A Fund to Follow - part 1

Forgive us for sounding like a broken record, but: economic uncertainty; potential disaster; markets fall off a cliff; how to make money now but not lose it when it all goes wrong; long/short equity; which mangers stand out?
Whilst we are ardent followers of MitonOptimal, we do recognise class when we see it. One relatively new fund to consider is the Turnstone European Fund, which is managed by Amanda McCracken who has been managing funds for MBMG since the last century.
The investment objective of this fund is to achieve positive absolute returns, uncorrelated with equity markets, while protecting against downside volatility. One of the strategies that Amanda uses is the Long/Short approach. What are Long/Short Funds? These are funds that combine long equity holdings and the short sale of stocks along with other instruments to vary their net exposures depending on their views on the market. The funds tend to increase their exposures in bull market periods and decrease them when they feel that the markets will be in decline. By varying exposures in this fashion, long/short managers have a valuable tool to control their participation in directional market movements.
The long side of the portfolios is constructed from stocks that are expected to outperform the market. These stocks will most likely have strong fundamentals with a good market position, an attractive rate of earning growth and offer a high return on equity.
An example of a long trade would be Google, the market leader in internet search engines. Google was floated with a price of $85 per share after a controversial auction mechanism that set the flotation price. From a fundamental point of view, the company had a promising valuation with high margins, strong, 3-digit rates of sales growth and an above-30% return on equity. At the end of the first day of trading, Google shares were in the region of $100 per share; indicating that the market was pricing in their expectations.
A long/short manager, who could not participate in the IPO, having a bullish view on Google could have invested $500,000 in the stock on the following day at a price of $100.33 and could have closed his position just over two months later at the price of $187.56. This would have been a perfect trade for the manager’s long side of his portfolio, realising a profit around $434,000. This would constitute a return of nearly 100% in three months.
On the other hand, the short side of a manager’s portfolio particularly focuses on the stocks that he maintains a bullish view on. These short ideas originate from flawed business models, poor balance sheets, and/or expected/emerging litigation cases acting as negative catalysts.
The negative exposure obtained through taking short positions serves two different purposes. First of all, the shorted individual stocks identified through deteriorating fundamentals create an opportunity to provide additional returns when the markets maintain their bullish sentiment. Secondly, when there is a general downturn, these short positions in their entirety will act as a hedge to offset the losses incurred by the long side of the portfolio.
The short positions are obtained through “borrowing” the stock. The manager borrows the stock from its broker at an agreed price and then places a sell order to liquidate it. Putting it more simply, the manager sells a stock that it does not own. In closing his short position, if the manager could buy the stock from the market at a lower price than the price the broker agreed to lend in the first place, he will make a profit.
A short trade could be demonstrated using Microsoft Corporation back in March 2004. Although Microsoft is a giant software company that dominates its industry, the bearish sentiment was sparked by a negative catalyst. The markets started pricing in the news emerging from the European Competition Commissioner who completed a draft of his decision in the EU’s antitrust probe against Microsoft Corporation. The expectations were that a negative decision would lead to having the world’s largest software maker fined as much as €500 million, a figure around 2% of the company’s annual sales.
A long/short manager, picking up this negative catalyst, taking a short position by short selling the Microsoft Corporation for an average price of $28.50 a share from the 23rd to the 26th of January, could have closed his short position by buying shares from the markets on the 23rd of March at a low of $24.15 a share to deliver them back to their broker. This would have led to an 18% profit over 2 months, during a period when the overall direction of the markets was negative, with the S&P500 index registering a loss of 5.4% for the same period.
If used wisely, the ability to sell short provides managers with a great tool to control the market risk that they are exposed to. Successful long/short managers have been able to deliver double digit absolute returns over the tough times of 2001 and 2002 by controlling their market exposure. Coupled with such hedging abilities, the inherent ability to use leverage gives long/short managers the upper edge compared to the traditional long only managers.
Managers may also use leverage in order to have higher exposure to both long and short positions in order to enhance returns. For instance, the manager above could have taken short exposure to Microsoft to the extent of 100% of the amount of his portfolio and long exposure to Google to the extent of 200% of his portfolio. This would have created a 100% net long position (the same as a traditional fund in terms of delta risk) BUT the return would have been over 210% instead of just under 100% for the same level of risk.
In reality many long short funds would actually try to achieve the same level of returns as the traditional fund (in this case just under 100%) but look to reduce risk (in this case the risk taken by the long short fund that achieves the same return as the traditional fund, would have only been around 47% of the risk taken by the traditional fund). Long short, even in this basic example allows you to take the same risk and more than double your returns OR achieve the same return but at less than half the amount of risk.
To be continued…

