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.
Thursday, August 30, 2012
Wednesday, August 29, 2012
Charlie Ellis On Fees
I am always interested to hear what Charles Ellis has to say. So when I saw that Investment News had an interview with him (and Mark Cortazzo), I had to hear what he had to say. The interview focuses on fees, with a 1% (of assets) asset management fee identified as standard for the investment advisory business. They go through a couple of exercises to try to make a point that advisor fees are actually higher than advertised: Charlie says compared to returns fees are 15%, Mark says due to stair steps the 1% on the last dollar actually turns into 1.67% on all dollars.
Some advisors have their business entirely structured as asset management. It is at these firms that Ellis' and Cortazzo's comments are aimed. Management fees of 1% (or more) are unsupportable when this is in the marketplace. Frankly, the competition to for these firms ranges from Morningstar ($500 to $1500 per year or 1% on a $50,000 to $150,000 portfolio) to mutual fund companies (with asset allocation apps on their websites and registered and fairly competent representatives available by phone at no extra charge). Every month, my Charles Schwab account monitors my investments for quality (as defined by Schwab experts) and for allocation outside of some model that has been selected for me.
Where I see more advisors today is providing a very wide range of services on an ongoing basis with their clients. They charge their clients an "asset management" fee, but portfolio oversight is a small part of the services provided. It just happens that advisors and client have agreed that it is a fair and transparent way of compensating the advisor while avoiding the piecemeal nature of hourly or project billing.
What the interview reminds me is that the market is highly competitive, and there is no lack for commentators ready to assert that this fee or that charge is too high. The remedy, of course, is an unassailable value proposition, and constant reminders of it with clients.
Some advisors have their business entirely structured as asset management. It is at these firms that Ellis' and Cortazzo's comments are aimed. Management fees of 1% (or more) are unsupportable when this is in the marketplace. Frankly, the competition to for these firms ranges from Morningstar ($500 to $1500 per year or 1% on a $50,000 to $150,000 portfolio) to mutual fund companies (with asset allocation apps on their websites and registered and fairly competent representatives available by phone at no extra charge). Every month, my Charles Schwab account monitors my investments for quality (as defined by Schwab experts) and for allocation outside of some model that has been selected for me.
Where I see more advisors today is providing a very wide range of services on an ongoing basis with their clients. They charge their clients an "asset management" fee, but portfolio oversight is a small part of the services provided. It just happens that advisors and client have agreed that it is a fair and transparent way of compensating the advisor while avoiding the piecemeal nature of hourly or project billing.
What the interview reminds me is that the market is highly competitive, and there is no lack for commentators ready to assert that this fee or that charge is too high. The remedy, of course, is an unassailable value proposition, and constant reminders of it with clients.
Tuesday, August 28, 2012
Money Fund Vote Withdrawn
Bloomberg published a story late last week that Mary Shapiro is withdrawing the proposal for money market funds to have floating NAVs or have money fund managers support the funds with some capital subordinate to investors'. Three of the commissioners opposed the proposal, suggesting that fund managers be allowed to refuse redemptions in times of market stress. One commissioner also suggested that more study is needed before any reforms be adopted.
The call for additional study is a canard, as the issue has been before the commission and the industry for two years. Allowing fund companies to refuse redemption requests is essentially the situation that we have now, but a little worse. As the experience with the Primary Fund shows, the first action taken when the buck is broken is to halt redemptions. The Primary Fund had to get SEC approval, which was immediately forthcoming. Giving fund managers the authority to close the redemption window will only accelerate the run, with large institutions leading the way at any sign of weakness.
Money market funds with a stable NAV are a product of arcane accounting rules that allow the funds to smooth the effects of short term market movements on short term debt instruments. Absent these accounting rules the NAV of the fund would fluctuate with market conditions, perhaps a penny in a week, maybe three cents in a year. Management could limit even that small amount of volatility through risk control techniques. Could also provide capital to absorb the first dollar loss.
