Good stock pickers are valuable!

Andrew Bolton has historically done well at stock pickking. That's why lots of investors are throwing money at him for his Chinese ventures.

The trust is attracting widespread interest from investors because of Mr Bolton's spectacular investment track record. More than 12,000 private investors have already registered to be sent the prospectus.

Fidelity is confident of raising $US1bn in what would be a record for a new conventional investment trust in Britain. It will take a 1.5 per cent annual management charge, which equates to $US15m.

Communication

It's important to not just have a good strategy, but to be able to communicate it as well. NAB seems to have doubters on both fronts: The Australian

Key graf:

The question now is whether the NAB narrative is understood.
Mr Clyne believes it is, but admits investors are tough critics who are keen for answers.
"We outlined our strategic view and what's critical to us is that we consistently deliver against that," Mr Clyne said.

Remember too that NAB has better resources than most to try and explain its strategy.

Once again, it's hard to beat the market..

..even if you job is to do exactly that. We're talking about fund managers here; the 'league tables' are out.

James Dunn in The Australian:

According to Phillip Gray, editorial and communications manager at Morningstar Australasia, last year 325 of 609 (or 53.6 per cent) actively managed large-capitalisation Australian share funds outperformed the S&P/ASX 200 Accumulation Index (which counts capital gain plus dividends reinvested.)

Over three years, 262 of 502 funds (or 52.2 per cent) beat the index. Over five years, the winning proportion fell to 41.7 per cent (176 of 422 funds), while 45 per cent (64 of 142 funds) came out in front after 10 years. After 15 years, 33 of 55 funds (60 per cent) were ahead.

This is no great surprise.

Apple's profits

Here's the impact of an accounting change for Apple: a new FASB standard allows them to be more aggressive in the recognition of revenue than was previously the case.

As reported in The Australian. Discussion at Gadgetophilia.com

Apple discusses the matter on the website here.

Woolworths' fails to impress

Woolies' results indicate why you need to consider macro, as well as industry and firm-specific information when looking at ratios over time.

The effects of the stimulus package mean that future sales growth may not match recent growth, as per this report in the Herald suggests:

The percentage sales growth was, however, half the gains it recorded last year when, as Mr Luscombe put it, ''we had all the moons aligned'' - lower petrol prices and interest rates, the Federal Government's stimulus package and people choosing to shop for pricier food over eating out at restaurants.

Woolworths' argument is that retail sales grew at unsustainable rates last year thanks to the stimulus package, and that a two-year growth rate comparison is more valid. Its two-year sales growth average was 6.5 per cent.

What the day traders are up to...

Certainly an alternative investment strategy to trying to identify good businesses that are undervalued, then buying and holding!

From the Sydney Morning Herald.

They are the new breed of derivatives traders: they have no clients, they trade their firm's own money using high-powered computer programs like F1 - Formula One, so-called because it is so fast - based on secret algorithms.

US sharemarket officials and Congress are mulling bans on some of their tricks. And it is so profitable, the big banks are using it. The New York Times and The Wall Street Journal have devoted pages to the dark arts of ''high-intensity'' and ''low-latency'' trading and the world of ''dark pools''.

Credit ratings agencies still under fire for their role in the GFC. Here's the Herald with the latest thoughts.

The essential conflict many of these agencies face is described here:

Critics want the cosy club inhabited by the three big credit ratings agencies to be replaced by a system with more accountability to investors, and less crippling conflicts of interest.

So what can be done to fix the credit rating agencies, seen by many as the unsung villains of the crisis?

Some suggestions include holding the firms responsible for their opinions in the courts, breaking up the oligopoly, and cutting investors' reliance on ratings. None is foolproof but each attempts to address the conflict of interest that was brutally exposed by the credit crisis.

A credit rating from one of the big three firms is virtually indispensable for companies looking to raise debt on the market. But it is now clear the incentives in the current system were skewed to encourage agencies to provide as many ratings as possible, at the expense of good advice.

For decades issuers have paid for the ratings because they need them most, and it has been in the agencies' interest to approve as many ratings as possible. However, the Bank for International Settlements says growth in structured finance - complex bundles of corporate debt - created huge systemic risks for this arrangement.

