In all of the back and forth on the issue, I have been confident that money market funds will be reformed to either have a floating NAV or some sort of capital support provided by the management firm. That confidence looked misplaced when the proposal failed to achieve the support of a majority of commissioners. However, I noted that the Financial Stability Oversight Council (FSOC) had expressed the opinion that the money market fund industry represented a systematically important financial institution, and, thus, worthy of regulation to ensure its continuity.
Now, Investment News is reporting that Timothy Geitner is urging the FSOC to issue its own regulations for money market funds. The article suggests that the FSOC will be more difficult to influence away from reform, presumably because it falls under the Treasury Department's purview. That may so, but it still appears that money funds will have to either adopt a floating NAV or raise subordinated capital. perhaps the best that the industry can hope for is a choice.
Tuesday, October 9, 2012
Wednesday, October 3, 2012
Vanguard's New Indexes
Investment News carried an story on Vanguard's announcement that they are changing equity index providers from MSCI to CRSP (domestic and balanced) and FTSE (international). The change in providers will reduce the licensing costs of using the indexes a bit, though I doubt that is the reason for the change (the recent reduction in fees by BlackRock and Schwab notwithstanding). CRSP has the most comprehensive stock price data, and thus a more robust universe from which to construct its domestic indexes. FTSE's indexes are expansive, though I am not sure how they compare to MSCI's. ( The article does mention that FTSE assigns the Korean market to the emerging markets index, while MSCI relegates it to the developed markets index.)
Having worked with Vanguard for over fifteen years, I am certain that this change was studied to death before being adopted. Some ten years ago, when Vanguard moved for the S&P and Russell indexes to MSCI's, issues of coverage and allocation were modeled for effect on risk and performance. I expect that any differences in expected performance will be compensated with the reduced fees and reflective of any change in the risk profile. Overall, I do not expect fund performance under the new indexes to diverge more than a few basis points per quarter from the performance of the old indexes, as adjusted for the an appropriate expense ratio.
Having worked with Vanguard for over fifteen years, I am certain that this change was studied to death before being adopted. Some ten years ago, when Vanguard moved for the S&P and Russell indexes to MSCI's, issues of coverage and allocation were modeled for effect on risk and performance. I expect that any differences in expected performance will be compensated with the reduced fees and reflective of any change in the risk profile. Overall, I do not expect fund performance under the new indexes to diverge more than a few basis points per quarter from the performance of the old indexes, as adjusted for the an appropriate expense ratio.
Monday, October 1, 2012
Glidepath Investing
The September 2012 issue of Fundamentals, a newsletter of Research Affiliates, addresses the question of glidepath investing, or the systematic adjustment of asset allocation during a person's lifecycle. Conventional wisdom suggests that an aggressive allocation early in a person's working years gradually becoming more conservative is a prudent course.
Research Affiliates conducted a study comparing the conventional strategy (80/20 to 20/80 glidepath) to a constant 50/50 and a reverse of the conventional wisdom (20/80 to 80/20). Using data from 141 years of capital markets returns, RA found that the reverse of the conventional strategy would provide for higher wealth at retirement, and that, even though the standard deviation of terminal wealth was higher, the worst case wealth measure was also higher than that of the conventional strategy.
RA correctly attributes the increased wealth to having the largest portfolio invested in the most aggressive allocation. This will also place a larger investment pool at risk. RA dismisses this: "(The reverse conventional investor) has to accept more uncertainty late in life as to how much she can spend in retirement—but it’s upside uncertainty!"
If all of this were true, no glidepath would be warranted; an investor maintaining an 80/20 portfolio throughout his career would undoubtedly retire with a superior retirement fund, and the worst potential outcome would most likely be higher than any of the others studied.
