Target Retirement Date Lifecycle Funds: Ignorance Is Never Bliss [View article]
Mr. Brunks
I agree with you about the marketability of lifecycle funds. They "appear" to provide the peace of mind that DC plan participants with less knowledge of personal financial management. However, calling lifecyle managed funds "professionally managed" (in terms of efforts expended on asset allocation) is a bit misleading. If I didn't know any better, I would read a statement like that and conclude that every 24 months, an investment commitee at the asset management company meets and concludes that the asset allocation mix within these funds should be changed based on the economic fundamentals at the time. I just cannot believe that is the case in practice.
In my estimation the allocation mix within these funds is governed (and quite frankly investment process) by a mathematical formula that goes something like this: 120 - age = allocation to stocks w/ the remainder to be put into fixed income. *Because we are a fund company we don't really compare index funds to find what we determine to be the best....we just allocate to the funds that WE have available in-house. That is probably a bit too simplistic since I am sure some of the funds closer to the target retirement date mix in different types of bond funds. Nontheless, I feel confident that whatever the actual formula is being utilized by the fund companies...it is quite similar in nature.
Thus, I think anyone familar with the simple rule of thumb (shown above) can create an asset allocation lifecycle investment strategy similar to these funds in about 10 minutes. I am sure the administration efforts that go into managing one of these funds are pretty complicated and take a lot of effort on the part of bank managers so I don't want to make light of that. But the actual asset allocation hardly requires thought once a formula is agreed upon which I find challenging to call "professional asset allocation".
At this point, if you agree with my assessment of how these funds handle asset allocation...it seems to me you must concede that these funds are not actively acting as fudiciaries for their investors past the stage of fund creation.
On the argument about diversification via investment options: looking at the funds that Seeking Alpha tagged for this article, all of the funds held within the target date funds appear to be publicly available including TIPS etfs. My only experience, which is obviously no where near a decent sample size, DC contribution plans have enough options that you can create AS MUCH diversification as target retirement date funds...particularly if you are just starting out in the working world-which is to say you will be invested +85% in equities. Now in my opinion that is not very much diversification, but that is a different story for a different time.
These funds are not an asset class. They are an investment strategy. They generate return streams 100% correlated to their asset allocation mix. It makes zero sense that it would be otherwise. As such, the only possible diversification benefit that can be had from including these funds in a portfolio is generated through either arbitrage from the funds traded price and the underlying holding fund values OR from incorporating a target date retirement fund with a different asset allocation mix than the current portfolio's asset allocation mix - which automatically suggest that your current portfolio has the wrong asset allocation.
In conclusion, I cannot agree with the status quo of target retirement funds that may offer "peace of mind" but virtually gauruntee that no one with more financial knowledge or fiduciary duty than the plan participant will be looking out for the plan participant's ability to retire. As a previous commentor correctly pointed out, we should all do things more frequently than what we actually do (i.e. checking the oil in your car). But in this case...I firmly believe that staying abreast of your finances is a far superior way to acheive retirement than a "set it and forget it" mentality which is what these investment vehicles represent.
I appreciate you reading my article and your arguments.
Jeff Saut: 'Equity Risk Premium Exceptionally Large'- A Bullish Sign [View article]
It would be interesting to scale the equity risk premium and corporate bond risk premium by some measure of risk. While some may argue that volatility and risk are not the same thing...I would still be interested in seeing if scaling this expected return differentials by some risk measure would actually change the results. I am positive it would definitely cause a little extra head scratching for people evaluating stocks - after all nothing is free so how much extra risk is assumed to earn this extra return?
Global Macro Notes: Forget Copper, What About Oil? [View article]
You seem to like oil despite the influence of OPEC in the oil market without even questioning the accuracy of DOE data or entertaining the notion that official statistics could potentially be manipulated to present data in such a way that it is favorable for certain parties. I am not saying this is the case...but if you are telling me you don't like copper because of rubber futures, surely it seems worth mentioning.
"Copper fell the most in a week after a report that Chinese regulators are investigating positions in rubber futures spurred speculation that some traders may be forced to sell commodities…"
That sounds like a worthless rationalization of a price move in the absence of fundamental data on the part of Bloomberg.
Should the Bush Tax Cuts Be Extended? [View article]
I think you are missing the point. Maybe the bush tax cuts were a dismal failure for the last 8-10 years. I am not arguing that the Bush tax cuts paid for themselves. I might not have been clear enough in my original post...but I am trying to focus in on the hoards of cash and what kind of stimulative effect it could have on the real economy.
