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.
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.
Tuesday, July 31, 2012
A Chilling Prospect
Investment News has a story about a Department of Labor investigation into a JP Morgan Chase (JPMC) stable value product that was included as an investment option in several 401(k) plans. The DOL is working to determine whether JPMC breached its fiduciary duties under ERISA by investing as much as 13% of the fund's assets in private-mortgage debt that was underwritten and rated by JPMC. According to the story, "[t]he Labor Department could be examining whether the fund holds
investments that are inappropriate and whether such risks were
disclosed...." What seems most obvious is that JPMC is at risk of being found having engaged in self-dealing in violation of its fiduciary duty to act in the sole interest of plan beneficiaries.
The most chnilling aspect of the story is that "[i]f the DOL finds that the firm violated ERISA with respect to the investments within the fund, plan sponsors and advisers who recommended it to 401(k) plans could be on the hook for failure to perform the proper due diligence." That is, since JPMC violated ERISA in managing the fund, employers and advisors may have violated ERISA for failing to uncover JPMC's activity. A successful due diligence defense will hinge on the nature and availability of the disclosure, the discovery by plan fiduciaries, and the actions taken upon discovery of the activity. Other factors that may affect the determination: the relationship between the advisor and JPMC, the relationship between the advisor and the administrator, the relationship between the administrator and JPMC, and the compensation mechanism of each of the service providers.
There was a time when an advisor could rely on the information routinely provided by service provider and money managers to satisfy their due diligence responsibilities. As advisors have gotten closer to employers and their retirement plans and accepted fiduciary status, whether they knew it or not. As this story indicates, a fiduciary, the advisor assumes responsibilities requiring investigation far beyond the standard management interviews and review of SEC filings.
The aspect of this story that is truly chilling is that there are forces at work to impose a fiduciary duty on advisors covering all of their client relationships. There are advisors that embrace the opportunity to work this closely with clients and have structured their practices accordingly. However, not all clients need or are willing to pay for such a high level of service. Nor are all advisors prepared to conduct business in such a manner.
The most chnilling aspect of the story is that "[i]f the DOL finds that the firm violated ERISA with respect to the investments within the fund, plan sponsors and advisers who recommended it to 401(k) plans could be on the hook for failure to perform the proper due diligence." That is, since JPMC violated ERISA in managing the fund, employers and advisors may have violated ERISA for failing to uncover JPMC's activity. A successful due diligence defense will hinge on the nature and availability of the disclosure, the discovery by plan fiduciaries, and the actions taken upon discovery of the activity. Other factors that may affect the determination: the relationship between the advisor and JPMC, the relationship between the advisor and the administrator, the relationship between the administrator and JPMC, and the compensation mechanism of each of the service providers.
There was a time when an advisor could rely on the information routinely provided by service provider and money managers to satisfy their due diligence responsibilities. As advisors have gotten closer to employers and their retirement plans and accepted fiduciary status, whether they knew it or not. As this story indicates, a fiduciary, the advisor assumes responsibilities requiring investigation far beyond the standard management interviews and review of SEC filings.
The aspect of this story that is truly chilling is that there are forces at work to impose a fiduciary duty on advisors covering all of their client relationships. There are advisors that embrace the opportunity to work this closely with clients and have structured their practices accordingly. However, not all clients need or are willing to pay for such a high level of service. Nor are all advisors prepared to conduct business in such a manner.
Sunday, July 29, 2012
Desperate Measures For Desperate Times
The low interest rate environment is leading investors -- and their advisors -- to desperate measures in an attempt to meet retirement income objectives. An article in Investment News addresses the dilemma faced by retirees and their advisors whose plans are being foiled by flat equity markets and plummeting interest rates. Three solutions explored are immediate annuities, high yield bonds, and preferred stocks.
An immediate annuity can be a valuable tool to allow a client to meet objections in the short term while allowing capital markets to do their job and provide a reasonable rate of return for risky assets. Of course, an investor will forgo the opportunity for increasing income from the capital devoted to the annuity. However, this assurance of lifetime income frees the remainder of the portfolio to address the risk of inflation. Absent the annuity, the portfolio runs a real risk of failing to last the lifetime of the retiree.
