By Adrian Ash Did you know...? Private investors like you can make 230% of emerging Asia's super-soar-away gains between now and 2014.
You're only tied in for three years. An early exit will return 130% of your initial investment.
And yes – it really does sound just too good to be true.
"Citigroup said these products should be for sophisticated investors only. But the municipalities were definitely not sophisticated investors..."
So says Eystein Kleven of the Financial Supervisory Authority in Norway, speaking this week to The Guardian newspaper. He's investigating the collapse of public funds in Narvik, a small town of 18,000 people some 140 miles north of the Arctic Circle.
"Terra Securities misled them," Kleven goes on. The municipality lost $35 million on high-risk US mortgage-backed investments. Seven other small Norwegian towns were also hit, apparently.
Why? Terra got busy selling Citigroup-issued derivatives to profit-hungry public investors. But it failed to explain that if their market price fell below 55% of face value, the products would be forcibly redeemed, leaving small towns like Narvik with an instant loss of 45 cents in the dollar or more.
Which is just what happened last summer, of course. Yet Narvik opted to pump fresh funds into these products, hoping they'd come back in due course. So now the same dumb investment has made the town's fund managers look stupid twice.
"Terra Securities did not disclose this mechanism to the municipalities," says Kleven in mitigation. "We are not sure whether the broker understood the mechanism himself." But so what? A lack of understanding should never get in the way of making an investment. Or so you'd guess from the professional market.
According to a survey released this week by The Economist and KPMG:
One-in-five asset managers worldwide lacks the staff needed to understand their more complex investments; One-in-four hedge funds admits the same; All told, one-in-three institutions now holding collateralized debt or structured products has "no in-house expertise" in understanding them. Just 42% of fund managers reckon they can quantify their true exposure to complex investments.
Interviewing more than 330 professionals in 57 countries worldwide – and with one-third of respondents based in the United States – Beyond the Credit Crisis also found that the blow-up in credit and debt derivatives has directly dented returns at 60% of investment funds. And as a result, a huge 70% of institutional investors now want to cut their exposure to derivatives and "other complex financial products".
Yet of those managers running $10bn-plus, three-in-four say their use of such instruments is growing regardless!
Of course, "Derivatives don't kill people; people kill people," as Frank Partnoy quotes a fellow Morgan Stanley salesman from the early '90s in his classic book F.I.A.S.C.O. Yet even now, more than 15 years after Orange County blew up, people wielding derivatives continue to "go postal" every so often.
Just take a look at the carnage amongst under-informed, over-reaching investment funds.
"Staff skill sets have struggled to keep up with the growing sophistication of the industry," says Tom Brown, head of KPMG's investment management division in Europe. "These firms cannot afford to continue flying blind." Flying blind worked up to summer '07; it's also much cheaper than training or hiring qualified staff. Quicker, too. Time is money when structured products with hidden clauses are waiting to get triggered.
But "if the fund management industry is to retain the trust of investors," reckons the KPMG-Economist survey, "it would seem imperative for it to both develop the necessary skills and then offer these skills to investors." Continued...