Argue what you will about the Bush tax cuts...but refute my argument that a zero dividend tax rate would add incentives for companies to payout more of their retained earnings - which could compound into some much needed stimulative support, provided by the private sector, for the economy.
Should the Bush Tax Cuts Be Extended? [View article]
Truth be told, I do my best to keep my rhetoric under control. I really am not a fan of most government entitlement spending at all. Thus I tend to find myself supporting, on philosophical grounds, any tax cut that can be found. But as you correctly point out, these tax cuts have not been met with any reduction in spending, so there is a real pickle.
A very typical argument against government meddling in the economy is that the government is poor at the allocation of scarce resources when compared to the private sector. Most large scale bankrupt government insitutions such as medicaid or medicare, social security, etc. are used as examples of how ineffecient governments can be. Energy policy with respect to ethanol is another perfect example of horrible resource allocation that has failed miserably but probably succeeded at increasing world hunger.
While many put their faith in the ability of the private sector to allocate resources in a superior fashion, hoarding unnecessary cash is not allocating resources at all - which is not really an improvement over the government mis-allocating resources. By recycling idle cash back through the economic system individuals will be able to allocate that capital how they see fit. Perhaps that would be buying corporate bonds. It could be some much needed repairs on their car. Maybe it is some new clothes for their kids.
I cannot recall the precise quote, but somewhere I have seen something along the lines of, "the decision to take no action is still an action". This is shown as a quote at the beginning or end of some movie. And I am literally beating my head against my desk to recall what movie it is so I can find the exact quote.
Nonetheless the quote is fitting in this situation. Corporations are hoarding cash because they do not see easy growth on the table. Yet, while they believe they are making a decent decision, they are abdicating their sole responsibility. If they do not see the opportunities to maximize shareholder value it is incumbent upon them to return retained profits to their shareholders to be recycled back into the economy as the shareholders see fit.
That is a possible private sector solution. That is capitalism. Now, we just need the government to encourage it. And it would certainly help if shareholders become a bit less complacent with companies holding so much idle cash.
Should the Bush Tax Cuts Be Extended? [View article]
I like your ideas. A 3-5 year tax holiday on profits for newly formed businesses sounds like a great idea. Perhaps that could be extended to include some sort of tax relief on costs incurred from adding to payrolls.
I hope I was clear that I don't find the trickle down theory of tax cuts particularly compelling...but I do find the notion of a massive corporate dividend, to recycle the uneccessary idle cash back into the real economy, very compelling. Sure dropping dividend taxe rate to zero doesn't by default trigger a massive increase in dividend payments, but it sure seems like it would increase the incentives for such a transaction. Market forces of extremely unpleasant shareholders would definitely start to take hold of corporations hoarding unneccessary cash. Couple that with some Obama led roadshows/marketing campaigns and maybe this could gain some momentum resulting in a massive private sector stimulus.
Hedge Funds Fail to Hedge – Again [View article]
May was a liquidity driven sell off in which many institutions moved to reduce risk (whether it be in short positions or long positions accross all asset classes) in an effort to raise liquidity. Notice how LIBOR shot up during May as the European problems came into the headlines (including some Spanish bank failures). Concluding that hedge funds don't hedge on account of poor performance coinciding with poor equity market performance, at best, leaves a lot to be desired.
The Bullish Case for Russia, Round II [View article]
Before this gets out of hand with 20+ comments on the similar topic...
"Privatization, particularly of Russia's oil, gas, and mineral resources, was a corrupt fiasco that created a small group of wildly rich and influential individuals. These oligarchs were clever businesspeople who took advantage of the weak state and lived above the laws they paid the politicians to write. Without effective laws and courts, companies resolved disputes by turning to what Russian sociologist Vadim Volkov calls 'violent entrepreneurial agencies,' or private legal enforcers....When Putin Won the presidential contest in March 2000, the previous decade of anguish had left him in no doubt that Russia's problems stemmed from the state's weakness." (courtesy of HBR article)
So yes...of course...Putin made Russia Moscow centric to a much greater extent than it had previously been in the past decade. Hence previously there was hardly any rule of law at all (which a whole group of commenters seemed very quick to point out). How does one go about establishing a rule of law? Making a stronger central government with rules that are increasingly enforced. Yes, there is a long ways to go...but I think arguing that there have been no improvements is somewhat niave-and perhaps ill-informed. Granted maybe I am wrong.
I just happen to be glancing at Bridgewater's website today and noticed on their "About Us" section of their website...
"Bridgewater manages approximately $73 billion* in global investments for a wide array of institutional clients, including foreign governments and central banks, corporate and public pension funds, university endowments and charitable foundations. Bridgewater has 800 employees and is based in Westport, Connecticut."
