Beware False Prophets Selling Investment Advisory Dogma

June 22, 2014


noun \ˈdg-mə, ˈdäg-\

: a belief or set of beliefs that is accepted by the members of a group without being questioned or doubted (courtesy of Merriam-Webster online).

Another Morningstar Investment Conference is in the books.  Among the myriad of panel discussions that took place over the course of the confab, it seems that the “Smart Beta” debate has generated (at least so far) a leading portion of the media coverage within the industry.  Pity.

I simply can’t understand why so much time and effort is expended by so many industry participants engaging in what for all intents and purposes is nothing more than a semantic discussion.  A number of industry players spend a majority of their time standing on the soap box expounding on the theory of why “Smart Beta”, as opposed to dumb beta, is a superior approach to extracting returns from the markets.  At the same time, a number of industry heavyweights spend an equal amount of time shouting at the top of their lungs in the attempt to discredit “Smart Beta” as nothing more than a marketing hoax perpetrated by those attempting to separate less evolved investors from their capital.

What a shame.  Both arguments are missing the central point of successful investing, in our opinion, and really should be considered as nothing more than high decibel sales pitches dressed up as academic and/or practitioner oriented investment proofs.  The recurring intellectual fisticuffs recounted so often in the financial media remind us of childhood sand box arguments engaged in by a series of 6-year olds who are clearly in need of an immediate nap.

Put very simply, there is no ONE investment strategy that is superior to all other investment strategies in ALL market environments.  That should be obvious to anybody who has spent more than 5 minutes analyzing the markets.  Sometimes passive beats active (although not always), sometimes growth beats value (although not always), sometimes small beats large (although not always), and sometimes strategic beats tactical (although not always).  I could go on.

Why can’t we in the industry let it go at that?  The Central Question referred to earlier is the following:  What investment style, strategy, or vehicle works best for a particular client with a particular risk/return profile in this particular market environment?  The answer is, universally, it depends.  What is better, chocolate or vanilla ice cream?  It depends.  What is better, chicken or fish?  It depends.  What is better, blue or green?  It depends.  Why do we in the industry make this so hard to understand?

Sometimes investment indices seeking to track a particular factor that are constructed utilizing a naive capitalization weighted approach to index construction (dumb beta) provide a better investment opportunity at a particular point in time than do related indices that seek to weight other factors more heavily than market cap (“Smart Beta”) in the index construction process.  And vice versa.  This game isn’t checkers.  Its chess.

Investors should never forget the following.  Low cost passive exposure to an overpriced asset is still exposure to an overpriced asset.  Which is a bad thing, irrespective of the low cost nature of acquiring this exposure.  At the same time, by definition, if an investment factor can be identified by the marketplace, and, therefore, utilized as an index construction methodology, then it can also be theoretically exploited to a point of over-valuation which will directly serve to render this “Smart Beta” exposure as being potentially dangerous.

There is no short cut to identifying attractive investment opportunities in the marketplace.  Let’s focus on solving that problem.  Stop with the silly debates.

Two hours to USA – Portugal in World Cup action.  Go Red, White, and Blue!


This Just In

May 10, 2014

So last week I was sitting in the lobby of an RIA firm I was visiting.  This particular lobby was straight out of the 1980s, with a decor one doesn’t normally see in today’s supposedly more modern age.  This room had the feel of old money.  This particular lobby also had a big screen TV tuned to the Cable News Network, better known as CNN.  As I had a few minutes to pass before my meeting, my gaze turned toward the TV just in time to witness a “Breaking News” update.  Given the numerous global hot spots and the multitude of potential newsworthy events that could potentially be shortly revealed, I focused my full attention onto the TV screen waiting for the update.  I had been traveling so I was a bit out of touch.  The “breaking news” announced it’s presence with authority, accompanied by enlarged bold type and some sort of seemingly important musical accompaniment to catch the casual viewers attention.  Almost like a John Williams Star Wars oriented composition.  It was strange.  And here it was.  Apparently the headline writing editors at the so called Cable News Network decided to issue a Breaking News alert to announce that the wreckage of Malaysia Air Flight 370 still had not been found.  In other words, a breaking news alert was issued to announce that there was actually no breaking news to report.  Hmmmmmm. Interesting.

