Saturday, 17 September 2011

Investing in Mumbai’s Politicians’ Fund…

I just wrote a while ago how investors keep being taken for a ride by active fund managers. This is common everywhere whether in India or US.

Now atleast we in India have a solution. There is an ongoing study in economic department of Mumbai University - Unraveling corruption in India: Politicians in the spotlight. The study shows Mumbai-based politicians make more returns than the city as a whole. The study is not out but you have some findings in HT:

The study compared the asset growth of 54 candidates from the city, who contested the 2004 and 2009 general elections as well as state assembly polls, to the city’s market growth during the same period.

The research reveals that assets of 27 candidates, who won the polls in 2004, grew at a rate consistently greater than the market growth rate. While the assets of MPs increased by 208%, MLAs’ assets grew by 240%. The market growth, however, was just 97% between the general elections of April 2004 and April 2009, and it was 163% between the assembly polls of September 2004 and September 2009.

Prof Pethe, who is leading the study picks the reasons based on Efficient Markets Hypothesis. There is a lot of insider information via which politicians make money:

“There are two forms of corruption: illegal or blatant corruption and legal corruption, which takes place because of the information advantage that politicians have over others,” said Abhay Pethe, economist with the department, who is guiding the study. “It is obvious that even a specialist can’t beat the market consistently, but our politicians have beaten it because of the information advantage.”

For instance, politicians may cash in on info about a project planned in an area, which would lead to an increase in property rates in the surrounding areas. “This information is exploited ‘legally’ by politicians to make private gains before it is made public and is discounted by the market,” said Pethe.

Awaiting the release of the study. Wondering how city returns are calculated. What goes in the index and how?

May be our politicos can open their own funds like a mutual fund and invite people to invest in the same. They could be given units like given the mutual funds, helping people make some returns as well. They can use the returns made as an election pitch saying I gave more return than the rival! The rival can then pitch in saying no the first one’s risk was higher and the risk adjusted returns show he has done better and so on…

We could have funds named XYZ Road Project Fund (based on roads coming up in some cities/states), Airport Fund (which would know insider info on where airports to come up), Hype Contra Fund (some projects have just been hyped for making money but will not happen, such fund would take opposite position) and so on. We could have funds named on ministers as well after some strong consistent performance. These funds would over a period of time be named after states/cities etc to differentiate.

Having such funds would imply people will also benefit and will be a win win game. This becomes an inclusive strategy for the government as well.

On a more serious note, this insider information on real projects is all pretty common and it is to frame the issues empirically. People say all you need to know is people in the Public and Works department (PWD) who know all the major projects coming up etc. People then invest in these areas and make huge returns. A friend based outside Mumbai said returns on property in Mumbai is nothing! You make much more in other areas knowing the PWD people and acting on insider information.


by: Amol Agrawal

Source: http://mostlyeconomics.wordpress.com/2011/09/16/investing-in-mumbais-politicians-fund/

1 comment:

  1. Hello Amol,
    Pass me your email id (by posting it here) , i will send you a copy of the study

    Sahil gandhi

    ReplyDelete