Do Investors and Policy Makers Misunderstand Asia? [View article]
Thanks for reading and for the comment. I did some dirty calculations using data from the OECD website. In 1970 gross fixed investment as a percent of GDP was 36.2%. In 2007, gross fixed investment as a percent of GDP was 23.2%. Using the time series from 1971 through 2007, the correlation between gross fixed investment as a percent of GDP and Real GDP growth was 53.1%. I used 1971 as the starting point because the OECD data only went back to 1971 for Real GDP growth. Thanks again for reading.
Why Airline Stocks Are a Prime Candidate for the Short Side of a Clean Energy Portfolio [View article]
There are a couple things that I feel should be added to the discussion. First, airlines are not a "major" source for the marginal demand of oil. If you take the time to observe via data from the eia roughly how much distillate fuel is converted into jet fuel for consumption, you are going to be grossly disappointed in how "not important" jet fuel is in the scheme of things. Secondly in terms of cost. You appear to have just about no idea whatsoever what the cost of jet fuel is. Jet fuel is not cheaper than conventional gasoline even factoring in any tax differentials.
These might seem like minor points in the scheme of your overall article...and that is rightfully so. But your logic in how you arrive at your conclusion is off base a chunk, in my opinion, even if I agree with the outcome of your decision.
Target Retirement Date Lifecycle Funds: Ignorance Is Never Bliss [View article]
Target Retirement Date Lifecycle Funds: Ignorance Is Never Bliss [View article]
I agree with you about the marketability of lifecycle funds. They "appear" to provide the peace of mind that DC plan participants with less knowledge of personal financial management. However, calling lifecyle managed funds "professionally managed" (in terms of efforts expended on asset allocation) is a bit misleading. If I didn't know any better, I would read a statement like that and conclude that every 24 months, an investment commitee at the asset management company meets and concludes that the asset allocation mix within these funds should be changed based on the economic fundamentals at the time. I just cannot believe that is the case in practice.
In my estimation the allocation mix within these funds is governed (and quite frankly investment process) by a mathematical formula that goes something like this: 120 - age = allocation to stocks w/ the remainder to be put into fixed income. *Because we are a fund company we don't really compare index funds to find what we determine to be the best....we just allocate to the funds that WE have available in-house. That is probably a bit too simplistic since I am sure some of the funds closer to the target retirement date mix in different types of bond funds. Nontheless, I feel confident that whatever the actual formula is being utilized by the fund companies...it is quite similar in nature.
Thus, I think anyone familar with the simple rule of thumb (shown above) can create an asset allocation lifecycle investment strategy similar to these funds in about 10 minutes. I am sure the administration efforts that go into managing one of these funds are pretty complicated and take a lot of effort on the part of bank managers so I don't want to make light of that. But the actual asset allocation hardly requires thought once a formula is agreed upon which I find challenging to call "professional asset allocation".
At this point, if you agree with my assessment of how these funds handle asset allocation...it seems to me you must concede that these funds are not actively acting as fudiciaries for their investors past the stage of fund creation.
On the argument about diversification via investment options: looking at the funds that Seeking Alpha tagged for this article, all of the funds held within the target date funds appear to be publicly available including TIPS etfs. My only experience, which is obviously no where near a decent sample size, DC contribution plans have enough options that you can create AS MUCH diversification as target retirement date funds...particularly if you are just starting out in the working world-which is to say you will be invested +85% in equities. Now in my opinion that is not very much diversification, but that is a different story for a different time.
These funds are not an asset class. They are an investment strategy. They generate return streams 100% correlated to their asset allocation mix. It makes zero sense that it would be otherwise. As such, the only possible diversification benefit that can be had from including these funds in a portfolio is generated through either arbitrage from the funds traded price and the underlying holding fund values OR from incorporating a target date retirement fund with a different asset allocation mix than the current portfolio's asset allocation mix - which automatically suggest that your current portfolio has the wrong asset allocation.
In conclusion, I cannot agree with the status quo of target retirement funds that may offer "peace of mind" but virtually gauruntee that no one with more financial knowledge or fiduciary duty than the plan participant will be looking out for the plan participant's ability to retire. As a previous commentor correctly pointed out, we should all do things more frequently than what we actually do (i.e. checking the oil in your car). But in this case...I firmly believe that staying abreast of your finances is a far superior way to acheive retirement than a "set it and forget it" mentality which is what these investment vehicles represent.
I appreciate you reading my article and your arguments.
