The easy money has been made. I am not referring to picking the market bottom reached on May 9, 2009. That would have been speculation, not investment. In fact, just six months before I attended a conference where Emerson Chairman and CEO Dave Farr spent 10 minutes explaining that his cash and liquidity position could withstand a two-year depression with no profit. Every presenter who followed did likewise. I never want to see that again and neither do you. Many attendees, of course, are no longer in the business.

Stabilized conditions + Fire sale asset prices = Alpha. This sounds trite, but once conditions stabilized, easy pickings were available. Stability meant that 1) capital markets were functioning thanks to global government action, 2) unemployment had stopped rising, and 3) data points were improving (and "getting less bad" counts as improving). Fire sale prices

In the first quarter of 2013, institutional investors added to their equity holdings in the healthcare sector while reducing their exposure to the technology stocks. Among the most widely held stocks, portfolio managers as a group added to positions in Citigroup (C), Johnson & Johnson (JNJ), Microsoft (MSFT), and BlackRock (BLK), and trimmed positions in Apple (AAPL), Oracle (ORCL), Pfizer (PFE), and Coca-Cola (KO).

In his book, One Up on Wall Street, renowned fund manager Peter Lynch said of the perfect stock, “The institutions don’t own it, and the analysts don’t follow it.” With institutional ownership of equities nearly doubling in the past 30 years, it has become harder to find such undiscovered gems. Despite Lynch’s advice, the fanfare associated with the recent Sohn and SALT hedge fund conferences, and Buffett-palooza, is clear evidence that the investing public is intently focused on

Throughout Singapore and elsewhere in Asia where it operates, we see an advertisement from one of the region’s biggest banks that says, “Asia’s safest bank.” Five years after the global financial crisis, depositors, investors, and the general public still worry about risk, and assurances seem necessary for them to trust the financial system.

Surveys conducted by various organizations have shown similar findings: The public has ranked the financial services industry rock bottom in trustworthiness. If collateralized debt obligations (CDOs) did not kill off confidence in the financial markets, the Libor-rigging scandal probably did. In the eyes of the investing public, financial markets have been manipulated by a few for their own benefit and have ceased to serve society’s needs.

This erosion of trust has far-reaching effects — on pensions, capital allocation, investments, and ultimately, the welfare of society. Globally, lack of trust has led

Financial statement analysis and security valuation are a big part of our training as CFA charterholders; for many of us, they are the most important part. We pride ourselves on the thoroughness, sophistication, and level of detail of our analysis. A friend of mine in private equity explained that his due diligence process for buying a company was so thorough it included learning "the first name of the CEO's second mistress." But how much impact does that particular detail have on investment performance? How many of the myriad qualitative facts that we gather about a company ahead of an investment decision actually make a difference?

Wesley Gray and Tobias Carlisle offer a different approach in their fascinating book Quantitative Value. They begin with two simple observations. First, value stocks -- as a group and over the long term -- outperform growth stocks. Second, value

Aging and the Macroeconomy: Long-Term Implications of an Older Population. National Academies Press. 2012.

Reviewed by Murad J. Antia, CFA

The United States and many other countries are in the infancy of significant demographic changes. Over the next four decades, the retiree demographic will constitute an increasingly large percentage of the population. In the United States, the old-age dependency ratio — the ratio of people aged 65 years and over to people aged 20–64 years — will likely increase by 80% by 2050.

In 2010, the U.S. Congress asked the National Research Council (NRC) to prepare a report on the long-run macroeconomic effects of the aging population. The NRC appointed an ad hoc committee to survey the academic literature and create a knowledge base for the ongoing debate on the demographic shift and its effects on Social Security, Medicare, and Medicaid. Aging and the Macroeconomy:

What do we make of the frenzy in Asia’s debt capital markets? In a span of five days last month, a staggering US$8 billion was raised in Asia ex-Japan. In the week that followed, Sinopec (SNP), China’s state-owned oil company, issued the largest bond in Asia in a decade — worth US$3.5 billion. As of mid-April, Chinese debt capital markets deals reached US$129.7 billion, up 34% from the same period last year, according to data provider Dealogic.

Debt is back with a vengeance — thanks to record-low interest rates and excess liquidity. Nowhere is that more apparent than in Asia’s high-yield debt market. As of mid-April, Asian high-yield issuances have reached US$18 billion, already exceeding the total for the full year of 2010. Foreign investors

Japan’s Nikkei index is on fire. In just the past six months, the benchmark is up 55% as of this writing. Why? Pretty simple: New Bank of Japan Governor Haruhiko Kuroda has announced that the Bank of Japan (BOJ) will begin purchasing approximately ¥7 trillion worth of bonds annually in a major new quantitative easing program. In short, Japan will be printing gobs of money and all of this money has to go somewhere. That may look like great news for investors who hold Japanese equities, but from where I sit, this has all of the classic makings of one big investment bubble.

Nikkei 225 Index
(click to enlarge)

Sources: CFA Institute, Dow Jones.

Even though Japan has been providing monetary stimulus for many years, the new policy represents a major expansion of the country’s existing response to deflationary pressures in the economy.

If you can’t make it in China, try Southeast Asia.

This seems to be the mantra these days among international banks and financial firms that want a foothold in Asia’s most coveted market but are turned off by regulatory requirements or stiff competition. If China has 1.2 billion people and a rising middle class, Southeast Asia has 600 million people, growing wealth, and plenty of investment banking deals too.

According to the Wall Street Journal, investment banking and trading revenues in Southeast Asia reached $13 billion last year (the second biggest in Asia ex-Japan after China’s $19 billion) on the back of mega deals such as Thailand’s C.P. Pokphand’s acquisition of Singapore food and beverage giant Fraser and Neave.

Without doubt Southeast Asia is on the ascendancy, largely a result of relative political stability in the region. I have recently traveled to a number of

What is the most important event over the past decade? Many would say that the rise of China completely changed the global economic, political, and social landscape. Since China’s entry into the World Trade Organization in 2001, China’s GDP has grown 4.5 times larger, making its economy a growth engine of the world.