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 graham@mbmg-international.comaham@mbmg-international.com.com

Snap Shots: by Harry Flashman

The ultimate photo-kitsch

An open letter from Harry Flashman.
Dear photographers,
There are many ways that photographers try to get their human subjects to look good. A smile is considered the sign of enjoyment, and you will often see the erstwhile photographer attempting to coax a smile from an unwilling subject. “Say cheese,” is the favorite, as in saying the cheese word, the teeth are shown. Something close to a cheesy smile, I suppose. Others photographers who are more risqué will be heard saying “Say sex!” This usually gets a laugh, rather than a smile, but at least gets some emotion from a wooden subject.
However, for the photographer who cannot take defeat in the smiling stakes, Sony has just the cameras for you. Theses little beauties, the DSC-T70 and DSC-T200 Cyber-shot series, feature some electro-trickery called ‘face detection technology’. This is otherwise known in the trade as ‘smile shutter’ technology.
What this does is ensures that the subject is smiling before the shot can be taken. The ‘smarts’ in the camera look for teeth, find them and allows the shutter to fire. No teeth – no photo!
Sony’s smile technology joins Japan’s Omron Corp, which developed “smile check” software that analyses happiness by facial features like mouth and eye wrinkles or lip separation. The so-called “Say Cheese” technology has three setting levels for smiles; it varies from a slight grin to a belly laugh.
In the US, where DSC-T70 and DSC-T200 Cyber-shot series are soon to be available, they will retail from $350 upwards. It has been claimed that Sony may have lost its lead to others in audio mp3 players, but in digital cameras they still reign supreme with innovative cameras and advanced features. The 8 Megapixel cameras DSC-T70 and DSC-T200 Cyber-shot models are the results of such innovation, we are led to believe. Or Sony wants us to believe.
Another innovative feature in the camera is it can focus on an individual from a handful of people in the view finder. By touching the object with the special pen, the camera will be able to focus and take the picture of that designated person only.
Sony Product Development’s Akira Tokuse said if there are parents and a baby in a group picture, by touching on the image of the baby, the camera will focus and will only take the picture once it smiles. Tokuse-San did not elaborate as to what the camera might do if the baby cries!
For me, this is all a very worrying trend. We are certainly getting far away from ‘true’ photography. If you want to take a dramatic black and white of someone sitting on a cliff looking out over the ocean in contemplation, don’t bring your DSC-T70. It won’t take it, because the subject isn’t smiling. Sony says it stops you wasting a shot. Baloney! How can you ‘waste’ a shot in the digital age? So you’ve just used up part of the memory stick, but you can delete and overwrite before the next shot. That is one of the inherent advantages of digital photography.
Of course the next step after “smile technology” is “beauty technology”. If the subject isn’t looking beautiful, the camera won’t take the shot. That should certainly cut down on wasted shots.
But the next, and even more frightening step, is that the electronic smarts will produce a smile for you. Don’t worry if the subject is scowling, this will be manipulated into a toothy grin.
And the step after that is that the camera will modify the entire image. Yes, it will automatically give all females a Pamela Anderson chest, wavy long blonde hair, luxurious eyelashes and high cheekbones, remove several kilos of excess weight and a little bit of an electronic face lift at the same time, using the additional ‘anti-wrinkle’ mode.
Fellow photographers, this has gone too far. Can we try and get back to real life, despite the digital capture of the images? I really hope so.
Sincerely,
Harry

Modern Medicine: by Dr. Iain Corness, Consultant

Insomnia - Is it a problem you can sleep on?