Jeff Saut: 'Equity Risk Premium Exceptionally Large'- A Bullish Sign [View article]
Global Macro Notes: Forget Copper, What About Oil? [View article]
"Copper fell the most in a week after a report that Chinese regulators are investigating positions in rubber futures spurred speculation that some traders may be forced to sell commodities…"
That sounds like a worthless rationalization of a price move in the absence of fundamental data on the part of Bloomberg.
Can Retail Sales Prosper Despite the Weak Labor Market? [View article]
Should the Bush Tax Cuts Be Extended? [View article]
Argue what you will about the Bush tax cuts...but refute my argument that a zero dividend tax rate would add incentives for companies to payout more of their retained earnings - which could compound into some much needed stimulative support, provided by the private sector, for the economy.
Should the Bush Tax Cuts Be Extended? [View article]
A very typical argument against government meddling in the economy is that the government is poor at the allocation of scarce resources when compared to the private sector. Most large scale bankrupt government insitutions such as medicaid or medicare, social security, etc. are used as examples of how ineffecient governments can be. Energy policy with respect to ethanol is another perfect example of horrible resource allocation that has failed miserably but probably succeeded at increasing world hunger.
While many put their faith in the ability of the private sector to allocate resources in a superior fashion, hoarding unnecessary cash is not allocating resources at all - which is not really an improvement over the government mis-allocating resources. By recycling idle cash back through the economic system individuals will be able to allocate that capital how they see fit. Perhaps that would be buying corporate bonds. It could be some much needed repairs on their car. Maybe it is some new clothes for their kids.
I cannot recall the precise quote, but somewhere I have seen something along the lines of, "the decision to take no action is still an action". This is shown as a quote at the beginning or end of some movie. And I am literally beating my head against my desk to recall what movie it is so I can find the exact quote.
Nonetheless the quote is fitting in this situation. Corporations are hoarding cash because they do not see easy growth on the table. Yet, while they believe they are making a decent decision, they are abdicating their sole responsibility. If they do not see the opportunities to maximize shareholder value it is incumbent upon them to return retained profits to their shareholders to be recycled back into the economy as the shareholders see fit.
That is a possible private sector solution. That is capitalism. Now, we just need the government to encourage it. And it would certainly help if shareholders become a bit less complacent with companies holding so much idle cash.
Should the Bush Tax Cuts Be Extended? [View article]
I hope I was clear that I don't find the trickle down theory of tax cuts particularly compelling...but I do find the notion of a massive corporate dividend, to recycle the uneccessary idle cash back into the real economy, very compelling. Sure dropping dividend taxe rate to zero doesn't by default trigger a massive increase in dividend payments, but it sure seems like it would increase the incentives for such a transaction. Market forces of extremely unpleasant shareholders would definitely start to take hold of corporations hoarding unneccessary cash. Couple that with some Obama led roadshows/marketing campaigns and maybe this could gain some momentum resulting in a massive private sector stimulus.
Is Standard & Poor's Any Better With Stocks Than Asset Backed Debt? [View article]
Hedge Funds Fail to Hedge – Again [View article]
The Bullish Case for Russia, Round II [View article]
"Privatization, particularly of Russia's oil, gas, and mineral resources, was a corrupt fiasco that created a small group of wildly rich and influential individuals. These oligarchs were clever businesspeople who took advantage of the weak state and lived above the laws they paid the politicians to write. Without effective laws and courts, companies resolved disputes by turning to what Russian sociologist Vadim Volkov calls 'violent entrepreneurial agencies,' or private legal enforcers....When Putin Won the presidential contest in March 2000, the previous decade of anguish had left him in no doubt that Russia's problems stemmed from the state's weakness." (courtesy of HBR article)
So yes...of course...Putin made Russia Moscow centric to a much greater extent than it had previously been in the past decade. Hence previously there was hardly any rule of law at all (which a whole group of commenters seemed very quick to point out). How does one go about establishing a rule of law? Making a stronger central government with rules that are increasingly enforced. Yes, there is a long ways to go...but I think arguing that there have been no improvements is somewhat niave-and perhaps ill-informed. Granted maybe I am wrong.
The World's Largest Hedge Funds [View article]
"Bridgewater manages approximately $73 billion* in global investments for a wide array of institutional clients, including foreign governments and central banks, corporate and public pension funds, university endowments and charitable foundations. Bridgewater has 800 employees and is based in Westport, Connecticut."
Do Investors and Policy Makers Misunderstand Asia? [View article]
Why Airline Stocks Are a Prime Candidate for the Short Side of a Clean Energy Portfolio [View article]
These might seem like minor points in the scheme of your overall article...and that is rightfully so. But your logic in how you arrive at your conclusion is off base a chunk, in my opinion, even if I agree with the outcome of your decision.
Copper Demand: Not as Weak as You Think [View article]