Reading the English newspaper
- l. Read the article and do the exercises.
In Search of Those Elusive Returns
“The Economist”
Despite this week’s stock market rally, tumbling equity prices and bond yields have sparked a fierce debate over asset allocation.
Early this week the markets were telling themselves that the second Gulf war was as good as won. Equities rallied; bond and oil prices fell; gold hardly flickered. But that did not help investors, such as insurance companies and pension-fund managers, with their thorny conundrum: how to allocate their assets over the long term? The accepted wisdom, that equities offer superior returns in the long run, has recently looked a little hollow. Forecasts for the so-called equity risk premium (the return in excess of the yield on government bonds demanded by investors to compensate for the extra risk of holding equities) range from a traditional 5 % to as little as 2.4 % a year. Such a thin premium may look on the low side to many investors, given that share prices could tumble again and that more corporate misbehaviour may be uncovered. Yet most of the alternatives to pure equities — bonds issued by governments (in developed or emerging markets), municipalities or companies; asset-backed securities; funds of hedge funds; bonds indexed to equities or to credit risks — all seem loaded with their own mixture of downside risk and lacklustre returns.
What can an asset manager do, apart from hiding under the duvet? There is plenty of advice available. For example, the amazing foresight of the pension fund of Boots, a British retailer, which moved all its assets into bonds in 2001 to miss the worst of the equity slump, is now inviting criticism. “Why sacrifice around 3 % a year so that trustees can sleep peacefully at night? That’s a lot of money compounded over 25 years,” argues someone who thinks he knows better.
The reason is that, for some pundits, equities have lost so much value that they are beginning to look cheap. In some cases the dividends paid on shares, divided by share prices, are even outstripping the yield on bonds issued by the same company. This makes no sense. The share price has no theoretical ceiling, while the bonds pay a fixed amount. A handful of academic works on the equity risk premium, published in the past year, far from gathering dust on university bookshelves, have become the stuff of hot debate in investment banks and company boardrooms, and among the trustees of pension funds and even university endowments.Why? Because popular assumptions about long-term investment returns have been overturned. A year ago Robert Arnott, chairman of First Quadrant, an investment firm, and Peter Bernstein, an investment adviser, estimated that the equity risk premium should be as low as 2.4 %. They argued that accidents of history, survivor bias, changes in corporate culture and many other factors had made equity returns look higher than they really were over the past 75 years. And they concluded that the outlook for equity and bond returns in the short term was about the same: between 2 % and 4 %. Sobering conclusions have also come from academics at the London Business School, whose analysis of equity returns since 1900 shows that, before the last bull run, only two decades, the 1950s and 1960s, had produced real rates of return of over 10 %. The authors, Elroy Dimson and others, note that returns were low in 1900, but that investors became used to higher returns over the next century.
Now, perhaps, shareholders will have to accept lower rewards once again. Bill Gross, a fixed-income champion at Pimco, an American asset-ma- nagement firm, predicted last September that bond returns will outstrip equities until share prices fall to their fair value, that is, until the Dow Jones Industrial Average is at 5,000 rather than today’s 8,000-odd. However, those with an equity bias, such as Chris Johns, chief economist at ABN Amro Securities, continue to argue for at least a 60 % equity weighting over the long term.
“We’re near to the wrong point of the cycle to go into bonds,” he says. The debate is even causing ideological rifts within the same financial institution, says Mr. Dimson of the London Business School. Corporate financiers are quoting one equity risk premium to companies creating incentive plans for their employees; fund managers pick another rate for asset allocation; those advising utilities use another to negotiate with governments on funding; universities worry about how much of their endowments they can spend each year. Then there are the aggregate — often wildly optimistic — returns forecast by equity analysts. “These are very hot issues,” says Mr. Dimson, “since the equity risk premium drives decisions on asset allocation and company investments.” Institutional investors know they cannot stay out of the market forever. Some dived into equities this week as stock markets rose. But they are also being tempted into so- called alternative investments. Hedge funds are attracting a growing proportion of institutional assets: they have been able to achieve above-average absolute returns in aggregate. But many investors will be disappointed, because fewer hedge funds are likely to outperform in future and the fees they charge are high. Jerome Booth of Ashmore Investment Management sings the virtues of sovereign debt in emerging countries.Since a crisis in 1998, these markets have become less volatile, he says; the investor base has become more institutional and less speculative; and there is less risk of contagion between countries. Rating agencies have consistently underrated sovereign bonds because the risk is hard to quantify, says Mr. Booth. He boasts over 25 % average returns for his funds in the past decade. But even he cautions investors against putting more than 5 % of their assets into such bonds, at least to start. What about the rest? Many investors have sought higher yields in corporate-credit markets, from singlename corporate bonds, credit default swaps, or packages of securities backed by pools of corporate names.