Did you have a bad night? How many sheep did you count last night? If it were more than one thousand you may have a problem. If you do have a problem, then you also have plenty of friends, as the latest reports would suggest that 30 percent of the population over 40 years old suffers from insomnia, with males slightly more than females. Maybe the answer is in ringing each other up.
Medically we tend to split insomnia into two groups - Primary or Secondary. Primary insomnia we say is when you have a problem getting off to sleep, or for at least one month a problem in maintaining sleep. On top of that, the insomnia has to cause clinically significant problems in daily social and occupational functioning.
Secondary insomnia, as the name suggests, comes after other problems such as anxiety or depression, drug use (both prescribed and illicit) or related to other disease states. This group includes all us males over 40 who have to get up for a pee in the middle of the night. Your prostate is waiting to get you! Sometimes these people do not complain of insomnia, but rather of daytime sleepiness and fatigue.
There are those who will tell you that insomnia is a self-limiting problem. So what if you have a bad night tonight, you will be so tired tomorrow that you will sleep well and the day after you will be hunky-dory again. However, this is not really the true picture. For the occasional night, perhaps yes, but when talking about real insomnia, with a duration of greater than one month, a very different picture begins to emerge. Insomniacs with symptoms of greater than one year, for example, have 40 times the chance of being depressed. That’s enough to make you depressed and lose sleep over it, on its own! Insomniacs also have more road accidents, go to the doctor more often, take more alcohol and are definitely sleepier in the daytime, with a decreased mental performance.
So what should you do about this problem? Well, if it is a Secondary insomnia, the obvious thing is to do something about the problem causing the insomnia. A general check-up is a good place to start, with specific treatment for primary factors like liver disease, depression and anxiety. And a prostate check is probably not a bad idea either. The PSA test is good for determining the size of the prostate gland.
For Primary insomnia there are many behavioral therapies that can be tried. Relaxation therapy, using progressive muscle relaxation techniques, practiced for two to four weeks can often break the insomnia cycle. Restrict your “bed” time to six hours a night only. Do this by prolonging the amount of time you stay up, not by getting up earlier. It may also be necessary to review some irrational fears about insomnia, such as the idea that you “must have eight hours of sleep every night” which is not correct. This is called ‘cognitive therapy’.
But of course, there are those who still have problems. Now is the time for pharmacological intervention, but done under medical supervision. Even in Thailand, with much available over the counter (OTC), hypnotics are not OTC and should only be taken as the last resort.
Finally, here are a few good sleeping hints. No coffee or alcohol just before going to bed. Forget the glass of port before retiral. Put aside some time to go over nagging problems before you go to bed. Don’t take your troubles to the bedroom. That includes matrimonial disputes. Don’t sit in bed to watch TV or read books, do that elsewhere - keep the bedroom for sleeping. Your daily exercise should be done in the morning, not at night. And don’t make it a habit to sleep in - set an alarm and get up at the same time every morning.

