A eurobond is a debt security handled internationally by syndicates, groups of bankers and/or brokers who underwrite and distribute new issues of securities or large blocks of outstanding issues. It is typically in bearer (non-registered form) and is issued outside the country of the currency in which it is denominated.
Borrowers and lenders are spread around the world, while the intermediaries are spread across Europe, with the majority of business being done from London. The market was founded in the early 1960s and has provided a competitive source of funding for borrowers who can tap discreet but important sources of finance. Japanese banks, pension funds and insurance companies have become important lenders in recent years and there are still plenty of wealthy individuals who prefer the anonymity offered by bearer securities. The eurobond market is the world’s second largest securities market after the US bond market in terms of trading volume and the third largest after the US and Japanese bond markets in terms of debt outstanding. Read the rest of this entry »
So far we have merely described an interest-rate swap and looked at its characteristics. Here we illustrate how they can be used in asset/liability management. Other types of interest-rate swaps have been developed that go beyond the generic or “plain vanilla” swap described and we describe these later.
An interest-rate swap can be used to alter the cash flow characteristics of an institution’s assets so as to provide a better match between assets and liabilities. The two institutions we use for illustration are a commercial bank and a life insurance company. Read the rest of this entry »
Earlier we provided two interpretations of a swap: (1) a package of futures/forward contracts, and (2) a package of cash market instruments. The swap spread is determined by the same factors that influence the spread over Treasuries on financial instruments (futures/forward contracts or cash) that produce a similar return or funding profile. As we explain subsequently, the key determinant of the swap spread for swaps with maturities of five years or less is the cost of hedging in the Eurodollar CD futures market. For longer maturity swaps, the key determinant of the swap spread is the credit spreads in the corporate bond market. Read the rest of this entry »
In an industry that has seen its share of fads, Vanguard has long stood as a symbol of low costs and plain-vanilla products. Founded by John Bogle in 1975, the Vanguard Group is now the second largest mutual fund complex in the United States and has inspired a loyal following among many of its shareholders.
Low-cost funds have been Vanguard’s hallmark— and one of its main rallying cries within the industry. Its ability to provide funds with low expense ratios depends on the company’s unusual business model. In the Vanguard Group, the management company is actually owned by shareholders of its member funds. Read the rest of this entry »
Driven by a combination of management-initiated efforts to improve defined contribution plans and increasing employee bottom-up requests for a wider array and range of investment options, the average number of choices offered by Benefits, Inc. clients is now 10, compared to 3 or 4 choices 10 years ago. Indeed, many large companies offer 75 or more options. However, a concern is whether these additional options are being used properly. Read the rest of this entry »
Earlier this year, two mutual fund management companies, American Guardian, Inc. and Best Management, Inc. entered into an agreement under which American Guardian would purchase all of the issued and outstanding stock of Best Management and merge Best Management into American Guardian. Although the companies are now combined, there are still two separate boards of directors for the funds. Each fund complex retained the same independent board members previously elected by the shareholders, but company-appointed directors were reevaluated and will be consistent for both boards. The combined entity, Best American Management, is now in the process of reviewing existing products and services and looking for opportunities to leverage its increased size.
American Guardian was a 30-year old Boston-based mutual fund complex. This fairly staid, conservative company was well known but had not been particularly innovative in fund distribution or shareholder servicing. It had historically chosen to distribute mainly through broker- dealers and outsourced its transfer agent process. The relatively new CEO of American Guardian firmly believed that in today’s highly competitive environment, mutual fund complexes must “grow or die.” He saw an acquisition as a necessary step to ensure that his firm’s products and services would be attractive to investors and their advisers in the future. Read the rest of this entry »
In reviewing the expenses of mutual fund investors, it is useful to distinguish between expenses paid directly by shareholders as individual investors and expenses paid by the fund itself (which are paid indirectly by all fund shareholders). In general, fees related to distribution and redemption are paid by shareholders at the time of a specific event, while fees related to management and service are paid by the fund on an annual basis. But this general rule has a few exceptions—most important, 12b-1 fees, which are continuing distribution charges borne by funds as a percentage of their assets.
Sales loads are the most significant fees charged to shareholders individually. Sales loads are paid to the fund distributor, usually affiliated with the fund management company, and mostly passed on to the broker who helped close the sale. The maximum sales load is 81A%, though as a practical matter, sales loads now average 4% or 5%. Historically, all sales loads were paid by shareholders when purchasing fund shares at the front end of their investment and therefore were called front-end loads. Read the rest of this entry »
When your neighbor, friend, relative, or colleague makes a bundle through investing, remind yourself to manage the envy you naturally feel. If you don’t manage this envy, you’re likely to copy his strategy or type of investment. It’s possible (though unlikely) that copying it may be effective in the short-term, but it is no way to meet long-term objectives.
Viewed without any context or history, a buddy’s great investment is not always what it appears. He may have been investing in food-related companies for years without much success, but he happened to be holding one food company stock that shot skyward because of some hugely successful product introduction. You are not privy to the years of futility as he pursued this approach; all you see is that a food company investment paid off handsomely. If you try and duplicate his “strategy,” you’re doing so without seeing the whole picture. If you possessed this broader perspective, you would never attempt to use his flawed approach.
Diminish your fervor to copy other successful tactics and techniques by asking your neighbor or colleague the following questions: How long have you had this particular investment? How has it done over the last three years? Have you ever had a similarly spectacular success in the past ten years? Have you been disappointed by your investing approach over the last five years? How were you disappointed? The answers are likely to make you less covetous.
Given the previous commandment, I would be the last person to predict the market’s direction in the coming years. What seems reasonably safe to assume, however, is that we will see a market that reflects the fast-changing, world-shaking events of our era. I don’t believe I’m going out on a limb when I suggest that the market is going to be full of surprises, that stocks everyone believed would do well will experience sudden downturns and stocks that no one had high expectations for will become big winners. Funds that have performed well for years will slide down a notch and turn in mediocre performances, and a little-known fund will become the hottest one on the Street. Read the rest of this entry »