The float or support proposal has backers out side of the SEC. (See my posts of April 13 and July 16.) With he support of the Fed and the new Financial Stability Oversight Board (a creation of the Dood-Frank financial reform bill), the proposal seems assured of adoption, despite the objections of the SEC commissioners and the money fund managers. It just remains to be seen when it will happen and what the final rules will look like.
The call for additional study is a canard, as the issue has been before the commission and the industry for two years. Allowing fund companies to refuse redemption requests is essentially the situation that we have now, but a little worse. As the experience with the Primary Fund shows, the first action taken when the buck is broken is to halt redemptions. The Primary Fund had to get SEC approval, which was immediately forthcoming. Giving fund managers the authority to close the redemption window will only accelerate the run, with large institutions leading the way at any sign of weakness.
Money market funds with a stable NAV are a product of arcane accounting rules that allow the funds to smooth the effects of short term market movements on short term debt instruments. Absent these accounting rules the NAV of the fund would fluctuate with market conditions, perhaps a penny in a week, maybe three cents in a year. Management could limit even that small amount of volatility through risk control techniques. Could also provide capital to absorb the first dollar loss.
The float or support proposal has backers out side of the SEC. (See my posts of April 13 and July 16.) With he support of the Fed and the new Financial Stability Oversight Board (a creation of the Dood-Frank financial reform bill), the proposal seems assured of adoption, despite the objections of the SEC commissioners and the money fund managers. It just remains to be seen when it will happen and what the final rules will look like.
Tuesday, August 21, 2012
A New Asset Mangement Paradigm?
Samuel Lum, CFA, has a piece at Seeking Alpha recounting a presentation on a new construct for portfolio management. Whereas the traditional asset management model called for portfolio construction based on asset classes, the new paradigm focuses on sources of return, specifically market-related (beta) and skill-related (alpha). The components of each are identified, and the various investment opportunities are categorized by the attributes and the attribution of their returns. A portfolio can then be constructed based on a more intuitive risk measure. (The article mentions Maximum Drawdown, but I can see Value at Risk taken into consideration.)
Institutions are adopting this new model, or at least its language. Allocations to alternatives are increasing, and are becoming more mainstream. On the other hand, beta exposure is being seen as a commodity, and a greater portion of the institutional portfolio is being indexed.
As the author indicates, the new model is complex; this is a bare summary of the elementary tenets. A more thorough discussion can likely be found in some of the CAIA curriculum. There are also alternative investment seminars being given all the time at various locations across the country.
Institutions are adopting this new model, or at least its language. Allocations to alternatives are increasing, and are becoming more mainstream. On the other hand, beta exposure is being seen as a commodity, and a greater portion of the institutional portfolio is being indexed.
As the author indicates, the new model is complex; this is a bare summary of the elementary tenets. A more thorough discussion can likely be found in some of the CAIA curriculum. There are also alternative investment seminars being given all the time at various locations across the country.
Thursday, August 16, 2012
This Is The Reason For The SEC Proposal
Financial Planning is reporting that management companies obtained permission from the SEC to provide support to161 money market funds during the credit crisis/financial market seizure of 2008. The list of funds and their sponsors was provided to Congress as a follow up to testimony the Mary Shapiro gave to the Senate Banking Committee in June. Five of the top 10 money fund managers were included on the list. In all of these cases, the management firms were willing to put up their own capital to allow the money funds to weather the storm.
Of course, the management firms are howling. Brian Reid, chief economist at the Investment Company Institute responded, "What's troubling about this list is that the reason for the support is completely obscured, and so it gives a false and misleading impression...Now they are trying to use sponsor support as some sort of inference that there's a problem."
Actually, it appears that the SEC is not suggesting that there is always a problem, just there are times when problems occur. What the proposal does is codify the for all money funds the steps that were taken to allow the 161 funds cited to survive the crisis. The proposal call for management companies to maintain a capital cushion for their money funds at all times, not just in crisis. Alternatively, they can allow the funds' NAVs to float on a daily basis.
The article does not say how much capital was committed to saving the money finds, nor the cumulative assets of the funds. this would give an indication of the reasonableness of the magnitude of the capital requirement. Otherwise, the number of funds affected four years ago seems to justify the new regulation.