So what's missing? The study is conducted only from the perspective of the twenty-year-old just starting his career. If that was the only time that a strategy could be set, the study would be valid. However, investors lifestyles, risk tolerances, and objectives change many times over their lifetimes, and it is imperative to change policies and strategies to reflect the new circumstances. As these new strategies are adopted, I woulds expect that over time, they will come to resemble the conventional glidepath investing strategy that RA is attempting to discredit.
Update (10/3/12): Financial Advisor carries a story on Folio Investing's Steven Wallman's response to RA analysis.
Research Affiliates conducted a study comparing the conventional strategy (80/20 to 20/80 glidepath) to a constant 50/50 and a reverse of the conventional wisdom (20/80 to 80/20). Using data from 141 years of capital markets returns, RA found that the reverse of the conventional strategy would provide for higher wealth at retirement, and that, even though the standard deviation of terminal wealth was higher, the worst case wealth measure was also higher than that of the conventional strategy.
RA correctly attributes the increased wealth to having the largest portfolio invested in the most aggressive allocation. This will also place a larger investment pool at risk. RA dismisses this: "(The reverse conventional investor) has to accept more uncertainty late in life as to how much she can spend in retirement—but it’s upside uncertainty!"
If all of this were true, no glidepath would be warranted; an investor maintaining an 80/20 portfolio throughout his career would undoubtedly retire with a superior retirement fund, and the worst potential outcome would most likely be higher than any of the others studied.
So what's missing? The study is conducted only from the perspective of the twenty-year-old just starting his career. If that was the only time that a strategy could be set, the study would be valid. However, investors lifestyles, risk tolerances, and objectives change many times over their lifetimes, and it is imperative to change policies and strategies to reflect the new circumstances. As these new strategies are adopted, I woulds expect that over time, they will come to resemble the conventional glidepath investing strategy that RA is attempting to discredit.
Update (10/3/12): Financial Advisor carries a story on Folio Investing's Steven Wallman's response to RA analysis.
Friday, September 28, 2012
On Further Review...
Investment News carries an article indicating that one of the SEC commissioners that had opposed the money market fund reforms may be willing to support just the floating NAV part. Well why didn't he say so in the first place?
Monday, September 17, 2012
Advisor Managed Portfolios Underperform?
Investment News reported on a study by Cerulli Associates that indicates that portfolios managed by advisors underperform alternative management arrangements. Cerulli studied the 2010 to 2011 period and determined that advisor managed portfolios returned 4.3%, while programs packaged by broker-dealers had a return of 9.9% and a fixed 60% domestic equity, 10% international equity, and 30% bonds returned 15.9%. On the face of it, very damning evidence.
However, the article does not mention how the advisor and b-d portfolios compare to the passive portfolio in terms of construction or risk exposure. Indeed, no risk measure is given. Nor does the article mention whether the returns are measured before or after management and administrative costs. Sometimes, advisors take advantage of opportunities to reduce total costs to clients by taking management internal. Besides which, two years is an awfully short tie period on which to be making judgements on out- or underperfomance.
Also missed is the customization that can take place when the client has direct access to the portfolio manager. Tax sensitive trading can be executed, liquidity needs addressed Even short term market risk can be addressed through a dollar cast averaging-like strategy.
Is there any value to e gleaned for the article? A passive strategy still provides great value for many investors. Even advisors managing money for the clients.
However, the article does not mention how the advisor and b-d portfolios compare to the passive portfolio in terms of construction or risk exposure. Indeed, no risk measure is given. Nor does the article mention whether the returns are measured before or after management and administrative costs. Sometimes, advisors take advantage of opportunities to reduce total costs to clients by taking management internal. Besides which, two years is an awfully short tie period on which to be making judgements on out- or underperfomance.
Also missed is the customization that can take place when the client has direct access to the portfolio manager. Tax sensitive trading can be executed, liquidity needs addressed Even short term market risk can be addressed through a dollar cast averaging-like strategy.
Is there any value to e gleaned for the article? A passive strategy still provides great value for many investors. Even advisors managing money for the clients.
