Ten interesting things that we read last week

End of active investing, India's home loan puzzle, and many more interesting articles

Published: Jan 27, 2017

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Image: Shutterstock.com

At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended January 27, 2017.

1) The end of active investing [Source: Financial Times]
Charley Ellis has produced here perhaps the best essay on investing you will read in 2017. In this piece he discusses how unlike the 1960-1990 period, high fees charged by active funds are not sustainable. The reason is simple – the active funds just don’t make enough excess returns to justify such fees. With technology making availability of information extremely easy, the “secret sauce” of active investors: getting “the first call” has been eliminated.

The number of professionals engaged in price discovery has, over half a century, exploded from an estimated 5,000 to over 1 million. As a result, institutional investors have collectively created a global expert information network that produces the world’s largest, most effective prediction market.  The only way for active investors to outperform is to discover and exploit pricing errors by other expert professionals, all having the same information at the same time with the same computers and teams of experts having much the same talent and drive. In such a scenario, active funds face an existential crisis on an aggregate level. Of course the dismal reality will not confront all active managers equally or simultaneously. Managers least at risk will be those delivering the best results or having the best client relationships or the least demanding clients — or both. Also, managers with clearly differentiated capabilities in mathematics or clearly longer fundamental research time horizons will be under less pressure. The greatest pressure will be on large, conventionally active managers of portfolios necessarily dominated by the same large stocks that are most widely owned and most carefully priced by the professional consensus. Meanwhile, the “vice of destiny” will continue to squeeze in on layer after layer of full-fee active managers.  

2) Fear the secret agent less than the accountant [Source: Financial Times]
Gossip is one thing, evidence is another. Donald Trump knows that to his benefit and Rolls-Royce has discovered it to its cost. The US president-elect last week managed to shrug off without much difficulty a lurid dossier about his alleged activities in a Moscow hotel room and his campaign team’s supposed links with Vladimir Putin by calling it fake news. Rolls-Royce also has foreign troubles but it was unable to escape them so easily, since it faced hard evidence of misbehaviour rather than merely juicy stories. This contrast shapes the “business intelligence” industry, which has sprung up in London, New York and Washington. The industry sounds like the corporate equivalent of James Bond but it is more like a combination of accountancy and legal research. Such intelligence has its uses in business, if filtered and edited for plausibility and reliability. Even if information cannot be published or produced in court, it can help a board of directors decide whether to buy a company or enter partnership with an entrepreneur in Russia and other opaque markets. The operation is similar to an intelligence agency: by picking the brains of a network of informants in whichever unreliable country the client is interested. They might be former spies and diplomats or business people, and they will be fairly senior.

3) The great Indian home loan puzzle [Source: Livemint]
Tamal Bandyopadhyay, India’s top banking journalist, says that we are witnessing a rate war in the Rs13 trillion home loan market. Such a war is not new but there new dimensions in this round. Almost every lender has joined it either through cutting rates or tweaking the products. This is driven by liquidity as every bank is flooded with money following the so-called demonetisation exercise. Banks’ year-on-year deposit growth, which was 9.8% until October-end jumped to 14.7% in the third week of January. Along with expansion of the market, lenders are poaching each other’s customers freely as there is no prepayment penalty for the customers. The only cost a borrower incurs is the so-called memorandum of deposit charges payable to the state government. SBI made the first move by cutting its one-year marginal cost of fund-based lending rate (MCLR), the anchor for all loans, by a massive 90bps to 8%. It is now offering 8.65% rate for home loans up to Rs75 lakh; for women borrowers, it is 8.6%. HDFC and most others have matched it but Punjab National Bank (PNB) is offering a lower rate—8.50% for all home loans, irrespective of the amount. Interestingly, PNB’s MCLR is higher than SBI’s (8.45%), down 0.7% from its December level. Still, it could offer a cheaper home loan rate than SBI because it is keeping only 0.05% spread over MCLR for home loans while SBI has jacked up its spread from 0.35% to 0.65%. Bank of Baroda has gone one step ahead and is offering home loans at its MCLR—8.35%, the lowest in the market. It has linked the home loan rate to a borrower’s credit score. This is the first time lenders have explicitly linked the cost of loan to an individual borrower’s rating. Typically, the lenders look at the repayment capacity of a borrower and as long as her total outgo towards repayment of loans is about 45% to 50% of income, the lenders have no concerns in granting home loans. Bank of Baroda has changed the rules of the game. The author asks that while competition is welcome, how will some of the smaller housing finance companies that are now offering home loans at a rate lower than the cost at which they had raised funds from the market a couple of months ago, sustain it? Will the banks be able to maintain the current rate when liquidity dries up? If not, would a sudden jump in the mortgage rate after a year or two put pressure on the borrowers and affect the quality of banks’ assets?

