Possessing basic money-handling and income-generating skills is important, especially with the economic crunch affecting big and small countries all over the world. The proverbial though blasphemous adage has never been truer than today: Money makes the world go round. And for thousands, it is a literal reality, as their hope of seeing another day becomes dimmer with each meal they miss.
But for the ordinary worker who gets a regular pay check each week or each month, having enough knowledge about money and how to make it work and multiply can spell the difference between a world one wants to keep going around or to make it stop so one can jump out.
Despair no more! It is never too late to learn new skills and techniques on money matters. Financial advisers are a-plenty nowadays what with Google making it a mere click away. Here are a few tips we can share here:
1. What you do not have, you can always find somewhere
Banks are not the only places to get loans from. Friends may have surplus cash they are willing to lend to someone who has the ability and diligence to make it grow. Or, cooperative groups that provide assistance to its members for a small business loan or for a multi-purpose loan. Taking the first step to look for capital for investing can produce great changes in one’s attitude and life.
2. Show your business plan
The trick to convincing people to part with their money so you can use it for your ideas is to present a simple and understandable business plan. It may not even be a written one. A verbal description of a project may already convince a relative or friend to lend you money for a venture. Of course, some may require a written contract. Your confidence in your idea should lead you to abide by their terms if that is the only way you can get capital.
3. Creativity always gives results
A friend once leased out a vacant lot and sub-leased it as a parking lot for a trucking company. He put a guard round-the-clock and provided minimal improvement and made more than forty times what he paid for it monthly. Not a bad deal for a creative guy who had a simple idea and worked his idea into reality. And anyone can do that with enough imagination and courage. The seed money may not even have to be there because if one really believes in a project, it will pay for itself. The down-payment for a lease will be enough to cover a loan you initially took out.
Keep cranking that brain of yours and you will eventually come upon an idea worth selling something valuable that you own in order to raise the capital and start rolling.
4. Get dirty
Starting a business or keeping one running will always require getting your hands dirty. Cleaning bottles for a peanut butter business or feeding pigs on a daily basis in your small piggery farm can seem menial but a necessary part in teaching you the fundamentals of running a business. Eventually, when you have other people doing the dirty work, you will have a better insight as to how the business runs and what makes for a successful operation.
Investing is not all about handling or making money; it is about thinking creatively, using your imagination, treating people compassionately and returning the fruits of your ventures back to your business and the people who keep the business growing and sustainable.
But for the ordinary worker who gets a regular pay check each week or each month, having enough knowledge about money and how to make it work and multiply can spell the difference between a world one wants to keep going around or to make it stop so one can jump out.
Despair no more! It is never too late to learn new skills and techniques on money matters. Financial advisers are a-plenty nowadays what with Google making it a mere click away. Here are a few tips we can share here:
1. What you do not have, you can always find somewhere
Banks are not the only places to get loans from. Friends may have surplus cash they are willing to lend to someone who has the ability and diligence to make it grow. Or, cooperative groups that provide assistance to its members for a small business loan or for a multi-purpose loan. Taking the first step to look for capital for investing can produce great changes in one’s attitude and life.
2. Show your business plan
The trick to convincing people to part with their money so you can use it for your ideas is to present a simple and understandable business plan. It may not even be a written one. A verbal description of a project may already convince a relative or friend to lend you money for a venture. Of course, some may require a written contract. Your confidence in your idea should lead you to abide by their terms if that is the only way you can get capital.
3. Creativity always gives results
A friend once leased out a vacant lot and sub-leased it as a parking lot for a trucking company. He put a guard round-the-clock and provided minimal improvement and made more than forty times what he paid for it monthly. Not a bad deal for a creative guy who had a simple idea and worked his idea into reality. And anyone can do that with enough imagination and courage. The seed money may not even have to be there because if one really believes in a project, it will pay for itself. The down-payment for a lease will be enough to cover a loan you initially took out.
Keep cranking that brain of yours and you will eventually come upon an idea worth selling something valuable that you own in order to raise the capital and start rolling.
4. Get dirty
Starting a business or keeping one running will always require getting your hands dirty. Cleaning bottles for a peanut butter business or feeding pigs on a daily basis in your small piggery farm can seem menial but a necessary part in teaching you the fundamentals of running a business. Eventually, when you have other people doing the dirty work, you will have a better insight as to how the business runs and what makes for a successful operation.
Investing is not all about handling or making money; it is about thinking creatively, using your imagination, treating people compassionately and returning the fruits of your ventures back to your business and the people who keep the business growing and sustainable.
Metronome’s unique advisory approach is designed to assist companies in exploring their strategic alternatives. Whether the ultimate solution is a strategic sale, leveraged buy-out, business unit divestiture, capital raise or recapitalization, Metronome has the depth and breadth of expertise, relationships, and access to capital sources necessary to deliver the desired outcome. We are dedicated to rendering unbiased advice concerning our clients’ strategic options, beginning with whether or not to undertake a transaction.
Strategic Divestitures or Acquisitions
We help corporations, entrepreneurs, and family businesses evaluate divestitures and corporate spin-offs, which typically allow clients’ to return their attention to core competencies, reduce working capital requirements, or raise investment capital. In addition, we help identify and evaluate strategic acquisition targets as well as advise clients on post-transaction integration considerations.
Corporate Vision and Positioning
We also assist our clients in understanding and executing their strategic plans and alternatives. Our experience, industry knowledge, and understanding of the marketplace enable us to render thoughtful and sound guidance to our clients and their Boards of Directors. Our Operating Partners also serve as valuable partners to our clients and frequently advise on corporate strategy and operations.
Are retail investors’ expectations upside down–high when conditions are bad for investing, low when conditions are good? Is there a better way to anticipate what’s going to happen to your retirement savings?
Our answers: yes and yes.
There is ample evidence that popular expectations for investment returns are just about the opposite of what would come from a sober analysis of the fundamental data. In 2000, when the market was trading at absurdly high multiples of corporate earnings, funds holding U.S. stocks hauled in $288 billion. In 2002, when stocks were cheap, the inflow slowed to a $13 billion trickle.
The inflow into stock funds dried up once again after the crash of 2007-09 and stayed low for most of the next five years. Now, with stock prices at abnormally high multiples of earnings, the investing masses are putting big money into stock funds.
It’s the same with junk bonds. A rational investor would be most likely to buy risky corporate debt when the reward–the yield–is highest and least likely when it is meager. The public is doing just the opposite.
In tumultuous 2008, when junk bond prices were depressed, their yields averaged a 10% premium over safe Treasury paper. That was a good time to be buying. But retail investors were doing more selling than buying. That year junk funds saw $6 billion of net redemptions, not counting reinvestment of dividends, according to data from the Investment Company Institute.