Explaining your accounts

I have mentioned in class that companies can use voluntary disclosure to explain how the accounting rules impact on their results, and also that we have seen examples of this with the adoption of A-IFRS accounting standards in Australia.

Here's one example - Westpac provided this presentation in April 2007 (note - link to pdf file).

How banks can manage earnings

No surprises, it's the loan-loss reserve. Businessweek with more details.

Inept boards - Krispy Kreme

From the New York Times (2005). Posted as KK is one of the case studies. Also shows the problems of rapid growth and franchising.

Security analysts & insider trading

The better the job you do as an analyst, the closer you get to insider trading. Apparently. An old (2005) New York Times article about the drug approval process and the work of security analysts

Stock options

From a few years back, how companies were trying to 'ignore' the requirement to expense stock options. This one was about the stressing of "pro forma" results, i.e. excluding the impact of expensing options. From the New York Times in 2005.

And a bit of background from the year before in Forbes focusing on Silicon Valley. Why hi-tech? Well that's where a large number of companies were paying large proportions of salaries as options.

Xerox and lease accounting

Here's an old one from the New York Times (by old, I mean from 2002) about Xerox's battles with the SEC over lease accounting.

And an even older one (from 2000) in Forbes about nonrecurring items that turn out to be, well, recurring.

Steven Mayne on the recent earnings results

In the Herald.

ASIC takes action against

After a long time during which ASIC has been accused of being too lenient on enforcement issues, action is taken against auditors involved in a corporate collapse.

THREE partners of accountancy giant KPMG have been banned from acting as auditors for periods of up to two years over their involvement in the $390 million collapse of the Westpoint property empire.

Leases and valuation

We were speaking this week in class about adjusting for accounting distortions. Here's a link to a recent article about capitalising operating leases by Aswath Damodaran from New York University. It's in the Journal of Applied Research in Accounting and Finance (JARAF), Vol. 4, No. 1, pp. 3-29, 2009

Here's the abstract:

When analyzing or the value of a firm, there are three basic questions that we need to address: How much is the firm generating as earnings? How much capital has been invested in its existing investments? How much has the firm borrowed? In answering these questions, we depend upon accounting assessments of earnings, book capital and debt. We assume that the reported operating income is prior to any financing expenses and that all debt utilized by the firm is treated as such on the balance sheet. While this assumption, for the most part, is well founded, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease payments are treated as part of operating expenses, but we will argue that they are really financing expenses. Consequently, the stated operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have far reaching implications for profitability, financial leverage and assessed value at firms.

Some old accounting analysis / earnings qaulity articles

Here's one by Gretchen Morgenson in the New York Times about how to spot and undo questionable accounting.

Also an old Businessweek cover story back from 2004 - Fuzzy Numbers.

News Corp - underlying economics or big bath?

News Corporation recently announced its full year 2008-09 earnings, and they included large write-downs. By large, we mean just under $US9 billion. Now we'd expect large write-downs given the impact of the "Global Financial Crisis"; but now would be a good time to take an aggressive approach to write-downs. Here's how The Australian (owned by News Corporation) reported the results. Here's the New York Times take on it. Here's the conference call transcript News held with analysts and investors.

* Photo by Flickr user oh_simone. Original photo here.

Security analysts & incentives

Not surprisingly, there still seems to be some pressure on (sell-side) security analysts to provide an optimistic outlook. Here's Andrew Main (City Beat) on analyst Brett Le Mesurier leaving the industry.

Le Mesurier's form includes being the first analyst to have put a sell on Babcock & Brown -- "not early enough" as he ruefully put it yesterday.

He's got a reputation for calling things as he sees them, which may not be an instant hit with the big corporate brokers. Take his view on NAB: "It's the worst-performing bank, and they've consistently delivered in that department."

He admitted such lines don't make him instant friends on the sell side.

"But the fund managers love it."

Australian retailing

How successfully implementing your strategy can benefit your competitors.

Matthew Stevens in The Australian:

SOMETIME before Christmas Bernie Brookes and his fellow owners of Myer Group could be given 1.5 billion reasons to thank Mark McInnes for being such a fine retailer.

This might seem a strange proposition, given that McInnes runs David Jones and is the bloke lauded for the impressive restoration of the brand and balance sheet of Australia's up-market department store operator.

* Photo from Flickr user Voice Pictures. Original photo here.