4) Spinning toys into tools that can turn around global health [Source: Financial Times]
Manu Prakash, a bioengineer at Stanford University dug out yo-yos, spinning tops and other old-fashioned toys to see how fast they could rotate. He struck gold with a whirligig, a plaything that has entertained children since 3,300BC. It comprises of a disc — a button will do — with a length of string threaded through its centre. Repeatedly pulling the string taut causes the disc to spin at dizzying speeds. Based on their investigations into how quickly such toys can revolve, Mr Prakash and Saad Bhamla, his colleague, have designed a cheap, hand-powered centrifuge that can be used in clinics in the developing world. Their research, published last week in Nature Biomedical Engineering, is a reminder that solutions to pressing problems can be sitting right under our noses and do not always require the largesse of a billionaire.

5) The Trump deficit [Source: Project Syndicate]
Ken Rogoff, professor of economics and public policy at Harvard, argues that it is a post-financial-crisis myth that austerity-minded conservative governments always favour fiscal prudence, while redistribution-oriented progressives view large deficits as the world’s biggest free lunch. According to him, this simplistic perspective, while perhaps containing a grain of truth, badly misses the true underlying political economy of deficits. The fact is that whenever one party has firm control of government, it has a powerful incentive to borrow to finance its priorities, knowing that it won’t necessarily be the one to foot the bill. So he expects US President-elect Donald Trump’s administration, conservative or not, to make aggressive use of budget deficits to fund its priorities for taxes and spending.  

6) Scientists turn mild mannered mice into killers [Source: Financial Times]
Scientists at Yale have delved deep into ancient brain circuits to reveal neurons that can instantly turn mild-mannered mice into ferocious predators — before switching the rodents back to their normal placid selves. Investigation of various brain regions showed that the central nucleus of the amygdala was closely associated with the urge to hunt and with controlling the jaw and neck muscles required to subdue and kill prey. By manipulating brain cells in this region through optogenetics, the Yale team found one distinct set of neurons controlled pursuit and another controlled the kill. If the hunting neurons were switched on and the biting set inactivated, the mice pursued prey but could not deliver the killer bite to finish it off. The next stage in the Yale project will be to explore how sensory inputs (from the eyes, nose and ears) into the amygdala trigger predatory behaviour and to discover how the brain co-ordinates its pursuit and killing modules. The Yale research could have practical applications, such as using improved knowledge of the brain’s motor circuits that control face and jaw muscles to treat neurological diseases. Researchers in mobile robotics and artificial intelligence could also use information from the predatory brain to create a device that pounces on a moving target.

7) Meet the man who has made Mumbai’s landscape his business  [Source: Indian Express]
Much like a genius hides in plain sight, you’ve probably seen samples of Abdulla Jam’s work without even realising it, no matter where you are in Mumbai. Each time you walk into a police station, past a route map for Ganesh Chaturthi or Eid-e-Milad processions, the Mount Mary Fair or the Mumbai marathon, his name is inscribed on the bottom right corner of the chart. His is also the name the Mumbai Police has relied upon for the past quarter of a century to understand the city. Now in his 60s, the cartographer still keeps himself busy with assignments from the Mumbai Police. In this piece, he recounts is journey through the years and recalls the current and former names of streets with the same ease as the high-profile crime cases he has assisted the police with.

