“Are PhD students being served?” (for ‘Times Higher Education’)

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“Are PhD students being served?”  by Brian Bloch

My article on Problems with supervision in Germany

was published today, 13. October 2011 for the Times Higher Education online.

An extract:

“German universities may be focused on improving their research, but doctoral students have highlighted serious flaws in their teaching.
The Deutsche Universitätszeitung (German University Newspaper), or the “duz“, has published two articles, one recently and one a few years ago, on problems associated with doctoral supervision.
A study reported by the duz in 2004, revealed that although two-thirds of students felt they were generally well supervised and did not regret doing a doctorate, serious shortcomings were nonetheless conspicuous.”  Read more>>

From where I sit – Gems in the research scrapheap (for ‘Times Higher Education’)

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T.H.E.“From where I sit – Gems in the research scrapheap” by Brian Bloch

My article was published today, 1. September 2011 for the Times Higher Education online.

An extract:

“An English-language journal has recently been launched in Germany that focuses on “failed” research. That is, it publishes material rejected by mainstream journals because it did not yield the desired results or was in some way unsatisfactory. However, the work is still useful in its own way and worth reading.”  Read more>>

Country and Regional Funds: Large Potential Profits, Real Diversification, Real but Manageable Risk

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COUNTRY AND REGIONAL FUNDS:
Large Potential Profits, Real Diversification, Real but Manageable Risk

by Brian Bloch

Published as “More Eggs in One Basket”, Bloomberg Money ISAS Guide
(ISAS – Essential Investor Guide and Information, February 2003, pp.40-42.)

Particularly since 2001, a proportion of astute equity investors have shifted their perspective out of the UK and America and into other regions which continue to boom. While shares languish back home and bonds offer security but little return, parts of Asia, Eastern Europe and elsewhere have been doing even better than the UK and USA markets at the height of the boom.

If one goes back to the fundamentals of asset allocation, it is clear that many investors favour their home countries excessively. This reduces diversification and increases risk, as so many British investors have discovered – and too late to avoid substantial losses.

There are lessons to be learned and money to be earned for those who have sufficient tolerance for risk or at least the ability to control it. With a greater than 50% rise in Indonesia over the past few months, Thailand at over 25% and South Korea yielding more than 20% last year, it is obvious that investors in the right place at the right time, are making big money, while elsewhere, people are licking their wounds.

Russia is currently being celebrated as the “bull amongst the bears”. Over the last four years, Russian equities have risen by an average of over 300%, and the broker house Troika Dialog still regards oil stocks as undervalued. Some African funds too, have done remarkably well.

In 2001, some analysts were predicting just such trends, and these analysts were right. The fact is, there is always a boom somewhere. It is not always difficult to find such regions, and before investors are at the point of “chasing trends”. Consequently, it can be argued that country funds represent a risk worth taking.

We are so used to the FTSE and Dow-Jones, that we tend to overlook how easy it is in this high-tech age, to follow indices and developments anywhere in the world. And given the misinformation and accounting scandals that are constantly breaking in the UK and USA, there is no reason to believe things are necessarily worse elsewhere. They may even be better.

The essential benefit of country funds follows from a basic principle of investment – success comes from seeking out the best opportunities, wherever they may be. Of course, moving out of familiar territory has its own risks, but then, so too did the high tech shares so close to home. and they dragged just about everything else down with them. But only everything close to home.

Nonetheless, there are real dangers, such that country funds should be handled in a very specific way. To achieve the objective of avoiding too many British shares, it is generally necessary to invest in markets that have a low correlation with the UK. Thus, a USA or broad European fund will not do the job.

Funds are the usual way of investing. Individual shares in Asia, Eastern Europe or South America would be pushing the luck of most investors too far. Here, distance and a lack of familiarity create substantial informational and monitoring problems for investors. Is generally easier to know if an entire country is doing well and likely to continue doing so, than to judge individual firms or possibly industry sectors.

Exchange rate risks put off many investors. Yet, if non-equity assets such are bonds are kept strictly within the Sterling zone, currency risks can be kept within reasonable limits. Likewise, by spreading the non-UK investments over several (but not too many!) currencies, diversification in this context also reduces risk.

And, if, for example, three funds are held, it is possible to have one aggressive holding (a Chinese fund conforms to this criterion), one that performs relatively well when things are bad in Western Europe (e.g. Eastern Europe), and one that is well balanced, such as a truly global fund. For all but the most aggressive investors, it is important to avoid the really risky ones such as those combining hi-tech with country risk. The fund Nordasia.com is a good case in point, and which has lost 80% of its value since 2000.

Risk can be controlled ever further by putting some money into country funds in developed markets. Those who went into Austria last year, fared better than in the UK. Likewise, the markets in France, Holland and Scandinavia have done better than the global or European indices. However, as always, yesterdays winners (or lesser losers!) need to be handled with care.

