Vocabulary

window-dressing (syn. creative accounting) – приукрашивание финансового отчета компании; to engage in window-dressing – заниматься приукрашиванием финансовой отчетности

to put money to work for smb – пустить деньги в дело, найти им применение; инвестировать средства

to disclose the portfolio – раскрыть содержание портфеля

hot stock ( syn. hot issue) – акции, пользующиеся большим спросом и имеющие высокую цену, а также те, которые, как ожидается, будут расти в цене technology stock – акции компаний высоких технологий

to mark up the portfolio – увеличить стоимость содержания портфеля

loser – акция, падающая в цене; winner – акция, растущая в цене

widows-and-orphans investors – небогатые инвесторы, которые вкладывают свои средства в акции с минимальным риском

market maneuvers – рыночные махинации

to create tax problems – вызвать проблемы с налоговыми органами

on-line investor – интернет-инвестор; active investor – инвестор с большим объемом операций

for fraudulent purposes – с преступными целями

It’s Simple: Make Fund Managers Spell Out the Risks

By Jeffrey M. Laderman

Stanford University economist William F. Sharpe won a Nobel Prize in economics for his analysis of how capital markets work and how investment returns can be measured and assessed for risk. From that body of knowledge come such concepts as “beta”, which measures the volatility of a stock to the overall market.

But Sharpe and a group of prominent financial economists say measures such as beta won’t help mutual-fund investors understand the risks they face in owning funds. This group, the Financial Economists Roundtable (FER), has come up with a refreshingly simple proposal. Its Policy Statement on Risk Disclosure by Mutual Funds urges fund companies to talk about future investment risk in their prospectuses and shareholder reports and downplay statistical measurements based on past performance. The proposal is sure to draw fire from the fund industry. But it’s an idea worth adopting.

Eighteen months ago, the Securities & Exchange Commission solicited comment on how to improve mutual-fund risk disclosure. It’s a topic of intense interest. Witness the 3,700 comment letters sent to the SEC – “an extraordinary response,” says a commission spokesman. By yearend, the SEC is expected to propose a new set of rules and guidelines for selling mutual funds.

Benchmark. Besides more forward-looking disclosure, the economists want more detail. Fund managers should “describe and quantify the expected relationship between their fund’s future returns and the relevant market indexes.” They want funds to choose narrower indexes that track, say, large-cap growth stocks or small-cap value stocks, rather than broad indexes like the Standard & Poor’s 500-stock index, and measure their returns by those indexes.

Recognizing that some funds aren’t easily categorized, the FER suggests managers instead adopt a mix of indexes as a benchmark. The economists also want funds to say how likely they are to diverge from those indexes and the probable sources of the divergences, such as concentrating the portfolio in fewer stocks or industry sectors.

They also want the funds to assess their exposure to such factors as interest rates or currency fluctuations and to report how the fund performed relative to those factors. The FER recommends more frequent portfolio reporting. Now, funds need show their complete portfolios only twice a year. Funds will balk at doing any more, because they don’t want to tip their hands to competitors. No problem, says the FER: Report twice a year, but show the positions as they were at the end of each month. Rather than getting two snapshots a year, investors will get 12 – and a better picture of what’s going on.

More forward-looking and detailed disclosure should give investors more realistic expectations about their funds. It will also help them build diversified portfolios of funds. The FER is simply applying the same practices to mutual funds that institutional investors like pension plans use on their investment managers. Define your investment niche, they say, and stick to it. The cost of straying can be high. Just ask investors in the Fidelity Blue Chip Fund. In 1995, blue-chip stocks soared but their mutual fund lagged because the manager had bought smaller company stocks.

Many mutual-fund companies will fight the FER’s suggestions, arguing they could crimp the managers’ ability to run the fund and could well hurt shareholders. For instance, if there were a sudden turn in the economy, a manager might want to substantially change his portfolio. “We’re not saying a manager can’t change his mind,” says Sharpe. “We just want his best estimate.”

Much of what the FER is proposing flies in the face of more than 50 years of fund practice. Funds don’t like to make outright forecasts, fearing lawsuits if they miss the mark. The economists are well aware of that, too, and recommend that the SEC grant mutual funds leeway to make”honest estimates without fear of later litigation.”And while the economists want to see their ideas in practice, they prefer voluntary rather than mandatory compliance. The thinking is that investors will gravitate to funds that provide better disclosure and competition will force the others to follow suit.

