Home › Posts tagged Investment management

Investment management

What has gone wrong with hedge funds?

Posted on by — No Comments ↓
When investors understand what their investments are doing anxiety is reduced and results improve. Hedge funds are too confusing for any investor to understand. The Hedge fund managers make a bulk of the money while the investor assumes all the risk. Always remember there is no free lunch. Past performance is no indication of future results.

Hedge Fund Managers - Lynching Party Needed
Hedge Fund Managers – Lynching Party Needed (Photo credit: smallislander)

Why the party endedContinuing with my example, another student sees the buck I pocketed and decides to enter my space. I find out that I can no longer buy that book for $20, as I have a competitor who bought the book for $20.25 and sold it for $20.75 to the student wanting the book. The arbitrage opportunity declined by 50 cents. Since it’s still an  attractive investment  opportunity, eight other students also compete, and soon the arbitrage opportunity is pretty much gone.

This 10-fold increase in competition is exactly what has happened, with hedge funds growing from $200 billion in 1997 to $2 trillion today.

This presented a dilemma for hedge fund managers, who wanted to make serious money and weren’t satisfied with the paltry 2 percent annual fee. The solution? Take as much risk as possible with their clients’ money. That extra risk entailed investing more in options and futures, which are all zero-sum games and where not a penny in the aggregate had ever been made. These alternative assets had far less to do with investing and were much more similar to betting on a football game.

Why the hangover continues

With most investments, you can take you licks and move on. Not so with hedge funds. I’ve had many clients who thought they could get their money back at any time, until I pointed to page 173 of the prospectus and the section where the fund manager has the right to limit or deny the withdrawal request. In some cases, years later I’m still trying to help clients get their money back from hedge funds. Being ahead of the curve helps, as I was successful in getting clients out of The Endowment Fund sold by brokerage houses before they “gated” withdrawals.

So while hedge funds have been a disaster for most investors, managers are still raking in the fees by limiting withdrawals. In short, these funds are an outstanding gig for the manager but not so good for the investor.

As author and money manager William Bernstein says, “there is no portfolio fairy” willing to magically reward upside and protect downside. Further, he says, “if you are at the poker table wondering who the patsy is, it’s probably you.”

via cbsnews.com

NO ONE can predict the future. There is also no one who can earn equity returns with treasury bill risk. Investors continue to seek out the ‘holy’ grail of investing without success.

Please comment or call to discuss how this affects you and your financial future.

Posted via email from Curated 401k Plan Content

Related articles
Enhanced by Zemanta

Gap Between Employer and Employee Views on Retirement Preparedness Through 401(k) Plans – MarketWatch

Posted on by — No Comments ↓
401(k) plans have been sold backwards since the beginning. Orginally they were a supplement to a oension plan, now they are the sole source of retirement for most Americans. Model portfolios should be automatic and then the participant can opt out and choose their own mix of funds.

The plan proposed the most complex highway interchange attempted in Ontario to that point. (Photo credit: Wikipedia)

A separate survey of 401(k) participants finds that relatively few have the desire to manage their own workplace savings plan. Koski Research, on behalf of Schwab, surveyed more than 1,000 workers enrolled in 401(k) plans across the country and found that:– More than half (52%) say they don’t have the time, interest or knowledge to properly manage their 401(k) portfolio.

— Nearly three-quarters (73%) spend less than eight hours per year managing their 401(k) plan account.

— Many (56%) do not review plan-related education materials they receive.

— Nearly one-third don’t know they pay any fees for their 401(k) plan. Of the 70 percent that understand they pay some sort of fees, 95 percent don’t know about investment fund operating expenses, and 67 percent don’t know about plan administration fees.

— A significant majority (83%) say they are interested in receiving professional investment management from their employer. However, this interest does not translate into action based on Schwab data that shows just one in 10 participants actually takes advantage of 401(k) investment management advice when it is offered(2).

via marketwatch.com

There will continue to be attention paid to the retirement crisis in America. We must provide employees with the prudent tools to accomplish their retirement planning needs. If not the government will.

Please comment or call to discuss how this affects you and your company.

Posted via email from Curated 401k Plan Content

Related articles
  • Most employees leave 401(k)s on autopilot (bottomline.msnbc.msn.com)
  • Why Variable Annuities Have No Place in Your 401(k) Plan (401kplanadvisors.com)
  • Is Human Nature Hurting Your 401(k)? (401kplanadvisors.com)
Enhanced by Zemanta

Give Your Retirement Plan an Annual Checkup

Posted on by — No Comments ↓
Just like your annual physical to protect your health your company retirement needs an annual checkup. Regulations are in a constant state of flux, plus there are advancements within the industry. Remember the 401k is becoming the sole source of retirement for most Americans and should be offered as such.

