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Postcard from America

Nothing seems to be behaving in a rational manner at the moment. The weather has been particularly odd.

eturning from the US last week – the Sunshine State of Florida, no less – I had to confess to those who said how well I looked that it was more wind burn and rust than sun.

Eastern America has been suffering hugely from adverse weather conditions. If there was one tip I brought back that seemed surefire, it must be to buy orange futures.

The market has been just as fickle. Shares, which ended the last decade on a wave of renewed confidence, have been weighed down by fears of sovereign default and slowing economic performance. Yet last week’s rebound recovered much of the ground given up.

Not that the news has improved. If anything, what has come out recently adds to the obscure picture being painted for equity investors. Even Barclays’ sterling results owed much to the sale of BGI.

Once in the US, you could be forgiven for thinking the rest of the world had ceased to exist. Coverage of global events was non-existent, except where there was a direct connection, like Afghanistan. But American financial pages made interesting reading, particularly the article I spied on the treacherous traits of exchange traded funds.

I am quite a fan of ETFs, though not enough to have bought any yet. The concept is great. An accurate index tracker, kept on course by market forces, open-ended, yet with a low total expense ratio. Who could ask for more?

But the author of this down-to-earth piece believes the very popularity of ETFs could prove their downfall. I particularly liked the first line of this lesson on why it is wrong to regard any investment as a one-way street: “Investors haven’t thirsted for something so cheap and liquid since prohibition.” The Americans are brilliant at soundbites.

Yet in the end, it would seem that rather than a systemic collapse, it is over-trading and over-specialisation that are the main fears.

The truth is, though, that some of these vehicles are now huge and very widely used by all manner of investors. SPQR Trust, with close to $70bn invested, is now the US’s biggest stock mutual fund. It was only launched 17 years ago. The number of new launches and the money committed to this particular sector of the market continues to grow apace. A real reversal of sentiment could have interesting consequences.

Some concerns have also been raised over counterparty risks. Although it is hard to see how these might affect a broad, equity-based fund tracking a single, liquid index, it is the new indices that cause greatest concern. Aside from anything else, how is a humble private investor or adviser meant to judge an index with little track record and indeterminate liquidity? Here, as anywhere, care is crucial.

To return to the American propensity to turn a nifty phrase, last week I met Ben and Jerry of ice cream fame at a broadcasting studio. I was there to comment on markets. They were promoting the fairtrade approach of their ice cream manufacturer, now part of Unilever.

After the broadcast, I remarked on the lack of recycling points in the US. They replied that the UK does the civilised things well – recycling, energy conservation and fair trade. What Americans excel in is greed.

Brian Tora (brian.tora@ is principal of the Tora Partnership


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