In doing so, China has helped reshape the private sector in not only emerging economies but also the developed world. In the past decade, China Exim Bank has extended $12.5 billion more in loans to sub-Saharan Africa than the World Bank. China National Offshore Oil Corporation spent $18 billion to buy Nexen in Canada, while the Chinese sovereign wealth fund China Investment Corporation bought 8.68% of Thames Water, the UK utility group — examples of recent Chinese transactions in strategic industries.

China’s story has been central in discussions about the “Asian Century.”

Japan's Nikkei index is on fire. In just the past six months, the benchmark is up 55% as of this writing. Why? Pretty simple: New Bank of Japan Governor Haruhiko Kuroda has announced that the Bank of Japan (BOJ) will begin purchasing approximately ¥7 trillion worth of bonds annually in a major new quantitative easing program. In short, Japan will be printing gobs of money and all of this money has to go somewhere. That may look like great news for investors who hold Japanese equities, but from where I sit, this has all of the classic makings of one big investment bubble.

Nikkei 225 Index
(click to enlarge)

Sources: CFA Institute, Dow Jones.

Even though Japan has been providing monetary stimulus for many years, the new policy represents a major expansion of the country's existing response to deflationary pressures in the economy. Moreover,

In his 2007 book, The Emerging Markets Century, author Antoine van Agtmael, argued that the world's economic center of gravity was decisively tipping toward emerging markets, a term he is said to have coined in 1981 while at the World Bank. Recently, Van Agtmael spoke at the CFA Institute 2013 Asset and Risk Allocation conference, and while he asserted that the shift in competitive edge which he had written about six years earlier remains intact, he sees it slowing because of a series of game changers that will spur an industrial renaissance in the United States.

Make no mistake, Van Agtmael remains bullish on emerging economies. In fact, he sees opportunities beyond the BRICs (Brazil, Russia, India and China), with the MIST countries (Mexico, Indonesia, South Korea, and Turkey) offering particular promise. But what Van Agtmael called the "creative response" from the United States,

Monday morning on CNBC, TrimTabs CEO Charles Biderman noted that "the Fed's balance sheet is up a few trillion, and the equity market caps are up a few trillion. To me, there's nothing else that's going on." The popular pundit line has been that QE (quantitative easing) is mainly psychological, but do the data support this claim? Is the reason for the steady move up in equity markets really just as simple as the Fed's balance sheet expanding?

Although many charts have compared when the QE programs have started/stopped with the S&P 500 Index or 10-year U.S. Treasury yields, I can't recall many that have used the Fed's balance sheet size as a direct comparison. The benefits of this comparison are relatively obvious. The actual size of the Fed's balance sheet reflects when securities have actually settled and the trades (excess reserves into the financial system

The Federal Reserve and the Financial Crisis. 2013. Ben S. Bernanke.

Reviewed by Marc L. Ross, CFA

It is fitting that The Federal Reserve and the Financial Crisis should be published in the centennial year of the institution. Adapted from a series of four lectures given by Ben Bernanke at George Washington University in March 2012, the book is a good primer on the workings of the central bank throughout its history, including its role in the recent financial crisis. Concepts are introduced with clarity, and the prose is straightforward. The book is appropriate for students of central banking, and experienced readers will find it a worthwhile account of the historical record for what it both does and does not reveal.

Each lecture builds on the preceding one. The book begins with the formation and objectives of the Federal Reserve, moves on to the

Evaluating the quality of a money manager is a perennially important topic. It's all the more important when that money manager charges 2% of assets under management and 20% of any gains. Yes, that age-old conundrum of how to choose a good hedge fund for your portfolio remains a difficult task. But Mark J.P. Anson, CFA, CAIA, thinks he has bright light to shine on the problem. As the person responsible for alternative assets at the Bass Family Foundation, he enjoys wider sight lines than many other investors who have taken the plunge into hedge funds.

At last week's 2013 Asset and Risk Allocation conference in New York, Anson began his presentation with a Sherlock Holmes-like quote: "When you have eliminated all of the beta, whatever remains, however improbable, must be the alpha." In other words, if you want to identify a skilled

When I was four, my grandmother would often supervise me at mealtime. Like many grandmothers, she believed her mission was to get me to finish all the food on my plate whether I was hungry or not. First, she would let me eat on my own. Then, when I'd try to leave the table, she'd arch an eyebrow and ask where I was going.

"I'm done eating," I'd reply.

"But your plate is still full!" she would say. It wasn't.

"No - see, I ate some of the oatmeal."

"I didn't see." She would sit next to me and fold her hands. "Show me."

At that point, no evidence I could muster would be enough to convince my grandmother. She would have to witness my eating firsthand.

Institutional investors behave in a similar way to my grandmother when selecting fund managers. After picking a manager for

With Kim Jong-un declaring that North Korea has entered a state of war with South Korea — not to mention cutting off a military hotline, threatening nuclear strikes, and shuttering Gaeseong, the joint North-South industrial complex — geopolitical tension in the Korean peninsula has been top of mind for global investors, especially those with a stake in the region. Events have been unfolding quickly. Earlier this week, the North Korean foreign ministry rejected overtures from the Obama Administration and U.S. Secretary of State John Kerry, who was in Asia last weekend and is seeking to defuse a potential nuclear crisis while also working to avoid rewarding North Korea for its bellicose behavior.

Meanwhile, South Korea’s KOSPI Index has dropped 4% since the end of March. With foreign investors fleeing, the valuation of the country’s benchmark index now checks in at one times net assets, compared

China's sovereign credit rating was cut by Fitch Ratings Wednesday. Analysts at Fitch called out China's growing debt burden on local governments. Fitch estimates that total credit in China's economy now exceeds 198% of GDP, much of this is carried by government-sponsored entities and local governments. In addition, the report highlighted the growing problem of shadow banking in China, where, it seems, scant few actually know how it works, let alone how big it is. As highlighted in a Financial Times article, it appears that trusts are at the heart of China's shadow banking.