OK.  I get it.  Breaking News reports put the casual viewing public on alert…perhaps gathering additional eyeballs that are so desired by Big Advertising.  So, while not exactly Walter Cronkite (Google this reference if this doesn’t ring a bell) worthy “Breaking News” is now as much a sales tool as it is an actual editorial news judgment.  And given the wholesale destruction that Internet bypass has wreaked on traditional media outlets, I understand that the business imperative now in many cases trumps the public interest imperative supposedly held sacrosanct over the years by traditional news gathering organizations.

But I have limits.  And they have pretty much been reached.  Once my trip concluded, and after another long day of running my investment advisory firm, managing our series of Model Portfolios, returning a large number of phone calls from a multitude of ETF sponsors that my firm is actively researching for potential investment, and, finally,  speaking to a number of RIA custodian platform research desks interested in learning more about my firm’s new mutual fund, I returned home and settled quickly onto the couch in the family room of my Connecticut home the other night to turn on the TV and quickly (hopefully) catch up on the newsworthy events of the day.  At least the ones that I had not already been made aware of and processed.

What I saw thoroughly disillusioned me.  The “Breaking News” tagline running across the bottom of the screen I was watching stated that somebody named V. Stiviano had apparently stated that somebody else named Donald Sterling was not a “racist”.  Of course I am referring to the current owner of the Los Angeles Clippers basketball team (Sterling) and somebody affiliated with him in some form or fashion (Stiviano).  I understand the uproar surrounding this story.  I get the issues.  I understand that the larger meaning intertwined with this general topic of race are completely newsworthy and certainly mandate thoughtful analysis and reporting by the national media.

However, the idea that some overly Botoxed faux celebrity wannabe is apparently a newsworthy enough source from which to seek a quote and a subsequent interview with Her Majesty the Doyenne Barbara Walters is appalling and shows just how far the national news media has sunk into the mire.  And why report a point of view from this particular overly Botoxed faux celebrity wannabe when it flies completely in the face and is wholly contradicted by the body of evidence that has been collected over the multi-decade long NBA team ownership tenure of Mr. Sterling.  From all the collected evidence and responsible reporting that currently exists in the public record, it is hard to argue with the point of view that Mr. Sterling is best characterized as being a despicably soulless, mean spirited, overtly racist, multi-billionaire, slumlord.  No quotes from overly Botoxed faux celebrity wannabes are necessary to inform the public in this matter.  CNN. Grow up.  Become the Cable News Network again.  You are better than this.  Jeff Zucker needs to remember that he got his start in the business actually presenting something to the public of value.  At the present rate, with its apparent journalistic standards currently in practice, CNN may likely soon offer a prime time show to whatever remains of the Swedish Bikini Team (again, Google this reference if it doesn’t ring a bell).

Which brings me to CNBC.  I hate what CNBC has become.  Its awful.  Its unwatchable.  Its embarrassing.  In its present form, it should be gently but nevertheless immediately euthanized.  Did I mention that it was embarrassing.  I recall fondly the era of more informed business news, circa approximately 1988.  Back then, the Los Angeles based Financial News Network (FNN) was actually the top dog while CNBC was a relatively unknown non-entity.  Much like Bloomberg Business news channel is today.  But after some horrendous financial and corporate mismanagement, FNN became a severely wounded media property that could  no longer exist on its own..thus falling into the arms of CNBC.  Beginning in the early 1990s, CNBC became the dedicated business channel of record on cable.  Which at first was OK.  Actually, for a good number of years, it was OK.  It was informative, in a general sense.  It gave investors, professional or otherwise, general context through which and from which to generally inform investment opinions.  It reported news.  As facts.  It included informative editorial commentary.  In short, it was OK.  It worked.  Ratings were good.  It was a profitable channel.  But GE wanted more.  It wanted stars.  And Big Hair.

