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1. Limit your investment in fringe asset classes. In recent years, investors have become infatuated with fringe sectors like emerging-market stocks, emerging-market debt, commodities, gold shares, junk bonds and REITs. There's anything wrong with having a small stake in any of these investments. But think long and hard before allocating more than 5% of your portfolio to any one of these sectors. 2. Your asset allocation mix should fit your risk tolerance. Every investor should have exposure to the broad U.S. stock market, to high-quality U.S. bonds and to developed foreign stock markets. These three core holdings should probably account for 70% or 80% of your investment portfolio, and maybe more. How you divvy up your money among these three core holdings will depend on your tolerance for risk and your need for returns. That brings us to another lesson that gets driven home every time the market tumbles: There are, within reason, no bad investment mixes -- just investors who can't live with them. In settling on your target percentages, think about what mix you can live with when markets turn volatile. 3. Excessive confidence hurts returns. Investing is always an uncertain enterprise. Yet many investors are regularly able to shed all self-doubt and make the most outrageously bold investment bets. In early 2000, investors bought tech and ended up as Wall Street road kill. A few years later, many people were absolutely certain that the stock market was a loser's game. Then share prices came roaring back. By 2005, folks were adamant you couldn't go wrong with real estate. Today, many condo flippers are suffering the consequences and REITs have taken it on the chin. The markets are trying to tell us something here -- and they aren't telling us to chase performance. The message: Not only do we need to think about risk as well as reward, but also we shouldn't be nearly so confident in our predictive powers. 4. Remember the fundamentals. When investments are hot, it can seem like there's no limit to the possible gains. Yet there are always limits -- and economic fundamentals always win out in the end. The broad market's share-price gains frequently outpace the economy's growth rate over the short run. But unless investors are willing to pay higher and higher price/earnings multiples for stocks, that can't go on forever. Home prices can climb faster than household incomes. But that isn't sustainable over the long run.
The research raises questions about the guessing game that plays out on Wall Street every earnings season. Conventional wisdom holds that executives "manage expectations," or try to keep analysts' profit estimates low ahead of profit announcements so actual reports will appear more impressive. Earnings forecasts move stock prices, although on average just 34% of S&P 500 companies issued quarterly guidance between 2001 and 2006.
“As things have gotten more globally correlated, sectors have become almost more significant than regions,” said Tim Hayes, chief investment strategist at Ned Davis Research. How would borderless investing work? Well, instead of putting some money into a domestic fund that seeks out the best energy, technology, health care and financial companies based in the United States, then investing in a separate fund that looks for the best stocks in those same sectors overseas, an individual investor might look to a globally oriented fund that scours the world for the best opportunities in each sector. For instance, while a domestic fund manager might feel compelled to invest in General Motors or Ford Motor to gain exposure to the auto sector, the manager of a borderless fund “might decide not to own any auto companies in the U.S. or in Europe — just to own them in Japan,” said Shigeki Makino, chief investment officer of the Putnam Global Equity fund. In theory, this approach allows fund managers to adhere to a very Warren Buffett-like principle: to concentrate your bets only in your top ideas, rather than watering them down through your second- and third-choice picks. There may be something to this approach. T. Rowe Price recently crunched some numbers and discovered that actively managed global funds earned a median annual return of 10.9% over the past decade, through April. That compares favorably with the 9.2% annualized gain you would have enjoyed in a divided portfolio consisting of 40% domestic stocks (represented by the Russell 3000 index of domestic shares) and 60% foreign stocks (as measured by the MSCI All Country World Index, excluding the United States). The notion of borderless investing appears to be taking hold among institutional investors. Through the first half of this year, institutional funds placed $18.7 billion into globally oriented strategies that permit managers to invest anywhere in the world, according to Eager, Davis & Holmes, a consultant to institutional managers. That is a huge jump from the $1.4 billion that was invested in this strategy in all of 2006. “The question is: Is this an anomaly, or is it something that will continue to develop going forward?” said David F. Holmes, a partner at the consultancy. An even bigger question is whether individual investors will follow institutional investors to this go-anywhere approach. Morningstar currently tracks a “world stock” fund category, which represents portfolios that are allowed to invest both inside and outside the United States. The category attracted $13.8 billion in net new money, or about 15% of all foreign-related flows, from January to May, according to the Financial Research Corporation. Fitting a globally oriented portfolio into an existing mix of domestic and foreign holdings can be challenging. Yes, you could take small slices from both your domestic and foreign portfolios and replace them with a global fund. Yet because you will never know with absolute certainty how much money your fund manager is deploying here and abroad, such a move can add a level of complexity to creating an overall asset allocation strategy. Adding to the confusion is the fact that this category of funds is still evolving. “This category has really changed,” said Bridget Hughes, a senior analyst for world stock funds at Morningstar. In the past, she noted, many world stock funds were really multimanager portfolios, with part of the assets handed to a domestically minded manager and the rest going to a foreign-stock team. But in recent years, she said, “newer funds have been introduced that are truly globally minded and view things with a single lens.” When you think about it, borderless investing is similar to the way consumers make their buying decisions, said David Antonelli, chief investment officer for non-United States equity investments at MFS Investment Management, whose MFS Global Equity fund also invests in this borderless style. “When you’re buying a TV, you might look for a model with the best picture quality, or you might look to what Consumer Reports said was is the most reliable television,” he said. “That TV might end up being a Japanese TV, but you’re not buying it because the company that made it was headquartered in Japan.” He added that “over time, this will be the same way people invest.”