Six years later the prices of risky bonds have recovered, and their yields are correspondingly lower. What are investors doing? They should be selling, but they are not. In 2013, when the yield premium on average was only half that of 2008, investors poured a net $54 billion into junk funds. The money is still coming in ($10 billion in the first four months of this year).
The pattern: If an asset class has done well recently, making its price high, fund buyers want it. If it has done poorly, making it a bargain, they want to sell.
The phenomenon described above anecdotally has been studied statistically. Two Harvard professors, Andrei Shleifer and Robin Greenwood, published a paper last year demonstrating that investor expectations are highest when objective models would say that expected asset returns are lowest, and vice versa.
“People react to salience,” says professor Greenwood. “Recent performance is salient.” That’s a polite way of saying that naive investors navigate with a rearview mirror.
You don’t have to make that mistake. There are better ways to come up with a forecast of future returns than to extrapolate the recent past. We’ll explore some formulas for stocks, bonds and the funds that own these things.
Experts can differ about how to come up with an expected return from an asset. But one thing they would agree on is that recent performance is a bad indicator of future results. You shouldn’t be buying an asset class because it has been going up.
The place to start is with the yield. For a bond, it’s the interest yield. For a stock, it’s the earnings yield, which is the net income divided by the stock price.
Next, investing costs have to be figured in–both the management fees and the cost impact of turning over a portfolio. If you are buying bonds, you have to allow for inflation. (Shares of stock, in contrast, are not impacted the same way because corporate earnings tend to keep up with inflation.) It’s just possible that 401(k) savers don’t pay much attention to these things.
When they were newlyweds 23 years ago Jeff Maggioncalda’s wife, Anne, challenged him to a Monopoly battle. Determined to gain the upper hand, Jeff secretly created a program, known as a simulation engine, to model the results of 1 million Monopoly games and used it to generate a list of probabilities and payoffs for all the game’s properties. “We played until she realized I had this little cheat sheet, and then she thought I was a total jerk,” he laughs. (Actually, Anne, whose Ph.D. dissertation was on the reproductive strategies of male orangutans, was amused by his creative adaptation.)
Maggioncalda, 45, has used his knack for simulations (and for landing on the corporate equivalent of Boardwalk) to win at a real-life game, too: the financial advice business. As chief executive of Financial Engines FNGN -0.48% he has built the nation’s largest registered investment advisor, with (as of Mar. 31) $92 billion in 401(k) assets under management for nearly 800,000 workers of 553 big employers, including Alcoa AA +0.88%, Dow Corning GLW +1.01%, Ford, IBM IBM +0.99% and Microsoft MSFT +0.14%.
Savers pay Financial Engines from 0.2% to 0.6% of their 401(k) assets annually to manage their nest eggs based on modern portfolio theory, which aims to maximize the return for a given level of risk. Its computers run thousands of scenarios (known as a Monte Carlo simulation) to give each worker a picture of how much retirement income he or she is likely to have, and use an “optimization engine” to determine the best portfolio given the costs, quality and styles of the mutual funds available in each 401(k), with a preference for low-cost index funds. Clients can consult with humans manning call centers, but the advice they’ll get comes from the computer models. (For two examples of Financial Engines’ portfolio makeovers, see below.)
Now, with its baby boomer clients edging toward and past 60, Financial Engines is angling to grab a piece of another potentially big business: managing assets and income payouts for retirees.
“Retirement income … it’s a really hard problem. You’re looking at a 30-dimension probability distribution,” observes Nobel-winning economist William F. Sharpe, a cofounder of Financial Engines. While Maggioncalda’s entrepreneurial energy has built Financial Engines, the 80-year-old Sharpe, who won the Nobel in 1990 for his work on the pricing of financial assets and the relationship between risk and return, is at its intellectual core.
Back in 1996 Sharpe was offering asset allocation software he’d developed on his website for free–to, as he puts it, “give ordinary people the tools to think probabilistically about their investments.” But during a long lunch at Stanford University’s student union, Joseph Grundfest, a Stanford Law professor and former member of the Securities & Exchange Commission, persuaded him that he’d make a bigger impact with a for-profit business. “If we’re serious about changing how people behave in the real world, we’re going to need to start a company,” Grundfest told Sharpe over a second cup of coffee.
The two academics, along with the late Craig W. Johnson, an attorney who took equity positions in startups, seeded Financial Engines, and Grundfest went hunting for someone to run it. “You needed a candidate who could have an intelligent conversation about modern portfolio theory with Bill Sharpe. Right away your pool of candidates gets cut down by 99%,” he says. Grundfest settled on Maggioncalda, then a 27-year-old newly minted Stanford M.B.A. who had written a prescient case study about how the Internet could disrupt the stock brokerage business for a class taught by Intel founder Andy Grove. The three older men hired Maggioncalda to write a business plan and promised to eventually make him CEO–if he could raise the venture capital to build the business. “At that time the idea of a 27-year-old CEO in Silicon Valley wasn’t broadly accepted. Today, at 27, you’re washed up,” muses Grundfest, now 62. Continue reading…
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Lending between individuals has been around since the beginning of human civilization. It may be the world’s second-oldest profession.
But in the modern era, there is little person-to-person about it.; borrowers work with institutions who have all the power; terms can sometimes be oppressive.
The Internet is leveling the playing field. Online peer-to-peer (P2P) lending platforms are doing away with the banks that act as slow-moving, costly intermediaries, bringing pools of borrowers together with individual investors. For professional investment managers, the result is an alternative—and attractive—income asset class. (Why do I say attractive? See my personal experience and returns with one such platform below.)
Tom Myers, a San Francisco-based principal at the wealth advisory firm Brownson, Rehmus & Foxworth, was an early adopter of P2P lending. With one of his clients on the board of Lending Club, the largest of the P2P platforms, Myers opened up a personal account. The more he looked under the hood, the more he liked what he saw as an option for some of his high-net-worth clients. Five years later, Myers now has about $75 million of client funds invested in the LC Advisors Fund, a professionally managed pool. “There’s decent return for some modest risk for the kind of clientele [average investable assets of $20 million] we serve,” he says.
Chris Spence of Picayune, Miss.-based Diligentia LLC is such a champion of P2P lending that he established his investment firm partly to exploit the advantages of investing in it, as well as other nontraditional asset classes. The value proposition Diligentia offers clients is also nontraditional: Clients receive a guaranteed rate of return. Diligentia profits represent the spread between its net annualized returns and the guaranteed payments to clients. Spence’s firm reserves the right to invest clients’ funds in a variety of asset classes including, but not limited to, equity instruments, debt instruments, ETFs, real estate and, increasingly, P2P lending.
