#Fincabulary 34 – Smart Beta

smart-beta-etf

Source: https://www.sanlam.com/

Meaning – Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions, as well as seeking to enhance risk-adjusted returns above cap-weighted indices.

The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio. In effect, smart beta is a combination of efficient-market hypothesis and value investing.

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Fino-graphic Series #1 – Treating Credit Risk Better Under Basel IV

By TJEF Editor Gandhali Inamdar

We are launching a new infographic series where we will tackle contemporary economic issues every week. Today we are reviewing the impact of Basel IV on credit risk for financial institutions. Take a look at this one and let us know your thoughts!

Infographics 1_ Treating Credit Risk Better Under Basel IV

#Fincabulary 33 – Bull Trap

Meaning –  A bull trap is a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline. The move “traps” traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also be referred to as a whipsaw pattern.

AMZN-111511
Source: http://www.stockcharts.com

It results from the absence of sufficient buyer interest to decisively reverse the downtrend. Traders who buy the stock on seeing it moving up for a while get trapped at a higher price point once the price reverses to continue its downward trend. Some traders use an appropriate stop loss order instructing their brokers to sell the stock once it falls below its previous minor low in order to avoid further losses.

Merger & Acquisitions – Decoding the Jargon

By TJEF Editor Ishan Kekre

Mergers-and-Acquisitions-Document-Management

Source: http://www.businessmantraa.in

Today mergers and acquisitions are in their fifth generation. Over the years, in order to adapt to the dynamic economic changes, firms have often taken decisions to merge, acquire or takeover in order to develop a competitive advantage and ultimately increase shareholder’s wealth. Companies can mutually agree to merge or one firm can acquire another firm by making an offer. In case of the latter, if the target is unwilling to get acquired it can plan to foil the takeover attempt by the acquirer. The target can employ several defence mechanisms which have become a source of a lot of fancy jargons and buzzwords that are used in the M&A parlance. Some of the frequently used jargons are listed below:

Hostile Takeover Strategies by Acquirer Firm

  • Dawn Raid – The acquirer firm instructs the stockbrokers to buy the shares at the current market price, early in the morning as soon as the market opens. The target firm remains uninformed of these actions until it is too late as the acquirer masks its identity and its takeover intent.
  • Saturday Night Special – This tactic was used by the acquirer by making a tender offer to the target suddenly over the weekend and hence the name.

Defense Strategies Employed by the Target Firm

  • Golden Parachute – This strategy involves giving incentives like bonuses and stock options to the top management by the target firm which makes of the takeover attempt a lot costlier for the acquirer and hence acts as a strong deterrent.
  • Greenmail – In this case, a substantial block of stock is held by a raider, who then forces the target firm to repurchase the stock at a premium to foil any takeover attempt.
  • Macaroni Defense – In this strategy, target firm issues a large number of bonds with the guarantee that they will be redeemed at a higher price if the company is taken over. It can be a double-edged sword because if a lot of debt is issued the target can default on interest payments.
  • People Pill – In this defence mechanism, the management team threatens to resign if the takeover is successful. The efficacy of this strategy depends on how good is the management.
  • Poison Pill – In this strategy, the target firm makes its stock less attractive to the acquiring firm. There are forms of the poison pill. First is the ‘flip-in’ poison pill where shares that are held by the bidder are diluted to make the takeover more expensive. Second is the ‘flip-over’ in which shareholders buy the acquirer’s stock at a discounted price in the event of a merger. The third form is the ‘suicide pill’ whereby the target company takes decisions that ultimately lead to its own destruction.
  • Sandbag – In this case, the target firm stalls and delays the takeover attempt that another favourable company will make a takeover attempt.
  • White Knight – It is that firm that comes in to save the day for the target company that is on the radar of corporate raider (Black Knight) by offering a way out with a better deal.

Conclusion

Thus mergers and acquisitions have an extensive jargon of their own and have some rather fancy and interesting strategies listed above. The next time if you read about an M&A that is going to happen, you can make an informed buying decision to purchase more shares at a cheap price.

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