Most investors who have held onto high-yield bonds (called junk bonds) or emerging-market debt for several years are still sitting on a tidy profit. Those gains were caused in no small part by the narrowing of this gap — or “spread” — between the yields on these riskier bonds and Treasuries. Over the last five years, average annual returns were 10.7% for high-yield bond funds and 15.3% for emerging-market debt funds, according to Morningstar. But the same forces started to work in reverse in the middle of June. Spreads began to widen. As a result, mutual funds that invest in junk bonds have lost about 1%, on average, over the last month, according to Morningstar. Some jittery investors have started pulling money out of junk-bond funds. They withdrew more than $900 million from them during the four weeks that ended Wednesday, according to AMG Data Services. The prices of emerging-market bonds have been steadier since they peaked early last month, and the returns on mutual funds that own these bonds have been relatively flat. But investors have still ratcheted down the amount of new money they are putting into them. Jack Malvey, the chief global fixed-income strategist at Lehman Brothers, warned investors that “there is very little chance that the outperformance of both of these asset classes will be replicated or sustained”. For one thing, their interest-rate premium over high-grade bonds has rarely been tinier. The spread between the average yield of the Lehman U.S. High-Yield Corporate Bond index and Treasuries narrowed to a record-thin 2.33 percentage points on May 23. That is less than half of the average spread over the last 20 years. This gap has since widened to around 3.25 percentage points. “There has been a repricing of credit risk, from pricing to perfection to pricing to reality,” Mr. Malvey said. Emerging-market bonds have not backed off as much from the record they set on June 1, when the average yield of the Lehman U.S. Dollar Emerging Market Bond index was just 1.39 percentage points higher than that of Treasuries, less than one-third the average spread since 1993. Since then, the spread has edged up to about 1.75 percentage points. Experts say that for junk bonds, spreads became so tight partly because nearly all borrowers in recent years have been able to repay their loans, with default rates as low as 1 or 2 percent. But Stephen Kane, a fixed-income portfolio manager at Metropolitan West Asset Management, says he does not expect this situation to last much longer. “Many of the lower-quality deals that have been brought to market over the last two years will likely result in defaults in 2008 and 2009,” said Mr. Kane. He predicted that junk-bond default rates could climb to 6 to 8 percent over the next two years. Some macroeconomic forces may be adding to the volatility of lower-quality bonds, said Martin Mauro, chief fixed-income strategist at Merrill Lynch. Mr. Mauro said he thought that economic growth would slow in the second half this year, and that such a slowdown often prompted fixed-income investors to demand more of a premium for owning riskier assets. “We think the market will be more discriminating in assessing risk going forward,” he said.
Moreover, the ratings are only meant to predict credit risk -- the risk of default. That doesn't take in the risk that the trading price of the security could fall if investors suddenly decide they don't want to own anything backed by a subprime mortgage, which is what has happened lately. In truth, the rating agencies were essentially flying blind. Most of these products were so new that they had never been tested by a market or economic downturn, and nobody could predict how they might perform. So why did so many supposedly sophisticated money managers invest so much money on the basis of such ratings? That, alas, remains a mystery.
There are ongoing troubles in the market for debt-backed by mortgages of borrowers with lower credit ratings, big losses at some hedge funds specializing in bonds, and the cloudy investment outlook has investors worrying about all kinds of risky investments. Another issue: a torrent of new low-rated bonds and loans being sold, potentially overwhelming demand. Over the next few months, more than $200 billion of below-investment-grade loans and bonds will be sold to back big leveraged buyouts announced in recent months, such as Kohlberg Kravis Roberts's $26 billion acquisition of First Data. Already, a number of planned junk-bond offerings have been withdrawn, due to limited investor interest. As a result, high-yield bonds now trade at yields that are more than three percentage points above those of Treasurys. The Bond Bears Say . . Investors should resist the urge to jump into junk-bond funds because the market is only now starting to provide more reward for the risks of these bonds, analysts say, rather than creating a rash of opportunity. In Wall Street terms, investors are "repricing risk," or putting a new, lower price on risky assets, though the price is not yet at bargain-basement levels. To wit: Junk-bond yields were as much as 10 percentage points above Treasurys five years ago. Another worry: The quality of bonds in the high-yield market has dropped in recent years, as lower-quality companies have been able to find eager investors. The Bond Bulls Say . . Bulls note that default rates remain very slim, and if the economy perks up a bit, it will be good news for junk bonds. At the same time, the recent selling has been indiscriminate, as investors sour on the entire sector, suggesting there might be some bargains for funds able to pick out strong companies that will be able to continue to make their high interest payments.
The 14 indexes included in Morningstar's initial launch track short-, intermediate- and long-term bonds in various sectors, including government, corporate and mortgage bonds, as well as the overall U.S. bond market. The indexes are appearing at a time when a clear understanding of the bond market is becoming increasingly important to small investors. The new indexes may be useful to investors because "it is more difficult to understand the risks" in a bond fund than in a stock fund, says Chris Wozniak, director of fixed income at Henderson Global Investors. Bond funds, for example, involve interest-rate risk -- when interest rates rise, bond prices tend to fall -- as well as credit risk, or the borrower's ability to make payments on the loans. Basic information on the new bond index family is now available at indexes.morningstar.com. Though the indexes are new, Morningstar has constructed more than eight years of historical performance data for the benchmarks.
Since June, the yield on 10-year Treasury notes has seesawed between 4.87% and 5.32% — and currently rests slightly above 5%. That is because the bond market can’t seem to make up its mind whether the economy is truly growing stronger, or whether troubles in the subprime mortgage market, which have already begun to hurt some hedge funds, might spill over into the broader economy. Right now, it’s hard to tell which side is winning this argument, as the “market is extremely sensitive to the news of the day — every day,” said Kimon Daifotis, chief investment officer for fixed income at Charles Schwab Investment Management. But it’s not as if the bond market is in a state of turmoil. To be sure, fixed-income volatility has risen recently. In fact, it hit a two-year high last month, according to the Merrill Lynch Move index, which measures bond volatility based on options on Treasury securities. And the fact that yields have yo-yoed their way higher recently has pushed down bond prices, which in turn has led to short-term losses in a vast majority of bond mutual funds. From June 1 to last Monday, some 2,510 of the 3,119 taxable bond funds tracked by Morningstar lost ground. Still, this is the fixed-income market we’re talking about, so the losses were generally slight. In many cases, the funds fell by less than 1%. And while bond yields are indeed higher than they were at the end of May, when it became clear that the economy was performing better than expected, long-term rates aren’t much different than they were a year ago. In fact, on June 29, 2006 — the day the Fed last voted to raise short-term interest rates — the yield on 10-year Treasury notes stood at 5.20%. Today, new 10-year notes are yielding 5.02%. So when you look at it from a longer-term perspective, the fixed-income market doesn’t look all that shaky. But on the margins, things have certainly changed. For example, if you invest in individual Treasury bonds — and plan to hold them to maturity, in which case short-term fluctuations in prices won’t matter to you — the recent jump in long-term yields “absolutely represents a buying opportunity,” said Mario DeRose, fixed-income strategist at Edward Jones. That is particularly true, he said, for investors who use a bond ladder. Some economists say they believe that long-term bond rates may rise further in coming weeks, especially if government data show that the economy grew faster in Q2 than the current consensus estimate of an annual rate of around 3%. But George Strickland, portfolio manager at Thornburg Investment Management, warned that “trying to time interest rates is harder than timing the equity markets.” And if you’re investing in a bond ladder, the chances are that you’re not looking for the absolute highest yields anyway. If you’re investing exclusively through bond mutual funds, the situation is a bit different. Keep in mind that bond funds, unlike individual securities, can’t be held to maturity because there is no single maturity date on a bond fund. Because fund investors can’t mitigate interest rate risk by holding to maturity, they may not want to venture into long-term portfolios at this time. Instead, they’ll probably want to stick with short-term funds — with an average portfolio maturity of, say, around two to three years — since their value won’t be hurt as much by rising interest rates as long-term bond funds would. The recent volatility in bonds has certainly created opportunities for investors outside the Treasury market. For example, Steven Shachat, portfolio manager of the Alpine Tax Optimized Income fund, says he finds municipal bonds “incredibly attractive now, and not just for those in the highest tax bracket.” Indeed, it’s now possible to find federal-tax-free municipal bonds in various states maturing in less than 10 years with yields of 4% or higher. If you’re in the 35 federal tax bracket, you’d have to earn the equivalent yield of 6.15% in Treasury bonds to match that 4% muni bond. That means you might be better off in a municipal bond even if you’re in a much lower tax bracket — and especially if you live in a high income-tax state like New York or California and invest in a muni bond issued there. “If you’re in the 25% tax bracket or higher, it’s a slam dunk to be in munis right now,” said Robert Millikan, director of fixed-income at BB&T Asset Management. What about corporate bonds? They may also yield some decent opportunities, though bond managers say you’re better off sticking with high-quality, investment-grade corporate securities. That’s because investors have recently been “reaching for yield.” In other words, they’ve been scrambling to find higher-yielding securities in what has been a historically low interest-rate environment. And as a result, low-quality corporate bonds aren’t yielding that much more than Treasuries. That means you won’t be paid much of a premium for taking on credit risk. Keep in mind that “the reason you buy bonds is because you want to sleep well at night and not worry about things,” Mr. Millikan said. In other words, bonds are for ballast. So why take unnecessary risks in your fixed-income holdings?