That good reputation was all destroyed, permanently in my opinion, once the Internet led NASDAQ bubble subsumed all other business reporting.  The CNBC talking heads became unabashed cheerleaders of the Bull Market that seemingly wouldn’t end.  This all culminated when one of the CNBC leading lights actually published a book with a title something along the lines of “Use The News”, if I remember correctlyUse the news for what, actually?  To paper the bottom of the parakeet cage?  To use as charcoal starter for the weekend neighborhood barbecue gathering?

The publishing of this book was a singular height of misplaced hubris and intellectual dishonesty and, in my opinion, helped sow the seeds that ultimately destroyed CNBC as a front line reputable business news entity.  The idea that regular investors could “use the news” to actually inform themselves to the point where they could successfully trade the markets is a wholeheartedly silly proposition bordering on editorial malpractice.

And its gotten worse since.  Much worse.  And the audience has responded in kind.  The CNBC audience has essentially evaporated.  Circa 2014, the average daylong audience of CNBC is down considerably more than 50% from not so long ago, with some “shows” on the channel actually recording ratings down almost 75% from prior peaks.  There have been a lot of “talent” body bags leaving CNBC HQ over the last few months.  And don’t get me started on the CNBC princeling who effectively transformed himself over the years into nothing more than an overly caffeinated carnival barker where once he occupied the relatively rarefied position as successful Hedge Fund Manager.  He must hear a clock ticking somewhere in the background.  At least he should.

There is more.  Remember the Wall Street Journal?  The 2 section business newspaper of record that very profitably existed for over 90 years from its founding on into the 1990s?  At which point it transformed itself into a 3 section daily offering in order to begin the process of allowing a more non-business general audience to find favor with a publication put out by a highly dysfunctional family dynasty that was imploding with increasingly rapid efficiency.

The Wall Street Journal has become little more than a New York City centric general news audience quasi-tabloid financial news grocery store check out stand publication.  At times it makes even TMZ look good.  Which is really hard to do.

TMZ operating as a legitimate news source?  “Breaking news” now showcasing itself on Twitter more than other media publications combined?  Seriously?  Is this what we have become?  Twitter as a quasi news organization?

Walter Cronkite where are you.



High Frequency Trading In Context

April 6, 2014

The recent launch of the latest Michael Lewis gem and an accompanying piece on 60 Minutes that attempted to tell the story of the HFT Bandits generated more discussion this week than was likely warranted given that HFT is now more or less a shell of itself circa 2007/2008…and, oh, by the way, the markets feel somewhat heavy.  Maybe we should focus more on that.

HFT has been painted as an arch-criminal to the little guy investor, a modern day Lex Luthor seeking to separate the investing public from its collective savings.  Great narrative, big time public impact, good rating on a national TV broadcast, but unfortunately not all that in sync with the reality of the markets today.  The average retail investor has approximately zero to fear from the HFT crowd from a front running perspective.  Lets just say that investors don’t have to fear pressing the “Buy” button on their respective electronic brokerage screens.  Investor orders will get executed at the best available prices instantaneously, unless the order is entered far enough away from the markets (price and size) to render itself non-executable.  To us, much of the narrative about the HFT Vikings pillaging the proverbial investor class town square is misguided and a bit silly, quite frankly.

Having said all that, there are issues raised in the book that do require a laser beam focus from regulators, legislators, and perhaps even the criminal justice system.  To me the real enemies are not solely the HFT hordes, which more or less gamed the system within the rules that were applicable (unless of course they broke the law which is entirely possible).  The HFT complex was simply operating with a profit imperative that attempted to maximize revenue due to discrepancies in the market pricing structure, intended or otherwise.   Its a form of “revenue management” that is employed daily by a variety of economic actors.  The hotel and airline businesses routinely utilize technology to maximize their respective revenues by “gaming” their customers in the attempt to charge as much as possible (including widely diverging rates for the same product) for a room or a seat based solely on the customers time of electronic inquiry. So this game isn’t new.