Spence started using Lending Club on a personal level in 2010 and quickly became a power user. “Once I got comfortable enough with P2P lending, I took an incremental approach in bringing in Diligentia assets,” he says. “I’ve been pleased by the net annualized returns. Both (Lending Club and Prosper) do a good job pricing their loans,” he adds, and the platform’s backtested results show accurate estimations of defaults.
Marketplace Lending
Indeed, so popular is P2P lending among the professional investment classes that some of the peerness is coming out of the process. The influx of funds is less from individuals and more from hedge funds, family offices and other institutions seeking to park private capital. Although I’ll continue to refer to it as “P2P lending,” perhaps “marketplace lending” better reflects the emerging reality.
Regardless, for investors, the best thing about P2P investing is how easy it is. There are few barriers to entry; you can get started for as little as $25. The platforms offer wide options for investors wherever they are on the risk-aversity curve. For conservative investors who want to supplement their CDs, the least risky notes on the platforms offer substantially better returns than bank certificates for modestly higher risk. For investors who want to complement their junk-bond portfolio, there are notes with correspondingly higher risk profiles. “I’ve never felt more confident in the stability of the asset class,” Spence says. “P2P is coming into the mainstream.” Lending Club has filed with the SEC to go public later this year.
Jeffrey S. Buck, an Atlanta-based principal and member of the investment team at Diversified Trust, thinks of P2P investing as an alternative to traditional fixed income. For receptive clients, he typically targets 5 to 8 percent of a client’s portfolio, often shifting money from lower-return, credit-sensitive bonds. While liquidity exists, Buck nevertheless counsels his clients to think of these assets as a five-year hold. “A key benefit offered by P2P diversification is that it has a low correlation to other asset classes in their portfolios,” he says.
Buck and the investment team at Diversified Trust analyzed P2P strategy until they had a good understanding of the expected risks and returns. “Reaction from our clients has been positive; some clients who had been receiving monthly distributions have recently elected to reinvest instead,” Buck says. “With rates low and expected to go sideways or higher, P2P is an attractive income alternative and diversifier to traditional bond strategies.”
“In the spring of 2013, Lending Club began experiencing a huge surge in investor interest from a diverse group,” says Bo Brustkern, co-founder of Lend Academy Investments, a service established specifically to help advisors and family offices invest in established and emerging P2P platforms. “Since then, Lending Club has been oversubscribed, and as a result it has restricted allocations to virtually everyone, including many family offices and advisors. While Lending Club attempts to catch up with demand, the situation today is that many large investors are still significantly delayed in putting their money to work. Eventually, we believe the marketplace will re-establish equilibrium,” he says.
P2P in Operation
Online platforms such as Lending Club and Prosper Marketplace match lenders with borrowers of varying credit risks, offering net annualized returns of around 8 to 20 percent. Investors usually take fractional shares of large numbers of notes to mitigate risk of defaults. Both platforms provide profiles of the creditworthiness of the borrowers and the performance characteristics over time of the notes they issue. The platforms then offer the notes in what is essentially an auction. Once a note attracts a sufficient number of investors, the loan is originated and serviced. Platforms charge borrowers a one-time fee and lenders a monthly service fee.
P2P loans are typically funded by specific individuals lending their own money on a fractional basis at interest to specific borrowers. For example, a note of $1,000 to a specific borrower is often funded by $25 investments from 40 different lenders. As borrowers repay the 36- or 60-month notes, the principal and interest payments are distributed proportionally to the individual lenders. Lending Club loans are $1,000-$35,000; the average is $13,913. All notes are unsecured.
Lending Club has some rigid underwriting standards. It rejects applicants with FICO scores lower than 660 and a debt-to-income ratio below 30 percent, a set of thresholds that is said to exclude over 80 percent of applicants.
Interest rates are a function of the calculated risk that the borrower won’t repay the loan. The higher the anticipated rate of default, the higher the interest rate the borrower pays and the lender can expect. Lending Club groups borrowers into seven loan grades, A through G. Within each loan grade borrowers are further categorized into five sub-grades, 1 through 5. The most credit-worthy borrowers are graded A1, the least worthy G5. Where applicants fall on that risk continuum depends on Lending Club’s assessment of their credit history. Applicants graded A1 get to borrow money at the lowest rates, currently 6.78 percent APR for 36-month notes and 7.3 percent for 60-month notes. For borrowers rated G5, the rates are, respectively, 29.99 and 28.69 percent APR. Prosper charges even higher rates for borrowers with lower credit histories.
More than three-quarters of borrowers list debt consolidation as the purpose for their loans. So it’s a no-brainer for them to borrow at, say, 11 percent from a P2P lender to retire credit card debt of 21 percent or more. Other purposes for loans include home remodeling, vehicle purchases, medical costs and even vacations. Of course, there is no guarantee that borrowed funds will be used for the listed purpose.
One-Year In: My Experience with Lending Club
To better understand P2P investing, I opened a Lending Club account in April 2013. Initially, I deposited just $275 and carefully selected 11 of the most conservative, lowest-interest-bearing A and B notes I could find. Like most fledgling investors, I dreaded defaults. Within 45 days, I started receiving daily interest and principal payments that totaled $8.46 per month, which represented a net annualized return of 9 percent. After a few months of receiving such returns, I considered that my savings accounts paid interest of 0.25 percent and my three-year CDs paid 1.5 percent. The more I researched this article, the more comfortable I got with P2P. In the following months, I began transferring idle cash to my Lending Club account, first gradually, then more aggressively.
Returns are gratifying and immediate. My Lending Club notes outperformed not only all my other self-directed investments, but all of the respectable returns my investment advisor harvested on my behalf in my retirement accounts.
Spending time on the platform, I saw that most savvy investors preferred the highest-yielding notes. In fact, there’s intense competition for the most desirable notes. Historical data seems to bear this out. The significantly higher yields (as high as 15 to 25 percent) seem to more than compensate for the very real increase in predicted defaults. My own tolerance for defaults increased.
A Random Walk Through Peer-to-Peer Lending
When I started, I wanted to see if my careful selection of notes would outperform notes selected at random. As an experiment, I created a diversified portfolio of 250 notes I individually selected, one by one. At the same time, I created another portfolio filled by an equal number of notes selected at random. To this point, I can report that I’ve found no significant difference in performance.
A number of services insist they have a better way to filter out and select the best-performing notes (see sidebar). But Renaud Laplanche, the CEO of Lending Club, insists that no loan is “better” than any other. “There is no evidence that any investor has generated better-than-average returns on the platform consistently,” he says. “[Advisors] can tailor their portfolios based on their risk appetite and objectives, but that doesn’t have a negative impact on the other investors.”