That’s the conclusion of a new study, “Information Diffusion Effects In Individual Investors’ Common Stock Purchases: Covet Thy Neighbors’ Investment Choices,” which appears in the July issue of The Review of Financial Studies. Its authors are Zoran Ivkovich and Scott J. Weisbenner, assistant professors of finance at the University of Illinois at Urbana-Champaign. The study relied on a database containing extensive information about the stock portfolios of about 35,000 households that were clients of a large discount brokerage firm from 1991 through 1996. Though the firm did not divulge these households’ identities, the database did include their ZIP codes. That let the professors determine whether investors were more likely to favor a stock if some of their neighbors were buying it or others from the same industry, too. There was strong evidence of such herding behavior. The likelihood that a household would follow the lead of other investors was greatest when they lived nearby. It tended to shrink quickly as the distance grew. One possible cause of this pattern is that investors — by word of mouth, whether over the garden fence or at the gym — learn which stocks their neighbors are buying and then tend to favor those stocks themselves. But the professors also looked into other possible causes, including the fact that some local economies are dominated by a single company or industry. In Silicon Valley, for example, investors are more apt to buy tech stocks than investors elsewhere, even if they never talk to one another about the latest hot software company. This possibility led the professors to devise a number of complex tests to determine the actual role of word of mouth in investor decisions. One of the more intriguing tests took advantage of a barometer designed by Robert D. Putnam, a professor of public policy at Harvard; it measures the level and intensity of social interaction in a community. States with the highest scores in Professor Putnam’s index were North and South Dakota; Alaska and Hawaii ranked lowest. Professor Ivkovich and Professor Weisbenner found significantly more herding behavior in high-ranking states. Over all, the professors concluded that “there is strong evidence that individuals’ stock purchase decisions are related to those made by their neighbors.” Because the time period the professors analyzed ended in 1996, it is unclear what impact, if any, the explosive growth in investment chat rooms, and of the Internet generally, might have on the word-of-mouth effect. But in his book “Bowling Alone,” Professor Putnam argues that more traditional modes of social interaction are in many ways far more powerful than those conducted over the Internet. This suggests that the word-of-mouth effect is likely to still be playing a powerful role, Professor Weisbenner indicated in an e-mail message. Is the word-of-mouth effect necessarily bad? You may be inclined to think so, especially if you have a statistical bent. But the professors are careful to stress that your neighbors’ influence may have some benefits. It may be that in an increasingly complex world, word of mouth is an efficient, inexpensive way to find out about promising opportunities. Nevertheless, there are obvious pitfalls to basing stock selections on what your neighbors are buying. One that the professors addressed is its effect on portfolio diversification. When we discuss the latest hot stocks with our neighbors, it’s unlikely that we will talk about more than just a handful of companies. As a result, this word-of-mouth effect is likely to make our portfolios too concentrated in just a few stocks. All other things being equal, underdiversified portfolios tend to be riskier than those with a broader sampling of stocks. A bigger potential problem, of course, is that individual investors, on average, don’t outperform the market. For word of mouth to have a positive effect, we need to resist the urge to buy a stock just to keep up with the Joneses; instead, we should buy it only if it survives more objective scrutiny.
