Investment News ran a story today about an investor ordered to pay the legal bills for a broker-dealer and its representative for bringing a frivolous arbitration claim. the FINRA arbitration panel found that the investor was experienced and sophisticated and made investment decisions independently. The investor was ordered to $75,000 of the firm's $110,000 legal costs, and $6,000 of the $7,200 hearing costs.
To say that this is an unusual outcome would be an understatement, especially since FINRA adopted a policy which allowed for all non-industry arbitrators hearing client disputes. This is a welcome development, even if it is only one in a row. Now, to set about collecting the award.
Wednesday, February 29, 2012
Thursday, February 23, 2012
RIP Grubb & Ellis
Investment News reported that Grubb & Ellis had sold most of its operating assets and filed for bankruptcy protection. Thus ends the the ill-timed and ill-fated story of the entry by one of the country's premier commercial real estate brokerage firms into the syndication business. The beginning of the end began with the merger of Grubb & Ellis with Triple Net Properties just as investment real estate was starting its descent. The exodus of senior management from the syndication operations, the the emancipation of Health Care Trust of America crippled the company. The announcement that Grubb & Ellis Healthcare REIT II replaced Grubb & Ellis as advisor and underwriter signaled that the end was near.
Wednesday, February 22, 2012
Unconventional Advice For Education Funding
The December 5, 2011, edition of Forbes has its 2012 Investment Guide. This annual special report is the most sound and sophisticated guide published in a general interest periodical. It leans heavily on conventional wisdom, but always brings an analytical eye to the task, and often has challenging observations. One suggestion in the section on Generation Xers, caused me to pause because, while it is diametrically opposed to the almost universal standard recommendation, the explanation is elegant and nearly unassailable.
Karen Hand, a financial planner from San Francisco, recommends allocating any funds that would go into an education account into the parent's retirement account. The economics are such that no parent can reasonably expect to save enough to put multiple children through college on savings plans, and it is perfectly acceptable to expect the child to pay some portion of his educational expenses, either by working while at college or paying off student loans after finishing. And now the kicker:
That is, under the financial aid formulas, a parent gets 100% benefit of the dollar he puts in his retirement account, but only a tax effect benefit from a dollar contributed to a 529 account. The additional funds in the retirement account ill make up for the holiday during the kids' college years by being exposed to a longer compounding period.
And of course, the kids are on their own for any graduate degrees.
Karen Hand, a financial planner from San Francisco, recommends allocating any funds that would go into an education account into the parent's retirement account. The economics are such that no parent can reasonably expect to save enough to put multiple children through college on savings plans, and it is perfectly acceptable to expect the child to pay some portion of his educational expenses, either by working while at college or paying off student loans after finishing. And now the kicker:
Current financial aid formulas don’t consider money in retirement accounts as available to pay the college tab. But when calculating how much parents can pay from their current income, these formulas don’t allow for any retirement savings while the kids are in college—even though parents are likely to be approaching retirement.
That makes it smart to stuff your retirement accounts while your kids are young and then reduce or stop annual contributions while they’re in college to free up cash for tuition payments, say college financial planning experts.
That is, under the financial aid formulas, a parent gets 100% benefit of the dollar he puts in his retirement account, but only a tax effect benefit from a dollar contributed to a 529 account. The additional funds in the retirement account ill make up for the holiday during the kids' college years by being exposed to a longer compounding period.
And of course, the kids are on their own for any graduate degrees.
Tuesday, February 21, 2012
The Real Impact Investing Market
Tom Kostigen's latest blog entry on the Financial Advisor website references an article in the Stanford Social Innovation Review. Kevin Starr of the Mulago Foundation sets down four factors that limit the profitability of investments in impact-focused organizations. In summary, the costs structures of impact organizations required serving a very large number of "customers" with financial resources to pay for the product or service. Adding a cost of capital on top of the cost structure aggravates the situation. Driving the organization to meet the bottom line expectations will further drive the organization away from its intended target market to one that can better achieve the financial objective of the organization.
Kostigen also points to a posting on NextBillion.net. It is is an account of an interview with Felix Oldenburg, a director with Ashoka, a social change organization. Oldenburg describes the forces giving rise to the impact investing movement in market driven terms. Social entrepreneurs search for the cheapest capital with which to fund their impact enterprises. Philanthropic grants have become scarce, and business plans are cheap and easy to prepare. Impact investing is a cutting edge social model. But it does not necessarily deliver the results in the most effective manner.
Mr.Starr's foundation defines impact investing specifically with a less than market rate of return. As he puts it,
"Investments that provide a big return don’t count: the market will take care of those, and we don’t need conferences (or industry cheerleaders - C.F.) to get people to put money into them." Mr Olenberg notes an estimate of $500 billion of capital available for impact investing over the next decade. This despite low deal flow of enterprises meeting investing criteria. So there is a gusher of capital chasing a trickle of deals in an arena in which profitability is acknowledged to be difficult and limited.
Kostigen, however, continues to insist that this capital can do double and triple duty, earning market returns and fulfilling social and political agendas. He rejects the notion that an investment able to generate a market return be considered a mainstream investment, even if tat is where it is most likely to get funded. Ironically, it is also the enterprise that is most likely to drive the positive social development for the affected constituency in the long run.
Kostigen also points to a posting on NextBillion.net. It is is an account of an interview with Felix Oldenburg, a director with Ashoka, a social change organization. Oldenburg describes the forces giving rise to the impact investing movement in market driven terms. Social entrepreneurs search for the cheapest capital with which to fund their impact enterprises. Philanthropic grants have become scarce, and business plans are cheap and easy to prepare. Impact investing is a cutting edge social model. But it does not necessarily deliver the results in the most effective manner.