WASHINGTON - DECEMBER 16: U.S. Attorney Gener...
Image by Getty Images via @daylife

Regular Plan MaintenanceIn addition to conducting an annual plan review, plan sponsors should perform regular maintenance to ensure seamless plan operations. This includes staying current on regulations, watching out for common mistakes and reporting to the federal government as required. Plan sponsors are responsible for establishing a program of internal controls, including monitoring and oversight controls surrounding the retirement plan.

A retirement plan committee can help the monitoring and oversight function. However, the committee won’t be effective unless it conducts regular meetings. These oversight meetings should not only review investment results but also check that internal controls related to plan administration are effective and operating appropriately to assist in identifying and detecting operational failures. The retirement plan committee should be well versed in all aspects of the plan, including review of investment performance, keeping current on law changes and monitoring of third-party administrators.

via shrm.org

Employers where hiring an ERISA 3(38) Investment Manager does not work, the establishment of a retirement plan committee is recommended. Be certain that this committee meet regularly and documents all meetings. This is necessary in the event of an IRS audit.

Please comment or call to discuss this process.

Related articles
  • Majority of Retirement Plan Sponsors Do Not Feel Prepared for New Fee Disclosure Rules (401kplanadvisors.com)
  • What Is A 401k Retirement Plan? (answers.com)
  • DOL Cracks Down on Retirement Plan Advisors for Fiduciary Negligence (401kplanadvisors.com)
Enhanced by Zemanta

Should Your Company Hire an ERISA 3(38) Investment Manager for The 401(k) Plan?

Posted on by — No Comments ↓

The 401(k) plan has attracted substantial attention, some wanted, some unwanted, in an effort to improve the quality of retirement plans for American workers. New regulations are being added or considered every day. For instance the new 408(b)2 fee disclosure regulations become effective later this year. These regulations are expected to change the ways plans are sold and by whom. These regulations are a real game changer.

Rewarding Eco-Friendly Farmers Can Help Combat...Because of these changes and the increased acknowledgement of fiduciary risks for plan sponsors, many sponsors are considering hiring an ERISA 3(38) Investment manager. By hiring this manager plan sponsors transfer the fiduciary responsibilities and risks to the investment manager.

The ERISA 3(38) Investment manager will follow the fiduciary process by:

  1. Developing an Investment Policy Statement (IPS)
  2. Select and Monitor Investment Options
  3. Offer Investment Education

The ERISA 3(38) Investment Manager will minimize their fiduciary liability by choosing index or structured funds.

Who can serve as an ERISA 3(38) Investment Manager?

  1. A bank
  2. An Insurance company
  3. A Registered Investment Advisor (RIA) subject ot the Investment Advisors Act of 1940.

Special note: stock brokers and broker-dealers can never be a 3(38).

Although the plan sponsor (employer) transfers all investment fiduciary risks and responsibilities to the ERISA 3(38) Investment Manager the plan sponsor must monitor the manager. This fiduciary responsibility cannot be delegated away. This entails meeting with the investment manager at least annually and review the process.

Is this for all plan sponsors?

No, however this fits well for small to mid-sized businesses who are too busy running their company to manage a retirement plan. When it fits it works very well. Not only will the plan sponsor outsource a very vital task, the plan participants will benefit from a prudently managed retirement. Ultimately, the goal is a successful retirement for the plan participants including the business owner.

Related articles
  • 401k Sponsors Increasing Focus on Investments (401kplanadvisors.com)
  • Retirement Plan Sponsors’ 401(k) Perceptions vs. Reality (401kplanadvisors.com)
  • What ‘Fee Disclosure’ Rules Really Mean for Plan Sponsors (401kplanadvisors.com)
Enhanced by Zemanta

Surprising Investing Myths

Posted on by — No Comments ↓
These myths are communicated by the media and the financial institutions to keep money moving. After all the financial institutions cannot make money unless it is moving. These myths will keep you from reaching the true potential for your investment goals. There are three simple rules when investing for your long term goals…own equities….globally diversify…rebalance. These three rules will guide you and you must remain disciplined.

Investment Frontiers Symposia
Investment Frontiers Symposia (Photo credit: apec2011ceosummit)

Stellar Past Performance Is a Good Measure of Investment SkillEvery year, another fund manager is anointed as the “next investment guru” based on his recent past performance. It’s more likely he was just lucky rather than skillful. It can take a very long period of time (often 20 years or more) to determine whether the performance of a fund manager was luck instead of skill. Relatively few fund managers stick around that long.

