Double or nothing: investments to swim against the tide

• DISTRESSED DEBT, CREDIT AND CDOs

The decline in value of distressed assets is impossible to quantify since there is no established price for them – one of the central problems of the credit crisis.

It seems a long time ago now that Australians watched in horror as Basis Capital slipped towards apparent oblivion, the first clear evidence that sub-prime had come to Australia (Basis did survive, although its Yield Fund did not and it isn’t accepting new applications in Australia anymore.) Other funds, though, continue to invest in the choppier ends of the fixed income and credit spectrum. Is it time to get back in?

Investors in the States have been fascinated to watch John Paulson, the hedge fund manager who made so much from the decline in subprime mortgages (believed to be several billion dollars) that he was called before Congress to explain himself, buying back in to distressed mortgage bonds, suggesting we may be at the bottom for these most poisonous of securities.

In Australia, funds like the Challenger High Yield Fund invest in a range of off-the-beaten-track debt securities. As of September 30, the fund had 13.63% of its money in mortgage backed securities, 2.69% in CDOs and 1.45% in credit default swaps – none of them exactly fashionable at the moment – alongside bigger holdings in convertible and floating rate notes. Writing to investors at the end of the July-September quarter, Challenger wrote: “The bottom may have been reached. Current spreads have priced in significant bad news and it is difficult to envisage further significant deterioration in credit markets.” By October 31, on Morningstar’s numbers, the fund was not looking good but was a damn sight better than equities: it was down 16.33% over 12 months.

But potential investors in this and similar funds might be given pause by this announcement on the Challenger web site: “Effective from 16 October 2008, the withdrawal process for the fund was amended. As a result, you will only be able to withdraw from the fund if we make an offer of withdrawal.” Oh.

• SHIPPING

The Baltic Dry Index, which measures the demand for shipping capacity versus the supply of dry bulk carriers (generally those that carry raw materials), stands at 804, a level last hit in late 2001. It was at almost 12,000 a few months ago.

Shipping is, to use a technical term, completely shafted in a recession. As demand for resources declines, there’s less demand for ships to carry them. As global trade slows, there’s less need for containers to be shipped. Worse, it takes a long time to build a ship, so there’s the risk of a customer going under before delivery, and also a very long lag time before customers regain the confidence to start ordering more ships, and longer still before the shipbuilder gets paid for them.

Consider Cosco Corp, the Chinese shipbuilder listed in Singapore. It edged over S$8 a share in mid-2007; at the time of writing it was trading at 71 cents. (Disclosure: the author thought it was a great idea to buy at $1.72. Still explaining that one too.)

Those wanting to invest in shipping – basically a bet that the countries will, when recovered, trade more with each other than ever – can do so by buying shipping stocks, and since August can buy a US exchange-traded fund called the Claymore/Delta Global Shipping Index, a 30-component fund investing in shipping stocks (particularly in Greece, if you’re interested). It kicked off at US$23.60 a share on September 8; it closed at $8.26 on Tuesday, which tells you something about what the world thinks about the outlook for shipping.

• THE AUSSIE DOLLAR

97.5 cents to the dollar in July, 64.5 cents today – a 33.8% fall in four months. It is now at a five-year low.

As commodities have fallen out of favour, so has the Australian dollar. It’s not just us: the same is true of other commodity exporting countries like Canada, while sterling has also dropped against the dollar after hitting historic highs earlier in the year. In large part this is more to do with the strength of the US dollar rather than any inherent weakness in Australia – it’s a flight of American capital back home, and it won’t last forever.