Fifteen months after starting this experiment, my account had slightly more than 4,000 notes of every risk threshold (see Figure 1). I’m only about halfway through the lifecycle of the 36-month notes and even earlier for the 60-month notes. Defaults, if they happen, tend to occur later in the process. Still, as I filed this article, I had only two notes go into default. Of course, 69 notes are in various stages of arrears and many of these will almost certainly be charged off. Interest from P2P loans is generally taxed as personal income instead of capital gains.
But in the modern era, there is little person-to-person about it.; borrowers work with institutions who have all the power; terms can sometimes be oppressive.
The Internet is leveling the playing field. Online peer-to-peer (P2P) lending platforms are doing away with the banks that act as slow-moving, costly intermediaries, bringing pools of borrowers together with individual investors. For professional investment managers, the result is an alternative—and attractive—income asset class. (Why do I say attractive? See my personal experience and returns with one such platform below.)
Tom Myers, a San Francisco-based principal at the wealth advisory firm Brownson, Rehmus & Foxworth, was an early adopter of P2P lending. With one of his clients on the board of Lending Club, the largest of the P2P platforms, Myers opened up a personal account. The more he looked under the hood, the more he liked what he saw as an option for some of his high-net-worth clients. Five years later, Myers now has about $75 million of client funds invested in the LC Advisors Fund, a professionally managed pool. “There’s decent return for some modest risk for the kind of clientele [average investable assets of $20 million] we serve,” he says.
Chris Spence of Picayune, Miss.-based Diligentia LLC is such a champion of P2P lending that he established his investment firm partly to exploit the advantages of investing in it, as well as other nontraditional asset classes. The value proposition Diligentia offers clients is also nontraditional: Clients receive a guaranteed rate of return. Diligentia profits represent the spread between its net annualized returns and the guaranteed payments to clients. Spence’s firm reserves the right to invest clients’ funds in a variety of asset classes including, but not limited to, equity instruments, debt instruments, ETFs, real estate and, increasingly, P2P lending.
Spence started using Lending Club on a personal level in 2010 and quickly became a power user. “Once I got comfortable enough with P2P lending, I took an incremental approach in bringing in Diligentia assets,” he says. “I’ve been pleased by the net annualized returns. Both (Lending Club and Prosper) do a good job pricing their loans,” he adds, and the platform’s backtested results show accurate estimations of defaults.
Marketplace Lending
Indeed, so popular is P2P lending among the professional investment classes that some of the peerness is coming out of the process. The influx of funds is less from individuals and more from hedge funds, family offices and other institutions seeking to park private capital. Although I’ll continue to refer to it as “P2P lending,” perhaps “marketplace lending” better reflects the emerging reality.
Regardless, for investors, the best thing about P2P investing is how easy it is. There are few barriers to entry; you can get started for as little as $25. The platforms offer wide options for investors wherever they are on the risk-aversity curve. For conservative investors who want to supplement their CDs, the least risky notes on the platforms offer substantially better returns than bank certificates for modestly higher risk. For investors who want to complement their junk-bond portfolio, there are notes with correspondingly higher risk profiles. “I’ve never felt more confident in the stability of the asset class,” Spence says. “P2P is coming into the mainstream.” Lending Club has filed with the SEC to go public later this year.
Jeffrey S. Buck, an Atlanta-based principal and member of the investment team at Diversified Trust, thinks of P2P investing as an alternative to traditional fixed income. For receptive clients, he typically targets 5 to 8 percent of a client’s portfolio, often shifting money from lower-return, credit-sensitive bonds. While liquidity exists, Buck nevertheless counsels his clients to think of these assets as a five-year hold. “A key benefit offered by P2P diversification is that it has a low correlation to other asset classes in their portfolios,” he says.
Buck and the investment team at Diversified Trust analyzed P2P strategy until they had a good understanding of the expected risks and returns. “Reaction from our clients has been positive; some clients who had been receiving monthly distributions have recently elected to reinvest instead,” Buck says. “With rates low and expected to go sideways or higher, P2P is an attractive income alternative and diversifier to traditional bond strategies.”
“In the spring of 2013, Lending Club began experiencing a huge surge in investor interest from a diverse group,” says Bo Brustkern, co-founder of Lend Academy Investments, a service established specifically to help advisors and family offices invest in established and emerging P2P platforms. “Since then, Lending Club has been oversubscribed, and as a result it has restricted allocations to virtually everyone, including many family offices and advisors. While Lending Club attempts to catch up with demand, the situation today is that many large investors are still significantly delayed in putting their money to work. Eventually, we believe the marketplace will re-establish equilibrium,” he says.
P2P in Operation
Online platforms such as Lending Club and Prosper Marketplace match lenders with borrowers of varying credit risks, offering net annualized returns of around 8 to 20 percent. Investors usually take fractional shares of large numbers of notes to mitigate risk of defaults. Both platforms provide profiles of the creditworthiness of the borrowers and the performance characteristics over time of the notes they issue. The platforms then offer the notes in what is essentially an auction. Once a note attracts a sufficient number of investors, the loan is originated and serviced. Platforms charge borrowers a one-time fee and lenders a monthly service fee.
P2P loans are typically funded by specific individuals lending their own money on a fractional basis at interest to specific borrowers. For example, a note of $1,000 to a specific borrower is often funded by $25 investments from 40 different lenders. As borrowers repay the 36- or 60-month notes, the principal and interest payments are distributed proportionally to the individual lenders. Lending Club loans are $1,000-$35,000; the average is $13,913. All notes are unsecured.
Lending Club has some rigid underwriting standards. It rejects applicants with FICO scores lower than 660 and a debt-to-income ratio below 30 percent, a set of thresholds that is said to exclude over 80 percent of applicants.
Interest rates are a function of the calculated risk that the borrower won’t repay the loan. The higher the anticipated rate of default, the higher the interest rate the borrower pays and the lender can expect. Lending Club groups borrowers into seven loan grades, A through G. Within each loan grade borrowers are further categorized into five sub-grades, 1 through 5. The most credit-worthy borrowers are graded A1, the least worthy G5. Where applicants fall on that risk continuum depends on Lending Club’s assessment of their credit history. Applicants graded A1 get to borrow money at the lowest rates, currently 6.78 percent APR for 36-month notes and 7.3 percent for 60-month notes. For borrowers rated G5, the rates are, respectively, 29.99 and 28.69 percent APR. Prosper charges even higher rates for borrowers with lower credit histories.
More than three-quarters of borrowers list debt consolidation as the purpose for their loans. So it’s a no-brainer for them to borrow at, say, 11 percent from a P2P lender to retire credit card debt of 21 percent or more. Other purposes for loans include home remodeling, vehicle purchases, medical costs and even vacations. Of course, there is no guarantee that borrowed funds will be used for the listed purpose.