How much of a portfolio should be invested in country funds? Asset allocation principles and portfolio theory tell us that with the right mix, one can increase potential returns without a significant rise in risk. It certainly makes sense to have between a third and one half of one’s EQUITY investment in non-UK shares. Of that proportion, up to one half could be invested in emerging markets. American expert Frank Armstrong, argues that that an optimum in terms of portfolio theory, is “about 60/40 domestic to foreign”. Of this 40%, a prudent proportion can be gainfully invested in higher-risk country funds. In other words, country funds can be used to “spice up” about 5-10% of a portfolio.

It is advisable to limit the investment to a maximum of three or four fund groups. Too many “bits and pieces” do not reduce risk further and merely makes monitoring and corrective action difficult. Exactly what countries or regions are selected, depends on how the various regions are doing at the time, how much money is to be invested, the time span, personal preferences and so on.

Potential gains rise as the country risk and volatility of a fund rises. However, for growth-oriented investors, this does not mean that massive losses in some funds are inevitable. But what applies to any equity investment applies even more here. Economic and stock market developments in an entire country must be monitored constantly. This must be linked to formal or informal stop-loss procedures that are implemented ruthlessly, irrespective of the temptation to “hang in there” till things improve. Investors must decide in advance, when to bail out if things go wrong, at say -20% or less. However, bearing in the mind the upside potential of markets like Russia or China, such losses may be worth risking. Likewise, even though some of these funds have up-front fees as high as 5%, they can be highly profitable.

Profit-taking at prudent levels is the other side of the coin. Getting out when one is ahead is just as important as the converse. Especially in these relatively volatile markets, one needs to “cut” one’s gains sensibly and accept that timing the peak is unlikely and risky. However, with careful monitoring, it should be possible to ride the market to very respectable rates of return.

To conclude, the strategy outlined above is not for the very fainthearted. If you want low-stress investments that are low maintenance, mixed funds, bond funds and the like are what you need. However, even a moderate degree of risk-friendliness and a prudent amount of moving in and out of country or regional funds, enhances the potential performance of most portfolios.

Art as an Investment: a challenging, but potentially profitable market

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ART AS AN INVESTMENT: a challenging, but potentially profitable market

Published as “Brush Strokes” (Investing in fine art), Wealth Magazine (London), September 2004.

by Brian Bloch

Particularly for high-net-wealth individuals, a prudent investment in fine art can constitute profitable and enjoyable diversification. Experts agree that an artistic investment of between 5% and 15% of one’s total portfolio may yield both profit and pleasure.

The results can be spectacular. A drawing by a minor Spanish master purchased for $26 000 in 1998 fetched $164 800 at Sotheby’s less than six years later. Such dramatic returns are the exception rather than the rule, but there is money to be made from art.

Some experts have calculated impressive art market returns over a period in which European and other stock markets went backwards in the short run and nowhere in the medium term. Michael Moses of the New York University’s Stern School of Business, argues that the art market has outperformed the S&P 500 by half a per cent over the last 50 years. Art Market Research in London claims that prices for the top 2% of contemporary artists have risen 72% over last three years.

With financial markets currently so volatile and inflation creeping upwards, there is a strong case for diversifying into hard assets and fine art. The low correlation with both equity and bond markets suggests that art can contribute substantially to constructing an optimal portfolio. The Wall Street Journal and a number of advisers and investors regard art as a legitimate asset class alongside bonds and hedge funds.

Admittedly, the last few decades have shown that, in comparison to most other markets, the art market develops with less regularity and predictability. However, this creates as many opportunities as it does risks. The art market bears a certain resemblance to volatile and unpredictable foreign equities. Yet, as with foreign shares and funds, these art investment risks can counter other risks in a portfolio, lowering overall volatility. This principle is, after all, the basis of optimal portfolio construction.

Enthusiasm for art investment is demonstrated by the existence of a London-based Fine Art Fund, and Fernwood Art Investments in the USA are also planning art funds. These remain exclusive investments and look likely to remain so for the time being, but they indicate a significant investment trend.

Some art works are relatively conservative investments. Really wealthy investors who want a relatively safe asset with an almost guaranteed rise in value can stick to the classics, both old and new. Monet, Dali and Picasso are almost always sound purchases. Even if the same money would buy a stately home or villa, if you already have these assets, why not diversify into some luxury paintings?

Furthermore, art investment can be particularly profitable for those with good negotiation skills. Some artists really are starving, others may still be happy to negotiate and some dealers really want to sell. This is potentially one of the greatest advantages over other more conventional asset classes. Prices are not fixed and it is possible to bargain prices down as much as 50 per cent below the asking price.

All the same, there is no denying that the art market is not a straightforward one. Its complexity and lack of transparency can be daunting. The market is unregulated and understanding quality and value is tricky.

Indeed, there is more than one kind of value. There is the trade value that a dealer will pay, an auction value or minimum price (generally 40-50% of the gallery value), and then there is an ideal or hypothetical value. The purpose generally determines the relevant value concept.