To be sure, many communities still have just one or two hospitals to pick from -- and in an emergency, choosiness may not be an option even in major cities. But hospital systems are expanding, and high-profile institutions are increasingly competing for patients across broad swaths of the country. The push for more public hospital information is also part of a larger effort to improve health-care quality and ultimately lower health-care costs. Such public comparisons sometimes make hospitals and doctors uneasy, but disclosure can also inspire change, says Marc Volavka, executive director of the Pennsylvania Health Care Cost Containment Council, which analyzes data on hospitals in that state. "If in the light of day, problems are shown," he says, "that spurs improvement more than anything else you can imagine." Here is as look at the mass of data being published online: Hospital Practices: Perhaps the biggest category of data involves so-called best practices. Such data -- available from a variety of public and private entities -- tracks whether hospitals adhere to recommended guidelines for certain procedures. So you can find out, for instance, how consistently your local hospital gives heart-attack patients a kind of medication called beta-blockers, or what proportion of surgery patients get antibiotics an hour before surgery. But experts caution that sites that primarily delve into hospital processes -- rather than outcomes -- won't tell you how well patients actually fare. The best-known source for hospital data may be Hospital Compare (www.hospitalcompare.hhs.gov1), set up jointly by the federal Centers for Medicare and Medicaid Services, hospitals and other groups. The site lets consumers search by city, state or other criteria, and look up a variety of statistics comparing more than 5,000 hospitals against one another and to state and federal averages. The site covers essentially all acute-care hospitals in the country. And although it draws on Medicare data, its findings can be applicable beyond elderly and disabled patients. Other groups track similar data on best practices, including the Joint Commission, the independent nonprofit group that accredits most of the hospitals in the U.S. On the group's site, www.qualitycheck.org2, consumers can search by hospital, location or type of service and get reports on hospital practices that draw on the commission's inspections of facilities it accredits. Much of the best-practices data available focuses on three of the most common areas of hospital care: heart-attack, pneumonia and surgery. There are some groups that include a broader range of procedures. The Leapfrog Group, a not-for-profit consortium of big health-care buyers like General Motors Corp., provides hospital ratings that are available to the public at www.leapfroggroup.org3. Like Medicare's, many ratings focus on process rather than outcomes, but it collects some data of its own and analyzes 30 different practices at about 1,300 hospitals. Measures include whether hospital procedures consistently encourage hand-washing, whether specialized doctors and nurses staff intensive-care units, and whether doctors enter orders electronically in an effort to avoid errors. The assumption is that hospitals with the best practices will provide the best care, Chief Executive Suzanne Delbanco says. The group also tracks how hospitals handle "never events" -- mistakes that should never happen, like a newborn abduction or amputating the wrong leg -- but it doesn't track how often such events occur. "We're not counting problems," Ms. Delbanco says. Overall, research shows that such "best practices" tend to be good for patients, but they ultimately are just a few of dozens of elements that determine good care, hospital experts warn. "I frankly don't care whether I get a beta blocker or not -- what I want to know is whether I live or die," says Mr. Volavka of the Pennsylvania Health Care Cost Containment Council. Tracking Outcomes: Some resources, including some state governments, are increasingly publishing data on how patients actually fare -- at least for some conditions. New York's state health department, for example, combines state and federal data to let consumers compare mortality rates for cardiac surgery at all hospitals in the state. At hospitals.nyhealth.gov4, consumers can compare facilities against one another and against state averages. The site also provides some data on how often a hospital does a particular procedure, as well as some best-practices statistics such as those on the Hospital Compare site. Mr. Volavka's agency in Pennsylvania collects a broad variety of data from hospitals in the state, and publishes quarterly reports on mortality rates, readmissions and complications for some conditions, and average lengths of stay adjusted for how sick patients are, among other details. The agency's Web site -- www.phc4.org5 -- also publishes reports comparing costs and outcomes for specific procedures, like open-heart surgery, and examining the frequency of patients acquiring new infections while at different facilities. Many states gather data from hospitals for public-health and other purposes, but only about 20 provide public quality reports for consumers, says Denise Love, executive director of the National Association of Health Data Organizations. Among the others: Florida, California and Texas. To see the association's map of reporting states, see www.nahdo.org/qualityreports.aspx6. Last month, Medicare started providing some mortality information for heart-attack and heart-failure cases through Hospital Compare -- specifically, measuring how likely such patients are to die of any cause within 30 days of admission at all of the hospitals it tracks. But critics say the information is too vague to be of much use: The site indicates only whether a given hospital is better, no different or worse than national averages -- and virtually all hospitals fall into the "no different" category. (Seventeen U.S. hospitals are "better" than the U.S. rate for heart-attack deaths, and seven are "worse," for example; the rest -- 4,453 -- are labeled "no different.") A private company, Health Grades Inc. of Golden, Colo., also rates doctors and hospitals and provides information on a broader range of outcomes. The company's site -- www.healthgrades.com7 -- rates hospitals on 32 conditions and procedures, from appendectomies to heart-valve-replacement surgery. The site, which offers data on more than 5,000 hospitals, draws on Medicare billing data to calculate the rate of complications or deaths in the wake of each procedure, giving a star rating and specific percentages. Much of the information is available free on the site, which is searchable by state, procedure and other criteria. Or, for $18, the group will provide more elaborate reports, including average-length-of-stay data and price comparisons. However, you won't get much on smaller hospitals: If a facility doesn't report handling a condition or procedure at least 30 times in three years, Health Grades says its data aren't statistically significant. Some insurers and large employers provide members and employees with access to reports from Health Grades or other companies that provide similar information to clients, including Subimo, a seven-year-old Portland, Ore., company, and HealthShare Technology Inc., recently acquired by WebMD Corp. of Elmwood Park, N.J. Don't stick with just one tool, says Samantha Collier, Health Grades' chief medical officer. "Go to all the sites you can. See if you're getting similar data." End-of-Life Care: For the intrepid consumer willing to wade through volumes of statistics, the Dartmouth Medical School's Dartmouth Atlas of Health Care at www.dartmouthatlas.org8 is a gold mine of information comparing hospital practices across regions and states -- suggesting, for example, that some procedures may be overused in some areas. Aimed primarily at researchers and policy makers, much of the information is too general for evaluating individual hospitals, but it does provide copious hospital-specific data on end-of-life care. For each hospital, users can explore a variety of data, including how often patients in the past six months of life were seen by specialists and what proportion were admitted to hospice programs, as well as what proportion of patients died in the ICU. The site -- which tracks all but specialty hospitals and very small facilities, or about 4,346 facilities -- also lets users compare hospitals to one another. Beyond end-of-life treatment, the data can also help consumers gauge how aggressive a particular hospital is in its overall care, says Kristen Bronner, the atlas's editor. "We're not going to tell you go to this hospital," Ms. Bronner says. "We're going to tell you the profile for this hospital is very aggressive, specialist-oriented, high-tech probably -- they're going to try everything and you're going to see everybody." Beyond the Numbers: Although online tools make hospital comparisons more thorough than ever, experts say other factors matter too, including such abstractions as reputation. "What most consumers have to rely on is not hard data," says John Conolly, president and chief executive of Castle Connolly Medical Ltd., which publishes lists of top doctors. "Reputation becomes probably the most important thing consumers rely on." Major brand-name institutions like the Mayo Clinic, of course, are well-known even far from their home turf. But for other facilities, reputation often boils down to word of mouth. Pay particular attention to recommendations, or warnings, from people who work at hospitals you're considering, experts say. Patients should also probe beyond a hospital's general reputation -- even a good hospital may not be good at everything. "You don't necessarily want to shop your hospital in general," Dr. Collier says. "You want to shop your specific procedure or condition." And consider calling the hospitals directly: Quality departments or medical staff offices can be a good place to start. Most facilities will take pains to answer questions about how often they (and individual doctors) perform procedures, for example. They know it's bad business to refuse, Dr. Collier says. The Data Sources: Resource Description Caveat Hospital Compare www.hospitalcompare.hhs.gov Compare how well hospitals adhere to key practices that have been shown to improve patient care. Most data measure whether hospitals follow best practices, not how well patients do after treatment. Leapfrog Group www.leapfroggroup.org Compare how consistently 1,300 hospitals follow 30 practices designed to improve care. The site includes only a fraction of the country's 6,000 or so hospitals. National Association of Health Data Organizations www.nahdo.org/qualityreports.aspx See at a glance which states provide hospital data in a consumer-friendly form. Doesn't link to state agency Web sites. Agency for Healthcare Research and Quality www.talkingquality.gov/compendium/ Find links to state agencies offering reports, searchable databases and other information on hospitals and other health-care organizations. Some information is dated; follow links to state-specific Web sites. Health Grades www.healthgrades.com Compare more than 5,000 hospitals on 32 conditions and procedures, including complication and death rates. Much of the information is free, but more comprehensive reports cost $18. Dartmouth Atlas www.dartmouthatlas.com Get detailed information on how hospitals care for patients shortly before they die, including transfers to hospice programs and time spent in ICU. Designed for researchers and policymakers, very detailed data can make searches complicated. How Fund Categories Fared WSJ 7-05-2007
Top Twenty ETFs LA Times 7-08-2007 The 20 largest exchange-traded funds, by assets, ranked by their second-quarter performance.