8) How human rights lawyers are tortured in China  [Source: NY Times]
Xie Yang, a Chinese lawyer, was encircled day and night by interrogators who blew smoke in his face, punched and kicked him, and threatened to turn him into an “invalid” unless he confessed to political crimes. Eventually, the isolation, sleepless days and nights of abuse and threats to his family from the police investigators proved too harrowing and Xie scribbled down whatever they told him to say about trying to subvert the Chinese Communist Party by representing disgruntled citizens and discussing rights cases. These records published by Xie’s attorney’s lay out the most detailed firsthand allegations thus far that torture has underpinned China’s crackdown on human rights lawyers and advocates that began in July 2015. The government detained almost 250 people in that operation, according to Amnesty International. Most were released, but four were tried and convicted last year on charges that they tried to subvert the one-party state, and about 13 are in detention and likely to face trial. Mr. Xie’s account of being locked away appeared after China’s president, Xi Jinping, sought this week to promote his government as open and mature. Mr. Xi told the World Economic Forum in Davos that economic protectionism was like a country locking itself in a dark room. Li Chunfu, a Beijing lawyer detained in the crackdown, was released early this month, emaciated and mentally shattered after nearly one and a half years in detention, according to his family and supporters. “It’s ironic that the Chinese government is calling for openness in Davos when the Chinese government is doing the opposite domestically,” said Maya Wang, a researcher on China for Human Rights Watch.

9) AI software learns to make AI software [Source: technologyreview.com]
Progress in artificial intelligence causes some people to worry that software will take jobs, such as driving trucks away from humans. Now leading researchers are finding that they can make software that can learn to do one of the trickiest parts of their own jobs—the task of designing machine-learning software. In one experiment, researchers at the Google Brain AI research group had software design a machine-learning system to take a test used to benchmark software that processes language. What it came up with surpassed previously published results from software designed by humans. In recent months several other groups have also reported progress on getting learning software to make learning software. They include researchers at the non-profit research institute OpenAI (which was co-founded by Elon Musk), MIT, the University of California, Berkeley, and Google’s other artificial intelligence research group, DeepMind. If self-starting AI techniques become practical, they could increase the pace at which machine-learning software is implemented across the economy.

10) When a buffalo is more valuable than a girl [Source: Indian Express]
This piece talks about how in a distant village in Haryana, Nathusari Kalan, as many as 61 girls were born to 42 boys in 2015, a sex ratio of 1,452. It was 852 in 2013 and 949 in 2014. As Haryana celebrates achieving 900 in sex ratio at birth [i.e. 900 girls for 1000 boys] for the first time in 15 years, Nathusari Kalan and the entire Sirsa district are among its foremost success stories. Officcials say that since the launch of the “Beti Bachao Beti Padhao” programme by Prime Minister Narendra Modi in January 2015, there has been a massive drive against sex selection, selective abortion and female foeticide, involving inter-district raids as well as at least 75 raids across the border in adjoining states such as Delhi, Punjab, Uttar Pradesh and Rajasthan. With khap panchayats also putting their weight behind the campaign, announcing that they would socially boycott people involved in female foeticide, the trickle effect is visible in Nathusari Kalan. However, not all has changed. In family after family in Nathusari Kalan, it is clear that while girls are no longer unwelcome, a family is considered complete only with a boy. They believe a son is necessary to carry the family name. Then there’s the issue of dowry. The feeling of girls as a ‘burden’ is visible from what a villager, Balwant Kasania with the seven granddaughters says, “I wonder what it would have been like if I had seven buffaloes instead. We would have been wealthy. Each buffalo is worth Rs60,000.”

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