To me, the true villains here are the Wall Street banks and the various broker/dealers who sell the order flow of their much larger institutional asset manager customers (and provide access to their respective Dark Pools) to the HFT outfits, in the process giving them a real road map into the possible future direction of trading activity, which is the equivalent of David Ortiz of the Red Sox sitting on a 3-1 fastball that happens to be grooved down the middle of the plate.  In other words, the HFTs are provided a target rich environment from which to profit.  Which they do.  Handsomely.  All this provided by a Wall Street which one would have thought had at least a mild fiduciary duty not to shiv their clients in the back.

Now I don’t give the HFT guys a free pass either.   Their MO of launching wave after wave of orders, only to simultaneously cancel many/most of them, for the sole purpose of attempting to identify future trading activity, is dangerous and can (and probably did in the Flash Crash of 2010) lead to structural market hiccups.  While the Flash Crash was bad, it could have been worse if it had occurred at a different time of the day.  A lot worse.

So, while HFT is likely an impediment to a well-functioning and trustworthy market trading apparatus, which is essentially at the heart of capital formation in this country (the real economic engine of the US), I don’t believe the sky is falling narrative that was so eloquently portrayed in the book.  In any event, the uproar brought forth by the book and the subsequent 60 Minutes story will certainly lead to added scrutiny by the appropriate parties.  Which is a good thing.  And the new IEX Exchange subsequently created by the main protagonist in the book is also a welcome addition to the brokerage landscape here in the US.  My firm will be trading on this Exchange going forward.

Now how about the ugly stock market this past Friday?  Many of the equity ETF strategies we look at appear tired, overdone, ripe for a pullback.  So far this has been a choppy year, feeling somewhat reminiscent of 2011.  Our relative caution to date (this can obviously change) has been proven to date to be the generally correct market posture.  Risk on/Risk off.  We shall see.

Congrats to my Gators for a great run.  Sorry to see it end.  Congrats also to the UCONN Huskies.  Well played.  Good luck Monday night.


The Smart Yield Weekly Update

March 29, 2014

Another interesting week in the markets…..a bit of froth here and there but no real major damage.  Except of course if you were involved in the Candy Crush IPO.  Or maybe you owned a bit too much Google.  Anyways, markets give and markets take.  It keeps it interesting.

We think that too many market commentators are getting it wrong.  There has been an inordinate number of prognosticators/cheerleaders publishing stories with the general line of thinking as follows:  “Gee, if we could actually see a good employment report than the markets would have confidence in corporate earnings going forward and, therefore, current valuations don’t appear all that out of the ordinary.  Maybe the market is ready for a rebound.”

We think that logic is essentially backward.  In our view, what will derail this stock market, if only temporarily but perhaps substantially, is if one of these days the employment print comes in well above expectations…finally…finally…signalling a beginning of the end the economic doldrums that have been so pervasive since the events of 2008/2009.  Our guess is that on the news of the upbeat employment number, if it happens, the market will rally reflexively…perhaps significantly.  And that move higher will be the signal to clear the decks as it will become clear to the major players that the gigantic accommodation offered by the Fed since 2007 will now have to be withdrawn in a more accelerated fashion than current Fedspeak suggests.  There are times when “good” news for the economy is bad medicine for the markets, especially so when future extrapolations of whatever influence the players are banking on are carried too far.  We shall see.

Maybe the worry on our part about an accelerating economy expressed above is misguided.  The bond market seems to think so, and I have always found the bond market to be much smarter money than the S&P 500 guys.  Take a look at the chart of the 30-year Treasury bond yield.  Bond yields have been falling all year, especially on the longer end.  The 10-year chart looks much the same.


Certainly there has been some flight to safety (driving down yields) given the relative state of the world in early 2014.  That logic is unassailable to me.  But, perhaps, just perhaps, the bond market is signalling a slowing economy rather than one of gathering strength.  I should have also mentioned that I believe that the bond market tends to leave the Fed in its dust as well.  The Fed always seems to be fighting the last war, not looking out over the horizon for the approaching enemy.  Unless and until yields stop falling, our view is that all is not as it may readily appear on the economic front.



