5 Questions to Ask for Too Good to Be True Investments

When you start blogging, you never know who might read you.  At least I know that the Great Firewall of China is not blocking me yet.

Here is the e-mail I received:

Hi David

glad to write to you and I found your email in your blog

plz call me banny and I live in china mainland and do business in china. my work is capital market.

here I have 2 questions hope to discuss with you.

1 have you ever heard of chinese fixed income product named xintuo? the return rate is from 9-15% per year. do you think this kinds of product is attractive to western investor?

2 as I know us mutual fund is very good and only american can invest in it, and most of the mutual fund is not open to thos people who are not american. it there any way to invest in such mutual fund? from offshore structure?

hope to know your idea about this

banny

Dear Banny,

I do not know about xintuo.  I do know that it is very difficult to earn returns of more than 3% over government debt yields under most conditions over the long-run.  One thing I write about at my blog is thatdishonest people use high yields as a means of cheating people out of their money.

When high yields are offered, people get tempted to invest.  But how do you know whether the yields can be maintained?

  • Is there an independent auditor of the financial statements?
  • Do you get financial statements regularly from whoever guarantees the return of principal at maturity?
  • Do you know what the xintuo is doing?  If they are not transparent, I would avoid them.  With most frauds the investors had little idea of what the manager of the assets was doing.
  • Is there a neutral third-party custodian who holds the assets for the good of the investors, and not the asset manager?

Be careful here.  Many Chinese wealth management products sound like Ponzi schemes.  They promise high returns, but it is likely that they are paying exiting investors with the money of entering investors.

On American actively-managed mutual funds: a few are good, maybe 10-20% of them.  The rest are bad.  They charge high fees and deliver performance less than the market.

As to how available they are to foreign investors, I myself was solicited to mirror my strategies for European clients.  There was not enough interest, so that did not happen.  We have a saying in the US, “Where there is a will, there is a way.”  If enough foreign money wants to invest in a US mutual fund, someone will come up with a way to do it.  In China, you may have to figure out ways to circumvent currency controls, but if you can, you can do it.

I wish you the best, and if you meet some of my friends in China, tell them Elder David greets them.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.