Mr.Starr's foundation defines impact investing specifically with a less than market rate of return. As he puts it,
"Investments that provide a big return don’t count: the market will take care of those, and we don’t need conferences (or industry cheerleaders - C.F.) to get people to put money into them." Mr Olenberg notes an estimate of $500 billion of capital available for impact investing over the next decade. This despite low deal flow of enterprises meeting investing criteria. So there is a gusher of capital chasing a trickle of deals in an arena in which profitability is acknowledged to be difficult and limited.
Kostigen, however, continues to insist that this capital can do double and triple duty, earning market returns and fulfilling social and political agendas. He rejects the notion that an investment able to generate a market return be considered a mainstream investment, even if tat is where it is most likely to get funded. Ironically, it is also the enterprise that is most likely to drive the positive social development for the affected constituency in the long run.
Monday, February 20, 2012
Longevity Insurance
Last year, I posted an item about the products that investment banks were developing to assist institutions in hedging their exposure to the longer lifespans of their beneficiaries. Recently, Investment News had an article on the developing market for longevity insurance, and a column in support of its use in the retirement plans of individuals.
The development of the longevity insurance, actually a deferred fixed annuity, is an enormous benefit for individuals who are at risk of outliving their assets. When properly coupled with Social Security benefits and immediate annuities, it can ensure that the income provided by an investment portfolio is replaced just as that assets are exhausted. The biggest drawback has been that there is no recovery of principal on death, even if benefits have not begun. In response to this objection, some of the products making it to market are including a death benefit or return of principal provision. The Hartford, MetLife Inc., Symetra Life Insurance Co. and New York Life are mentioned as writing the contracts.
The contracts are apparently getting a boost from regulators. Both pieces mention that the Labor Department is developing guidelines for offering the contracts in retirement plans. This would promote the distribution of the contracts as it will make it easier to market the offerings to 401(k) and IRA accounts. Wider distribution reduces the possibility of adverse selection and promotes more competitive pricing, improving the risk exposure of the companies writing the policies and the prospective income to the individual.
The development of the longevity insurance, actually a deferred fixed annuity, is an enormous benefit for individuals who are at risk of outliving their assets. When properly coupled with Social Security benefits and immediate annuities, it can ensure that the income provided by an investment portfolio is replaced just as that assets are exhausted. The biggest drawback has been that there is no recovery of principal on death, even if benefits have not begun. In response to this objection, some of the products making it to market are including a death benefit or return of principal provision. The Hartford, MetLife Inc., Symetra Life Insurance Co. and New York Life are mentioned as writing the contracts.
The contracts are apparently getting a boost from regulators. Both pieces mention that the Labor Department is developing guidelines for offering the contracts in retirement plans. This would promote the distribution of the contracts as it will make it easier to market the offerings to 401(k) and IRA accounts. Wider distribution reduces the possibility of adverse selection and promotes more competitive pricing, improving the risk exposure of the companies writing the policies and the prospective income to the individual.
Sunday, February 12, 2012
Fundamental Bond Indexing
The Journal of Indexes an article by Shane Shepard of Research Affiliates (RA), laying out the case for using a scheme other than capitalization-weighting for bond indexing. For those familiar with RA's fundamental indexing for equities, it will sound very familiar. The premise is that in any market, securities will become subject to pricing errors. Without conducting continuous valuation analysis on each security in the market, one cannot know which securities are priced incorrectly, nor in which direction n the error is occurring. RA has addressed the issue by removing the security's price from the weighting mechanism. In their equity portfolios, securities are weighted by financial statement factors. Now, in bond portfolios, the securities are weighted by factors that are presumed to reflect credit-worthiness. Thus portfolios of sovereign debt is weighted on factors such as GDP, population, land area, and energy consumption. Corporate debt is weighted by sales, cash flow, dividends, and book value of assets.
For the periods studied, the fundamentally weighted portfolios outperformed their cap-weighted counterparts significantly. The developed country sovereigns notched an 80 basis point average annual advantage over the period January 1997 through June 2011. The emerging market sovereigns chalked up a 130 basis point of outperformance. Fundamentally weighted corporate bonds posted similar performance improvement over well-known indexes.
These backtest results do not necessarily mean that the fundamentally weighted bond portfolios are superior to cap weighted funds. The portfolio weighting scheme was designed specifically to overweight credit quality and liquidity relative to cap weighted indexes. This testing period is dominated by two rounds of financial stress in which credit quality and liquidity were particularly valuable. Expect RA to publish additional research testing its fundamentally weighted portfolios over other time periods. pay particular attention to relative performance of, say, 1982-1986 and 1992-1997.
Brian Bollen is reporting that Citi and RA are going to launch a series of global sovereign bond indexes based on the RA methodology. Look for open en mutual funds and ETFs to follow.
For the periods studied, the fundamentally weighted portfolios outperformed their cap-weighted counterparts significantly. The developed country sovereigns notched an 80 basis point average annual advantage over the period January 1997 through June 2011. The emerging market sovereigns chalked up a 130 basis point of outperformance. Fundamentally weighted corporate bonds posted similar performance improvement over well-known indexes.
These backtest results do not necessarily mean that the fundamentally weighted bond portfolios are superior to cap weighted funds. The portfolio weighting scheme was designed specifically to overweight credit quality and liquidity relative to cap weighted indexes. This testing period is dominated by two rounds of financial stress in which credit quality and liquidity were particularly valuable. Expect RA to publish additional research testing its fundamentally weighted portfolios over other time periods. pay particular attention to relative performance of, say, 1982-1986 and 1992-1997.
Brian Bollen is reporting that Citi and RA are going to launch a series of global sovereign bond indexes based on the RA methodology. Look for open en mutual funds and ETFs to follow.
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