Net new cash inflows to domestic and foreign stock mutual funds totaled $84.1 billion from January through May, down 31% from the $121.3 billion in the same period of 2006, according to the Investment Company Institute, the fund industry's trade group. While stock funds took in fewer dollars, bond funds surged in popularity. A net $79.8 billion in fresh cash flowed in during the first five months of this year, nearly four times the $21.1-billion inflow in the year-earlier period. Money market funds, which invest in very short-term IOUs and are designed to have virtually no risk of loss, took in more than either stock or bond funds. The net cash inflow to money funds was $94.3 billion in the first five months, up from $16.2 billion in the year-earlier period, although money fund investors include companies and institutions as well as individuals. To put those numbers in perspective, stock fund assets total about $6.6 trillion, bond funds hold $1.6 trillion and money market funds hold $2.5 trillion. In part, the ebbing cash flows into conventional stock funds reflect the rise of exchange-traded funds, which track broad or narrow market indexes and allow investors to better customize their stock portfolios. ETFs have mushroomed in popularity in recent years. But add in ETFs and the picture doesn't change: Total net cash inflows to conventional and exchange-traded domestic stock funds lagged behind bond fund inflows in 2006 and are doing so again this year, according to Financial Research Corp., which tracks fund data. It's Financial Research's data that show intermediate-term bonds as the single bestselling category of conventional funds and ETFs this year, with a net cash inflow of $32 billion in the first five months, double their intake in the same period of 2006. Another element of portfolio rebalancing has been the tilt toward foreign stock funds in recent years. Many U.S. investors ignored foreign markets in the 1990s. No more. On average, foreign stock funds have outperformed domestic funds every year since 2003, and that streak continues this year. As the funds' performance has surged, investors have poured in. Net new cash invested in foreign stock funds accounted for about 85% of the total inflow to all stock funds from January through May, according to the Investment Company Institute. The average domestic stock fund gained 6.4% in the three months ended June 30, lifting the first-half gain to 8.7%, according to Morningstar Inc. in Chicago. The average international stock fund jumped 8.5% in the quarter and 12.1% in the half. Large-cap stocks took the lead in the second quarter, as measured by key indexes. The total return (price change plus dividend income) of the S&P 500 was 6.3% in the quarter, compared with a 4.4% gain for the Russell 2,000 small-stock index. But the picture was mixed among mutual funds. Mid-cap and small-cap growth funds, up 7.9% and 7.2% in the quarter, respectively, fared better than large-cap growth funds, which gained 6.7%, on average.
But asset-allocation funds -- which for the study's purposes include traditional balanced funds as well as target-date and lifecycle funds which automatically rebalance investors' portfolios -- can help temper those tendencies, said Lou Harvey, president of Dalbar. Investors are likely to hold asset-allocation funds substantially longer than either equity or fixed-income funds, the 20-year analysis showed. For example, based on the average investor's behavior in 2006, an investor in an asset-allocation fund would hold it for 5.2 years, while an investor in an equity fund would hold it for only 4.3 years, and an investor in a fixed-income fund would stay put for only 3.7 years, the study projected. However, traditional performance measures show that asset-allocation funds severely underperform equity funds, the Dalbar report said. The average equity fund investor's 20-year annualized return jumped to 4.3% from 3.9% in 2006, while the average fixed-income fund investor's return was 1.7% and the average asset-allocation fund investor gained 3.7%, according to Dalbar. Nevertheless, asset-allocation funds have prevented significant losses due to fear-based selling, the researcher says.
The reason is debt. Home prices have gone up a lot, but borrowing against homes has gone up even more in almost all of the last 20 years. “Owners’ equity,” as the Federal Reserve calls the difference, is gradually eroding — a detail that millions of families ignore, focusing instead, perversely, on the rising dollar value of their homes. “People believe their homes will continue to appreciate in value,” said Mark Zandi, chief economist of Moody’s Economy.com, “so that even if they take out money and reduce their equity, it will all come back very quickly.” When they sell, most still pocket a tidy sum after paying off their loans. But millions of middle-income families don’t sell; they take out another loan, which they often spend, surveys show. And then, as the margin of potential profit — a k a owners’ equity — shrinks, it becomes a little harder for a family to weather an unexpected hardship: an illness, a layoff, a wage cut or a forced early retirement. There is less market value to borrow against in the event of such setbacks and less cash from a forced sale, particularly if the sale comes as home prices are falling, squeezing owners’ equity from the other end. Just such a squeeze appears to be under way as home prices level off and begin to drop. The stake that families have in their homes fell faster in the 12 months through March than at any time since the early 1990s, the Fed reports. At the end of the first quarter, the nation’s homeowners owned, free of debt, only 52.7 percent of their dwellings, down from 54.1 percent a year earlier and 57.5 percent at the start of the century. The decline occurred even though owners’ equity, measured in dollars, rose by an astonishing $4.3 trillion since 2000. Unfortunately, mortgage debt rose by $5 trillion. “Basically people are gradually consuming their capital,” said Edward N. Wolff, an economist at New York University who studies household wealth. “It makes the middle class in particular more vulnerable. Their homes are still their biggest saving, and that is the bottom line.” Even now, the illusion of rising equity obscures its erosion. For a family with a $50,000 mortgage and a house valued at $100,000, for example, the owner’s equity is 50 percent. Two years pass. The family borrows an additional $60,000, raising debt secured by the house to $110,000. The expected selling price, however, has risen to $200,000. True, the ratio of equity to value has fallen to 45 percent, but in a sale, the family would pocket $90,000, after paying off debt. That is nearly double the cash it would have collected two years earlier. Home prices, however, must continue to climb for this merry process to continue. Indeed, millions of homeowners seem confident that they will do exactly that over the long run, despite the drop in recent months. After all, home prices have risen in most of the country for most of the last 30 years, the exceptions being the late 1980s through the early 1990s — and, perhaps, now. Even if prices continue to fall, homeowners are likely to cut their borrowing only slowly and reluctantly, if the last year’s behavior is a guide. Using one’s home as an A.T.M., as economists like to say, has become so easy since the 1980s that it is hard to kick the habit. Home equity loans proliferated, giving families a readily available line of credit, and government encouraged lenders to reach out to low-income families, allowing them to qualify for mortgages with little (sometimes no) down payment. Mortgage lenders shed their caution, able to sell sketchy home loans on Wall Street and pass on their default risk to other