One-Year In: My Experience with Lending Club
To better understand P2P investing, I opened a Lending Club account in April 2013. Initially, I deposited just $275 and carefully selected 11 of the most conservative, lowest-interest-bearing A and B notes I could find. Like most fledgling investors, I dreaded defaults. Within 45 days, I started receiving daily interest and principal payments that totaled $8.46 per month, which represented a net annualized return of 9 percent. After a few months of receiving such returns, I considered that my savings accounts paid interest of 0.25 percent and my three-year CDs paid 1.5 percent. The more I researched this article, the more comfortable I got with P2P. In the following months, I began transferring idle cash to my Lending Club account, first gradually, then more aggressively.
Returns are gratifying and immediate. My Lending Club notes outperformed not only all my other self-directed investments, but all of the respectable returns my investment advisor harvested on my behalf in my retirement accounts.
Spending time on the platform, I saw that most savvy investors preferred the highest-yielding notes. In fact, there’s intense competition for the most desirable notes. Historical data seems to bear this out. The significantly higher yields (as high as 15 to 25 percent) seem to more than compensate for the very real increase in predicted defaults. My own tolerance for defaults increased.
A Random Walk Through Peer-to-Peer Lending
When I started, I wanted to see if my careful selection of notes would outperform notes selected at random. As an experiment, I created a diversified portfolio of 250 notes I individually selected, one by one. At the same time, I created another portfolio filled by an equal number of notes selected at random. To this point, I can report that I’ve found no significant difference in performance.
A number of services insist they have a better way to filter out and select the best-performing notes (see sidebar). But Renaud Laplanche, the CEO of Lending Club, insists that no loan is “better” than any other. “There is no evidence that any investor has generated better-than-average returns on the platform consistently,” he says. “[Advisors] can tailor their portfolios based on their risk appetite and objectives, but that doesn’t have a negative impact on the other investors.”
Fifteen months after starting this experiment, my account had slightly more than 4,000 notes of every risk threshold (see Figure 1). I’m only about halfway through the lifecycle of the 36-month notes and even earlier for the 60-month notes. Defaults, if they happen, tend to occur later in the process. Still, as I filed this article, I had only two notes go into default. Of course, 69 notes are in various stages of arrears and many of these will almost certainly be charged off. Interest from P2P loans is generally taxed as personal income instead of capital gains.
Motley Fool - We’re now four days into the new financial year – the ASX having delivered a 17.4% return, including dividends over the past twelve months. Added to the prior year’s gain, an investor who achieved the market average return has seen their wealth swell by 44% in 24 months.
It’s almost – almost – enough to make you forget about the pain and anguish of the GFC. Certainly markets are in an optimistic mood – new floats seem to be hitting the market almost every week, and companies are wheeling and dealing in ever greater numbers, with merger and acquisition activity hitting levels not seen since last millennium.
And that’s reflected in the market’s mood.
From euphoria to pessimism and back
Two years ago, bad news was terrible, good news was bad and great news earned a shrug of the shoulders. Greece was going to hell in a handbasket, the US was in an intractable recession and the mining bust was going to be the end of us.
These days, the share market has hardly noticed Ukraine, Iraq, slowing Chinese growth or tepid corporate profit growth – it’s full steam ahead for investors, who’ve enjoyed that almost 50% two-year gain and are in a significantly happier mood.
The market is a moody and unpredictable beast… except that its moodiness is completely predictable! No, you can’t forecast when, or by how much the market will overshoot, but it always does, in both directions, as sure as night follows day.
Which of those two periods were right? The ‘endless winter’ or the ‘everything is wonderful’ phase? Probably neither – things are never so bad, or so good, as we imagine.
So as we head into this new financial year, here are some things to keep in mind.
Be prepared
There will be many predictions made. Remember that doom and gloom sells, so those are the ones that’ll be given the biggest headlines and the highest rotation on the business news. And for every prediction of doom, there’ll be a prediction of a boom. Ignore them… the success rate of pundits tends to be indistinguishable from a coin toss.
Forecasters always group around the average. You don’t lose your job for guessing that the market will return about average. If you’re wrong, at least you’ll have plenty of company. Being outlandish is never a good career move. But there’s a corollary:
Beware the forecaster who has nothing to lose. Eventually, he or she will guess right, then dine out on that (and earn a lot of money on the speaking circuit) for many years. In the meantime, they’ll be spectacularly wrong.
It’s a rare market that moves in a straight line in either direction. “The trend is your friend”, they say. That’s true… until it ends.
The laws of gravity don’t always apply to financial markets. What goes up can keep going up… but not necessarily. Looking for trends and patterns can be dangerous.
It’s always easy to explain what the market is doing… in hindsight. The future is never so clear, and the things that make the market jump or slump are usually from left field anyway. And finally…
Never, ever fall for the trap of believing that the market is efficient and rational. If it were, the GFC would never have happened, nor would the tech boom. Booms and busts happen precisely because the market is irrational.
Foolish takeaway
The stock market can seem scary, unfathomable, difficult and stacked against you. There are many ‘helpers’ who’ll only too happily reinforce those notions then offer to help you… for a hefty fee.
Despite assumptions to the contrary, successful investing hasn’t been helped by the internet, lower brokerage and a deluge of data and opinions. There’s a reason Warren Buffett moved from New York to his hometown of Omaha, Nebraska, and doesn’t have a computer on his desk!
Successful investing is buying quality businesses at attractive prices, then letting management do its work, only selling when you lose faith in the company or the shares are significantly overvalued. It’s simple, but it’s not easy, so controlling your temperament should be your New Financial Year resolution.
It’s almost – almost – enough to make you forget about the pain and anguish of the GFC. Certainly markets are in an optimistic mood – new floats seem to be hitting the market almost every week, and companies are wheeling and dealing in ever greater numbers, with merger and acquisition activity hitting levels not seen since last millennium.
And that’s reflected in the market’s mood.
From euphoria to pessimism and back
Two years ago, bad news was terrible, good news was bad and great news earned a shrug of the shoulders. Greece was going to hell in a handbasket, the US was in an intractable recession and the mining bust was going to be the end of us.
These days, the share market has hardly noticed Ukraine, Iraq, slowing Chinese growth or tepid corporate profit growth – it’s full steam ahead for investors, who’ve enjoyed that almost 50% two-year gain and are in a significantly happier mood.
The market is a moody and unpredictable beast… except that its moodiness is completely predictable! No, you can’t forecast when, or by how much the market will overshoot, but it always does, in both directions, as sure as night follows day.
Which of those two periods were right? The ‘endless winter’ or the ‘everything is wonderful’ phase? Probably neither – things are never so bad, or so good, as we imagine.
So as we head into this new financial year, here are some things to keep in mind.
Be prepared
There will be many predictions made. Remember that doom and gloom sells, so those are the ones that’ll be given the biggest headlines and the highest rotation on the business news. And for every prediction of doom, there’ll be a prediction of a boom. Ignore them… the success rate of pundits tends to be indistinguishable from a coin toss.
