[TaoJones]

Originally Posted by Alan Wheeler

I am also scepticle about such a high return rate. Unless the finace company is run by Mafia or some other loan shark, 24% just is either wrong, or some Laonee is being truely ripped off.
As Seafox stated, NZ is one of the highest interest rates in the world. It is why our dollar is so high. It is a popular country for offshore investment.

The figures rebel heart has given are accurate. Seafox and Wheels are also correct that the Janus Contrarian Fund's average performance since inception (Feb '00) is 11.88%.

What does it all mean? Well, as the prospectus says,
"Data presented reflects past performance, which is no guarantee of future results and investment results and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, current performance may be higher or lower than the performance shown. . . . "

Wheels and Seafox are also correct that the Kiwi dollar is one of the world's strongest currencies, at the moment. By setting rates high relative to the rest of the world, the RBNZ (Royal Bank of New Zealand, NZ's central bank) has made the Kiwi dollar one of the world's most attractive investments for those who pursue the Yen carry trade.

The Yen carry trade is an investment strategy whereby a person borrows a sum of money in Japanese Yen (because of its incredibly low interest rate of .5%), and invests the borrowed funds in higher yielding currencies such as the NZ$ at 8.75%. The investor captures the difference in yield as his profit.

It looks like a no-brainer investment with a guaranteed return of 8.25% - so what's not to like? The inherent risk in this strategy is the forex uncertainty; i.e. the possibility that the rate of exchange between the two currencies will move adversely (Yen strengthen, Kiwi dollar weaken), thereby quickly eating into the interest rate differential before the investor can "un-wind" his position.

Further complicating the trade is that most people engaging in the carry trade do so by leveraging their investment. Leverage of 10:1 is not uncommon in the carry trade. If an investor borrows the equivalent of $1,000,000 US in Japanese Yen, and uses the funds to purchase the equivalent of $10,000,000 US worth of Kiwi Treasury Bonds paying 8.75%, he will earn $825,000 in interest differential (8.75% minus 0.5% times $10,000,000) each year he keeps the trade in place. He can thus re-pay his Yen debt in little more than a year, but it will be the longest year of his life.

If the Japanese maintain their incredibly low interest rate in an effort to keep their currency weak (virtually a necessity in an economy so dependent on exports), the carry trade is almost risk-free. However, an investor is exposed to incredible risk in the event the Japanese change their policy, and raise interest rates. See, for example: A Meltdown From The Yen-Carry Trade? - Forbes.com

The Forex (foreign exchange) Market is always moving, and in these uncertain times the swings can be fast and furious. Even a small change in interest rate policy can have an enormous impact on a highly-leveraged investment like the carry trade, and if you happen to be on the wrong side of the bet, you can be wiped out in a heartbeat.

Will the Japanese raise their rates at some point? Absolutely. Will the RBNZ lower rates at some point? Without a doubt.

High interest rates attract a flood of foreign capital, but eventually strangle the domestic economy. When enough people lose their jobs, increasingly intense political pressure forces the central bank to begin lowering rates to stimulate the economy and get people working (and earning and spending) again. As rates head down, all of that hot foreign capital is withdrawn, as the carry trade crowd moves it to the then-current strong (i.e. high-yielding) currency.

Dan (ex-calif) mentioned that commodities are "Lamborghini to Hyundai to Lamborghini" investments. This is true, but it's not because commodities are inherently riskier, or more volatile, than, say, stocks. It's true because of the incredible leverage offered in commodity investing.

An investment of as little as 5% can control a commodity contract - that's 20:1 leverage. Investing $1000 to control $20,000 worth of some commodity means that a movement of 5% either doubles one's investment, or wipes it out. If a person had invested $20,000 in that same $20,000 contract, the 5% move would only mean that it is now worth either $21,000 or $19,000 - not a major impact on the investment, nor a cause for either euphoria or depression.

The potentially devastating effects of over-leveraging an investment are currently on display in the American housing market (and will be coming soon to the British and other recently "hot" markets). Even those who put 20% down and took out conventional fixed-rate mortgages have had their investment effectively wiped-out if the value of their home has fallen by 20%, and they're forced to sell. So it won't be just bad credit risks (most of whom made far less than 20% down payments) who see their real estate fantasies go up in smoke.

TaoJones