Investing in today's volatile markets challenging
Everyone knows that investing involves a degree of risk. Even
investments which are considered least risky, can sometimes be found
shaky in changing circumstances. In September 2008, the 'A' rated Lehman
Brothers collapsed, and those who held deposits and shares in Lehman
Brothers lost heavily, exploding the myth about 'A' ratings! In the UK,
the Royal Bank of Scotland was saved by the Government with a massive
intervention, but not before investors lost badly. In August 2011, the
US Government struggled desperately to pass legislation through Congress
to enable them to increase their borrowing limits from September 1,
2011. If by some unfortunate political quirk, the US Congress was unable
to pass the law to increase its borrowing beyond the then existing
level,there was a very real possibility that the US Government would
have defaulted on its debt of over $ 10 trillion!
It is in this immensely volatile and tension-packed environment that
international reserve managers of the world function.
They have to safeguard their funds and at the same time deliver
reasonable returns. The delivery of reasonable returns has become even
more challenging, because many Western governments, including the US, UK
and Germany have reduced their policy interest rates to almost zero,
while Japan also has a near zero interest rate.
Therefore, investors have to diversify at least a small proportion of
their funds to other types of investments, including securities of
countries that yield good returns, but with a higher risk rating. Sri
Lanka, as an emerging nation, has benefited from this investment stance
of many international investors.
In fact, although Sri Lanka has a relatively low 'B1'sovereign rating
from Moodys', that rating has not discouraged hundreds of foreign
investors from investing $ 3,000m (Rs.400 b) in its international
sovereign bonds, and about $ 2,500m (Rs 335 b) in its Government bills
and bonds.
A total of about Rs.735 billion! Obviously, the higher returns
yielded by the Sri Lankan securities would be an attraction in the
global low interest environment. But, at the same time, a large majority
of investors, when they take decisions to invest, will also consciously
select a few lesser rated securities to allocate a small proportion of
their total funds, to earn higher returns.
While such a diversification enables the Funds to spread their risk,
the strategy also allows them to generate reasonable returns on the
reserves under management. This type of investment strategy is now
common all over the world among those who manage large funds and should
be understood in that context, since the performance of a fund is
evaluated on the total returns it generates to its members, while
enhancing the long-term value of the Fund.
So far, from all available reports, there is no dispute that both the
EPF fund managers and the international reserve managers of the Central
Bank have been able to generate returns that are well above average.
They have also ensured the consistent growth of their respective
funds and enhanced its value. On a dispassionate evaluation sans
political rhetoric, it may even be said that the Central Bank fund
managers have provided outstanding value to its stakeholders. There is
irrefutable evidence to this fact when the results of the two funds are
considered.
The EPF has provided returns well above the inflation rates and other
long term fund rates,and consistently enhanced the value of the Fund.
The International Reserve Fund Managers have delivered gains of $ 430
m or approximately 6.6 percent on its average reserves, in 2011, which
is above the Fed Fund average rate of just 0.25 percent in that year,
while enhancing the value of the total reserve.
In these circumstances, the Central Bank must be given the space to
take their investment decisions in an independent manner,as enjoyed by
fund managers globally.
They must not be subjected to intense harassment, as being practised
by some members of the local opposition. At a recent seminar, it was
pointed out that the Central Bank has more than 500 of the best and the
brightest brains in this country, including economists, IT specialists,
lawyers, fund managers and accountants, in its cadre. From all accounts,
these professionals are also continuously trained in relevant areas of
operations of the Central Bank, at the best institutions in the world.
On that basis, these professionals must be held accountable for the
delivery of the outcomes they are responsible for and not subjected to
vituperative abuse on a transaction by transaction basis, with
unsubstantiated accusations of mismanagement, corruption and fraud, to
satisfy the political agendas and egos of a few politicians. Such
attacks blatantly disregard the primary principles of portfolio
investment, risk analysis, risk parameters and diversification policies.
Therefore, suspicions could be legitimately raised that those attacks
may be designed to push the public service to a stage of "policy
paralysis", in a manner similar to what is taking place in India's
public service today. In that regard, it may perhaps also be worthwhile
to investigate whether such suspicions have validity.
In the meantime, a new breed of so-called "investment experts" have
also emerged who are today busy, dissecting the Central Bank's
investments on a piece meal basis.
It is clear that they do not wish to recognise or understand the
principles of "portfolio investment" practices. They are quick to
attribute ulterior motives whenever a particular investment has not
performed adequately at a particular time. But they are quiet when
profits are realised in other transactions lead to over all profits and
gains being made by the relevant Central Bank Fund Managers.
These 'experts' also conveniently ignore large unrealised gains in a
bull market, but are vociferous whenever the portfolio carries
unrealised losses in a bear market! This type of selective stance
therefore casts serious doubts about their bonafides, and hopefully, a
discerning public will soon see through the machinations of these
"experts" and understand the motives behind these sinister exercises.
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