Forecasters always group around the average. You don’t lose your job for guessing that the market will return about average. If you’re wrong, at least you’ll have plenty of company. Being outlandish is never a good career move. But there’s a corollary:
Beware the forecaster who has nothing to lose. Eventually, he or she will guess right, then dine out on that (and earn a lot of money on the speaking circuit) for many years. In the meantime, they’ll be spectacularly wrong.
It’s a rare market that moves in a straight line in either direction. “The trend is your friend”, they say. That’s true… until it ends.
The laws of gravity don’t always apply to financial markets. What goes up can keep going up… but not necessarily. Looking for trends and patterns can be dangerous.
It’s always easy to explain what the market is doing… in hindsight. The future is never so clear, and the things that make the market jump or slump are usually from left field anyway. And finally…
Never, ever fall for the trap of believing that the market is efficient and rational. If it were, the GFC would never have happened, nor would the tech boom. Booms and busts happen precisely because the market is irrational.
Foolish takeaway
The stock market can seem scary, unfathomable, difficult and stacked against you. There are many ‘helpers’ who’ll only too happily reinforce those notions then offer to help you… for a hefty fee.
Despite assumptions to the contrary, successful investing hasn’t been helped by the internet, lower brokerage and a deluge of data and opinions. There’s a reason Warren Buffett moved from New York to his hometown of Omaha, Nebraska, and doesn’t have a computer on his desk!
Successful investing is buying quality businesses at attractive prices, then letting management do its work, only selling when you lose faith in the company or the shares are significantly overvalued. It’s simple, but it’s not easy, so controlling your temperament should be your New Financial Year resolution.
Buy stocks that are getting scarce–their price is likely to go up. That quirky strategy is behind AdvisorShares TrimTabs Float Shrink (TTFS), an exchange-traded fund that invests in companies creating a share scarcity of sorts by buying in their own stock. In the philosophy of Charles Biderman, founder and chairman of TrimTabs Investment Research, prices on Wall Street are a function not so much of earnings as of supply and demand.
That philosophy would be somewhat jarring to a student of corporate finance. Indeed, a classic theorem says that, in the absence of real-world frictions, a corporation neither helps nor hurts its shareholders when it buys and sells shares, borrows money or pays a dividend.
As for shares going up because they are in short supply, the finance professor might well ask Biderman: How could there be a scarcity of something that can be manufactured with a mouse click? Corporations can issue more shares whenever they feel like it.
They can, but they don’t. If a company like Apple AAPL +0.04% or 3M MMM +0.08% is buying its own shares in the open market, Biderman says, it’s more likely than not that the insiders expect good things from the business. TrimTabs owns both of those stocks.
If Twitter TWTR +1.74% or Alibaba is selling shares in a public offering, that could be because the smart money considers the pricing rich. Biderman doesn’t want to own stocks like those.
However quirky Biderman’s theory looks on paper, it works passably well in practice. The fund is up 96% since it opened its doors in October 2011; over the same period the S&P 500′s cumulative return is 81%.
Delving deeper into his theory about what makes Wall Street tick, Biderman describes assets–commodities or stocks–as chips in a casino. “In every market the house has an edge over the players, or the market wouldn’t exist,” he says. Commodity producers, corporate managers and Wall Street underwriters have to be compensated, or they wouldn’t bother to be in business.
What saves us, he goes on, is the fact that in a rising economy there is enough money to make the insiders happy and still leave at least a little something for ordinary investors. And ordinary investors can improve their odds by watching what the insiders are doing.
If there’s a bit of cynicism in Biderman, it could be blamed on the fact that the 67-year-old started his career as a journalist (assistant to Alan Abelson, the longtime editor of Barron’s). He got a degree at -Harvard Business School, became a Wall Street analyst and started TrimTabs, a Sausalito, Calif. boutique research firm for institutions, in 1990.
Biderman branched into money management late in life. He was just reaching Medicare age when the Float Shrink fund started taking in money. It now has $138 million.
There is no shortage of corporations doing buybacks. Standard & Poor’s researcher Howard Silver-blatt calculates that share repurchases have overtaken dividends as the principal means by which big companies disburse profits. Shareholders should be pleased. The switch to buybacks lowers their taxable income.
So corporate executives who authorize share repurchases are devoted to maximizing the aftertax wealth of shareholders? A cynic would have an alternative explanation. Buybacks also boost the value of executive stock options, to which executives are especially devoted.
Let’s pursue the cynic’s line of thinking. In a world where any corporation might rationally replace its quarterly dividend with a buyback program but only some do, what do buybacks tell us? Perhaps that the insiders at those companies see better prospects ahead. “It’s not illegal for a company [as opposed to the managers] to buy back shares on insider information or to sell on inside information if things are getting worse,” Biderman says.
You can’t put too much faith in raw share reductions, since corporate treasurers’ timing is imperfect. Buyback volume was high in 2007, when shares were expensive, then shrank in the depths of the recession, when shares were cheap.
So Biderman looks for further evidence that the share repurchases are a sign of strength. To get in his portfolio a company has to be generating more cash from operations than it is consuming in capital expenditures, and it can’t be increasing its ratio of debt to equity. That distinguishes his fund from PowerShares Buyback Achievers (PKW).
There’s another refinement. The TrimTabs analysis looks not at shares outstanding but at the “float,” the count of available shares not held by insiders. If the company is buying in shares but managers are lightening up their own holdings just as fast, then Biderman doesn’t want to own it.
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Investing Guide at Deep Blue Group Publications LLC Tokyo
China’s top leaders continue to struggle to get local and provincial governments to implement economic reforms. China’s government appears to be struggling to get local governments to implement its economic reform policies.
Following a meeting of the State Council, China’s cabinet, on Friday, Xinhua News Agency reported over the weekend that the State Council will dispatch eight inspection teams to visit local governments nationwide to investigate whether economic reforms are being properly implemented.
“Responsibility for poor implementation of policy measures will be investigated, accountability will be serious, and there will be verbal admonishments, criticism or even administrative sanctions according to laws and regulations,” the State Council said, according to Reuters.
The inspection teams will travel to various localities from June 25 to July 5. They have been asked to review implementation of 19 different policies the State Council has announced since July of last year. The State Council has ordered local governments to conduct their own internal reviews of implementation before the inspection teams begin arriving later this month.
According to Reuters, at the top of the State Council’s list is streamlining the administrative approval process to reduce the amount of red tape, an issue that Premier Li Keqiang has been particularly forceful in promoting. The report said the list also includes ecological and environmental improvements, “construction of major water projects, investment policies for non-state companies, employment of college graduates, construction of affordable housing, and efforts to ensure that the financial services industry supports the real economy.”