According to former Chinese finance minister Xiang Huaicheng, local governments owe at least $3.2 trillion - almost double the official figures.

For those following Michael Pettis, this should come as no surprise. Last year at the CFA Institute Annual Conference in Chicago, he laid out the case for

What do quant great Edward O. Thorp, behavioralist Jamies Montier, and value investing legends Benjamin Graham and Warren Buffett have in common? These investment practitioners all make a seemingly incongruous appearance together in Quantitative Value, a new book by Wesley Gray and Tobias Carlisle. The authors' objective -- not clearly stated, alas, until the tenth chapter -- is "to develop a sensible quantitative value investment strategy that will deliver returns in the real world." The long-only strategy espoused in the book rests on a checklist of sophisticated stock screens, strict adherence to which delivers on the book's subtitle: "A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors."

In the opening chapter, Carlisle, a portfolio manager, and Gray, a hedge fund manager and assistant finance professor at Drexel University, present an elderly, quantitative Benjamin Graham. This version of Graham

At the recent Global Investment Risk Symposium, Ron Ryan, CFA, of Ryan ALM, appealed for greater transparency and the application of commonsense principles in pension accounting. He warned that without such changes, the solvency of corporations, cities, and states is at stake. Ryan estimated that mark-to-market accounting would put the U.S. private pension deficit today at $538 billion, and the public plan deficit at $4.3 trillion - together roughly a third of U.S. GDP. If the $700 million Troubled Asset Relief Program (TARP) was considered a national emergency, Ryan asked, "What do you call this rascal?" As to what led to the pension crisis we now face, Ryan said that a fundamental misunderstanding of risk and inappropriate accounting rules as the primary culprits.

Ryan long ago saw the need for risk to be redefined. In 1966 Nobel laureate William Sharpe equated risk

The United States is at war, but not in the conventional sense. There are no troops on the ground. There are no drone strikes. Instead, the weapon of choice is the U.S. dollar and the "enemy" is America's trading partners. Welcome to Currency War III.

That, at any rate, is James G. Rickards's view of the world. In a presentation at the recent Global Investment Risk Symposium, Rickards, a partner at JAC Capital Advisors and author of Currency Wars: The Making of the Next Global Crisis, outlined the case for why the international monetary system is dominated by currency wars. He also argued that capital markets are complex systems that are bordering on a "critical state" and are "potentially prone to collapse" - and that the U.S. Federal Reserve risks "melting down the system."

As Rickards sees it, we are well into the third

Shares of Cummins (CMI) have traded 17% higher (12% net) over the past three months, and our institutional clients are starting to ask what we think of the name. Stocks move for different reasons, but the fundamental driver is always tied to change in outlook, such as an improvement or deterioration or an increase or decrease in risk. In recent weeks, machinery stocks have "caught a bid," which is institutional investor lingo for "moved up a lot."

(click to enlarge)

Let's dive into Cummins and figure out what to do with the stock. As usual, there is a lot of noise. Last week, four "name" sell-side firms confirmed or changed an estimate, rating, or target on Cummins, so in theory you can just listen to Wall Street. Unfortunately, three of the four firms have covered the sector for less than two years.

Should you buy Cummins?

Conventional wisdom holds that the lack of a legal framework for political and monetary union makes policy coordination within the EU and the eurozone impossible. Instead of solving crises, finance ministers race from one disaster to the next, with no real resolution. When such a lack of structure collides with excessive debt and negative economic growth, the thinking goes, there is only one endgame: economic doomsday.

With a capital-poor banking sector that is seven times as large as its economy, Cyprus is the latest eurozone fire hazard and - as conventional wisdom would have it - the most likely candidate to spark a conflagration of the euro. Adding to the inevitable sense of gloom is the fact that European negotiators forced depositors holding more than €100,000 to endure large losses. In so doing, policymakers have violated a social contract, in place since the

Daniel Lacalle works at Ecofin, where he runs a long-short sector-focused hedge fund in London. The hedge fund concentrates on the oil and gas industry, utilities, and infrastructure. Lacalle writes a weekly column for the Spanish digital newspaper El Confidencial and a blog, Energy, Markets and Money, about his areas of expertise. Several times, he has been voted into one of the top three places in the Thomson Reuters Extel Survey (considered the leading benchmark for excellence in investment banking and asset management in Europe) Mr. Lacalle has recently written a book, Nosotros, los Mercados (We, the Markets), released 12 March 2013, about his experiences in the asset management industry.

Gustavo Teruel, CFA: Let's start with oil. I've read in your blog that you believe the oil market is perfectly well balanced, with 3.5 million spare barrels per day, which leaves a margin of

Arnab Das, managing director of research and investment strategy at Roubini Global Economics, began his speech at the CFA Institute Middle East Investment Conference in Dubai, United Arab Emirates, by outlining a global debt crisis in which we are all caught in "this trap of excessive debt".

Das argued that the most important parallel issues are the distribution between creditors and debtors and the balance between future and present economic activity. Central banks have sought a way out of the macroeconomic crisis by smoothing consumption through expanding public sector balance sheets. But debt, defined as spreading the cost of current investment over the future, has, as Ken Rogoff and Carmen Reinhart have pointed out, brought too much future activity to the present.

Creditor countries, such as Japan, Germany, China, and some Middle Eastern countries, are caught in the middle of this trap because their

The deal to take U.S. computer maker Dell Inc. (DELL) private provides an answer to a question that initially occurred to me many years ago while working as a portfolio manager during the dot.com era. My idea was to check the stock market's discounting abilities with a real world example. Put another way, I dreamed of looking at the market capitalization of a business over long periods of its life to see how accurate the market discounted the value of the business based on future streams of actual net income, plus an estimate of terminal value.

This is much harder than it sounds. Discounted cash flow analysis requires a terminal value to account for the value of a business as a going concern in cases where the business continues operating beyond the forecast period. When businesses are acquired a kind of terminal value is established. But

Xi Jinping and others in China’s new leadership team highlighted several policy goals in the 18th party congress in November. These likely will be ratified in next week’s National People’s Congress. In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers which of the policy goals is the most important.