investors (the perils of which have been exposed in the recent Bear Stearns debacle). The tax code has played its own special role in all of this. Congress changed the law in 1986, allowing individuals to deduct on their tax returns only those interest payments on loans tied to housing. Interest on other loans no longer qualified. With that big change, borrowing against one’s home to buy a car or an appliance or clothing or a vacation became cheaper, after taxes, than standard consumer credit. “What surprises me,” said Lee Price, chief economist for the House Appropriations Committee, “is that more people haven’t mortgaged higher percentages of their equity.” Low-income families, just scraping by, certainly have mortgaged their equity, qualifying for subprime mortgages that require very little down payment. The adjustable interest rates on these loans are now a problem. As rates rise, many poor families can no longer afford the monthly payments, or they are falling behind and into foreclosure, making the subprime crisis headline news. Subprime borrowers, however, are too few to be the major reason for the nationwide decline in owners’ equity. That honor, Mr. Wolff says, goes to a vast number of middle-class families with incomes of up to $150,000 a year and net worth of up to roughly $420,000. The culture of “own your home free of debt as soon as possible” had endured for decades. Through the 1960s and ’70s, owners’ equity ranged from 65 to 70 percent. As recently as 1983, some 52 percent of American homeowners who were 55 to 65 years old owned their homes without any mortgage debt — allowing them to be free of monthly installment payments during their retirement years. By 2004, however, that percentage had dropped to 36 percent, according to Federal Reserve data. The first sharp decline in owners’ equity — nearly three percentage points — came in 1990 as home prices dropped while borrowing held strong. The decline then continued, despite the housing boom, although at a slower pace — a fraction of a percentage point annually during most years. And then last year, another steep drop in equity kicked in, as home prices weakened but owners kept up their borrowing. “You might end up without enough pension income to pay off your mortgage, or enough equity to draw on if health costs get out of hand,” said Conrad Egan, president of the National Housing Conference. “But people seem to be saying, “O.K., I’m willing to live in that kind of environment.’ ”
The 60 economists who took part in the survey, conducted in mid-June, offered a mostly upbeat outlook for an economy that has recently sustained declines in both manufacturing and business investment, and that still faces a deepening housing slump. With consumer spending holding up, a weaker dollar propelling U.S. exports and a pickup in production and investment, they expect real GDP to grow at an annualized rate of 2.6% in the second half of this year and 2.9% in 2008. That is down from 3.3% in 2006, but much better than the 0.7% pace of the first quarter of 2007. In the consensus forecast, the moderate rate of growth will generate an average of almost 115,000 jobs a month over the next year. That wouldn't be enough to keep the unemployment rate from rising slightly by November to 4.7% from the current 4.5%, after which it would hold steady through June 2008. Forecasters put the probability of a recession over the next 12 months at 23%, down from 27% six months ago. What the outlook for growth will mean for inflation has become a major point of disagreement. An increasing number of economists worry that the battle with inflation isn't over, despite the benign message sent by recent data. As of May, the Fed's preferred measure of inflation -- the "core" index of personal-consumption prices, excluding food and energy -- was up only 1.9% from a year earlier. That compares with 2.4% as recently as February. the consensus forecast for the CPI is 3.1% for the second half of 2007. In the survey, one in five forecasters saw a resurgence of inflation as the greatest risk facing the economy. That is more than twice the proportion who saw it as the #1 risk six months ago. As a result, they now see little chance that the Fed will lower its target for short-term interest rates from the current 5.25% by December. They do, however, lean toward a cut to 5% by June 2008. Six months ago, they were betting the Fed would cut rates to 4.75% by December. Economists fret about inflation in part because the prices of food and energy have been rising so fast for so long. On average, forecasters expect overall U.S. consumer prices -- including food and energy -- to be up 3.1% in December 2007 from a year earlier, marking the fifth straight year in which the broadest measure of inflation has exceeded the core measure preferred by the Fed. Joseph Carson, chief economist at investment management firm Alliance Bernstein, sees the persistent divergence between headline and core inflation as evidence of a longer-term trend, in which the emergence of new industrial bases and consumer demand in developing nations such as China are driving up global energy and food prices. Food and energy prices are also increasingly linked: In the U.S., government efforts to promote homegrown ethanol as an alternative to imported oil have driven up the price of corn, as well as the price of meat from animals that eat it. "It's time we rethink the way we look at globalization -- it gives us lower goods prices but higher energy prices and, in this case, higher food prices as well," Mr. Carson says. "At the end of the day, food inflation is something that hits the average consumer pretty hard, as does energy. So we can't just ignore them." According to the survey, one in three economists believes that globalization, long perceived as an anti-inflationary force, is now, on balance, pushing up prices in the U.S. Together with rising wages, the higher food and energy costs are putting pressure on all kinds of businesses to raise their own prices. Tom Douglas, who owns six restaurants in the Seattle area, says his gas bill at one location has more than doubled over the past three years. The price of the beef he buys is up 50% from a year ago, and the wages of workers such as line cooks have risen about 15% over the same period. As a result, he plans to increase menu prices this year, but not enough to keep his profit margin from falling to about 3.5%, from 5% last year. "At this point we're trying to split the difference with the customer," he says. Mr. Douglas's story illustrates a second reason economists worry about inflation: Businesses are having a harder time offsetting rising costs by squeezing more output out of each worker. In recent months, productivity growth has waned, in part because businesses have kept hiring at a brisk pace even as the economy has slowed. In the first quarter, output per hour at nonfinancial corporate businesses was up only 0.3% from a year earlier -- its slowest pace since 1993. In the longer term, forecasters expect nonfarm labor productivity to grow at an annual rate of 2.2%, down from almost 3% during the decade ended in 2005. If they are right, it means the rate at which the economy can grow without fueling inflation has fallen, too. On average, forecasters set the economy's new "speed limit" at 3% growth, though several put it as low as 2.5%. That would make managing the economy more difficult for current Fed Chairman Ben Bernanke than it was for his predecessor, Alan Greenspan. "In the late 1990s, the boom in productivity allowed you to have stronger growth without inflation," says Ethan Harris, chief U.S. economist at Lehman Brothers. "Now, the fading of productivity means that even if we have moderate growth we may get some acceleration in inflation." Eking out productivity gains