Category Archives: Strategy

S&P 500 Pensions and OPEB: good for companies, not good for our retirement

S&P has released their annual S&P 500 Pension report (which is available on its website at www.spdji.com or directly at bit.ly/1jPIDiE ). The short bottom line is that, in aggregate, pensions and OPEBs have become an acceptable and manageable expense for S&P 500 issues with respect to their underlying assets, earnings and cash-flow. For individuals, the additional responsibility has been shifted from corporations to them for pensions, and is already well underway for OPEBs, with the Read more [...]

Why is the VIX so high?

No, our crack proofreading team didn’t muff the headline.  After several weeks of seemingly unanimous commentary about how investor complacency has resulted in VIX® levels that are “too low,” we want to ask the contrarian question.  Rather than being too low, why is the VIX so high? The question is germane because there has been hardly any volatility in the S&P 500®. Realized volatility has been running at roughly 6%-7% annualized. And although the VIX is a measure of implied, or Read more [...]

The Mind of the Fed

The saying goes, “if the only tool you have is a hammer, everything looks like a nail.”  That is the difficulty Fed chair Janet Yellen sees in monetary policy: if the only tool is raising or lowering interest rates, then everything – bubbles, inflation, unemployment, excessive risks, yield hunting or systemically important financial institutions – looks like nails.  In a lecture at the IMF earlier this week (here), Mrs. Yellen answered questions about future bubbles and rate increases by Read more [...]

Practical Considerations for Implementing Alternate Beta Strategies

Recent financial crises have exposed the shortcomings of the traditional approach to asset allocation and have led an emerging shift, especially among institutional investors, towards dynamic asset allocation, hinged on the diversification across risk factors. While there are numerous research papers that explore this topic, they tend to be theoretical and it is for this reason we have written a research paper which has a stronger focus on the practical aspects of implementation. (Click here to access Read more [...]

Euphoria vs. Anxiety

A heavy weight battle over economic policy and financial markets is brewing between the Bank for International Settlements (BIS) in one corner and the International Monetary Fund (IMF) in the other. Meanwhile the world’s major central banks may be lining up on one side or the other with the Bank of England (BOE) moving towards the BIS and the European Central Bank (ECB) drifting closer to the IMF. The Bank of Japan (BOJ), having embraced Abenomics, is ahead of the IMF.  The Federal Reserve appears Read more [...]

Why are active managers lagging?

In late 2013 and early 2014, we heard considerable chatter about the coming "stock picker's market."  2014 would favor stock selection strategies, it was said, because intra-market correlation was falling as macro-economic risks receded.  This morning's Wall Street Journal reports that the contrary view -- that low levels of stock market dispersion would make 2014 an especially difficult year for active managers -- has been vindicated.  "So far in 2014, more actively managed mutual funds are Read more [...]

Creating a Performance Tailwind

Some stock selection schemes seem silly.  This weekend's Wall Street Journal reports the results of two hypothetical portfolios which are clearly intended to be nonsensical.  One example, the so-called "Graham and Buffett Portfolio" comprises stocks whose ticker symbols consist only of the letters found in the names "Benjamin Graham" and "Warren Buffett."  Silly it may sound, but a 20-year backtest of the Graham-Buffett portfolio shows that it handily outperformed the S&P 500. The Graham-Buffett Read more [...]

Average Performance

This morning's Wall Street Journal advised us that the performance of many large institutional investors has lagged that of the equity market since the beginning of the recovery five years ago.  The Journal attributed this performance gap to institutions' moves into alternative investment categories such as hedge funds and private equity.  The explanation may be even simpler than that.  Any large endowment or pension fund will be diversified across a number of asset classes, and by definition the Read more [...]

Inflation Fears and the Fed

Last week’s Consumer Price Index (CPI) release spooked a few people with a month to month change of 0.4%, the largest since February 2013; food prices were up 0.7% and the CPI ex-food & energy up 0.3% with both rising the most since August, 2011.  To top it all, the twelve month change in the CPI was 2.1%, above the Fed’s 2% target. The immediate responses were (1) the Fed is going to raise interest rates a lot sooner than anyone expects and (2) the Fed will still wait for at least a year Read more [...]

Even Worse Than You Think

It’s commonly recognized that the average active manager underperforms the market. There are good theoretical reasons why this should be true, and ample empirical evidence that it is true. On average during the last ten years, e.g., 59% of large-cap U.S. equity managers lagged the S&P 500, with comparably poor results for mid- and small-cap specialists. Capitalization-weighted indices like the S&P 500 have a number of virtues, the most important of which for present purposes is that Read more [...]