Weekly Update – April 2, 2010

April 7, 2010

And so it goes.

A recent academic study published in the Financial Analysts Journal details (see link below) how the concept of asset allocation is not nearly as important as once believed when attempting to understand the sources of investment return for a given portfolio.  Consider this article another in a growing body of work that ultimately calls very much into question the underlying philosophy upon which the vast majority of assets are currently managed in the capital markets.  At this point, many of the core beliefs regarding optimal investment management that migrated out of the leading academic labs circa 1950-1990 have been shown to have deficiencies, in some cases so serious as to render the prior understanding erroneous.

As I have previously written here and elsewhere, I do believe that we are in a new era of capital market expectations and investor behaviors.  The world has changed.  Many of the old slogans invented by the slickster marketing departments of Wall Street (remember this one (“….it’s not “timing” the market that is important but “time in” the market that leads to the best results”).  Yikes, I have to admit that I have said that once or twice myself over the years.  Maybe I even believed it at some point.  But I don’t now.

 This is an incredibly hard business that does not lend itself to simple answers or catchy bromides.  Blind reliance on general market indexing can work, except when it doesnt.  Buy and hold works, until it doesn’t.  Both of these investor behaviors work well when the tide is rising and all boats are raised.  And they work equally poorly when the tide is going out (anyone remember 2008?).  So timing does matter.  I remember a day when Vanguard couldn’t give away its first equity Index fund.  Go check the data.  For almost ten years after its launch it had negligible fund flows.  And that made perfect sense at the time given that the underlying market was and had been lousy, and the class of investors then existing hadn’t yet been brainwashed into buying all dips.  Just why would any right minded investor accept a highly volatile series of underwhelming investment returns for an extended period of time? 

All that changed during the almost 20 year bull market in stocks and bonds that started in the early-1980’s and crescendoed into 2000.  And equity fund flows were massive over the last years of the internet/technology/Y2K derived bubble years.  Then they had a spectacular blow-off upward, and peaked.  Right at the top of the market.  And investors got crushed.  And it happened again 8 years later to equity investors.  And it will likely happen to bond investors starting somewhere around now.  Of course timing matters.  Why did we ever think otherwise?

So it makes sense to pay attention.  Do your homework.  And don’t believe in slogans.  Markets can and do go up, and down, a lot. Even bond markets.  Entry points matter.  Exit points matter.  You should never ever fall asleep at the wheel.  Something can always go wrong, and it usually does at the worst possible moment when we are most complacent.

Stay tuned.



Weekly Update – March 26, 2010

March 28, 2010

And now a quick word from our sponsors. 

OK, we have no sponsors.  Nor do we seek them.  Nor will we accept them.  But consider the following a commercial.

I am often asked what I believe is the best source of market, economy, or investment related information available to the public.  My response, as always, is that there isn’t one.  There are far too many information sources, in far too many forms and media formats, to select a single source as being the best repository of beneficial investment related knowledge.

Having said that, I am now going to make a recommendation.  I have found one source of market information to be consistently excellent.  Not simply for investment ideas or investable themes.  I don’t look for those in the media (nor should the investing public in my opinion).  The source of info that I am about to name typically profiles a leading investor or market strategist each week, providing a full and wide-ranging discussion that is as topical and timely as any single source that I have yet found.

Drumroll please.

Consuelo Mack| WealthTrack is a weekly TV show produced by Public Television.  It appears in my area of greater New York City on Saturday mornings.  Check your local listings below:


I wholeheartedly recommend that all investors take the time to watch this show.  The roster of recent guests interviewed by Consuelo Mack, a highly savvy journalist with decades of experience covering the financial beat, have included:  Bill Gross, Steve Romick, Bruce Berkowitz, Niall Ferguson, and Jim Grant (my single favorite episode).  All of these individuals are A-players in their respective fields.  For those seeking a balanced and measured view of what the economy/markets may look like in the months/years ahead as we recover from the market meltdown of 2008/2009 (with just a little Fed bashing thrown in for good measure), please watch the episode featuring James Grant that was broadcast earlier this year (link included below: )


I have come away from each WealthTrack show with a fuller understanding and/or a deeper perspective on many issues facing the economy/markets. 