Learn to Live to Learn: with Andrew Watson

Pedagogy and Classroom Management

Pedagogy is defined as “the function or work of a teacher; teaching” (Dictionary.com) although I prefer to think of it as “the art or science of teaching”. As far as I can tell, it is an art. But behind the invariably closed doors of the classroom, a secret world exists. Who really knows what happens once the bell goes and that door shuts? It’s a peculiar thought isn’t it? Just a teacher in there, “in loco parentis”, and about twenty students.
In my visits to schools around the world, I am regularly surprised by the number of classrooms that are closed to the outside world, often divided from reality by breeze blocks and imposing, heavy, grey doors. I’m more surprised still when I find windows into classrooms, which might otherwise have provided a glimpse of the art of teaching, rigorously blacked out with paper. What has anybody got to hide?
Most surprising of all, however, is when classrooms that are light and airy (as they should be) and perfectly visible to the passer by, serve only to draw attention to pedagogy which is not worthy of the name. Much though I might refer to teaching (when performed properly) as an “art”, I would never be so presumptuous as to suggest that only teachers themselves can tell the difference between good, bad and ugly pedagogy.
In fact, quite the reverse. On some notable occasions, it has appeared that those making a living from education, charged with making a judgment in this regard, have little or no idea (or experience) of what good pedagogy might involve.
Whereas, anybody in any profession worth their salt should be able to spot a “shirker” from a mile away. It’s a curious comment on the sometimes narrow world of international education, that often it is left to parents, who by and large represent a highly articulate and well educated body, almost by definition successful in their own fields of work, to point out gaping holes in the core business of a school; teaching and learning. And what volatility such parental revelations can bring to a staff room!
I’ve been in schools where quite deliberate (and preposterous) attempts are made to cover up the poorest practice imaginable and no effort whatsoever is made to rectify the situation. I would love to say that such incidents are isolated. There’s a subtle but important difference between keeping disciplining a teacher “behind closed doors” and giving them the proper support that they are entitled to – giving them a chance – and er, doing nothing. The worst case scenario, I suppose, is hushing it all up, paying the teacher off and offloading them onto another unsuspecting set of unfortunate students.
I must say, I much prefer school boards that are populated by parents. Whilst it’s probably true that any system can work, with appropriate systems and structures in place, there’s a sense of accountability in having parents know the intimate ins and outs of what is after all, their school, that I find reassuring, on principle. I mean, what’s the alternative? Unaccountable autocracies, where parents only get to hear what a couple of people want them to hear? I’ve seen that too and what happens is that cliques are created, whilst anybody with integrity and indeed often, class, moves on. You’d think that rotten empires wouldn’t last long, but I fear that just capitulation doesn’t always happen. The phenomenon of people being promoted to their next level of incompetence is well documented.
And so to the relationship between pedagogy and classroom management. What should you expect to see in a classroom? We might envisage “order”, for instance, as a classroom full of neatly arranged students in their seats, faces and pens desk-ward, whereas the truth of the matter might be that they are experiencing mind-numbing boredom and learning nothing. Similarly, a classroom full of noisy, laughing students could be interpreted as chaotic, whereas a happy, buoyant classroom is by no means incompatible with a successful classroom.
There’s a lovely moment that comes along sometimes, when students feel so comfortable and enthused, that they start humming to themselves, almost unconsciously. Generally, it’s not always easy to know what’s going on, even for inspectors, who witness of course, the poorest teacher preparing a lesson for the one and only time. But you can’t kid all the people all the time and that is why, on the whole, I prefer the evidence of the students. They know better than anyone when somebody is late for their lesson.
From a theoretical point of view, when considering classroom management, it’s important to take into account differing abilities and learning styles. Differing ability provision includes contextual support, assessing task appropriateness, setting collaborative teaching teams and studying groups, personal tutoring, inclusion programmes, not labelling or lowering expectations, clear classroom instructions and routines and rewarding success to gain confidence.
Differing learning styles provision includes different types of “learning centres” in classrooms, provision of small group learning, shifting methods of presentation, tools and programmes and different approaches to a problem. Students are a mix of abilities and styles and need to be stimulated in all types of intelligences (Gardner, 2005). I’d like to think that every lesson, whilst structured, planned and contextualised, left enough room for digression, deviation, a little bit of frivolity, a touch of humour and some genuine opportunities to learn something. Whilst I agree that students (as we all do) need to know their boundaries so that they can function safely within them, I do think it’s important that every lesson is just a little bit different from the one before and the one after.
As ever, all the theories and all the rhetoric are as nothing if students come second. If students are denied a role in shaping how their school evolves and resources are postponed for the sake of barbecues and beer, then surely something has gone wrong somewhere? As Dumbledore said, “A child’s voice however honest and true is meaningless to those who have forgotten how to listen.”
Next week: Forgetting how to listen