Thursday, January 11, 2018

Do pro-diversity policies lead to greater corporate innovation?

That's the question that we (myself, Roger Mayer of NC State and Jing Zhao at Portland State) recently studied in a paper that's forthcoming in the finance journal: Financial Management.

The answer is YES.   We found that firms that promote diversity have more new products, more patents and more influential patents.

You can read the paper here: http://onlinelibrary.wiley.com/doi/10.1111/fima.12205/full

Here's the summary on the NC State news page. https://news.ncsu.edu/2018/01/diversity-boosts-innovation-2018/

And here's a nice write up on WUNC radio's website, together with some additional links that talk about the benefit of diversity in teams.  http://wunc.org/post/study-diverse-companies-are-more-innovative

Wednesday, September 13, 2017

Bitcoin is a fraud says JPM boss

https://www.theguardian.com/technology/2017/sep/13/bitcoin-fraud-jp-morgan-cryptocurrency-drug-dealers

It should be remembered however, that this is coming from the CEO of the company that received a $12bn government bailout.  https://dealbook.nytimes.com/2008/03/18/jpmorgans-12-billion-bailout/

The problem with Bitcoin, as I see it, is that it is a commodity and not a currency.   It's largely like gold, except that gold has some use outside of being a means of speculation.

While I wouldn't be surprised if Bitcoin remains marginalized, what is more important is the role that blockchain technology will play in finance in the future.

Tuesday, August 1, 2017

The stupidest thing you can do with your money.

In a recent episode, the Freakanomics podcast talks about why you should index.  It's a great show - check it out: http://freakonomics.com/podcast/stupidest-money/


Interestingly, Anthony Scaramucci is interviewed as being an advocate of active management (he's the guy who ended up being fired by Trump after 10 days).  Scaramucci's arguments for active management don't really make any sense - they are based on the idea that financial advisors and active management are the same thing.   They are not.  A good financial advisor who understands indexing is well worth the fees.  Such an advisor can help in tax planning, retirement, college savings etc and provide real value to clients without ever selling an actively managed product.

Thursday, July 20, 2017

Why 8.5% is delusional

I am quoted today in an article on Bloomberg.com about the Connecticut pension fund return assumptions.  The article is here:  https://www.bloomberg.com/news/articles/2017-07-20/connecticut-sinks-deeper-in-debt-as-pension-returns-lag-target

So why is an 8.5% return assumption delusional?

It's pretty simply really.  Assume that your fund is 50% bonds, 50% stocks.  Currently 10-year Treasuries are yielding about 2.3%.  Let's round that up to say 3% to be generous.  Assume an equity risk premium of 5%, and equities will return about 8%.  So our hypothetical pension fund is going to earn:

             50% bonds + 50% equities = 0.5*3 + 0.5*8 = 5.5%

Even with a tweaking the bonds to 4%, and using a risk premium of say 6%, you are looking at:

            0.5*4 + 0.5*10 = 7%

I think 7% is still pretty optimistic, but if we use today's numbers, 8.5% implies stock returns of:

            8.5 = 0.5*3 + 0.5*X

Solve for X, ... go ahead, I'll wait.

           X = 14%.

So stocks would need to return 14% on average, implying an 11% equity risk premium.  That's why it's easy to say that 8.5% or even 8% is delusional.

But just labelling something delusional doesn't really help anyone, and I appreciate this.   Unfortunately to ensure a pension fund is fully funded, and meets a realistic return goal, either contributions have to increase, or payouts have to decrease.  Both are hard choices and there's no easy fix.  Just setting a high return merely kicks the can down the road.


Saturday, July 15, 2017

Will fee cutting hurt the pension fund?

In an article yesterday in the News and Observer (http://www.newsobserver.com/news/business/article161425553.html), David Ranii explores whether fee cutting by the pension fund might hurt future returns.