The article acknowledges the incremental risks of high yield bonds and preferred stock. Here is how one advisor addresses the risk:
Of course, the two holdings can work very well together. The inflation protection of the increased coupon of the high yield bonds offsets at least a portion of the cost of living risk of the annuity, and vice versa. Which is the whole idea of diversification.
An immediate annuity can be a valuable tool to allow a client to meet objections in the short term while allowing capital markets to do their job and provide a reasonable rate of return for risky assets. Of course, an investor will forgo the opportunity for increasing income from the capital devoted to the annuity. However, this assurance of lifetime income frees the remainder of the portfolio to address the risk of inflation. Absent the annuity, the portfolio runs a real risk of failing to last the lifetime of the retiree.
The article acknowledges the incremental risks of high yield bonds and preferred stock. Here is how one advisor addresses the risk:
“We invest in a high-yield ETF with 10 or 20 bond positions that have low management fees, which eliminates the need for us to investigate the company,” said (the advisor).Very scary stuff. While an ETF provides liquidity for the junk bond position, its pricing will reflect the marketability of the underlying bonds, and if one of the holdings (about 5% if there are twenty holdings) defaults, that pricing will wilt. The period since 2009 has seen very positive results for high yield bonds, it has been an unusual period. The assumption that an economic meltdown would be necessary to have a negative effect on high yield bond returns is unduly optimistic, especially in such a concentrated portfolio.
“We’ve been in junk bonds since 2009 and they’re great performers. Unless the entire economy implodes, I think they are a fairly good buy,” (the advisor) said. “The risk is that the issuer can default, which we assess beforehand.”
Of course, the two holdings can work very well together. The inflation protection of the increased coupon of the high yield bonds offsets at least a portion of the cost of living risk of the annuity, and vice versa. Which is the whole idea of diversification.
Wednesday, July 18, 2012
Cap Rates Lower Than Advertised
REIT.com interviewed Paul Curbo, portfolio manger for INVESCO, about market conditions for commercial real estate. The article (and video) include a number of insights into the various sectors of investment real estate. What caught my eye was the discussion of cap rates and the examples he cited: apartments changing hands at 5% cap rates, and 4% in California. While the fundamentals are entirely different today than they were then, this pricing is reminiscent of the frothy markets 2006 and 2007. Curbo's observation that a development pipeline will provide immediate value add is true as long as pent up demand for units continues. At the rate that units are being built and mothballed construction is being restarted, that backlog will not exist for long.
Tuesday, July 17, 2012
Another Note Program Halts Interest Payments
Investment News has a story about Thompson National Properties (TNP) suspending payment of interest on a program that raised capital in 2008 and 2009, just as TNP was getting started. The program, TNP 12 Percent Notes Program LLC, was intended to provide working capital for TNP. The only assets of the program were loans to TNP and affiliates. TNP provided no credit enhancements or guarantees. If I remember correctly, investors are members of the LLC, and the LLC made the loans. Of course, an affiliate of TNP is the Managing Member of the LLC.
I don;t believe that investors have any immediate recourse, other than to remove the Managing Member, and install one that will act in their interests. That would take a lot of time and money, and if TNP's forecasts are accurate, interest payments would be flowing again.
On the other hand, Tony Thompson has faced a lot of adverse conditions, has worked hard to resolve them for the benefit of investors, and has made a lot of money for investors and himself along the way.
The comments on the article are very interesting. They reflect just how polarizing an figure Tony Thompson is. Tony has just as many fans as he does detractors.
I don;t believe that investors have any immediate recourse, other than to remove the Managing Member, and install one that will act in their interests. That would take a lot of time and money, and if TNP's forecasts are accurate, interest payments would be flowing again.
On the other hand, Tony Thompson has faced a lot of adverse conditions, has worked hard to resolve them for the benefit of investors, and has made a lot of money for investors and himself along the way.
The comments on the article are very interesting. They reflect just how polarizing an figure Tony Thompson is. Tony has just as many fans as he does detractors.
Monday, July 16, 2012
Now The Fed Is Getting In On The Action
I have mentioned before about the proposal to insulate money market funds from runs that would have an adverse impact on markets. The proposal would have money market funds either 1) have a cushion provided by the management firm, or 2) allow the NAV to float. Next, the Financial Stability Oversight Board stepped in to say that is the SEC didn't adopt the proposal, it would require the commission to enforce it..
