Thursday, August 25, 2016

Pension Funds using options.

Two states, Hawaii and South Carolina are using Cash Secured Puts to boost the yield of their pension funds.

So what exactly is a cash secured put?  

A put is a bet that the underlying stock will fall in price.

  • Buying a put results in a payoff when the stock price falls below the strike.   

  • Conversely, selling a put results in a loss when the stock price is below the strike.   

The benefit to writing (selling) a put is that you earn a premium when the stock is trading above the strike.   But when the stock price falls, the writer incurs a loss.  The payoff from this strategy is basically the same as a covered call.

A cash secured put involves keeping cash on hand to cover this loss.   In the case of a pension fund, this cash is probably in the form of Treasuries.   Holding this cash doesn't make the loss go away, it just means that you have the money to cover it.   When the option is exercised, the writer sells the Treasuries to buy the stock, and ends up holding the stock.

If as a portfolio manager, you wanted to move money from Treasuries to, say the S&P 500, but wanted to do so when the price of the index fell below a certain level, then a cash secured put would be one way of doing this.  During the periods when the index was high, you'd keep your money in Treasuries and instead earn the option premium.  It's similar to issuing a limit order.

So is this a risky strategy for a pension fund as implied by the Wall Street Journal?   I don't think so.   The payoffs are pretty clear and the risk is quite quantifiable providing that the strategy is managed
carefully.  That said, essentially what these states are doing is providing market insurance to other market participants.   The insurance business is a great business to be in, except when there is a disaster.   Just ask AIG.

A bigger issue is whether or not the optimal asset allocation of the pension fund is being compromised.  For example, if the pension fund is holding larger allocations to Treasuries instead of stocks, the fund will miss out on stronger performance by stocks in an up market.   The fund will instead be an aggressive buyer of stocks in a declining market which may result in an overweighting of stocks in a bear market.

Wednesday, August 10, 2016

More poor performance from the NC Pension Fund

Ron Elmer crunches the numbers on the recent performance of the NC Pension Fund and yet again finds that the fund has underperformed a simple basket of Vanguard funds.

This isn't just bad luck.   It is exceptionally bad decision making.   Here's to hoping that the next Treasurer will do a better job.

Monday, June 13, 2016

John Oliver on retirement plans

John Oliver on retirement plans, advisors and fees.

His conclusion:  Index Funds.    Now where have you heard that before?

MSFT buys LinkedIn

I guess I didn't see this one coming.

I was looking back at my blog posts from 2011, and I was convinced that LinkedIn was overvalued then.  I think it still is, but you'd have done pretty well if you bought the stock at the IPO.  That's why I'm an indexer and not a stock picker!

Sunday, June 12, 2016

R&D expenditures - then and now.

Here's an interesting article comparing R&D expense in 2006 with now.

Top R&D today:
Amazon, Alphabet (Google), Microsoft, Intel and Apple.

Top R&D in 2006:
Ford, Pfizer, GM, J&J, Microsoft, IBM, Intel.

Saturday, June 11, 2016

Radiohead - it's all about taxes.

Radiohead the band has an incredibly complex corporate structure, comprising of numerous individual companies.  As a colleague of mine has been known to say: "I bet there's a tax story in there somewhere".

Read about it here:

Thursday, June 9, 2016

Should students use laptops in the classroom?

Step into any classroom and you'll see rows of students with laptops open tapping away at their keyboards.  Some of these students are taking notes, some are checking facebook or instagram.

Aside from distractions, I've wondered whether laptop usage is a good thing or not.  Turns out, the evidence is pretty clear.   We shouldn't use laptops for note taking.

Here are a few articles...

Scientific American reports that deeper understanding comes from handwritten notes:

See also:

Laptops are a distraction to not just the owner, but also other students:

And one Prof even writes about being a Luddite:

I think that we should seriously consider imposing laptop bans in classrooms, but also encourage online students to be low-tech and keep notes using pen and pencil.