It's a good article, I was interviewed for it, and I recommend that you read it.  I would, however, like to add a small comment/clarification with regard to my comments within the article.

While I strongly support attempts by the pension fund to reduce fees, this has to be done in a sensible manner.  When high cost equity managers are liquidated, the proceeds should be put into an equivalent low cost index fund.  What the pension fund has been doing is to put these proceeds into cash and fixed income.  In the article, I am quoted as noting that this action will likely result in lower returns for the pension fund going forward.  

The article incorrectly portrays me as in conflict with critics of the pension fund's strategy.  This is inaccurate.  I fully agree that cutting fees by firing equity managers and then putting the proceeds into cash is a bad idea.  This will hurt future returns.






Wednesday, June 14, 2017

Folwell reduces fees by $50m

Some good news from the Treasurer's office.  Apparently our new Treasurer has reduced fees by $50 million so far.  He reports that he's on track to hit $200 million by the end of his first term.

http://www.newsobserver.com/news/business/article155868344.html

This is great news.   I am sure we will be digging into the numbers when the annual report comes out, but for now, this is a great start.

Wednesday, January 25, 2017

Dow hits 20,000

What does this mean?

Ummm. Not much.

 https://www.bloomberg.com/news/articles/2017-01-25/-time-to-get-out-as-dow-milestone-a-call-for-caution-pros-say

Some will say that you need to get out once a milestone is met.   Trouble is - when do you get back in?   Oh - that's right - before the market goes back up.

Of course, 20,000 is no 36,000.  We're still waiting for that one.

Wednesday, October 26, 2016

Nevada only pays $13 Million to run its $35 Billion pension fund!

A recent article in the Wall Street Journal is getting some attention - as it reports that Nevada only pays $13 million to run its $35 billion Pension Fund.  To put this in perspective; North Carolina pays 12 times as much, even after you take account of the size differences in the plan.

So how does Nevada keep costs so low?   The answer is simple: the plan is indexed.

Not only are the costs super low, the performance is pretty good.   Ron Elmer runs the numbers and finds that over 10 years, Nevada's plan earned 6.2% while NC earned 5.5%.   A difference of 0.7%.

Together with a few others (Ron Elmer, Andy Silton and SEANC), I've been advocating indexing for the NC Pension Fund for quite a while now and we've struggled to see any meaningful change.  But now we're now in a position to elect a new state Treasurer.

Recently - WRAL's "On the record" interviewed both candidates - you can see the video here.
http://www.wral.com/candidates-for-state-treasurer-go-on-the-record-/16005623/
(start at the 18 minute point).

Of the two candidates, I think that Dale Follwell understands the problems and has a realistic approach, so I'll be voting for him.



Just as a point of clarification (this came up in the video) - there is a huge difference between the funding of the plan and the performance of the plan.
  • A plan's funding level is based on how much money is put into the plan - basically - has the state honored its obligation to fund the plan?
  • A plan's performance is based on the investment choices that the plan makes.   Poor investment choices (and high fees) result in lower performance and can negative impact the funding level.  These choices are largely controlled by the Treasurer.




Monday, October 3, 2016

You can't consistently beat the market. Just ask Harvard.

Harvard University has been lamenting a substantial loss in the value of their endowment.  Apparently about $2 Billion.   See:http://www.chronicle.com/article/What-a-2-Billion-Loss-Really/237965

Harvard has chased all sorts of exotic strategies, including private equity and hedge funds and yet - to quote the above article:

"...if Harvard had passively invested in a standard mix of 60 percent stocks and 40 percent bonds, it would have gotten a higher rate of return — 8.9 percent over the past five years, versus 5.9 percent with its active in-house management, according to The Boston Globe."

What's worse, is that Harvard was paying its money managers millions to come up with these strategies.   While Harvard is clearly one of the premier academic institutions in the world, this status does not give it the ability to beat the market.  Other institutions (I'm looking at you NC Pension Fund) would do well to learn from this.