could prove particularly difficult in some service industries that have been creating the most new jobs, such as health care. Over the past five years, Catholic Healthcare West, which runs 42 hospitals in California, Arizona and Nevada, has managed to shave the number of full-time employees per occupied bed to five from 5.4. Now, though, Chief Financial Officer Michael Blaszyk says further efficiency gains will be harder to achieve. That is not only because regulations call for a certain ratio of nurses to patients, but also because serving an aging and more diverse population puts a greater strain on resources. If they can't pull off a resurgence in productivity, businesses face a tough choice: Raise prices or live with reduced profit margins. Judging from their outlook for corporate profits, the forecasters believe that many, like Mr. Douglas, will choose to split the difference. On average, they expect corporate profits as calculated by the Commerce Department, to grow 5.3% in 2007 and 5.6% in 2008, down from a 21.4% pace in 2006. In other survey findings, much as they did six months ago, almost one in three forecasters see a deeper housing slump as the biggest risk facing the economy over the next twelve months. "I think it's going to take a while for the lack of housing wealth creation to really sink in to the consumer psyche," says Steve East, chief economist at Friedman Billings Ramsey. The consensus estimates for the Jobless rate is 4.7% - and for 3mo Treasury on Dec 31st - 4.90% and 10 year Treasury - 5.16%. Monthly Employment Stats
Health care employment grew by 30,000 in June, with gains in hospitals (+14,000) and in nursing and residential care facilities (+8,000). Over the year, health care employment has expanded by 371,000. Employment in social assistance was up by 13,000 over the month. This industry has added 84,000 jobs in the last 12 months. Retail trade employment edged down in June. General merchandise stores lost 10,000 jobs over the month, and smaller declines occurred among other retail industries. Food services and drinking places added 35,000 jobs in June. Employment in this industry has risen by 387,000 over the year. In June, wholesale trade employment increased by 20,000, with gains in both its durable and nondurable components. Employment in government continued to trend up in June (+40,000). Over the year, state and local governments together added 347,000 jobs, while federal employment was about unchanged. Professional and business services employment was little changed in June. During the first 6 months of 2007, job growth in the industry averaged 13,000 per month compared with an average of 42,000 per month in the last half of 2006. In financial activities, employment in credit intermediation and related activities fell by 9,000. This loss was partially offset by a job gain in securities, commodity contracts, and investments (+6,000). Manufacturing employment continued to trend down in June (-18,000). Job losses occurred in several component industries including primary metals (-5,000), computer and electronic products (-4,000), wood products (-4,000), and textile mills (-2,000). Partially offsetting the declines, machinery (+6,000) and beverages and tobacco products manufacturing (+3,000) added jobs over the month. Elsewhere in the goods-producing sector, employment in construction was little changed over the month. Since its most recent peak in September, construction employment has declined by 44,000. In June, the average workweek for production and nonsupervisory workers on private nonfarm payrolls increased by 0.1 hour to 33.9 hours, seasonally adjusted. Weekly hours for factory workers rose by 0.2 hour to 41.3 hours, while factory overtime hours increased by 0.1 hour to 4.3 hours. The index of aggregate weekly hours of production and nonsupervisory workers on private nonfarm payrolls rose by 0.5 percent in June to 107.8. The manufacturing index increased by 0.3 percent to 95.6. Average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls increased by 6 cents, or 0.3 percent, in June to $17.38, seasonally adjusted. This increase followed gains of 4 cents in April and 7 cents in May. Average weekly earnings grew by 0.6 percent over the month to $589.18. Over the year, both average hourly and weekly earnings rose by 3.9 percent.
Quick Facts, Stats & Opinions Why Car Dealers Do Not Like Cash Micheline Maynard, NY Times 7-28 Cash-paying customers are less welcome than buyers who want to lease or finance their cars. “We actually love all paying customers,” said George Borst, the chief executive of Toyota Financial, “but we really want people to finance.” Buyers who pay cash, whether they write a check or borrow the money elsewhere and bring it to the showroom, provide car dealers with fewer opportunities to make money on a car deal. That ranges from the cut they get from arranging a lease or loan, to options like extended warranties or antirust coating that buyers are more likely to choose if they can fold it into the amount they borrow. In some cases, those extras account for up to 75% of a showroom’s profits. Some 11.7% of buyers paid cash for cars in the first half of this year, versus about 8% over the last few years, according to a survey by CNW Marketing Research, which studies car buying habits. In all, about 26% of buyers are bringing cash to the table, whether it is out of their bank accounts or in pre-arranged loans through their credit unions, banks or home lenders, according to the Power Information Network, the research arm of J. D. Power & Associates. Cash-paying buyers, who tend to be wealthier than typical consumers, are often reaping investment profits. This year, 34.8% paid for their cars by selling stock, the most common source of cash, compared with 31.8% who took money out of their savings, Mr. Spinella’s data showed. At brands like Mercedes-Benz, Volvo, Audi and BMW, as many as one-third of transactions are cash sales. Our Microbial Cells Outnumber the Cells that Make Us Human Robin Moroney, WSJ 7-06 The human body contains about 10 times as many microbial cells as human cells. These micro-organisms, including bacteria and yeasts, perform a host of tasks, including helping with food digestion and making vitamins and amino acids that human cells can’t produce. Scientists have known little about the microbes until recently, with the advent of new genetic-sequencing machines that can rapidly identify the DNA that make up the microbes’ genes. A major finding in the nascent field of “metagenomics,” came in a Washington University School of Medicine study of obesity that suggested that overweight individuals tend to have different kinds of microbes in their gut than lean people. Follow-up research on mice revealed that the kinds of microbes that obese humans had in abundance break down food more efficiently than other kinds of microbes. This means an obese person could eat the same food as another person but extract more calories from it. Some microbiologists also hypothesize that the disappearance of certain microbes from the general population, thanks to such changes as cleaner drinking water and wider use of antibiotics, might lie behind some broad health trends. For example, Martin Blaser, a microbiologist at New York University, has in preliminary research linked the absence of a gut microbe called Helicobacter pylori to asthma, possibly by causing the immune system to function abnormally. He says nearly everyone used to be infected with H. pylori (most famous for its link to stomach ulcers), but only 10% of U.S. children have it now. Nationwide, about $500 billion in so-called hybrid ARMs are scheduled to reset over the next 18 months, with an average increase in monthly payments of 30%, according to the investment bank JPMorgan Chase. However, most