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.
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