Now, the Federal Reserve has stated its intention of using its bank regulatory powers to accomplish the same objective. According to Investment News, the Fed is considering reclassifying the funds provided by money market funds to a riskier category. this would make money funds a less attractive option for funding, possibly limiting the investment available to the money market funds. Of course, all would be well if the money funds would drop their opposition to the SEC proposals. Wink,wink, nudge, nudge, knowwhatImean?
Last time I said it's going to happen. Now it's time for money fund companies to figure out how they will comply. As a money fund with a floating NAV is not much of a money fund, I expect more than a few funds to announce that they will have the 3% (or so) equity buffer. Expect any fee waivers that these funds enjoyed to be dropped, and fees to increase once interest rates increase sufficiently to cover them.
Now, the Federal Reserve has stated its intention of using its bank regulatory powers to accomplish the same objective. According to Investment News, the Fed is considering reclassifying the funds provided by money market funds to a riskier category. this would make money funds a less attractive option for funding, possibly limiting the investment available to the money market funds. Of course, all would be well if the money funds would drop their opposition to the SEC proposals. Wink,wink, nudge, nudge, knowwhatImean?
Last time I said it's going to happen. Now it's time for money fund companies to figure out how they will comply. As a money fund with a floating NAV is not much of a money fund, I expect more than a few funds to announce that they will have the 3% (or so) equity buffer. Expect any fee waivers that these funds enjoyed to be dropped, and fees to increase once interest rates increase sufficiently to cover them.
Friday, July 13, 2012
Wells Foregoes Fee on REIT II
On June 29, The Rational Realist reported that Wells REIT II had announced that it will not pay to internalize its advisor. This is a big deal, as the internalization fee was the big payday for a syndicator, and it wasn't subject to such uncontrollable factors as performance. Wells Real Estate Funds is forgoing probably between $150 and $200 million.
This is not an altruistic move. Leo Wells is a very charitable man. However, he is very quick to tell you that Wells Real Estate is not a non-profit organization.
Nor is this an indication of some newfound backbone by the Board of Wells REIT II. REIT boards are filled from a good ole boy network, and Leo Wells is the definition of a good ole boy.
Forgoing the internalization fee is the second move that the wells organization is taking to address an issue tat is much bigger to Leo Wells: slumping sales. at its core, Wells Real Estate Funds is a sales organization, not an investment organization, not a real estate organization. Every decision is made through a lens pointed at sales trends. Wells Timberland's capital raise was an enormous disappointment. The raise for its Mid-Horizon Value-Added fund has been lackluster. Core Office REIT was on a run rate of about $1 million per day raising just $225 million through December 31, 2011 and $282 million through March 31, 2012. In May, Wells made wholesale changes in its senior sales personnel. Now, Wells II has reduced its fees.
What has not happened is the renunciation of internalization fees for the Core Office REIT. I guess Wells is hoping that the market will pick up the implication that no more internalization fees will be charged. Their market prospects would improve much more significantly if the Core Office REIT would just adopt that position.
This is not an altruistic move. Leo Wells is a very charitable man. However, he is very quick to tell you that Wells Real Estate is not a non-profit organization.
Nor is this an indication of some newfound backbone by the Board of Wells REIT II. REIT boards are filled from a good ole boy network, and Leo Wells is the definition of a good ole boy.
Forgoing the internalization fee is the second move that the wells organization is taking to address an issue tat is much bigger to Leo Wells: slumping sales. at its core, Wells Real Estate Funds is a sales organization, not an investment organization, not a real estate organization. Every decision is made through a lens pointed at sales trends. Wells Timberland's capital raise was an enormous disappointment. The raise for its Mid-Horizon Value-Added fund has been lackluster. Core Office REIT was on a run rate of about $1 million per day raising just $225 million through December 31, 2011 and $282 million through March 31, 2012. In May, Wells made wholesale changes in its senior sales personnel. Now, Wells II has reduced its fees.
What has not happened is the renunciation of internalization fees for the Core Office REIT. I guess Wells is hoping that the market will pick up the implication that no more internalization fees will be charged. Their market prospects would improve much more significantly if the Core Office REIT would just adopt that position.
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