subprime borrowers already are stretched financially and may not be able to make higher payments. On top of that, this year's adoption of tougher credit standards by mortgage lenders - and stagnant or falling house prices in most areas - are making it hard for those borrowers to qualify for new loans. The result, according to Mark Zandi, chief economist at Moody's Economy.com in West Chester, will be a surge in defaults this year and next that could cost investors in securities backed by subprime and other risky mortgages more than $100 billion. The accompanying rise in foreclosures is adding to the record supply of houses on the market, putting further pressure on an already weak housing market, Zandi said Thursday. (Harold Brubaker, Philadelphia Inquirer 7-29) Less than a week after the S&P 500 joined the Dow in record territory, bets in the options market that the index will fall 10% are now double those that it will rise. “That ratio had been in place for a month, the longest period since Bloomberg began to collect the data in 1995,” according to Douglas McIntyre of 24/7 Wall Street. “It has been four years since the market dropped 10%, but slow earnings and problems in the subprime market could converge to take prices down,” Mr. McIntyre says. (Worth Civils, WSJ 7-17) Since the Dow is weighted by share price instead of market cap, stocks trading at higher prices, such as Boeing and Cat, have more impact than those at lower prices, like Microsoft and Citi. In fact, notes Chad Brand, president of Peridot Capital Management, materials and industrials account for a “whopping” 35% of the Dow due to their high share prices, “which may not be shocking given the name of the index.” Those two groups “have been leading the market higher, so it is not surprising that the Dow has been soaring,” Mr. Brand says. “On the other hand, financial services firms have been lagging this year, but they only account for 14% of the Dow.” (Worth Civils, WSJ 7-17) Second-quarter profits, excluding one-time items, among Standard & Poor's 500 companies are expected to be up just 4.4% from a year ago, according to Thomson Financial. Third-quarter earnings are forecast to rise 6.2%, a far cry from the double-digit growth rates registered in the past few years. But analysts see a quick return to robust earnings gains -- their projection for the fourth quarter is a 12.3% year-over-year increase. Analysts might have been expecting the housing market to be out of the woods by year's end. The other key to their forecast change is the outlook for consumer-discretionary companies, which include restaurants, retailers, auto makers and other companies that cater to consumers. The sector has been hit hard. Consumer-discretionary earnings were down 7% in the first quarter from a year earlier, and they are projected to be down 10% in the second quarter. But analysts see the sector's profits bouncing by 25% in the fourth quarter as the economy picks up speed and earnings by auto makers and home builders rebound. (Scott Patterson, WSJ 7-12) Despite all the worries about U.S. economic competitiveness, the U.S. remains both the world’s largest magnet for foreign direct investment and the biggest source of such cross-border investment. Among industrialized countries, the U.S., the United Kingdom and Luxembourg were the biggest recipients of foreign direct investment in 2006, while the U.S., France and Spain were the biggest investors, a recent tally by the Organization for Economic Cooperation and Development found. A separate tally of FDI by the United Nations finds the U.K., U.S., China, France and the Netherlands were the biggest recipients of foreign direct investment in 2005, in that order. (Deborah Solomon, WSJ 7-06) Hedge Fund / Private Equity News Briefs For the ninth consecutive quarter, venture capital investment has experienced positive growth, reaching its highest dollar and deal volume since 2001 with an 8% gain in the second quarter, according to the Quarterly Venture Capital Report by Ernst & Young and Dow Jones VentureOne. The increase translates into VC investment of $7.4 billion in 717 transactions. “For more than two years, we’ve seen steady growth in the amount of venture capital invested and the promising liquidity markets – on the public exchanges for technology companies and primarily in mergers and acquisitions for health-care companies –look to be driving investor optimism, says Jessica Canning, VentureOne’s director of global research. Healthcare currently accounts for one-third of all VC dollars, with medical devices seeing a 58% jump in investment from a year ago to $1 billion, representing nearly half of the $2.4 billion invested in the sector. Information technology continues to dominate VC investment, raising $4.1 billion of the total in 435 deals, while information-service companies inch toward the billion-dollar mark for the first time with $979 million in 131 deals, a more than 50% jump in both dollars and deals. (Hedge Fund Daily 7-24) Hedge fund presence in the credit derivatives market is so great that they may magnify volatility in a down market, Fitch Ratings says. In a survey of banks, insurers and money managers, the rating service says hedge fund growth in the sector has been nothing less than “dramatic,” as HFs account for 60% of credit-default swap trades and one-third of collateralized debt obligations, according to Greenwich Associates figures. Credit derivatives have been on a tear, with the sale of $50 trillion of them last year alone – a 113% surge from a year earlier, and 15 times greater since Fitch started surveying the sector in 2003. Fitch found that Morgan Stanley was the most frequent trader in the contracts, with Deutsche Bank, Goldman Sachs Group and JPMorgan Chase rounding out the top five. In all the top 10 firms are grabbing an ever-larger share of the total market, 89% in the latest Fitch study, up three percentage points from the previous survey. “For better or worse,” stated Fitch analysts in their report, “counterparty concentration appears to remain a feature of this market.” According to the report, a number of respondents “expressed concern for how smoothly the market can deal with an eventual downturn in the credit cycle,” citing worries over liquidity, “the impact that unwinding of system leverage can have on volatility, and settlement following a credit event.” (Hedge Fund Daily 7-19) Hedge funds experienced a growth spurt in the second quarter, gaining 5.25%, compared with 2.1% in 1Q, according to Morningstar. Leading all strategies in the second quarter were emerging-market funds, which averaged 9.7% on the strength of China-focused funds as the Mainland market staged a recovery, and growth was further fueled by energy markets in Brazil and Russia. Other top performers in 2Q are equity-net long (5.84%), equity-variable (4.87%), event driven (4.82%), merger arbitrage (3.45%) and convertible arbitrage (2.66%). Citing figures from Thomson Financial, Morningstar notes that merger arbitrage can credit its performance to a 62% growth in M&A activity. “Overall, all hedge fund categories produced consistent returns and continued to contribute positively in 2007 year-to-data returns,” Carey Teichman, a Morningstar analyst, said. “Strong economies in emerging markets and a rise in global equities pushed hedge fund returns upward this year.” But not far enough to rise above other indices for the quarter. According to Morningstar, hedge funds lagged behind the S&P500 index, which rose 5.81% in the second quarter, and MSCI World Index, which was up 5.82%. Year to date, however, hedge funds have gained 7.77%, ahead of the S&P500’s 6%, but behind the MSCI World Index at 8.01%. (Hedge Fund Daily 7-17) Home Page Previous Factoid Top Sites
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