The recent high levels of defaults and ratings downgrades have taken the shine off that market There may, therefore, be little alternative to a cautious return to equities. Messrs Arnott and Bernstein recommend that investors accustom themselves to much lower returns than they have enjoyed in the past. “It’s naive to expect earnings and dividends to grow faster than the economy,” says Mr Arnott. That translates roughly into higher pension contributions, a longer working life and less rosy retirement all round. Or you can take a punt. Recently, Jonathan Compton of Bedlam Asset Management said he was buying his 18-year-old daughter shares in one company, BP: “One of the great opportunities this side of Mars,” he was quoted as saying. This week BP’s shares dipped when a $ 3.4 billion shortfall appeared in its pension fund.- 2. Answer the following questions.
- How did the Gulf war inflict the financial markets?
- Why is long term assets allocation a puzzle for the investors?
- What are the forecasts for equity risk premium?
- What are pure equities?
- What is possible advice in the given situation?
- Why did equities lose so much in value?
- What do academics think about the problem under review?
- Why do the returns seem to be illusive?
- Why can many investors be disappointed nowadays?
- З. Translate into Russian the following sentences from the text.
- Despite this week’s stock market rally, tumbling equity prices and bond yields have sparked a fierce debate over asset allocation.
- The alternatives to pure equities — bonds issued by governments (in developed or emerging markets), municipalities or companies; asset- backed securities; funds of hedge funds; bonds indexed to equities or to credit risks — all seem loaded with their own mixture of downside risk and lacklustre returns.
- Corporate financiers are quoting one equity risk premium to companies creating incentive plans for their employees; fund managers pick another rate for asset allocation; those advising utilities use another to negotiate with governments on funding; universities worry about how much of their endowments they can spend each year.
- The recent high levels of defaults and ratings downgrades have taken the shine of that market.
- 4. Find the words in the text which mean the following:
- to buy or sell a commodity to establish a definite price for future use;
- an ordinary share on which no fixed amount of interest is paid;
- to burn unsteadily; shine with an unsteady light;
- a large bag filled with feathers or man-made material and is used on a bed instead of a sheet and blankets to keep one warm;
- to be very pessimistic because of difficulties;
- a person or firm that holds and controls property or money for an advantage of someone else or a member of a group appointed to control the affairs of a company; "
- agreement by contract to pay money to someone if something especially misfortune, happens to them.
- 5. Think of a word which best fits each space. Render the text.
Representatives from the Tacoma (Wash.) Russell 20-20 Association — among the world’s... groups of pension and investment advisers — are scheduled to arrive in Russia on May 12 for a very special ... . The nonprofit Russell 20-20 was founded by Tacoma investment ... George Russell Jr., after the ... of the Berlin Wall in 1989 as a vehicle for top financial ... to explore the... climates in emerging-market countries. Representatives from GE Asset Management, State Street Global Advisors, and Lazard Asset Management, among others, will ... with Russian political and business ... in Moscow, including ... Alexei Kudrin.
The goal is for each company to ... Russia’s prospects as a place for ... investment. (The association makes no joint investment... .) Everyone knows the country’s ... market is hot — the Russian Trading System ... is up 43 % for the year But is topsy-turvy Russia a great spot for investors with a 30-year time horizon? On the ... of the association’s visit, Business Week Moscow Bureau Chief Paul Starobin put that question — and plenty of others — to Moscow investment fund manager Mattias Westman. The director of Prosperity Capital Management, with $ 270 million in..., Westman has ... great success in negotiating Russia’s investment minefields. Over the last three years, Russian Prosperity Fund, created in 1996, has been the country’s top with\'a return on ... of 557 %, according to Standard amp; Poor’s.