The State Council’s announcement came after its own meeting on Friday as well as the third meeting of the new Leading Group for Overall Reform. At the latter meeting, the Leading Group announced “a framework for pilot programs of judicial reform, a work program on judicial reform in Shanghai, and a plan to set up special courts on intellectual property rights (IPR).” Judicial reforms in part are aimed at weakening the grip of power of local leaders.
The Leading Group also debated plans for reforming the fiscal and household registration systems, both of which will be particularly important for local governments in China. At the meeting, President Xi Jinping — who presides over the Leading Group for Overall Reform — said, according to China Daily, that the main objectives of the fiscal reforms are “ensuring a clear division of power [between levels of government], reform of the tax system and stabilizing the tax burden, transparent budgeting, and improved efficiency.” Xi was also summarized as saying that he expects “a fiscal system to serve the initiatives of both central and local governments while clarifying the responsibilities of the two.”
On China’s household reforms, Xi was quoted as saying, “Accelerating reform of the household registration system is an important part of urbanization and involves hundreds of millions of rural migrants.”
He also stressed that implementation would be the key to success in all areas of reform. “The success of our blue print [for reform] will be its implementation,” Xi said. He also said that leading departments should be assigned for every area of reform. “Every single issue should have specific personnel to manage, supervise, urge and implement.”
Primer Li, who is a deputy of the Leading Group on Overall Reform and heads the State Council, also emphasized the importance of reform during an economic conference last week. “To achieve the development goals for 2014, we should better mobilize efforts from both the central and local authorities” to implement reform, Li said, according to local media. At the State Council meeting, Li also reportedly said, “My only concern is that our existing policies are really implemented.”
China’s top leaders are seeking to rebalance the economy from the current model which relies heavily on state-led investment to one more dependent on domestic consumption. This has slowed growth considerably, especially in certain provinces in western and central China that are heavily dependent on government investment and certain kinds of manufacturing.
As The Diplomat expected, local officials — who benefit disproportionally from the current model — appear to be the largest barrier to implementing the necessary reforms. The South China Morning Post reports that at a State Council meeting on May 30, Li “pounded the table as he blasted local officials for inertia in carrying out central government directives.” The new inspection teams for implementation are the latest way the central government has tried to force local governments to get in line.
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State-owned enterprises, or SOEs, have made a remarkable contribution to the growth and development of the Chinese economy over the past 30 years. They have provided a stable long-term environment for investment and encouraged the development of the state enterprise sector in line with public as well as private interests.
But SOEs are in retreat. Between 1998 and 2010, the share of SOEs declined from 37% to less than 5% by number of firms, and from 68% to 44% by assets. Calls from inside China are getting louder for further downsizing and corporate governance reforms of the still very substantial SOE sector. Under the new administration of Xi Jinping, policymakers have proposed reforms of government-backed enterprises. The question that remains to be answered is what should take the place of state ownership in the future.
A decade or more ago the answer would have been easy. The investment banks in New York or London would have advised the Chinese government to sell its stakes via secondary offerings to a mixture of banks, financial institutions and private investors, preferably foreign as well as domestic. The objective would have been to use this opportunity of state sales to create an Anglo-American type of capital market characterised by dispersed ownership and high levels of liquidity.
It is far from clear today that this strategy is right for China. A former Minister of the UK government, Paul Myners, has characterized the UK stock market as comprising ‘ownerless corporations.’ The origins of this description can be traced to the highly dispersed nature of ownership in UK stock markets, where institutions such as domestic and foreign mutual funds, pension funds and insurance companies dominate the market. Most of these investors hold too small stakes in companies to be active investors and lack the skills to understand the companies they invest in. The result is that control is vested in the company’s board members who have little ownership and often manage the business at high cost and with poor performance.
Operating as a publicly listed company is also becoming less attractive. Harvard professor Michael Jensen predicted ‘the eclipse of the public corporation’ in 1987, well before the wave of ‘going private’ started around 15 year ago. The Economist in 2012 reported that the number of listed American companies had fallen by about 37% from 1997 to 2012, while in the UK the decline was even more dramatic, at 43%. Many of the companies that have been delisted have been taken private by management and private equity funds tired of the perceived short-termism of the stock market.
It is therefore not obvious that the Chinese government should try to emulate the Anglo-American model of ownership and control. It simply may not be the best one. There is however, another reason not to follow this route and that is, in order to function effectively, the Anglo-American model is dependent on a complex set of institutions, including markets for corporate control and well-developed systems of corporate law and enforcement. China does not have many of these institutions, or rather has different institutions, and grafting Anglo-American stock markets onto the Chinese institutional structure will simply not work.
Japan’s experience of attempting to emulate US capital markets when its institutions were simply not ready for such a task is instructive. When Japan was defeated in the Second World War, the American Occupying Authority sought to dissolve and sell-off Japanese family dominated companies, the ‘zaibatsu,’ which had been implicated in Japanese militarization. Shares in the zaibatsu were sold to employees and investors in local communities. The result was that Japanese share ownership in the mid-1950s was more dispersed than the stock markets of the UK and the US. Laws were passed, including a Glass Steagall Act separating commercial and investment banking, and bankruptcy legislation and security regulation were introduced modelled on the US system.
The experiment failed and had substantial unintended consequences. Shares held by individuals were sold, and gradually accumulated by banks and other financial institutions resulting in a system of “insider” corporate cross-holdings that has only recently begun to be unwound.
Why did Japan fail to develop its capital markets along Anglo-American lines when seemingly all the ingredients were in place? The answer is that Japanese institutions were simply not developed to support the outsider system of ownership. An example is the emergence of investment funds, which have been important in both UK and US capital markets, and at one point comprised about 10% of the Japanese market. Institutions created these funds in Japan to dispose of unwanted stock and sell them to private investors but insider dealing and breaches of trust in combination with other scandals led to the rapid disintegration of this market and instead the emergence of a market dominated by corporate insiders.
What are the alternatives to Anglo-American systems that China could pursue? There are several. Oversight of SOEs could be extended through state asset management companies managing China’s sovereign wealth and state pension funds. Employee share ownership and employee-owned enterprises could be increased and the rights of workers enhanced through their representation on the boards of companies, as is widely observed in many central European corporations in Austria and Germany. Private and public pension funds similar to those found in Canada, the Netherlands and Sweden could provide the engaged, long-term, sustainable ownership that China seeks.
The main message from the experience of Japan and other countries is that whatever path China chooses, it should be tailored to its particular social and cultural context and the role that is sought of enterprises in Chinese society. While there are important lessons to be learnt from other countries, it should not be presumed that their models can be transferred from elsewhere without significant adaption to the Chinese context.
