock my family and friends and would be the laughing subject for the town back home but I didn’t care and so I married a bargirl like almost all foreigners do. Next few years went fine and everything seemed great with few bumps, mostly financial. I still had to pay her “stipend”, which seemed awkward to me but to her it was expected of me to pay her for being my wife. As my daughter approached school age, we checked out all the local international schools and I was shocked at the cost of educating a single foreign child here in Thailand, never mind two or more. The financial hardship was too much for me to pay so we decided to go back home to my home country. It was a sad day when I left Thailand and I didn’t know what to expect, but I had to try. I stayed with my son who seemed genuinely happy to see me but his wife and my sisters and their husbands were not. They didn’t say too much and put on an appearance but I knew what they were thinking. They saw a dirty old man who married a prostitute younger than their kids with a young child and deserve what was coming to me. They never said this to me but I could see it on their faces. After couple weeks I found a small apartment for my family and got a job as an accountant which was my trade before entering Thailand. As I suspected, I was the laughing subject of the neighborhood. Everybody seemed to know the whole story. When I walked with my wife and daughter, I would hear them gossiping and laughing at us. Even my wife and daughter felt the pain. What hurt the most was when my daughter was ashamed to see me in school because her friends would make fun of her for having such an old man as a father. After two years, my wife seemed angry at me for small things that seemed minor and insignificant but she would get angry over nothing. She just wanted to fight all the time and I didn’t know why until I found out after few months. She was having an affair with the local policeman her age who lived in the same apartment complex. I was hurt and angry and ready to hurt somebody but for the sake of my daughter I stayed collected over the whole incident. As I expected, she filed for a divorce with the help of her policeman boyfriend. I had to move out and consulted a lawyer. As he explained it, she would get the custody of our daughter and child support until my daughter turns 21 or until my death. This sounds funny now but it wasn’t funny then since I seriously thought about suicide. I didn’t know what to do so I took some time off and came back to Thailand to think. Currently, I barely have enough money to live on. If it wasn’t for welfare system for old people from my country, I would be on the streets.
Another Lonely Old Fool

Dear Lonely (but not an Old Fool),
Hillary can understand your pain, and I congratulate you on being so brave as to put it all down in your letter. I hope you will take the time to read my reply, just as I have taken the time with yours. First off, you have done nothing “wrong”. Marriages are always difficult relationships, and forget about the bargirl, older foreigner statistics. Were you aware that more than 50 percent of first-time marriages in the UK and America fail as well? And there’s no cultural or communication problems in those unions.
The reason for the hostility in your home country over the so-called ‘trophy bride’ situation stems purely from jealousy. Men do not often grow gracefully older with their aging partners, but lust after what they used to have – which you were still having.
I will not go into the divorce laws in your home country, but they were not designed to be equitable, but you are stuck with them. Even though it is hurtful, just remember that your daughter will always owe her initial upbringing and educational possibilities to you. Nobody else.
You are a good man. You have acted honorably. You can hold your head up high. Life may be ‘different’ these days, but your own spirit will carry you through again. Congratulations on coming though a very difficult period in your life. One day we might even share some champers and chocolates!

Psychological Perspectives:  Sexual attitudes and behavior are changing among young people

by Michael Catalanello, Ph.D.

It might seem obvious, particularly to those of us living in Pattaya, that sexual mores within our societies have changed over the years. We seem to be living in a much more permissive society than our parents and grandparents did. A study published this month in the journal Review of General Psychology sheds light on how these changes have appeared in the attitudes and behavior of North American young people.

Examining 530 studies which were published over a period of 56 years, involving 269,649 subjects, researchers concluded that today’s young people are having intercourse earlier, engaging more in oral sex, and are feeling less guilty about their sexual behavior than did previous generations. The changes are most pronounced among females.

During the late 1990s, sexual activity was reported by 47% of surveyed teenaged girls and young women aged 12 to 27 years of age. During the 1950s, a mere 13% of this group reported being sexually active. Increases in sexual activity also appeared among young men, although the changes were not as pronounced.

The popularity of oral sex has also increased over the years. In 1969, 48% of young men and 42% of young women reported engaging in oral sex. By 1993 the figures had risen to 72% for young men and 71% for young women, according to the report.

Investigators found that young people are becoming sexually active at a younger age, as compared to previous generations. Before 1970, the average age at which young men and women were first having intercourse was 18 and 19 years of age, respectively. The average had dropped to 15 years for both groups by the late 1990s.

Interestingly, although sexual behavior of young people has become more permissive over the years, the average number of sexual partners reported by those participating in the study showed no significant change over the five decades covered by the study.

Besides examining sexual behavior, the researchers also looked at changes in the attitudes of young people relating to sexual behavior. Results indicate that young people have become more approving of premarital sex over the years. Young women in the late 1950s overwhelmingly disapproved of premarital sex, with only 12% approving. A whopping 73% approved by the 1980s. For young men the figure went from 40% approval in the 1950s to 79% by the 1980s.

Consistent with changes in attitude toward premarital sex, researchers found a decrease in sexual guilt among young people of both genders. Once again, females showed the most dramatic changes in attitudes toward sex.

An interesting question concerns the nature of the relationship between the attitudes and sexual behavior of young people. If changes in behavior preceded changes in attitude, it might be inferred that changes in behavior were affecting attitudes. If, on the other hand, attitudes were changing first, the reverse might be the case, with changes in attitudes bringing about behavior change. A third possibility is that attitudes and behaviors changed in tandem. Results supported the latter alternative: attitudes and behavior changed simultaneously, particularly among females.

These results, in my opinion, may be viewed as a mixed bag. Clearly, a move away from guilt-ridden and restrictive norms of sexual behavior among young adults may be seen as a positive development. Premarital sex between consenting young people, although often discouraged by societal institutions, seems quite normal, and healthy for most. While there might be good reasons for some to delay becoming sexually active, guilt is not one of them. Guilt and self-condemnation for performing such acts seems quite unhealthy.

Unfortunately, engaging more freely in sexual activities in the age of HIV/AIDS poses a particular hazard to young people who might not have been adequately informed about the risks and methods of avoiding contracting STDs. Young people are notoriously naive in assessing risks, and often behave as if they are impervious to danger. Perhaps the present understanding of the trends in the attitudes and sexual behavior of young people could serve as a reminder of the importance of educating our young people to the risks and responsibilities that go along with the greater sexual freedom they now enjoy.

Dr. Catalanello is a licensed psychologist in his home State of Louisiana, USA, and a member of the Faculty of Liberal Arts at Asian University, Chonburi. You may address questions and comments to him at [email protected], or post on his weblog at