In your view, which of the following policy goals is the most important for China’s new leadership team?

(Click to enlarge)

Some 48% of respondents rated the policy goal of “fighting corruption, eliminating bureaucracy and encouraging government officials to conduct themselves honorably” as the most important. This response appears consistent with the efforts of the new leadership in China, which organized work group meetings on these topics soon after the 18th National Congress. The seasoned and respected vice premier Wang Qishan (王岐山) was appointed Secretary of the

One could be tempted to feel sorry for banks, especially European banks. The lack of clarity in regulation has never been worse, and some of the most invasive regulation is still to come. Yet banks soldier on, trying to defend their old way of life and hoping that regulators will leave some stones unturned.

After the financial crisis, the general public and politicians have been looking for scapegoats and ways to “fix” the problems and avoid a recurrence of a financial meltdown.

Are they close to accomplishing their goal? Is the regulation wave likely to prevent another crisis? Can they restore trust in a banking system that is viewed as starving the economy of credit, mis-selling products to the public, and taking excessive risks to feed oversized bonuses? Most of these questions will probably remain unanswered for some time, and some may be answered negatively eventually. But

Reviewed by Mark K. Bhasin, CFA

In Europe's Unfinished Currency: The Political Economics of the Euro, Thomas Mayer, a senior fellow at the Center for Financial Studies at Goethe University Frankfurt and a senior adviser to Deutsche Bank, argues that European monetary integration can work but only if policymakers repair its faulty original architecture in the correct way. He argues that a new framework for the euro must be based on two elementary principles:

1. The euro must be a nonpolitical currency, shielded from any form of fiscal dominance by member states of the Economic and Monetary Union (EMU).
2. Sovereignty and liability in essential fiscal policy matters must be firmly aligned at the national level.

Mayer posits that launching the EMU and creating the euro without some form of political union were risky undertakings

In a previous post, I used the S&P 500 as an example to demonstrate the use of a sophisticated quantitative method, rescaled range analysis, for evaluating whether a time series is random, persistent, or mean reverting. Rescaled range analysis was developed to spot trends hidden in the seeming randomness of African rainfall and its effect on Nile river flooding - but its application to investing yields many interesting insights.

Without much further explanation in my prior post, I stated that the S&P 500 had a Hurst exponent, H, of 0.35, for the time period January 3, 1950 to November 15, 2012. What does that mean? Is there greater granularity in the rescaled range analysis that reveals even more interesting findings? What other associated measures can be used to provide even greater insight?

First, let's recap the basics. Recall that H takes on values between

How much does $8.8 billion in $1 bills weigh? The weight of a $1 bill is about 1 gram.

How much does $8.8 billion in $1 bills weigh when it is a write-down of an acquisition?

Write-downs related to acquisitions, such as the one taken by Caterpillar (CAT) and reported on by Bloomberg’s Jonathon Weil, are disclosed as “non-cash” write-downs. As Weil explains, the term “non-cash” is disclosure that seemingly softens the blow of an ill-fated acquisition. “Non-cash” is technically correct in that no cash was lost today, but it is misleading since real cash was paid to acquire that entity — so “non-cash” today but real cash yesterday. Such was the case with Hewlett-Packard’s (HPQ) $8.8 billion write-down of its acquisition of Autonomy. But the reasons for this write-down will now be subject to further scrutiny.

Recently the Financial Reporting Council (FRC), which sets

Editor’s note: This is the second of two conversations with Gerry Fowler, CFA, Global Head of Equity Strategy at BNP Paribas in London.

Click here to view Part 1.

CFA Institute: In your 2013 outlook, you talk about quality improvers. What are quality improvers?

Gerry Fowler, CFA: Quality improvers are those companies that are focused on improving the quality and safety of their earnings by reducing previously high balance sheet leverage and by focusing on increasing cash flows and profits.

We charted the average valuation of global companies based on their profit volatility over the past 20 years. Our research showed that there is clear market discrimination at the moment based on this measure. The most highly valued companies were the ones with the lowest profit volatility, like consumer staples and consumer discretionary companies. The lowest valuations were companies with the highest volatility in

By now you have probably heard that Dell (DELL) founder Michael Dell is looking to take his eponymous-named company private with the help of private equity firm Silver Lake Partners. The size of the deal, at $24.4 billion, has caught the imagination of the financial media as it would represent the largest private equity buyout since the financial crisis.

The debate in the media has mainly focused on the perceived inability of a company to perform the kind of turnaround Dell is looking to do in the public market with the short-term quarterly pressures that come with being a public company. This assumes that public shareowners are not capable of a long-term view and seeing the benefits of the type of reorganization Dell is attempting.

We have frequently written on the issue of market "short-termism," most recently in our Visionary Board Leadership paper,

We are just one month into 2013, and investors have already seen the relentless run in high-yield bonds continue. Despite a backup in the last week of January, high-yield has notched a total return of 1.39% so far this year using the JPM U.S. High-Yield Index data.

This has been a rally in terms of both spread and absolute price. High-yield spreads have contracted from 613 bps in mid-November to 513 bps on Feb. 1. Loomis Sayles' Dan Fuss, CFA, held little back in his recent comments to Barron's: "High yield is as overbought as I have ever seen it," Fuss said. "This is absolutely, from a valuation point, ridiculous."

When a person like Fuss makes comments that strong, it's usually worth digging a little deeper. In this article, I will look at two characteristics of the high-yield market that have changed over the past few

As many of you know, I have been following the events in Japan with great interest.

Are you the trusting sort? How about when it comes to trusting banks some six years after the financial crisis? You should consider reading The Atlantic’' recent article "What's Inside America's Banks?" on why many in the investment world, and the general public, still don't trust banks.

In this article, the authors give reasons such as 1) the highly publicized fallout from the JPMorgan chief investment officer's $6 billion trading position loss, 2) big banks' manipulation of LIBOR, 3) the accusation that U.S. government officials helped Mexican drug dealers launder money, and 4) the charge that American banks falsified mortgage records by "robo-signing" papers to speed up the foreclosure process. Not pretty stuff when it comes to restoring trust in banks.