If Only I Qualified for a Hedge Fund Investment

Be thankful you don’t. If you do, avoid the temptation. In his new book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, Simon Lack concludes that hedge fund investors as a group would have been better off if they had simply invested in Treasury Bills. Lack bases his conclusion on publicly available data from Hedge Fund Research, Inc. Hedge funds are great investments for those who run successful ones, because of the excessive fees they charge: commonly 2 percent of assets and 20 percent of profits. This fee structure motivates them to take very high risks… with your money!

via huffingtonpost.com

Investors are continually looking for the right answer to one question. Where is the best place to invest my money? There is no answer with regard to which asset class or fund manager. The real question should be what strategy will help me reach my goal.

Please comment or call to discuss how this affects you and your employees.

Related articles
Enhanced by Zemanta

The Greater Fool Theory and Investing

Posted on by — No Comments ↓
Stock pickers success has nothing to do with skill and all to do with luck. To succeed in reaching your long term financial goals own the market, globally diversify and rebalance. The final piece is to remain disciplined to your strategy. The formal phrase is the investment policy statement. You will not know if you succeed unless you have a goal and a strategy. Remember predicting the future is for fools.

Image via Wikipedia

You are Picking StocksPicking stocks refers to both the practice of buying individual stocks because you believe they are mispriced, or purchasing actively managed stock mutual funds, where the fund manager attempts to beat a designated benchmark. If you are engaging in either of these activities, you are a participant in the GFT.

Individual and institutional stock pickers assume they can find mispriced (typically underpriced) stocks, hold them and sell them at a profit. If anyone could do this, you would think it would be Bruce Berkowitz, the much lauded manager of the Fairholme Fund. With much fanfare, on Jan. 12, 2010, Morningstar issued a press release naming him the “Domestic-Stock Fund Manager of the Decade.” It noted this was a new award recognizing fund managers who have achieved superior risk-adjusted results over the past 10 years and have an established record of serving shareholders well.”

How did the “Domestic Fund Manager of the Decade” perform in 2011? According to data provided by Morningstar Direct, his fund suffered a staggering loss of 32.4 percent!

Greater fools thought that Berkowitz had the Midas touch that would continue indefinitely. They assumed there would always be buyers at a higher price for stocks picked by him. They were wrong.

If you purchase any actively managed mutual fund, you are engaging in the GFT. One study (reported here) showed the Vanguard Index fund beat 75 percent of designated mutual funds before taxes for the period 1982-1991. The same study found that its after tax return beat 65 out of 71 mutual funds. When you buy these actively managed funds, you are the greater fool.

via huffingtonpost.com

Stock picking and over weight in gold are two big mistakes investors make. Many are driven by fear and media hype. The best strategy is a risk adjusted globally diversified portfolio. This takes out the guess work as well as the anxiety.

Please comment or call to discuss how this affects you.

Related articles
Enhanced by Zemanta

Look deeper in choosing target funds

Posted on by — No Comments ↓
Target date funds should be used with caution. Because of the wide variety of methods the plan sponsor must perform thorough due diligence to protect plan participants and themselves. Many are off target.

Target for Today
Image via Wikipedia

The lack of a consistent approach among managers also makes it difficult for plan sponsors — or advisers working on their behalf — to evaluate target date providers, leaving many wondering how best to select a target date suite that meets the unique needs and characteristics of their participant base.For plans looking for an off-the-shelf target date product suited to their participants, the due-diligence process must go beyond traditional performance-based measures such as relative benchmark performance and peer group rankings to incorporate a thorough analysis of the differences in product design and features.

via investmentnews.com

Target date funds can become a hiding place for new money managers and poorly performing funds. Additionally, each participant has different needs and tolerances regardless of age. Given the importance of the retirement plan, plan sponsors should investigate using professionally managed risk adjusted globally diversified portfolios for their plan.

Please comment or call to discuss your alternatives and what is best for your company.

Related articles
  • Benchmarking: The Key to a 401k Plan Sponsor’s Fiduciary Compliance Review (401kplanadvisors.com)
  • A Great Way To Improve Your Company 401(k) Plan!! (401kplanadvisors.com)
  • Eight suggestions for improving your 401(k) plan (401kplanadvisors.com)
Enhanced by Zemanta

Morningstar’s Fund Manager of the Year: A Slippery Slope

Posted on by — No Comments ↓
A percent sign.
Image via Wikipedia

There are really only three simple rules to sinvesting successfully..own equities….globally diversify….rebalance. Looking at past performance to determine the best performers and looking for them to repeat is a futile exercise.

Past Performance is no… (You know the rest)Will Danoff, who managed the Fidelity Contrafund, was Domestic Equity Manager of the Year in 2007. In that year, he beat his benchmark by almost eight percent. In 2009, he underperformed his benchmark by almost the same percentage.

Mason Hawkins, who managed Longleaf Partners, won the award in 2006, when he beat his benchmark by 6.17 percent. He underperformed his benchmark by 6.22 percent in 2007 and by 13 percent in 2008.

