The Asian crisis of 1998 has raised a number of questions about the approach of fund managers in the ...
Warland said that much of the criticism aimed at investment funds has come from the emerging economies themselves, with allegations that mutual funds pulled out and added to the instability.
He said: "The figures generally do not bear that out. I might put the question the other way. Why were mutual funds in these economies in the first place and why did they not pull out earlier and faster than they did?"
It may be, Warland added, that there is a degree of delusion amongst some fund managers and investors.
"Certainly one analysis of the behaviour and performance of US emerging market mutual funds suggested that the returns from the emerging market funds, when risk-adjusted on a Sharp ratio basis, had been less than for US Treasury Bills. This suggests a basic failure of analysis by some investors.
"The fact that the fund managers went into these markets and did not get out in good time also suggests a failure of analysis by the managers themselves who, presumably, should have paid attention to a number of features of these markets that have now become well known, such as the weakness of the banks and the financial institutions.
"It is not as if this was a lesson that we were learning for the first time. The history of Japan over the past 10 years has shown what happens when a robust, and in this case a developed economy, has poorly supervised and almost insolvent financial institutions."
Other features of the emerging markets saga should also give investors pause, Warland said.
"It appears that some investment analysts and managers from developed countries were applying the same valuation techniques to emerging market stocks as they would do in liquid developed markets such as London and New York. Certainly in Malaysia there was the same attraction to companies with high P/E ratios.
"One wonders whether financial information on companies was taken at face value, when monies raised from both equity and bank debt was being passed through to affiliated companies, often family owned, never to return to the listed company in which it had been invested."
"If this is not necessarily a case for greater regulation of the international investment fund industry, there nonetheless may be a case for sounding some warning notes. My first question would be 'what is your benchmark?' There is no doubt that indexation in less developed countries, particularly those with relatively illiquid stockmarkets, is a recipe for disaster."
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