What about trusting bank financial reporting? The authors go through some key financial reporting matters of a supposedly conservative bank to demonstrate how

The numbers are grim. Renaissance Capital’s recently released global IPO market review (PDF) reported that global IPO proceeds declined by 27.8% in 2012. And while last year’s sharp decline was largely attributed to weakness in China and continued fallout from the sovereign debt crisis, it also appears to be part of a

By this time of year, we have seen more than a few forecasts and commentaries about what the market is likely to do over the next few years. I’d like to take something of a different approach: offer a view into where consensus is forming and discuss some of the risks these forecasts are predicated on.

Speaking broadly, most commentaries expect that a relatively benign growth picture coupled with continued global easing will drive wayward investors into riskier spread and equity products. The “Street” is so unanimously certain of this fact that as astute investors, we should be wary and look for ways to hedge against a contrarian outcome.

The consensus is that there is more juice left in these berries because of a few fairly compelling technical factors. In the fixed-income market, we will experience a genuine shortage of issuance. To start, most companies

If you’re contemplating retirement, chances are you’re trying to calculate how much money you can afford to pull out of your retirement nest egg each year. The key here is what withdrawal rate is sustainable: Naturally, you want to avoid exhausting your savings while you are still alive. Financial planners call this longevity risk, and it’s a growing problem as people are living longer. Here, we will discuss withdrawal rates, along with the related issue of how to generate that annual income (hint: it’s helpful to distinguish the need for cash from the need for yield).

An appropriate withdrawal rate will obviously differ for someone who is 65 years old versus someone who is 80, and will depend on health and other issues specific to each individual. While determining a withdrawal rate is not an exact science, we thought it would be helpful to apply some

Fact: Hedge fund fees are high.

Indeed, hedge fund fees are unquestionably the highest amongst active managers of marketable securities.

Fact: Some premium goods in life are considered worth their price by the buyers.

Aston Martins, private schools, and family guides at Disney World are all super expensive and yet worth every penny to their consumers.

Fact: Hedge funds have delivered gross returns that are very impressive.

In all the hullaballoo about hedge funds and the fees they charge, we often miss the important fact that hedge funds have been very successful in generating high risk-adjusted returns at a time when stocks and bonds have been challenged to meet spending needs.

While the harshest critics of hedge funds focus on the disproportionate share of gains that accrue to managers[1], I have never seen a study that concluded that hedge funds failed to deliver on a gross

That global trade imbalances matter has been made abundantly clear by the ongoing global economic malaise. The likely path to more sustainable levels of trade deficits, however, remains far less clear. Consider the potential global impact of populist cries for protectionist trade policies ostensibly aimed at easing the difficult transition to more sustainable trade and debt balances. In the event of a trade war, we would all lose. Perhaps even more disquieting, however, is how these consequences would most likely play out across nations. The evidence presented in this commentary suggests that countries like China, which depend heavily on total trade in relation to their overall economy, would suffer most severely. This evidence further suggests that instead of pursuing short-term quick fixes that would exacerbate the malaise, global leaders must work together to establish a long-term path to more sustainable trade and debt balances.

Focus on

"Successful investing requires both art and science," said Preston Athey, CFA, a 34-year veteran of T. Rowe Price. "When T. Rowe Price was founded back in 1937, Mr. Price always considered investing an art, and in fact, he often considered it a black art."

Athey has seen all sides of the growth/value investing spectrum as analyst and portfolio manager, and has managed T. Rowe Price Small-Cap Value Fund (PRSVX) since 1991. He imparted pearls of wisdom, timeless investment principles and keys for investment success from his years of experience to the audience recently at the 15th Annual Equity Research and Valuation Conference in Philadelphia.

The Science of Risk and Return

Athey is highly skeptical about some of the theories and formulas developed by the scientists and academics in the field of investment management over the last 50 years. "Granted, the

Despite a deep-seated bias toward pessimism that pervades much of intellectual thought throughout history, the human condition - physical and economic - has steadily improved for at least two centuries and will continue to do so in the future. In contrast to the past 200 years, however, future economic growth will be accompanied by population stabilization as fertility rates decline in developing countries even more quickly than they declined in developed countries in past decades. In other words, the population explosion is almost over. A "greener" environment will be a consequence of the leveling off of world population and increasing affluence as more resources are devoted to conservation, pollution control, and environmental remediation.

As a population becomes richer, there is a change in the trade-off facing a couple deciding how many children to have. Children become expensive and provide fewer benefits (e.g., you cannot put them

Recognized as an important primary-level sourcebook on the municipal bond market, 'The Fundamentals of Municipal Bonds' by Neil O'Hara and SIFMA (Securities Industry and Financial Markets Association) was first published in the 1960s by the Investment Bankers Association of America and has been published since 1982 by SIFMA (Securities Industry and Financial Markets Association). The latest edition - the sixth and the first since 2001 - covers the foundations of the municipal bond market, as well as the major changes and developments in the market since 2001.

In the preface, author Neil O'Hara states,

The U.S. municipal bond market is large and complex with $2.9 trillion outstanding by official estimates. It is also the most diverse and eclectic of the U.S. capital markets. The more than 50,000 issuers range from large states that sometimes borrow $1 billion or more at

Behavioural Macroeconomics . 2012. Ian M. McDonald.

The worldwide financial crisis that began in 2008 has sparked renewed interest in macroeconomic policy. Debates over intervention versus free-market solutions have abounded. Should the market be left to adjust on its own or should governments use monetary or fiscal stimuli to foster economic growth? Also subject to debate is whether traditional economic theory provides the answers or whether economists need to look outside mainstream thought to gain a better understanding. Behavioural Macroeconomics proposes that psychology and behavioral economics can help answer these questions.