Of course, the management firms are howling. Brian Reid, chief economist at the Investment Company Institute responded, "What's troubling about this list is that the reason for the support is completely obscured, and so it gives a false and misleading impression...Now they are trying to use sponsor support as some sort of inference that there's a problem."
Actually, it appears that the SEC is not suggesting that there is always a problem, just there are times when problems occur. What the proposal does is codify the for all money funds the steps that were taken to allow the 161 funds cited to survive the crisis. The proposal call for management companies to maintain a capital cushion for their money funds at all times, not just in crisis. Alternatively, they can allow the funds' NAVs to float on a daily basis.
The article does not say how much capital was committed to saving the money finds, nor the cumulative assets of the funds. this would give an indication of the reasonableness of the magnitude of the capital requirement. Otherwise, the number of funds affected four years ago seems to justify the new regulation.
Wednesday, August 15, 2012
An ETF Shakeout
So it's a shakeout of two minor players. Investment News has the story that Scottrade and Russell will be exiting the exchange traded fund business.
Scottrade's exit comes with a change in management. Its $100 million in FocusShares will cease trading on August 17 and liquidate. The funds had been introduced as a low cost provider, with expense ratios 1-2 basis points lower than Vanguard. However, the funds never gained enough investor interest to create critical mass and justify their existence, either as a loss leader or asset management product.
The Russell funds were designed to replicate active strategies through passive replication. The lineup included 26 funds which seemed to represent legitimate investment strategies. Only one of the funds is m ore than 15 months old, so it is difficult to tell how well the funds have been representing their strategies. Technically, Russell is conducting a strategic review, but IN is reporting that 30 related jobs have been cut. Perhaps another fund family will pick up the funds, one that already licenses Russell indexes, such as iShares or ProShares.
Scottrade's exit comes with a change in management. Its $100 million in FocusShares will cease trading on August 17 and liquidate. The funds had been introduced as a low cost provider, with expense ratios 1-2 basis points lower than Vanguard. However, the funds never gained enough investor interest to create critical mass and justify their existence, either as a loss leader or asset management product.
The Russell funds were designed to replicate active strategies through passive replication. The lineup included 26 funds which seemed to represent legitimate investment strategies. Only one of the funds is m ore than 15 months old, so it is difficult to tell how well the funds have been representing their strategies. Technically, Russell is conducting a strategic review, but IN is reporting that 30 related jobs have been cut. Perhaps another fund family will pick up the funds, one that already licenses Russell indexes, such as iShares or ProShares.
Tuesday, August 14, 2012
The Money Market Vote is August 29
Two articles in Investment News (here and here) note that the SEC appears to be moving forward on its money market fund proposal, scheduling a commission vote on August 29. If passed, the proposal will go into a public comment period which will bring heavy lobbying by the investment industry. The Chair of the Commission, Mary Shapiro, has made it very clear in recent months that the regulatory community is plumping for measures to reduce the likelihood of another fund breaking the buck.
The articles maintain that the outcome of the vote is in question. I would very surprised if the vote is held and the proposal does not pass. This has been discussed to death already. Everyone is clear on the issues. That the new Financial Oversight Board and the Federal Reserve have publicly declared their support, and outlined regulatory steps to enforce it, suggest the proposal is all but guaranteed passage.
The articles maintain that the outcome of the vote is in question. I would very surprised if the vote is held and the proposal does not pass. This has been discussed to death already. Everyone is clear on the issues. That the new Financial Oversight Board and the Federal Reserve have publicly declared their support, and outlined regulatory steps to enforce it, suggest the proposal is all but guaranteed passage.
Wednesday, August 1, 2012
New Real Estate Product
Private Wealth has an article announcing a private label real estate fund designed for high net worth individuals. Regis Metro Associates is offering to create customized portfolios of real estate on behalf of clients through its joint venture partners. The private label funds are being offered through wealth advisors, RIAs and multifmaily offices.
Subscribe to:
Posts (Atom)