There are also strange “value hierarchies” in the art market. For instance, a Dutch expert explains that as far as animals are concerned, horses fetch more than dogs which, in turn, are better investments than sheep. Even the seasons have their relative values. Paintings of winter and autumn tend to fetch more than those of spring and summer. Perhaps more predictably, pictures of flowers and fruit are better investments than skulls and dead birds.

Art expert Peter Mellor warns of some common art market dangers. Insiders inflate prices at auctions, posters are sold as prints and there is the obvious danger of forgeries and fake signatures. Transaction costs are frequently high. As in the stock market, psychological effects and subjectivity may exert a strong influence. Also, sales cannot be made in a hurry and it is not uncommon to have to wait three to six months for an auction.

Partly because of such risks, art investors need to like what they buy, want to live with it, and study both the artistic and business aspects. The art market is one in which knowledge of various kinds is critical. German art historian Beate Kemfert points out that, far more so than with equities and bonds, people are not, and should not, be indifferent to their paintings and sculptures. She explains that “nobody should buy art purely as an investment, because unless people really enjoy it, they will not bother to find out what they really need to know”.

Informational asymmetry is as familiar as in the stock market. That is, the buyer tends to know a lot more than the seller or the other way round. Precisely for this reason, investors need to make sure that this asymmetry works in their favour.

Because of the difficulty of keeping informed, investors should limit their field. Sculptures from the 80’s, photographers of the 70’s or painters of a specific time, place or genre, constitute market segments in which informed specialisation is possible. Visits to galleries, exhibitions and art fairs are all forums for gathering data as well as having a good time. Networking with the right people at arty cocktail parties can also help.

Where and how does one buy and sell? There are established and trustworthy galleries and dealers in most larger regional centres. Some regions have a particularly high concentration. For instance, in Germany, Cologne is well known for its modern and contemporary art.

Regular art fairs offer yet another dimension to the market. Art Basel has been prominent since 1970 and there is the ARCO in Madrid, Arte Fiera in Bologna, Art Frankfurt and the Art Forum Berlin. Visiting these events is always worth while to get a feel for the market in all its facets.

Since the 80’s, auction houses have become increasingly popular, even for private buyers. Art historian Christel Sieling Klinger gives some tips. The European “auction season”, she explains, reaches its peak in Autumn and the New Year. There are mixed auctions and those dedicated to specialist areas.

Auction house catalogues are important sources of information in the art market. Together with lists of prices, they provide a realistic economic orientation as well as insight as to how auctions function.

Many countries and regions have well organised associations which offer lists of dealers and auction houses. It is not difficult to locate well-established and reputable outlets, although caution and information from objective third parties remain advisable.

Like other regional markets, those for art rise and fall over time. Until the 50’s, France was the world leader, but, with its current estimated world market share of 5.6%, has been superseded by London and even more so by New York. The UK as a whole accounts for 29% of world trade and the USA for 50%. It is important to monitor such trends over time.

Buyers can and should turn to independent experts and valuers such as the British David Freeman (http://www.freemanart.ca/atists.htm). Their main tasks are to determine if a work of art is genuine and if so, what constitutes fair value. Such individuals are widely used by banks and insurance companies, and increasingly by private individuals as well. Again, most European countries have well established bodies which accredit experts and provide relevant information about them and their services.

Books, magazines and the internet provide constant information on international and national art market developments. For instance, a report on Fine Art and Antiques Market in Switzerlandcan be obtained from http://www.internationalbusinessstrategies.com/ , a research organisation based in Maryland, USA. Sites like http://www.artnewsonline.com/ provide useful and valuable investment insights.

Insurance is yet another significant issue. Especially at the upper end of the market, it is essential to have works sufficiently and reliably covered for all relevant risks. Art displayed at home must also be protected by alarms and possibly other security measures.

There are unique legal dimensions to the art world. Ownership and transfer rights sometimes cause problems and it is worth ensuring that, for instance, the seller really owns the painting! Some lawyers even specialise in this area. In any event, insurance specialists generally know the right people.

Despite the above, the impression should not be created that art investment is only for the rich. Beate Kemfert regards an entry into the market with a couple of hundred pounds as quite possible. Indeed, part of the excitement, and of optimising investment potential is finding up and coming young artists whose popularity is set to rise. Regional art associations promote young artists. Buyers with a flair for such things are often surprised to find that their modest purchases are worth considerably more over a few years.

In summary, the art market resembles others in some respects, but has its own unique characteristics. If these are exploited, rather than their becoming pitfalls, art is a sound investment for those genuinely interested in both the aesthetic and financial aspects.

Considering the appalling scandals that have beset more conventional investment markets over the last few years, branching out into aesthetically pleasing and tangible assets that one can admire daily, can be more rewarding than a piece of paper signifying title to a bond or share.