For many financial economists, the origins of behavioral economics and finance lie in Daniel Kahneman and Amos Tversky's pioneering work on prospect theory. Traditionally, behavioral economics has been considered a microeconomic topic, focused on certain types of logical errors made by individuals. In an effort to broaden the perspective of mainstream behavioral

Reviewed by Martin S. Fridson, CFA

John Bogle's story is well known among investment professionals. After writing his Princeton University senior thesis on the fledgling mutual fund industry, he joined Wellington Management, where he rose to chief executive officer. Fired in the wake of the 1972-74 bear market, Bogle rebounded by founding the Vanguard Group. There, he pioneered and tirelessly championed the index fund, one of the most important financial innovations of the past half century.

It is an oft-told tale, yet even Bogle junkies will learn some fascinating new facts from The Clash of the Cultures: Investment vs. Speculation. For instance, Bogle recounts that in 2004, he unsuccessfully tried to persuade the chairman of Putnam Investments' funds to convert to the "mutual mutual fund" organizational structure introduced by Vanguard, in which fund shareholders own the

One of the most important and oft-discussed topics in asset management is benchmarking. Even though the daily turnover in global currency markets has reached over $4.7 trillion, (according to Bank for International Settlements) investors need to be aware of some key issues when it comes to benchmarking currency portfolios.

Growth in Global Currency Markets

In terms of daily turnover, global currency markets are almost 20 times the size of global equity markets and about 36 times the size of global bond markets. From 2007 to 2010, just the daily spot transactions had a 48% increase, from $1 trillion to $1.49 trillion^.

Data Sources: Bank of International Settlements; World Federation of Exchanges.

Key Drivers behind This Rapid Growth

The key drivers behind this explosive growth are increasing global trade, the rapid rise of emerging economies along with their foreign exchange reserves, and ever-increasing international investing. This

Most investors are no doubt familiar with the standard disclaimer “Past performance is not indicative of future results.” We know from working closely with individual investors for the past 20 years, however, that this compliance truism tends to stay in the fine print, both on paper and in investors’ minds, when they make decisions on the basis of real-time market dynamics.

Even if investors purport to buy into the logic of the “random walk” argument about security prices, in practice they tend to extrapolate recent history into the future (termed recency bias in behavioral finance) when making portfolio decisions — for example, believing that if stock prices have gone up recently, they will continue on that upward trajectory. When the desire to chase returns goes unchecked, investors often engage in aggressive trading. But do they end up better off for their efforts?

To find out, the

Good investments arise when one identifies a disconnect between the expectations of the market and the underlying reality. Yet, getting two investors to agree on specific opportunities or risks is sometimes a Herculean feat.

Individually, investors employ a wide range of styles and investment principles to govern their investment decision making. Collectively, these various investors and their principles form beliefs that drive market behavior. Successful investors typically form a clear understanding of these market expectations that get embedded into a particular security at a specific moment in time and then compare those market expectations to their own. So, whatever your particular investment style or belief system, the CFA Institute Global Market Sentiment Survey (GMSS) can help you better understand what the market believes and thereby help you make better choices for your portfolios as you apply your own investment style.

The GMSS surveys investment professionals

In the junk-bond fueled M&A boom in the late ’80s, I owned some stocks that were taken over at generous premiums. My returns were impressive over a very short interval, and for a bit longer than that, I believed myself to be a skilled stock picker. But when results are due to luck, the passage of time brings mean reversion, and two decades later I’ve a pretty good notion of where I sit on the investment luck/skill continuum. (Hint: I do not manage portfolios for a living.)

According to Michael J. Mauboussin who spoke at the 15th Annual Equity Research and Valuation Conference on December 6, in Philadelphia, investing is one of many activities that involve both luck and skill, and it is not always easy to untangle the two. How many hot hitting baseball players in April are still hitting in August? How

It is around this time of year that we survey our 110,000-plus members around the world to gauge their expert opinion on the health of the markets, world and local economies, and the state of financial market integrity around the globe.

First let me give you the option to skip my brilliant explanation, and to see the results and interpret them for yourself, here.

In summary: things are getting better, but things are not getting better.

Let me explain.

First the good news, because everyone prefers good news. When we asked CFA Institute members whether they believed the global economy would expand, contract or stay roughly the same over the coming year, about 40% answered that the global economy would expand, with 20% predicting a global economic contraction.

In normal times, we would not highlight the fact that fewer than 50% of CFA

Loomis Sayles is undeniably one of the pre-eminent names in the world of bond funds. The flagship $22 billion Loomis Sayles Bond Fund has returned 10.07% annually over the last 10 years, beating the Barclays Capital U.S. Aggregate Bond Index by a remarkable 4.66% annually. While the big name at Loomis Sayles is the lead manager Dan Fuss, CFA, co-manager Matt Eagan, CFA, plays a crucial role in managing the Loomis Sayles Bond Fund and other funds.

I recently had the chance to catch up with Matt to discuss the fixed-income universe, issues facing the global macro economy, and his multi-sector global opportunity Loomis Sayles Strategic Alpha Bond Fund. This fund is a go-anywhere multi-sector bond fund that is managed to relatively low volatility versus core funds. It’s a very interesting fund given the uncertainty in the bond markets from central banks and

Editor’s Note: The complicated story of Argentina’s national debt has some of the character of a spy novel. There is a secretive hedge fund, political unrest, and a court ruling that could cause a default. What’s really working here? We are pleased to have a charterholder reporting from inside Argentina.

To understand why a judge in New York has to force Argentina to pay its sovereign obligations, we need to go back to 2002, when Argentina defaulted on its debt.

After three years of negotiations and restructuring, a debt swap was opened in 2005 and many of the creditors decided to accept it. Additionally, in 2010, a new debt swap was opened. In total, a sound 93% of all creditors accepted the new debt.

The remaining creditors (the “holdouts”), who deemed the terms of the swaps unacceptable decided to take their case to a U.S.

The all-star cast of speakers during the University of Virginia's Investing Conference - Jeremy Grantham, John Taylor, Kyle Bass, David Rubenstein, and Lawrence Goodman - presented mostly dire themes facing the US economy: extreme loss of confidence (both in the markets and regulators), the Central Bank assuming an unprecedented interventionist role (crossing the lines between setting monetary, to now fiscal, policy), an overvalued bond market, the far-reaching effects of uncertainty, convoluted new regulations that evade understanding, an exploding balance sheet - and let's not forget that fiscal cliff that threatens to take each of us and whatever remains of global stability down with us.

