The race for US Presidential elections is in the final stretch and it is getting very serious. The presidential debates might be Romney’s best chance to catch up with Obama—it may be the last roll of the dice
President Obama’s poll numbers are beginning to defy gravity. The economy has not improved and it actually might be getting worse but after the Democratic Convention in Charlotte, North Carolina, where former president Bill Clinton laid out the case for his re-election. President Obama seems to be on a bit of a roll. Everyone thought that Mitt Romney had made a breakthrough with his selection of the young and energetic Paul Ryan to be vice-president and that Ann Romney’s speech at the Republican Convention, particularly the bit about the fairy-tale marriage, had humanised him and would enable him to make a break-through. But it hasn’t happened and President Obama’s job performance ratings are once again hovering around 50% comfortable territory. Now in some national polls he is leading by four percentage points and in some crucial swing states like Ohio by 10%.
So Mitt Romney must stem the draining of support and reverse things before it’s too late and the best bet is the three presidential debates. Romney is a good debater. To hear the Democrats tell it has a great debater, he must now score a decisive victory in the debates and also he must seem more likeable to the public. He has to connect with them and he has to look them in the eye and say I am one you guys and also I care about each one of you not just 47%. My comment about 47% was meant for rich bozos and must not be taken too literally.
This is a complex task as he has to do all this while answering what are likely to be tough questions about the domestic policy, foreign policy and the like and if the liberal bias of the media is any indication, he has to make his own openings. As the 23 Republican debates showed he is a competent debater, well-versed with the facts, but against him is the comfortable Harvard-educated lawyer who has a natural way with words and for whom even a draw will look like a victory. So the onus is on Mitt Romney to do the running.
In the modern era presidential debates have been around since 1960 when John F Kennedy and Vice-President Richard Nixon had debates and John F Kennedy looked a more comfortable before the camera and went decisively ahead. The latest debates to make a difference were the debates between George W Bush and Al Gore where Al Gore made some misstatements and exaggerated facts and paid the price for it. Al Gore had a lead of five percentage points going into the debates it was dead heat coming out of the debates and George Bush won a squeaker of an election aided by the Supreme Court.
One of the things the debates does for the challenger is that it increases his stature as he stands on the same podium with the president. The large audience (more than 50 million are expected this time) gives a unique opportunity to both the contenders to state their point of view. President Obama has been rehearsing with John Kerry playing the role of Romney and Governor Romney has been rehearsing with Senator Rob Portman of Ohio playing the role of President Obama. Governor Mitt Romney seems to have taken more time off in his preparation and has concentrated more on the debates than President Obama.
There are many things that the American people want to know from both the candidates. They want to know from President Obama as to why he thinks they are better off than they were four years ago and what his plan is for the next four years. And they want details from Mitt Romney a fleshing out his plans regarding taxation and balancing the budget. They will also want to know what his foreign policy will be with regard to China, to Russia, to the Middle East, and the like.
“We are better than this”, a national convention on how to prevent gun death and injuries has sought to urge Jim Lehrer the moderator of the first presidential debate to ask the candidates about gun violence.
The letter partly states that the debate will take place within ten miles of two of the most deadly mass shootings in US history—Columbine High School and Aurora movie theatre.
• Every day in America 32 more Americans are murdered with guns.
The first debate is to be held at the University of Denver and one moderator is Jim Lehrer of PBS who is a veteran of eleven presidential debates. I do hope that the avuncular Jim Lehrer will help bring out clearly the contrasts between President Obama and Mitt Romney.
Both sides are busy with the expectations game, lowering the expectations of their side so that even an average performance will look good. After the debates the talking heads on both sides will be out talking up the performance of their own candidates.
The race is in the final stretch and it is getting very serious. This might be Romney’s best chance to catch up with President Obama—it may be the last roll of the dice.
(Harsh Desai has done his BA in Political Science from St Xavier's College & Elphinstone College, Bombay and has done his Master's in Law from Columbia University in the city of New York. He is a practicing advocate at the Bombay High Court.)
A Kaufman Foundation research has found out that investment in venture capital is a bad idea as it has not beaten the American markets since the late 1990s. Worse, investors have got back less cash than they have put in
Facebook has been the most sought-after investment story of the decade, with its recent high-flying (if highly controversial) initial public offering (IPO) generating millions of dollars for its founders and the investment firms that invested vis-a-vis venture capital (VC). The success story of Facebook has prompted investors, institutions and the general public to truly believe that VC produces superior returns, over and above market returns. However, a recent research study, conducted by Kaufman Foundation, an institution that invests in VCs, found out that VC is broken and has indeed produced inferior returns. Here are some of the findings:
In other words, VC is just not worth your time, unless you want to gamble all your chips, hoping that the VC they invest in will be able to find the ‘next’ Facebook.
VC is a form of investment vehicle that concentrates on start-ups and early stage investing. They invest in companies that have no prior track record. They invest in ideas and act as incubators to those ideas and use the funds to hire talent and infrastructure to grow ideas into reality. Facebook, Google, Yahoo!, Flipkart are some examples of companies that grew out of VC backing. Typically, they invest in a growing a firm for a few years, sometimes ranging from 3-10 years, depending on the idea, and cash out during the IPO.
One reason that investors (or institutions/investment firms) believe in VC as an asset class is because of a well-known behavioural bias known as narrative fallacy. The media has sold countless success, albeit sensationalist, stories to the investment public who, more often than not, fall for it and believe in it strongly. A lot of investment funds (which in turn invest in VCs) have mandates set up by a bunch of brilliant Ivy League graduates, armed with PhDs and MBA degrees which state that some percentage of the corpus must be invested in VC (a mandate is more of a rule than anything else). These mandates are created despite the abysmal track record of VCs. The study clearly states this startling statistic: 62 out of 100 VC funds failed to exceed returns available from the public markets, after fees and carry were paid. This leads us to another key issue for underperformance—high fees.