 I recommend this show without reservation.  Some episodes are better than others, certainly, but on balance I consider it time very well spent.

For purposes of full disclosure, we at HWCP receive no compensation from anybody directly or indirectly related to WealthTrack.

The commercial is now over.

Stay tuned.


Weekly Update – March 19, 2010

March 26, 2010

So I recently spent a few days on the road engaged in a due diligence mission.  After a lot of changes over the past year, one of the major mutual fund families invited a group of investment advisors (the folks who sell their funds to clients) to come by HQ and kick the tires and visit with many of the new PM’s and execs that have come on board this particular fund family over the last 18 months.  All in all, it was a very well-organized trip.  Extremely well done.  This fund family remained on point and on message throughout the visit.  Not a lot of stones were left unturned.  This fund family showcased a lot of investment talent to the gathered visitors.  A succession of very impressive people hit the stage.  Many of these folks were industry heavyweights.  After a very mixed performance over the last 10 years, my guess is that this fund family is very well positioned for the future.  It shall remain nameless since I don’t do public recommendations.

But part of me remains uneasy.  One of the main topics of discussion during the visit focused on a particular fund strategy that this firm, along with many other fund families, has recently brought to market.  The investment strategy has been described in various terms and in various ways, with “hedged equity”, “real return”, “absolute return”, and “multi-strategy, multi-asset class” being among the most prevalent of the adjectives.  This category of funds (including ETF’s) is among the fastest growing of all new strategies coming to market.  The ETF pipeline is currently bursting with vehicles scheduled to go public over the next 6-9 months that are expected to employ strategies like the ones described above. 

So why am I concerned?

Many of these funds have expressed in some form or fashion that they expect to employ an “absolute return” investment strategy.  Thats all fine, except for one thing.  “Absolute return” is not a strategy, it’s a return target.  And most of these new funds have specific return targets.  In some cases, extremely specific.  The problem is, the capital markets don’t work that way.  Simply publishing a return target in advance, even if it is a relative return target, doesn’t necessarily mean that the capital markets will provide the opportunities to generate returns up to that intended level.  Maybe they will, maybe they won’t.  The point I am trying to make is that investment strategies aren’t necessarily repeatable year in and year out.  Sometimes they work, sometimes they don’t.  It’s the nature of the beast.  Promising a return in advance to investors is dangerous, if not downright silly.

Make no mistake.  My view is that the future belongs to multi-strategy, multi-asset class investment vehicles and approaches.  Highly rigorous, highly methodical, highly diversified, and highly risk-managed total portfolio investment solutions are in (and likely to remain) the sweet spot given the dynamics of the current capital market environment.  A lot of fund families are bringing vehicles of this type to market.  It will soon become a tidal wave.  Some will thrive.  Most will fail.  But by no means are all these vehicles created equal.  Many of them have been crafted by slickster marketing types seeking to garner as much of the fund flow to this category as possible.  And when you peel back the marketing hype and peek under the hood to see what many of these funds are actually doing with the assets entrusted to them, its cause for concern.

So, be careful out there.  Don’t just read the label.  Do your homework.

Stay tuned.


Weekly Update – March 12, 2010

March 14, 2010

But there is trouble in paradise….all is not well in the City of Angels“…….Danny deVito as Sid Hudgens, L.A. Confidential, Brian Helgeland/Curtis Hanson (writers), Warner Bros. Pictures, 1997.

So I attended an Investment Consultant Roundtable conference in New York City this week.  The main topics of discussion centered around how the investment consulting industry is navigating the institutional investor landscape so far in 2010, with a particular focus on how the turbulent market environments experienced over 2008-2009 may have taught valuable lessons.  Representatives of many of the leading consulting firms were present, as was a good cross section of the institutional investor marketplace.  Multi-family offices, pensions, endowments, foundations, hedge funds, and international consulting firms were particularly well represented as a percentage of all those participating.  Approximately 150 people were in attendance.