While including threads of doomsday predictions in her address, keynote speaker Sheila Bair, former chair of the FDIC, had things to say on a number of levels about the future of financial services, in light of the current economic dilemmas, including

Conventional wisdom holds that if a global stock investor is able to identify which countries’ economies will grow briskly and which will lag, he has conquered half of the investment battle. Economic growth should translate into higher corporate earnings per share and thus rising stock prices, so the investor should favor the economies where he anticipates zippy economic growth. Sound simple?

Actually, it’s not. In theory, over long time frames, earnings growth should track economic expansion and equity returns should reflect that earnings growth. But over shorter time frames, these relationships can break down. When Gerstein Fisher analyzed the historical relationship between GDP growth and stock price performance in eight major developed and developing countries between January 1, 1994 and December 31, 2011 (see graph), the results were quite startling. We found that the correlation between annual stock returns and economic growth was actually pretty tenuous

During an astonishing 10-minute span on 6 May 2010, the Dow Jones Industrial Average plunged 1,000 points and then turned around and recouped its loss. In the time required to cook a hamburger (medium), some $700 billion in equity market value evaporated and rematerialized. Accenture’s (ACN) market value, which began the session at more than $30 billion, briefly approached zero as its stock plummeted to $0.01 a share. Concurrently, Sotheby’s (BID) stock soared from $34 to $100,000 a share, temporarily giving it a market capitalization of $6 trillion, roughly equivalent to the gross domestic product of China.

Contrary to initial rumors, this hair-raising episode did not result from a “fat finger” error - that is, a trader mistakenly entering an oversized sell order. Rather, say Sal Arnuk and Joseph Saluzzi in Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are

On a day when it appeared as if Congress was closer to bridging the divide on the fiscal cliff, the minutes came out from the Federal Reserve's Oct. 23-24 policy meeting indicating that the Federal Open Market Committee would most likely announce a new bond buying program in December to jump start the labor market.

Operation Twist (in which the Fed sells shorter-term U.S. treasuries and purchases longer maturities) is scheduled to end, and the Fed seems intent on replacing it with a program of buying longer-term U.S. treasuries. Now more than ever, there seems to be a dramatic divergence between the paths of monetary and fiscal policies.

Central bankers continue to increase the dosage of medicine while our legislatures debate the degree of spending cuts and/or tax increases that are necessary. Given the lessons of the past and the results of monetary policies thus far,

A review of the aggregate SEC Form 13F filings for the third quarter of 2012 revealed that U.S. institutional investors added to their holdings in energy and financial stocks, and reduced their exposure to the industrials and consumer staples sectors. Portfolio managers as a group added to positions in Google (GOOG) , Microsoft (MSFT) , General Electric (GE) , Procter & Gamble (PG) , and Cisco Systems (CSCO) , and trimmed positions in Pfizer (PFE) , Johnson & Johnson (JNJ) , AT&T (T) , Coca-Cola (KO) , and Oracle (ORCL) .

In The Hedge Fund Mirage , Simon Lack observed that "if all the money that's ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good." With that disclaimer in mind, here's a quick look at some of the notable portfolio changes made by several

In Security Analysis, Benjamin Graham and David Dodd first proposed that investors examine an average of earnings over "not less than five years, preferably seven or ten years." By smoothing out the effect of the business cycle on corporate earnings, investors would get a truer picture of how expensively or cheaply stocks are priced. This advice was later popularized by Yale professor Robert Shiller, and the Shiller P/E ratio, alternatively known as the cyclically-adjusted P/E (CAPE) ratio, has become a widely followed and efficacious stock market valuation measure.

With the Shiller P/E for the S&P 500 Index currently standing at a 21.4 (approximately 30% higher than its long-term average), many value investors, including Cliff Asness of AQR Capital Management, have adopted a cautious stance toward US stocks. In "An Old Friend: The Stock Market's Shiller P/E," Asness presents his

Ronald W. Chan explores the strategies of 12 highly successful investors from around the globe in The Value Investors: Lessons from the World's Top Fund Managers. Chan is the founder of Chartwell Capital Limited, an investment management company based in Hong Kong. He is a frequent commentator and contributor in the financial press and the author of 'Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett's Top Business Leaders'.

The foreword was written by Bruce Greenwald, in my opinion the ideal person to introduce Chan's book given that Greenwald co-authored a leading book on value styles. Greenwald points out that other memoirs on investment styles and investors present "a unique perspective on the character traits necessary for investment success... Unfortunately, an investor with all these qualities is a rare bird indeed." Chan's book, however, recognizes that a variety of approaches can be

By Daniela G. Lee, CFA

After Ron Cordes sold his company to Genworth Financial and set up a family foundation in 2006, he soon found that there were few products or resources available for making social and environmental impact beyond traditional grantmaking. So Cordes cofounded ImpactAssets, a nonprofit financial services company based in Bethesda, Maryland, that aims to help solve the world’s toughest problems by catalyzing investment capital for

In physics the term “observer effect” refers to the changes that the mere act of observation may have on the phenomenon being observed. For example, in order to measure tire pressure, you need to let some air out to insert the gauge.

In economics, the observer effect is writ large. Not only do economists influence markets and asset prices, but also high-profile economists like Ben Bernanke and Mario Draghi are important parts of the very system they are studying. So, their choices influence outcomes and certainly help shape the world in conforming to their views of what will happen.

As the year 2012 winds down, there is a great deal of uncertainty about the future direction of the United States. What is certain however, is that recently reelected President Obama faces a large “fiscal cliff” at the end of 2012, when the terms of

President Barack Obama swept to victory on Tuesday, securing four more years in the White House. Now what? What does the outcome mean for taxable investors, and what should you and your clients be thinking about between now and the end of the year?