Every one of the fund managers of the year had subsequent years of some underperformance. Perhaps the worst example is Jim Callinan, the manager of the RS Small Cap Growth fund, who was the 1999 Domestic Equity Manager of the Year. No wonder. His fund beat its benchmark by an unbelievable 140 percent! Then Jim fell off the wagon. In six of the seven ensuing years, he underperformed his benchmark. In the only year he beat it (2004), it was by a measly 0.85 percent.

The Lack of Evidence of Skill

Of the sixteen funds studied, only one fund manager evidenced skill based on a statistical test (the t-test) which determines if the fund’s outperformance was really attributable to skill (with a 95 percent or higher probability) or if it could be explained by luck. Even if you can find a fund manager who passes the test for a finite period of time, it is not a slam dunk that his skill will persist in the future.

Helpful Data from Morningstar

While Morningstar’s “Fund Manager of the Year” awards are likely to mislead investors, other data it provides is worthy of serious consideration. It reported 2011 inflows of passively managed long-term funds of $76.4 billion in 2011. In sharp contrast, actively managed funds had net outflows of $9.4 billion. Clearly, investors are getting the message. Still, the overall market share of actively managed funds, as reported by Morningstar, is 85.2 percent compared to 14.8 percent.

via huffingtonpost.com

Plan participants need to understand the value of the fund managers in your plan. In a vast majority of cases these actively managed funds add no value. There is evidence that asset allocation is the main determinant of portfolio success.

Please comment or call to discuss how this affects you and your organization.

Related articles
Enhanced by Zemanta

Who’s On The Hook For Decisions Made In Your 401(k)?

Posted on by — No Comments ↓
In my opinion the best plan will offer less choices and have more of a pension fund like feel. Plan participants are confused by all the choices most plans provide. Many plan sponsors believe because theeir broker tells them so that more fund choices will reduce their fiduciary risks. This is not true. Given the increasing regulatory changes taking place now and in the future plan sponsors would be wise to hire an ERISA 3(38) investment manager to manage the investments in their plan. This transfer the

Image via Wikipedia

fiduciary risk to the professional investment manager.

The Reality

The Board of Directors or the owners of company are busy trying to make their companies successful. Spending time understanding and properly supervising the 401(k) is often way down their list of things to do. This “bottom of the list attitude”, towards the 401(k) is often demonstrated by the staff administrating the plan as well.

The common result is no one is properly supervising the 401(k). The people “up the chain” think that the people “down the chain” are “taking care of it”.  The people “down the chain” do not have the training or experience to really “take care of it” and they do not want to disappoint those “up the chain”. They often overly rely on their financial services providers (Merrill Lynch, John Hancock, ING, Fidelity, Wells Fargo etc.) who look at the 401(k) as a “cash cow”. The result is that the plan participants are often harmed.

The mandate for better supervision of 401(k) plans needs to start at the top with the company owner or in the boardroom. The reason is for the betterment of the plan participants and for the company owner or Board of Directors avoid looking foolish in a deposition.

via forbes.com

This is additional proof that plan sponsors do not provide the necessary time and resources to managing their 401(k) plan. The regulations require that if the plan sponsor lacks the expertise or resources they are required to seek outside professionals to assist.

Please comment or call to discuss how this affect you and your company.

Related articles
Enhanced by Zemanta

A Day Late and a Dollar Short

Posted on by — No Comments ↓
For investors and their advisers trying to beat the market or find ‘alpha’ this provides additional proof that it is really mission impossible. Many advisors believe that they bring value to clients by making prediction, picking under priced stocks. This is totally false and will cause investors to lose money unnecessarily. They would be better served by utulizing a prudent process and remain disciplined to that process. Advisers providing this type of guidance brings value to the client relationship. Selling return only increases client turnover and decreases public trust.

English: "Our aim is to serve investors,“...
Image via Wikipedia

The market for stocks and bonds takes into consideration all publicly available information and instantly incorporates that information into the price. This irrefutable fact has profound ramifications. Think about how most individual investors make investment decisions. They trade on their own using research tools provided by discount brokers (or worse, relying on technical charts with purported predictive value). They rely on analyst reports and the recommendations of their brokers or advisers. These “financial experts” are all too willing to pick the next “fund manager of the year,” identify “mispriced” stocks, select high yielding bonds and predict the direction of the markets.

Relying on this advice, instead of looking at the market and recognizing the current price is a fair price, which reflects current and forecasted news, is the most fundamental error made by investors. The likelihood of identifying mispricings and profiting from them is 50 percent, before costs and taxes.

This is not an intelligent way to invest.

via huffingtonpost.com

Another example and good advice on predicting the future. No one can consistently predict the future. The best alternative for all investors is to own equities, globally diversify and rebalance. This prudent process will lead to a successful investment experience.

Please comment or call to discuss how this affects you.

Related articles
Enhanced by Zemanta