A major defence industry supplier, Death Mines plc, wishes to borrow £1 million for twelve years at a fixed interest rate to finance a new investment project. It could do so by issuing a straight eurobond but, as it is not well known in the market and does not have a high credit risk rating, would have to pay a coupon of 8 per cent which it regards as too high. The firm’s own bank is willing to lend Death Mines the required amount via a one-year floating rate note at a rate of 2 per cent over LIBOR, currently at 3.6 per cent.
Clearly, the floating rate loan is much cheaper at the moment, but LIBOR could easily rise over the period of the loan to such a level that Death Mines would finish up losing on the project. Thus, it enters into a contract with a swap bank, Border International, to pay to it 5 per cent on the principal, receiving in exchange LIBOR.
The position of Death Mines now is:
Pays to its own bank LIBOR + 2 per cent
Pays to Border 5 per cent
Receives from Border LIBOR
Net position — fixed rate loan at 7 per cent Read the rest of this entry »
Nearly all of the mutual fund families offer multiple funds that are geared toward international investing. The different kinds of funds can be categorized into index funds, international funds, regional funds, country funds, emerging market funds, and global funds. International mutual funds have higher expense ratios than domestic mutual funds to cover higher trading costs and higher management fees. The funds also tend to have redemption fees to control frequent trading. Examples of funds offered by major mutual fund companies are given below.
* Index funds. These include Fidelity Spartan International Index Fund, Vanguard Developed Markets Stock Index, Vanguard Emerging Markets Stock Index, and Price International Equity Index Fund.
* International funds. These funds do not invest in the domestic market. Funds include Fidelity International Growth, T. Rowe Price International, Fidelity Overseas, Vanguard International Growth, Fidelity Diversified International, and so on.
* Global funds. These funds invest in all countries, including the domestic market, and include Templeton World, GT Global Worldwide, Dreyfus Global, Vanguard Global Equity, Price Global Stock, and so on. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
James M. Clash
A wave of consolidation is washing over the mutual fund business. So far this year funds totaling more than $125 billion in assets have changed hands. To hear the consolidators tell it, mergers are good because they bring fund investors economies of scale and breadth of choice within a fund family. Will these promises be fulfilled? It is instructive to consider some of the bigger recent mergers. The results are not encouraging.
Take the Dreyfus funds, purchased in December 1993 by Pittsburgh’s Mellon Bank. In the three years before the merger, the 12 domestic stock funds at Dreyfus performed, on average, on a par with the S&P 500 index. In the three years since, these funds, on average, have underperformed the index by a stunning seven percentage points a year.
Then there’s the American Capital/Van Kampen merger in August 1994. In the 26 months prior to the marriage, the 11 stock funds here outperformed the S&P 500 index by an average of two points annually. In the 26 months since the merger, the funds have underperformed, Read the rest of this entry »
