Mutual funds look beyond chaos in Iraq

Friday, March 17, 2006
By Jennifer Levitz, The Wall Street Journal

Considering the strife bordering on civil war, this may not seem like the best time for mutual funds to put money into Iraq.

But some are doing just that. Looking for high yields -- and confident that oil reserves will be there to repay the debt -- mutual funds are among the investors quietly buying small chunks of about $2.8 billion in bonds issued by the Iraqi government in January as part of its restructuring of debts left by Saddam Hussein.

T. Rowe Price Group Inc., based in Baltimore, says about $16 million of its $558 million Emerging Market Bond Fund is invested in the new Iraqi bonds. Standish Mellon Asset Management Co., of Boston, says it has about $2 million in Iraqi bonds, spread out among some of its emerging-market mutual funds. It declined to identify the funds but said they had a total of $400 million in assets.

ING Group and Merrill Lynch & Co. recently showed up on a brokers-only computer network as bidders for the Iraqi bonds, one person with access to the system says. It couldn't be learned whether the firms were interested as buyers for their own accounts or for customers. Merrill and ING said they couldn't comment on interest in Iraq.

John Peta, a portfolio manager for emerging-market strategies at Standish Mellon, isn't surprised that the topic is touchy. "Given what's going on in Iraq, people don't want to fess up to owning" Iraqi debt, he says.

Interest in Iraq is a sign of how hungry some fund managers have become for high-yielding issues that can satisfy investors in emerging-markets bonds, which have been on a hot streak. During the past three years, diversified emerging-market funds have earned an average 36 percent annual return, according to Chicago fund-research firm Morningstar Inc. Investors put $10.1 billion into emerging-market bond funds in 2005, more than double the amount in 2003, according to Emerging Portfolio Fund Research, of Cambridge, Mass.

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http://www.post-gazette.com/pg/06076/672237.stm

I find it amazing that some people are such skeptics that they cannot see the forest because of all the trees. Iraq will one day be one of the wealthiest countries in the middle east and perhaps the world. If you think it is a fools game to invest in Iraq then you are the fool.

"Iraq will one day be one of the wealthiest countries in the middle east and perhaps the world. If you think it is a fools game to invest in Iraq then you are the fool."

The point in the first sentence may be true. But the second does not follow.

Always remember this time-honored adage: "the [financial] market can remain irrational longer than you can remain solvent."

If you invested in oil in 1850 or so knowing it would be the lifeblood of civilization -- correctly and presciently -- you still might have been broke by the time your kids inherited in say 1885.

Nasdaq logic doesnt always pay even in the long-run at times.

And as long as the number 0 exists, and the concept of default, there's always a looming downside.

Iraq has a lot of potential, human and mineral. So did the steam engine when it was prototypes in like 300 BC. When potential goes actual and starts paying dividends, for once Keynes is right -- in the long run, we're all dead.

For now Iraq and its recovery ahave no "horizon". They are junk bonds with very high risk.

(Disclaimer: I hold no long or short positions in anything Iraqi.)

Well, some spam to clear out before a comment.

As to the comment, Iraq is certianly not going to be one of the richest countries in the world, nor in the Middle East. Not in any time frame that makes sense for investments. Of course what a country does macro level and what an investment does micro level are two seperate questions.

I think it is a fools game for the little retial Iraqi dinar speculars to be speculating in currency. Thus the comment. Your lack of literacy notwithstanding. Amusing, though, this attracted comment nearly a year late.

Hi,

I'm going to be honest with you, I log on to your website at least once every week or two to read your column, I find the site interesting, I suppose that I am drawn towards people who are smarter than I am as I like to learn about them and what they think.

I lost my business last year, I had a garage business which also did car valeting and Rolls Royce hire, we had two beautiful Rolls Royce cars and two new Mercedes e class, these vehicles were used mainly for wedding hire, and we did ok, we had a very good business with lots of cashflow.
Unfortunatly the local council wanted the land for building flats on and we had to get out, so nine and a half years work went down the drain.
The council could not give a toss about me or my family, luckily we were cash rich, we owned everything, sold the cars, I even had a yacht, sold that as well, got to admit I did not enjoy that part, I loved my boat.

Anyway

I was looking on IIF today and noticed that you had posted, I am glad you did, I have read all of your posts on that site, I am and was a member when you first started posting, I have enjoyed reading your point of view.

I have purchased 30.5 million iraq dinar, do you realy think that I have made a mistake doing this, do you think I should sell? your opoinion would be welcome even if you said I am an idiot for buying these dinars.
Things do seem to be moving in the right direction over there, I have friends in the Royal marines who are on their 4th tour over there, they seem to think that Iraq is booming, with new infrastructure, new buildings going up all over the place. After R&R when they go back to Iraq, they always say how quickly Iraq is moving forward.

On a personal note, I am sorry you are ill, I lost my mother in 96, same sort of thing.
Although we dont know each other I wish you well.
See you in another life, maybe.

Best regards,

Ian Macdonald.

Actualy you dont have to reply, I think I know what the answer will be.....sell..sell....sell
Take care.
Ian.

Well, I think generally that speculating on foreign currency is not something that small-timers who are not extremely well-versed in FX.

FX is a hard market, not something to get involved in without a lot of skill.

Now, you've already put your money in.

That, frankly, I think, was an error.

But one thing you learn in finance, one has to not only not cry over spilled milk, one should not price it in to your decision going forward.

My opinion is you have to adopt a realistic view on the timeline for Iraq - it will appreciate in the long term barring political disaster, but in the long term we're all dead.

If you can afford to hold, say for ten years, I would say do so. Why not at this point?

If you can't - well, one should think about cutting one's losses and unloading.

More thoughts later, but oddly my advice is not sell, sell - only that one needs to have a cold and very unsentimental approach to the issue.

One reason I was so mean (besides it being my nature i suppose) is that the site is all emotion-driven "we only can accept rah-rah news" driven.

No matter what one is playing with in financial sector, when one starts getting sentimental, one gets fucked.

But this is an interesting area of research in "behavioural finance" - it appears people tend to make consistent errors (from an analytical point of view) in their management and response to own portfolio developments.

Returning to this, on the soldiers, while I have the utmost respect for the RM, frankly it is rare to meet soldiers with a decent sense of economics.

That being said, the problem with the analysis is that the economy and the currency may not necessarily strengthen together - there's certainly a relationship, but it's not necessirly direct.

Effectively the core error made at the site was to try to approach understanding the currency value via the GDP, when in fact one needs to think about the currency as a product which has substitutes (such as dollars).

It is entirely possible for the real economy in regions to grow (and even nationally), but the currency to lose relative value due to loss of confidence or oversupply relative to demand (i.e. printing money), etc.

Now, the Iraqi central bank seems to be behaving quite responsibly and doing a yoeman job of managing the currency under very, very difficult circumstances. However, I view it as well nigh impossible for the currency to substantially appreciate in the next 5 years.

My other observation is that it is nothing short of madness to hold physical currency, and terribly naive. The risk run that one gets stuck with bills that are unexchangeable or in a nightmare scenario where say the Iraqi government changes the currency and requires in country exchange.

All things being equal I would say if one is going to hold Iraqi currency that it would be better to hold it in a non-physical form (i.e. bank account) - although of course that has its own risks like bank failure.

Nevertheless for exposure to dinar risk, I would personally prefer to hold an asset like dinar denominated Iraqi bonds that have a core return.

Regardless, as you have an existing position with dinar exposure, like I said supra, I wouldn't say "dump it" but optimise if you have a tolerance for the possible down-side.