To learn some of the answers, I checked in with Robert N. Gordon, founder and president of Twenty-First Securities Corporation, adjunct professor at NYU, and coauthor of Wall Street Secrets for Tax-Efficient Investing: From Tax Pain to Investment Gain.

But first, a quick recap of where things stand: Congress has less than eight weeks until the U.S. economy heads over the so-called “fiscal cliff,” the scheduled series of mandated tax increases and spending cuts that go into effect in January 2013. While capital gains and dividend tax rates have not received as much attention as other aspects, both are

Few bond fund managers attract as much attention as DoubleLine Capital’s Jeffrey Gundlach. His firm has seen its assets under management grow to more than $45 billion in just over two years since its founding. Although these assets span a multitude of fund vehicles, by far the largest is the DoubleLine Total Return Fund (DBLTX), which held almost $35 billion as of 25 October. I am always anxious to see portfolio changes made in this fund, and I recently had the opportunity to take a close look at the fund holdings as of 30 September, which can give some valuable insight into how fixed income investors might consider positioning their portfolios.

He’s Made a Bigger Move into CMBS

During the month of September, DBLTX’s percentage allocation to commercial mortgage-backed securities (CMBS) rose to 4.5%, up from 3.6% in August. That means he bought almost $300 million

"Cash is trash" goes the saying in the market these days. Cash in a bank account yields virtually nothing, and near-cash investment vehicles like money market funds and certificates of deposit offer the prospect of paltry returns. No wonder investors are busy reaching for yield (and grabbing extra risk with that apparent return).

At other times, however, you hear market participants express another sentiment entirely: "Cash is king."

Complete opposites in their meanings, the two sayings point to the bipolar feelings that many investors have about holding cash. It either depresses them or excites them, depending on the phase of the market. When things are good and most assets are doing well, cash is indeed thought to be trash. But when markets are under pressure and the only thing holding its value is cash, a sizable position in it makes you feel like a king.

The

Risky debt dominates the world of fixed income with most securities only offering a legal promise to pay interest and to pay back principal to investors. These uncollateralized, unsecured bonds are nothing more than glorified IOUs.

But what if fixed income instruments were backed with actual collateral? You might say such an instrument already exists and is called an asset-backed security (ABS). But even ABS suffer from a risk I will call "talk to the hand." This is because most ABS are created by third parties and sold to investors with the issuers retaining no future obligation to buyers once the ABS is collateralized and sold. So if buyers lose money they cannot take their grievances to the issuer, and instead must "talk to the [issuer's] hand," the notorious ABS "servicer."

What if bonds were not just collateralized but remained the obligation of issuers? Such a

Daily calls for resolving the ongoing sovereign debt crises plaguing the global economy make clear that they're not over yet, but a continuation of the sovereign debt crises of countries with large and rising trade deficits is not necessarily a fait accompli. Mitigation of the impact of these trade imbalances requires more than aggressive monetary policy alone. (There is an abundant literature on the impotence of a stand-alone monetary policy absent a coordinated fiscal policy. See, for instance, " Some Unpleasant Monetarist Arithmetic ," " The Role of Monetary Policy ," and " Statistical Modeling of Monetary Policy and Its Effects .) A credible commitment by both governments and citizens to rein them in is also needed. Attempting to muddle through absent such a firm fiscal plan will only undermine the economic recovery.

Consenting Adults

The current global economic slowdown is clearly a structural one,

"Don't sell economic stability to buy economic growth" warned Tomáš Sedlácek, chief macroeconomic strategist at CSOB Bank and author of The Economics of Good and Evil to an audience of investment professionals at the CFA Institute European Investment Conference in Prague. Sedlácek's unconventional view is that our problem is not lack of growth, but too much of it. He believes that the role of the economist should not be to encourage economic growth but to decrease the swings of the business cycle.

Sedlácek said that there are parallels between how a depressed economy is treated by today's economists and how a depressed patient is treated by the doctors. The economist's prescription of running budget deficits and thereby increasing debt is similar to the doctor's prescription of anti-depressants. The problem with both debt and anti-depressants is that they can become addictive.

Sedlácek said that "Our

The Halloween indicator, popularized by the well-worn adage, "Sell in May and go away," holds that stocks offer their best returns during the November through April period. But is such a seasonal trading strategy really valid and thus an opportunity to be exploited, or is the Halloween indicator more trick than treat? Recent research seems to confirm what earlier studies found, which is that, remarkably, this stock market anomaly dating back to at least the 1930s has not been arbitraged away, and in fact, is stronger than ever.

The practice of abandoning stocks beginning in May of each year is widely thought to have its origins in the United Kingdom. The privileged class would leave London and head to their country estates for the summer months, where they would largely ignore their investment portfolios. To this day, many stock market watchers have postulated that the

In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked professional investors what they thought would drive equity-market returns in the coming year. Whereas global equity market returns have been driven largely by central bankers and geopolitics since the 2008 collapse of Lehman Brothers, respondents to this week's poll expect monetary policy and geopolitics to have a diminished influence on stock prices in the next 12 months.

What Do You Expect To Be the Primary Driver of Equity-Market Returns during the Next 12 Months?

(click to enlarge)

Nearly one-third of respondents expect economic news to be the primary driver of equity prices, with corporate earnings the second-most-favored response. Both Fed Chairman Ben Bernanke and European Central Bank President Mario Draghi have limited additional means at their disposal to further stimulate the "animal spirits" of investors, and thus it

Noted behavioralist and value investor James Montier, a member of money manager GMO's asset allocation team, recently participated in the European Investing Summit, an online conference hosted by ValueConferences. He addressed the prospect of investing in European stocks through the framework of his Seven Immutable Laws of Investing. These are common sense, value-based principles that are too often violated by the typical investor. Although Montier suggests that there are pockets of value in Europe, he still sees considerable risks - just the type of environment that demands a disciplined investment approach.

Here's a quick recap of how Montier applied his laws of investing to Europe:

1. Always insist on a margin of safety. Montier emphasized the importance of making an accurate valuation assessment. He does this by breaking down returns into their component parts: Valuation (using a normalized P/E ratio), profit margins, sales