After sitting through a day of discussion and dialogue, my sad and unfortunate conclusion is this, and on this point I was certainly not in the minority based on my post conference interactions with others:  Investment consulting firms don’t seem to get it, and too many institutional investor clients of investment consulting firms don’t seem to listen to their advice anyway.  So whats the point of it all.

A few recurring thoughts of mine throughout the day based on the presentations given and panel discussions that followed:

1.  Investment consulting firms seem to have no true analytical methodology or framework upon which their supposedly forward looking asset class returns or asset allocation recommendations are based. At best the forecasts appeared arbitrary.  At worst they were just a stale recitation of historical averages. For example, one member of a leading consulting organization stated that he used “100 year averages” to forecast future asset class returns.  Another member of a leading institutional investment consultant stated that her firm has the same annual return forecast for the equity asset class in 2010 as they did in 2008.  And this was significantly higher than the return forecast that they had carried for 2009.  The underlying logic as to why the firm was positioned this way was “we needed to catch up to the market”.  Excuse me?  Has this individual ever heard of buy low-sell high?  Lastly, the director of asset allocation policy at a global investment consulting firm that purportedly advises clients with an aggregate asset base in excess of $900 billion (thats with a B) essentially stated that they “pretty much default to historical averages” when setting their asset class returns and asset allocation policy recommendations.  When pressed to give a more specific answer as to the time periods incorporated in their analyses, his reply was “that depends”.  Yikes!  Thats the best they can do?

2. It was also quite apparent to most in attendance that much of the institutional investor complex (Pension, Endowment, Foundation, etc.) has a broken governance model.  Board of Director and/or Trustee oriented decision making mechanisms at far too many of these institutions seem hoplelessly outdated or ineffective, unable to cope with the much faster paced and complex market environments of today (especially in periods described as crises or panics). It was painful to hear how many institutions disregarded their own policy directives in early 2009 by refusing to re-orient portfolios to stated guidelines.  In effect too many of them decided to not only not rebalance equities back up to even minimum target levels, but in fact to allocate further assets away from equities as they were considered too dangerous.  Now clearly, Q1 2009 was an extraordinary period.  Many investors had been shaken by the turmoil over the prior 6-9 months.  I was shaken.  The market felt like it was coming apart.  Melting down almost.  It felt like September 2008 all over again. 

But, policy is policy.  And I don’t just mean a piece of paper called an Investment Policy Statement (IPS).  What I am referring to is the disciplined and methodical analysis that is undertaken during the planning by all internal and external constituencies that ultimately leads to the creation of the Policy Statement.  As General Eisenhower stated when asked after the War to describe the plan for the D-Day invasion, he is reported to have said “……it’s not the Plan, but the planning, that was most important”.

If an institutional investor is not going to follow its plan, expressed and formalized through the creation of an IPS, which presumably was arrived at after careful and considered analysis, then why have one in the first place?

While sitting through one presentation after another, my lingering thoughts throughout the day were this.  Is it any wonder that we have such a pension crisis in this country?  Is it any wonder that so many investment plan sponsors across the public/private spectrum are currently experiencing such tremendous gaps in their funded status?  How did we get here?  Is this the best we can do?

Stay tuned.


Weekly Update – March 5, 2010

March 10, 2010

Hello From Squam Lake

The Squam Lake Working Group On Financial Regulation is a collection of civic minded leading academics (how ominous does that sound?) who have come together in a non-partisan fashion to offer their collective wisdom and guidance in the service of creating a more rational framework within which to regulate the national financial markets.  A report detailing several of their higher level recommendations is currently available on-line at (http://www.squamlakeworkinggroup.org/).

