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February 25, 2007
David Warsh, Proprietor


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What’s News

A new online Internet news magazine has appeared, covering 22 Asian nations from Afghanistan to Japan.  It fills the void left by the demise of the Far Eastern Economic Review and Asiaweek, and gives further evidence of the capacity of the World Wide Web to add to the spectrum of high-quality news.

Among the editors of AsiaSentinel are Philip Bowring, the former editor of the Far Eastern Economic Review; A. Lin Neumann, former executive editor of the Hong Kong Standard; and John Berthelsen, a former correspondent with Newsweek and the Asian Wall Street Journal and most recently managing editor of the Standard.

A recent issue carried a knowledgeable piece about Milton Friedman’s romantic view of Hong Kong. The great economist and his wife touted the former British colony’s devotion to laissez-faire principles in their 1980 documentary series, Free to Choose.

Wrote the Sentinel’s correspondent, “So determined was Friedman to defend his rosy version of Hong Kong’s economy, which he attributed to its 1960s Financial Secretary John Cowperthwaite, that just weeks before his death he claimed to be seeing state intervention such that the former city-state, now part of China, ‘would no longer be such a shining example of economic freedom.’”

But Friedman routinely overlooked three key facts about the city in the years of its rapid growth: as much 50 percent of its housing receives a substantial government subsidy; its citizens enjoy almost free medical treatment at government clinics and hospitals; and the cost of its defense has been borne entirely by the United Kingdom and now China.  Mark these services to their market prices, said the Sentinel, and the famously low share of government spending in GDP climbs sharply.

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Stanford University economist Paul Romer has sold Aplia, Inc., the educational software company he founded in 2000, to Thomson Learning, a division of Thomson Corp. Terms of the deal were not disclosed.

Aplia’s principal innovation has been to create Web-based subscription software that makes economics homework, including online experiments, easy to create, deliver and grade. Designed to support introductory economics texts of all sorts, the company’s systems were quickly adopted by most leading publishers of economics textbooks, including Thomson (N. Gregory Mankiw), Holtzbrinck (Paul Krugman/Robin Wells) and McGraw-Hill (Benjamin Bernanke/Robert Frank, Campbell McConnell/Stanley Brue, Paul Samuelson/William Nordhaus). Among major international publishers, only Pearson (Karl Case/Ray Fair, Michael Parkin) held out in the interest of developing its own platform.

Rapid development of new course material required ever-more investment, however, and Romer opted to sell out to a much larger company (one whose business in electronic platforms has been conspicuously lagging) in an industry that is on the verge of a major restructuring. He told instructors that he would “continue to play an integral role in leading and advising the company.”

Whether Thomson can manage to continue to sell the Aplia platform to rival publishers remains to be seen, but then, so does the future of Thomson Learning itself. Its privately-held Canadian corporate parent, a provider of scientific, legal and financial data, indicated last autumn that it planned to sell the educational unit, which is valued at around $5 billion. In November, Houghton Mifflin was sold by its private equity owners to Riverdeep, an Irish educational software group, for $4.5 billion.

College publishing, preparing to subordinate print publishing to electronic services, is entering the computer age.

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Readers of Dava Sobel’s 1996 best-seller Longitude: The True Story of a Lone Genius Who Solved the Greatest Scientific Problem of His Time know all about the power of credible and well-advertised prizes to galvanize inventors to devise a solution to a thorny problem.

Plagued by its inability to accurately reckon longitude at sea, the British government, through an act of Parliament in 1714, promised a prize of £20,000 (an enormous sum in those days) to anyone who could provide measurement of longitude accurate to within half a degree. Clockmaker John Harrison invented the necessary sea-going timepiece (no pendulum clock could work), only to be nearly stiffed for the prize by a jealous competitor with a rival method), and New York Times reporter Sobel turned the story into a thrilling tale.

Earlier this month, a consortium of five nations and the Gates Foundation created a modern counterpart of the longitude prize — a more sophisticated version known as an Advanced Market Commitment (AMC) propounded for years by economist Michael Kremer, of Harvard University and the Brookings Institution, and his wife, Rachel Glennerster, and developed analytically in their 2004 book Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases. The idea is to provide a guaranteed market for new vaccines against pneumococcal diseases tailored to the world’s poorest countries, where pneumonia and meningitis kill around 2 million people a year, 1.6 million of them children.

Representatives of Canada, Italy, Norway, Russia, the United Kingdom and the Gates Foundation, meeting in Rome, signed off on a $1.5 billion protocol that represents a legally-binding commitment to purchase vaccines that met predetermined standards of efficacy and safety in the nations where they will be used. Any number of peoples worked hard to bring the program about; some of them are listed on a Center for Global Development blog that gives a sense of the amount of the painstaking committee work by lawyers, doctors and diplomats that was required.

But if you want to really understand why the development of the AMCs are such welcome news, hit the video button in the menu bar at the top of this page and witness an unusually powerful argument.

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Those who enjoy a good financial mystery story will want to turn to Stansky’s Monster: A Critical Examination of Fidelity Magellan’s “Frankenfund,” a working paper by Ross Miller of the State University of New York at Albany Business School and Miller Risk Advisers, which has just appeared on the Social Science Research Network.

The broad outlines of the famous fund’s lackluster performance since Peter Lynch turned it over to Jeff Vinik in 1992 are well known. Lynch had his “tenbagger” stocks, companies whose share price rose dramatically in the bull market of the 1980s. Vinik had his one really, truly, memorably bad year — 1996, when he put a quarter of the funds assets into bonds, just as the stock market took off into the Internet craze.

But what about Robert Stansky, who took over from Vinik in the middle of 1996? For the first several years of Stansky’s stewardship, the enormous Magellan Fund was widely thought to have become a “closet index fund” — that is, an actively managed fund that nevertheless tracked closely the performance of the market as a whole.

Then, suddenly, in late 2002 the thing went haywire, dramatically underperforming the S&P 500, rising just 2.55 percent in a period when the broader market (as measured by the Vanguard Institutional Index Fund) rose 11.53 percent. Stansky rant RAN the fund until October 2005, when he was abruptly shown the door.

What happened? Miller has his suspicions. Not to spoil a thumping good ending, I will only say that, even though he argues that if the active component of Magellan’s holding were considered as a stand-alone market neutral investment its investors would have lost at least 50 percent of their money between 2002 and 2004.  The bulk of that loss, which is four times greater than the worst comparable hedge fund, cannot be accounted for by any combination of Magellan’s stated expenses, portfolio turnover, investment style, industry selections, or stock picks. So where did those billions go?

You can wait for The Wall Street Journal to bring you up to date on “factor-model arbitrage” and discover who may have picked the unwitting Magellan’s pockets. Or you can read Ross Miller’s lucid and amusing (and important) detective story for yourself.

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