One of the solutions Kaufman Foundation has suggested is to, obviously, abolish needless mandates or rigidly defined rules and, instead, have flexible mandates to invest anywhere, so VCs can be avoided at all costs. It is important for the investment public (and institutions) to know the ratio of failure to success and it isn’t looking good at the moment. The media, however, doesn’t write about horrid stories of funds gone bust because, ironically, in the investment world, pessimism doesn’t sell.
Touching upon the issue of high fees, most investment funds operate on an incentive structure known as “2-20” (2% of corpus as fees and 20 percent of profits) which puts the onus on funds raising rather than searching for profitable opportunities. Regardless of fund performance, the fund manager collects his 2% fees. The larger the funds collected the deeper will the fund managers’ pocket be. Moreover, most the funds collected go into high risk VC (partly can be attributed to mandates). Hence, there is no regard to management of funds or allocating it in efficient investment channels nor is there any effort to find the next ‘Facebook’.
The study stated, “The most significant misalignment occurs because limited partners (LPs) don’t pay VCs to do what they say they will—generate returns that exceed the public market. Instead, VCs typically are paid a 2% management fee on committed capital and a 20% profit-sharing structure (known as “2- 20”). This pays VCs more for raising bigger funds, and in many cases allows them to lock in high levels of fee-based personal income even when the general partner fails to return investor capital.”
One of the solutions recommended by Kaufman Foundation is to pay for performance. In other words, change the way VC managers are incentivised and rewarded in such a way they will be more focussed on fund management and identifying investment ideas instead. It even suggested following a ‘European’ style where investment money is actually returned once a hurdle is achieved. This puts far more clarity on investment and actually might entice investors to put money.
Finance minister P Chidambaram wants a slew of changes which will mean getting the banking and insurance regulators to do what he says. Can he? The FM’s other moves, too, may not have many takers
The finance ministry has come out with a slew of changes to jolt the slumping life insurance business. Here are the proposals and the reality on the ground:
Tax incentive for pension products and service tax easing – Apart from NPS (National Pension Scheme), pension plans may get a separate limit of Rs20,000, which will be over the above the 80C limit of Rs1 lakh. Today, premium paid towards pension products (80CCC) fall in the same bucket of 80C, unlike in the past when it had its own exemption limit of Rs10,000.
Reduction in service tax on first-year regular premium as well as single-premium policies is also proposed.
What it really means: Taxation related amendments will need approval from the Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). The FM may be able to get this done but tax benefits may not lead to more pension products since insurance companies do not want to launch guaranteed return products. And the public is not interested in buying a variable return product even if it is tax-free.
Opening bancassurance – Banks may be allowed to set up broking arms to sell products from multiple insurance companies. This will put the onus on banks to have properly trained personnel that can possibly reduce mis-selling.
What it really means: This move from the finance ministry trashes the Insurance Regulatory and Development Authority’s (IRDA) draft guidelines on the complicated zonal tie-up to partially open bancassurance. Currently, IRDA allows a bank to sell the products of only one insurer. Moreover, the Reserve Bank of India (RBI) is not in favour of allowing banks to set up broking arms as their performance will affect the balance sheet of the bank itself, which will not be in the interest of depositors.
Moneylife is of the opinion that making banks accountable has not been successful till now and going for an open architecture can further complicate the matter. It remains to be seen whether the FM can hammer the RBI and IRDA to agree to his ideas so quickly. Both are headed by seasoned officers of the Indian Administrative Service who have their own ideas.
Use-and-file escape route – The FM wants to make it easier for insurance companies to launch new products. Under the existing “file and use” procedure, approval of the filed product is needed before launching it in the market. The finance ministry wants “use and file” for standard products. IRDA will prepare a list of standard products that qualify for the “use and file” system which entails allowing the insurer to market the product if there is no regulatory objection within 15 days. IRDA will also draw up guidelines so all products can be cleared within a period of 30 days.
What it really means: Moneylife view is that the proposed change empowers the insurance company more than what may be desirable. Insurance products, except pure term plans, are complex for customers and hence coming up with standard products list is prone to error. In the past, IRDA had to ban products like Universal Life Plan (ULP) which it had approved. IRDA is still debating for a long time if it needs to ban highest NAV products. “Use and file” is good for insurance companies, not consumers. The pressure on IRDA to approve products within 30 days seems unrealistic. Instead of listening to the industry, the finance ministry should find out the reasons for delay in product approval by IRDA.
Remove the differences between traditional products and ULIPs - Today the commission on traditional products is 30%-40% of first year premium while that on ULIPs is half of that or lower. The FM has talked of rationalising it.
What it really means: If the arbitrage between traditional and ULIP products is removed, it will mean a big fall in the sales of traditional products. The commission itself was driving the sales after regulatory changes in ULIP after September 2010. LIC has seen a complete reversal in its portfolio. Traditional product business is 80% and ULIP 20% when it used to be 80% ULIP and 20% traditional before September 2010 ULIP changes. Moneylife feels that this is good news for consumers. There could be resistance from insurance companies on this contentious issue.
Investment norms – The FM has promised to allow debt investment of up to 12.5% of investments in products rated lower than AAA (the highest credit rating).
What it really means: Nothing. The LIC may be ‘persuaded’ to invest in lower grade debt instruments but private insurers will continue to follow their risk-control measures.