But SOEs are in retreat. Between 1998 and 2010, the share of SOEs declined from 37% to less than 5% by number of firms, and from 68% to 44% by assets. Calls from inside China are getting louder for further downsizing and corporate governance reforms of the still very substantial SOE sector. Under the new administration of Xi Jinping, policymakers have proposed reforms of government-backed enterprises. The question that remains to be answered is what should take the place of state ownership in the future.
A decade or more ago the answer would have been easy. The investment banks in New York or London would have advised the Chinese government to sell its stakes via secondary offerings to a mixture of banks, financial institutions and private investors, preferably foreign as well as domestic. The objective would have been to use this opportunity of state sales to create an Anglo-American type of capital market characterised by dispersed ownership and high levels of liquidity.
It is far from clear today that this strategy is right for China. A former Minister of the UK government, Paul Myners, has characterized the UK stock market as comprising ‘ownerless corporations.’ The origins of this description can be traced to the highly dispersed nature of ownership in UK stock markets, where institutions such as domestic and foreign mutual funds, pension funds and insurance companies dominate the market. Most of these investors hold too small stakes in companies to be active investors and lack the skills to understand the companies they invest in. The result is that control is vested in the company’s board members who have little ownership and often manage the business at high cost and with poor performance.
Operating as a publicly listed company is also becoming less attractive. Harvard professor Michael Jensen predicted ‘the eclipse of the public corporation’ in 1987, well before the wave of ‘going private’ started around 15 year ago. The Economist in 2012 reported that the number of listed American companies had fallen by about 37% from 1997 to 2012, while in the UK the decline was even more dramatic, at 43%. Many of the companies that have been delisted have been taken private by management and private equity funds tired of the perceived short-termism of the stock market.
It is therefore not obvious that the Chinese government should try to emulate the Anglo-American model of ownership and control. It simply may not be the best one. There is however, another reason not to follow this route and that is, in order to function effectively, the Anglo-American model is dependent on a complex set of institutions, including markets for corporate control and well-developed systems of corporate law and enforcement. China does not have many of these institutions, or rather has different institutions, and grafting Anglo-American stock markets onto the Chinese institutional structure will simply not work.
Japan’s experience of attempting to emulate US capital markets when its institutions were simply not ready for such a task is instructive. When Japan was defeated in the Second World War, the American Occupying Authority sought to dissolve and sell-off Japanese family dominated companies, the ‘zaibatsu,’ which had been implicated in Japanese militarization. Shares in the zaibatsu were sold to employees and investors in local communities. The result was that Japanese share ownership in the mid-1950s was more dispersed than the stock markets of the UK and the US. Laws were passed, including a Glass Steagall Act separating commercial and investment banking, and bankruptcy legislation and security regulation were introduced modelled on the US system.
The experiment failed and had substantial unintended consequences. Shares held by individuals were sold, and gradually accumulated by banks and other financial institutions resulting in a system of “insider” corporate cross-holdings that has only recently begun to be unwound.
Why did Japan fail to develop its capital markets along Anglo-American lines when seemingly all the ingredients were in place? The answer is that Japanese institutions were simply not developed to support the outsider system of ownership. An example is the emergence of investment funds, which have been important in both UK and US capital markets, and at one point comprised about 10% of the Japanese market. Institutions created these funds in Japan to dispose of unwanted stock and sell them to private investors but insider dealing and breaches of trust in combination with other scandals led to the rapid disintegration of this market and instead the emergence of a market dominated by corporate insiders.
What are the alternatives to Anglo-American systems that China could pursue? There are several. Oversight of SOEs could be extended through state asset management companies managing China’s sovereign wealth and state pension funds. Employee share ownership and employee-owned enterprises could be increased and the rights of workers enhanced through their representation on the boards of companies, as is widely observed in many central European corporations in Austria and Germany. Private and public pension funds similar to those found in Canada, the Netherlands and Sweden could provide the engaged, long-term, sustainable ownership that China seeks.
The main message from the experience of Japan and other countries is that whatever path China chooses, it should be tailored to its particular social and cultural context and the role that is sought of enterprises in Chinese society. While there are important lessons to be learnt from other countries, it should not be presumed that their models can be transferred from elsewhere without significant adaption to the Chinese context.
Review Foreign Investment Policy in Defence: Assocham
In April, the government has said that companies engaged in defence manufacturing will not be allowed to further increase foreign portfolio investment beyond August last year level.
Industry body Assocham today asked the government to review foreign investment policy, particularly related with FIIs, in the defence sector.
In April, the government has said that companies engaged in defence manufacturing will not be allowed to further increase foreign portfolio investment beyond August last year level.
This condition "goes against the principle of a stable policy framework which is needed to attract large investments in this sector", it said.
It also said that the April decision has brought the entire process of issuance of industrial licenses to domestic private sector companies to a standstill and, "therefore, be amended,", it said in a statement.
Several domestic companies have applied to the DIPP for industrial licenses to manufacture a wide range of defence products and shares of most of these companies are listed.
FIIs inflows should be encouraged in order to boost country's foreign exchange reserves, it said.
"FIIs are in no position to exercise any control over management of the affairs of Indian companies. Further there are adequate checks and balances within the existing policy framework to protect our strategic interests," it added.
The chamber said that "there is urgent need to review the existing foreign investment policy applicable to the defence sector" on the issue of FIIs investment so that the matter of industrial licenses to several Indian companies which has come to a grinding halt can be restarted and clearances can be expedited.
Speedy implementation of projects in this critical sector of the national economy will contribute in reducing country's dependence on imports, it added.
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This Article is from MoneyControl
Industry body Assocham today asked the government to review foreign investment policy, particularly related with FIIs, in the defence sector.
In April, the government has said that companies engaged in defence manufacturing will not be allowed to further increase foreign portfolio investment beyond August last year level.
This condition "goes against the principle of a stable policy framework which is needed to attract large investments in this sector", it said.
It also said that the April decision has brought the entire process of issuance of industrial licenses to domestic private sector companies to a standstill and, "therefore, be amended,", it said in a statement.
Several domestic companies have applied to the DIPP for industrial licenses to manufacture a wide range of defence products and shares of most of these companies are listed.
FIIs inflows should be encouraged in order to boost country's foreign exchange reserves, it said.
"FIIs are in no position to exercise any control over management of the affairs of Indian companies. Further there are adequate checks and balances within the existing policy framework to protect our strategic interests," it added.
The chamber said that "there is urgent need to review the existing foreign investment policy applicable to the defence sector" on the issue of FIIs investment so that the matter of industrial licenses to several Indian companies which has come to a grinding halt can be restarted and clearances can be expedited.
Speedy implementation of projects in this critical sector of the national economy will contribute in reducing country's dependence on imports, it added.
Read More on Facebook Page
This Article is from MoneyControl
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