It’s going to be tough to craft a forward-looking description of fund risk that wins the acceptance of fund managers and can pass regulatory muster. But it’s got to be an improvement on the history lesson investors get now.

Notes

1. Beta coefficient (Beta Factor) – коэффициент “бета”: показатель относительной неустойчивости (volatility) цен акций – ковариация цены относительно всего остального рынка; акция с “бетой” больше 1 – более неустойчива, меньше 1 – более устойчива , чем рынок в среднем

2. to draw fire – to cause criticism

3. to fly in the face of smth – бросать вызов к-л или ч-л

4. to pass regulatory muster – пройти проверку контролирующего органа

Don’t just read the news, understand it

Unit 6

Central Banks

Monopoly Power Over Money

During the cold war, Russian leaders’ every word was scrutinised by an army of Kremlinologists. Now, the honor is accorded to the world’s central bankers, whose pronouncements are pored over by throngs of well-paid financial analysts.

These days, central bankers seem all powerful. In most rich countries they go about their business without interference from politicians. And their success at using their new-found independence to bring down inflation has earned them great respect.

Cental banks matter to the financial system for two main reasons. First, thet set short-term interest rates. These affect the cost of borrowing throughout the economy, from money markets to mortgage rates, and they have an additional influence through their impact on exchange rates, inflation and growth. Second, central banks generally support (and often regulate) the banking system, notably by acting as a lender of last resort to banks in financial distress.

For all central banks’ importance, they remain tiny participants in huge financial markets. So how do they affect prices, i.e., interest rates, in those markets? The reason is that the Fed has a monopoly on supplying bank reserves. Banks are required to hold a fraction of the money deposited with them in a reserve account at the Fed. They usually hold more, for precautionary reasons. The interest rate at which banks’ demand for reserves matches the Fed’s supply is known as the federal funds rate; this is also the rate at which banks lend reserves to each other overnight. The Fed controls it by changing the supply of reserves through sales and purchases of government securities, known as open-market operations.

When the Fed wants to raise the federal funds rate, it sells government securities. And when the Fed wants to lower the rate, it buys securities, which increases banks’ reserves and bids down interest rates.Changes in the federal funds rate ripple through financial markets and the economy. They have knock-off effects on the interest rates at which banks lend to households and firms, and hence the amount of credit in the economy. And they influence long-term market interest rates too.

The Fed can also influence the federal funds rate indirectly, by changing the discount rate, the rate at which it will lend reserves to banks. Raising the discount rate makes it less attractive for banks to borrow reserves. This reduces the volume of reserves, which pushes up the federal funds rate.

Most central banks set monetary policy with the aim of keeping inflation low. The Fed also has a duty to support employment and economic growth. To meet their aims, central banks usually adopt intermediate targets as well. These guide policy, as well as keeping expectations of inflation low. One option is to target money-supply growth, but the historical relationship between money-supply growth and inflation broke down, partly because financial deregulation and innovation made the demand for money unpredictable.

A country with a poor record of controlling inflation can peg its currency to that of a low-inflation economy. In effect, this allows it to piggy-back on the low-inflation ciuntry’s credible monetary policies. But with freely mobile international capital movements, exchange-rate pegs have become vulnerable to speculative attack. So now most rich countries either have permanently fixed exchange rates, as in the euro area, or they have floating rates and control inflation in other ways.

Some economists argue that inflation targets focus too narrowly on consumer-price inflation, which may lead central banks to ignore potentially harmful asset-price bubbles. In Japan in the late 1980’s, the Bank of Japan failed to check soaring shares and property prices, because consumer-price inflation remained low. When the bubble burst, the economy plunged into recession.

Central banks’ monopoly on supplying cash and bank reserves is realtively new. In the19^th century, private banks in Britain and America issued competing currencies. A return to such a “free-banking” era seems unlikely, but even if central banks’ monopoly is not in danger, it may eventually become irrelevant. Privately issued electronic money could one day complicate or even nullify central banks’ ability to set interest rates. Central banks are not about to vanish overnight. But, like the Kremlin, they may not retain their pre-eminence forever.

The Economist

Notes

1. Kremlinologist – политолог, специалист по России, владеющий подробной информацией о ее политическом, экономическом положении, ее руководителях и других сферах жизни; во времена Советсокого Союза такие специалисты назывались советологами

2. for all their importance – see Krasnov ex.24, page 76

3. piggy-back (from pick-a-back) – to carry somebody pick-a-back – нести кого-нибудь на спине, на закорках; to piggy-back – здесь: выгодно использовать