I read with great interest Working Paper # 6 regarding the current state of the nation’s retirement system (see link below).  Without going into detail overdrive, one of the group’s recommendations struck me as being so provocatively intuitive and right on the money, I quickly concluded that the recommendation in question has ZERO chance of being adopted.  Which is unfortunate.

The recommendation I am referring to is related specifically to defined contribution plans and their sponsors.  And how providers of investment management services should operate when dealing with plans of this type.  So as not to paraphrase, here is an excerpt:  

We recommend changes in disclosure requirements and investment options. To be eligible for defined contribution plan investments, a mutual fund should be required to provide a simple standardized disclosure of the costs and risks of investing in the fund. Our model is the nutrition label required for packaged foods in the United States. The investment label should emphasize tangible characteristics that are related to cost and risk. Expense ratios, for example, should be prominent 

When trying to forecast future investment returns, investors often overestimate the information in prior returns. Even five-year return histories are of almost no use in forecasting future relative performance. For this reason, we recommend that the standardized disclosure should not include information about prior returns.

Umm, did you read that last sentence? Not include prior performance when attempting to make an informed investment decision and/or selection? Are you kidding me?

When I read that sentence I couldnt believe it. It is so…..so……so….APPROPRIATE ! What a wonderful concept. Attempting to purchase investment products or services without defaulting to the analysis of historical returns as the primary, if not only, form of analysis would actually make it required for investors and/or professionals who attempt to analyze third-party investment managers to make the attempt to UNDERSTAND what the fund manager is trying to do. What a novel concept.

More seriously, it should be clear by now from the growing body of academic and practitioner research (did you read the latest blast aimed directly at Morningstar that was recently published in SmartMoney Magazine……That link is also below) that most providers of manager search/selection services really have a very limited idea about what they are doing. Not all providers, of course. Some are quite well established, if not very good. But all, or at least most, very rarely earn their elevated fees.

Historical performance is clearly an appropriate metric upon which to pass judgment of investment managers. All those performing analysis on investment managers must take into consideration the historical performance. But most manager search work being undertaken today effectively stops there. It is either done by junior personnel who “screen” databases to search for good recent track records, typically a minimum of 3-years is required, which is truly silly; or by additional junior personnel who delve deeply into 50-100 question multi-part questionnaires provided by managers so that still more junior personnel can attempt to devine the true stock selection, portfolio construction, and risk management techniques of the manager in question. OK, if it works for you so be it.

But the data is showing more clearly every day that that approach doesn’t work. More importantly, it can’t work. When will the lights go on?

Stay tuned.





Weekly Update – February 26, 2010

March 2, 2010

Don’t buy that mutual fund if it carries a load! 

I am sorry if my previous comment upsets a significant percentage of those practicing in the wealth management/investment advisory business as it exists today.  But the facts don’t lie. 

Don’t take my word for it.  Read this. 


The above study published in 2004 is one of the definitive, if not the pre-eminent, investigations of the returns generated by a wide sample of publicly available mutual funds.  The study made the attempt to ascertain whether their existed a statistically significant differential in the load-adjusted returns produced by mutual funds that carry a sales charge and their no-load counterparts. 

Here is an abstract from the author of the study: 

Matthew R. Morey 

Journal of Banking & Finance 

vol. 27, no. 7 (2003):1245–71 

Many mutual funds charge customers sales fees, known as 

“loads,” and the market share of such funds has increased since 

1997. The sales charges are designed to compensate financial 

advisors for their marketing, advice, and service. The author 

asks whether investors give up any performance in the 

exchange. Although researchers have shown that the performance 

of load and no-load funds is virtually identical, they did 

not take into account the effect of the sales charges. When the 

sales charges are included, no-load funds significantly outperform 

load funds. Investors must decide whether the service and 

advice are worth this performance shortfall. 

Obviously the value of the “advice” rendered must be called into question simply given the fact that investors are apparently being steered into high-cost investment vehicles which in the aggregate are expected to underperform their lower cost cohorts.  “Advice” like this can’t be worth much. 

The true value of “service” is another question entirely.  I will leave that up to others to decide. 

Stay tuned.