Friday, September 14, 2012
Credit Where Due
It is easy to be cynical when analyzing alternative investments packaged for retail distribution. They tend to have high fee structures, lack liquidity, and be quite opaque in terms of structure and governance. Investment and operating strategies tend to be driven by marketing considerations rather than sound business or investment fundamentals.
That said, I would like to publicly commend American Realty Capital Trust (ARCT) on engineering a liquidity event for investors and an exit for the entire transaction within eighteen months of the close of the offering. And at prices ($10.50 and $12.20) in excess of the offering share price (as reported in Investment News).
There may be some questions raised about the exit coming so quickly on the heels of the listing. Just read the Comments below the cited article. The fact remains that investors received something like a 7% dividend during the holding period, and will recognize anywhere from 5% to a 22% capital appreciation. All within 18 months of the close of the offering.
Kudos to American Realty Capital Trust and to Nick Schorsch and Wiliam Kahane for their efforts in achieving such a positive outcome for investors.
That said, I would like to publicly commend American Realty Capital Trust (ARCT) on engineering a liquidity event for investors and an exit for the entire transaction within eighteen months of the close of the offering. And at prices ($10.50 and $12.20) in excess of the offering share price (as reported in Investment News).
There may be some questions raised about the exit coming so quickly on the heels of the listing. Just read the Comments below the cited article. The fact remains that investors received something like a 7% dividend during the holding period, and will recognize anywhere from 5% to a 22% capital appreciation. All within 18 months of the close of the offering.
Kudos to American Realty Capital Trust and to Nick Schorsch and Wiliam Kahane for their efforts in achieving such a positive outcome for investors.
Thursday, August 30, 2012
Money Fund Industry Information Sites
I was directed to this website by a thread on a bulletin board discussing the SEC proposal for money market funds. The web site includes links to this site and this one as well. The second one is from Federated Investors, a big provider of money funds, especially to institution such as custodial banks and brokerage firms. Federated obviously has an interest in the proposal, as money finds represent a significant source of revenue.
The first is an effort by the Investment Company Institute. The only identification is the logo at in the footer of the site. Investment Company Institute (ICI) is the trade group for mutual fund management companies. It provides public relations, soft marketing and lobbying for the industry. As such, the website does a good job on behalf of the industry. All of the points made are valid.
Unfortunately, does not identify its sponsor very well. Even the contact links go to ICI's public relations firm. Kinda disappointing that ICI does not have the courage of its convictions to conspicuously identify itself with its positions.
All of the arguments being made in favor of retaining money funds in their current form are valid and convincing. The only problem is that Mary Shapiro is not charged with securing any of the good things identified with money funds. Her job is to safeguard individual investors from realizing a loss in an investment designed to avoid losses, and from illiquidity in what is intended to be most liquid of investment funds. That he Chairman of the Commission has put forth a proposal that can reasonable be expected to achieve these goals is attributed to by the endorsement of the Financial Stability Oversight Board. I do not believe that this fight is over.
The first is an effort by the Investment Company Institute. The only identification is the logo at in the footer of the site. Investment Company Institute (ICI) is the trade group for mutual fund management companies. It provides public relations, soft marketing and lobbying for the industry. As such, the website does a good job on behalf of the industry. All of the points made are valid.
Unfortunately, does not identify its sponsor very well. Even the contact links go to ICI's public relations firm. Kinda disappointing that ICI does not have the courage of its convictions to conspicuously identify itself with its positions.
All of the arguments being made in favor of retaining money funds in their current form are valid and convincing. The only problem is that Mary Shapiro is not charged with securing any of the good things identified with money funds. Her job is to safeguard individual investors from realizing a loss in an investment designed to avoid losses, and from illiquidity in what is intended to be most liquid of investment funds. That he Chairman of the Commission has put forth a proposal that can reasonable be expected to achieve these goals is attributed to by the endorsement of the Financial Stability Oversight Board. I do not believe that this fight is over.
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