Friday, March 14, 2014

Why did the market fall today?

Depends who you ask - but Josh Brown offers a range of explanations based on media outlet.

A snippet:

Wall Street Journal: Tensions in Ukraine and the Crimean peninsula
Yahoo Finance: Russians
Fox Business: Obamacare
CNBC: It didn’t sell off at all, it was actually a reverse rally
Forbes: Taxes are too high
Huffington Post: Taxes are too low
Fox News: Gay marriage
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Tuesday, March 11, 2014

Wednesday, March 5, 2014

"I don't consider the bloody ROI" ...

... said Apple CEO Tim Cook.

First I find it amusing that the word "bloody" - a great staple of the English language in its native country  - is making its way into the mainstream lexicon in the USA.  But for it to be really effective, I recommend combining it with "hell" from time to time.

But back to Mr. Cook.  Mr Cook was being questioned on the Apple's CSR (corporate social responsibility) policies by a conservative "think tank" (the National Center for Public Policy Research).  Mr Cook didn't appreciate the line of questioning - hence the money quote in the title of this blog post.

I think Aswath Damodaran frames the issue quite well.  There is plenty of evidence that CSR policies can create shareholder value when conducted in a careful and thoughtful manner.  But responding as he did, Mr Cook gave the NCPPR a great sound bite that ends up making Apple look bad.  That said, the alternative reality that the NCPPR occupies is so devoid of any understanding of science that I can understand why Mr. Cook was so exasperated.


Tuesday, March 4, 2014

Charlotte Observer on NC Pension Fund Fees

Today, the Charlotte Observer tried to sort out the debate on the level of fees paid by the NC Pension Fund to hedge fund managers.

The debate has evolved into what fees do Fund of Fund managers pay the managers of the hedge funds that they hire?   Ted Siedle, the consultant hired by SEANC argues that these fees are massive and greatly underreported by the pension fund.   The pension fund (and Andy Silton) argue that Siedle's estimates are overblown.

I think we're missing the point here.  So let me recap.  Until a couple of years ago, nobody cared about the fees being paid by the Pension Fund.   Then, during the Treasurer's reelection campaign, one of her opponents starting raising the issue.   Since then a few vocal critics have continued to argue that the pension fund pays too much in fees and doesn't disclose the fees adequately.  SEANC realized that this was an issue of importance to its members and hired Ted Siedle to look into the matter.

Here are the key issues:

1. The fees are too high.
The article quotes a spokesperson for the pension fund who says that the fees are only  0.52% in total.   0.52% may not seem much, but on $86 billion it is well over $400 million per year.   As a contrast, my personal retirement portfolio with TIAA-CREF has an average fee of 0.1%.   I find it hard to believe that I have better buying power than the State of North Carolina.  My portfolio also outperforms the State's.

2. The fees being paid by the State are not unusual.  
They are the industry standard fees.  The problem is simply that the Pension Fund is allocating too much money to high fee investment products such as hedge fund funds of funds.   This is a debate about poor asset allocation.

3. The Pension Fund does not adequately disclose all the fees paid.
We don't know whether Mr. Siedle's estimates are too high or too low, because these layers of fees are not disclosed.  But my guess is that if they were disclosed - if we saw all of the trading costs and fees incurred by the pension fund - the total fee bill would be well over half a billion dollars.

Let me repeat that: a reasonable guess of total fees must be over $500 million.

This is what SEANC is upset about, and it is what all tax payers and citizens of NC should be upset about.   The State Pension fund is handing over around half a billion dollars annually to Wall Street and in exchange is getting mediocre performance.


Saturday, March 1, 2014

How much does the NC Pension Fund pay hedge fund advisors?

The answer is hard to figure out.  While the pension fund will disclose (reluctantly) the fees paid directly to managers - in many cases those managers hire other managers who in turn charge another layer of fees.   This practice is common and indeed the norm in the hedge fund industry where investors contract with "fund of funds" managers.

So how much are these hidden fees?   According to the Treasurer's office fees paid to Franklin Street Partners (an alternative investments manager) by the pension fund were around $2.6 million.  But an ongoing SEANC audit reveals that when fees to the funds managed by Franklin Street partners are accounted for, this total fee bill is $16 million.   And this is just one manager.

A more detailed discussion appeared on Forbes.   And a brief summary of the problem was discussed on WRAL news.

Apparently Franklin Street states they aren't doing anything wrong and this is normal industry practice.  I am sure they are correct.  But that's the problem.  Normal industry practice is all about making Hedge Fund managers rich.

Wednesday, February 26, 2014

Goldman Sachs Elevator Gossip

Hitting the news today is the "revelation" of the person behind the @GSElevator twitter feed.   The twitter feed is an insight into the minds of some of the Wolves of Wall Street.   Some quotes confirm all that you suspect is wrong about Wall Street, other quotes are brilliant.

A recent sampling;

And finally..

Tuesday, February 25, 2014

Rebalancing my portfolio

You'd think a that finance professor would be monitoring his portfolio daily... however this prof usually has better things to do.  That said, I have to admit that I've been neglecting my portfolio.  But tonight I did a thorough bit of house keeping.  I also learned a few things along the way.

Like most academics my retirement money is with TIAA-CREF, although the basic ideas are the same regardless of provider.

I have two primary goals - first to get all expenses ratios to be under 10 bp or 0.1%, and second to rebalance to 80% equities, 20% bonds.   The first goal is no brainer.  The second goal will either seem horribly aggressive or way too conservative depending on your perspective.  



Here's what I found.

1. Some fees are surprisingly high
I discovered that I had quite a few funds in my account that had expense ratios of 0.40-0.50%.  But there are options in the plan that have expense ratios of less than 0.1%.   What was I thinking!!!   It might seem small, but cutting 0.3% from my expense ratios is a non-trivial amount.  I won't share the details, but let's just say that it would pay for dining out every week of the year.

2. The choices are not the same across plans
I have four plans.  Two from my prior employer and two from my current employer.  For both employers there is an optional plan and the main plan.  The optional plans have much more choice.  For example they contain bond index funds and international index funds.   The main plans have limited choices.

3. I needed to rebalance
I only had 3% in bonds - because I haven't rebalanced in years.  Therefore I rebalanced my current portfolio as follows:
S&P 500 Index TISPX 50%
Bond Index TIBFX 20%
International Index TCIEX 16%
Small Cap Index TISBX 14%

Because of the differing choices across the plans, these rebalancings can't be done evenly.  For example, one plan was rebalanced entirely into bonds because it was a plan that offered the low cost bond index fund.

4. I needed to change future allocations
I set up my future contributions as follows:
S&P 500 Index TISPX 50%
Bond Index TIBFX 15%
International Index  TCIEX 15%
Small Cap Index TISBX 20%

This isn't ideal - I'd like more in international, but the main plan from my employer doesn't offer the international index fund.  So I have to use the 403(b) - which is a smaller contribution.


Conclusion.
Grab a beer, glass of wine or your choice of beverage, sit down with a spreadsheet and take time to do a thorough inventory of your retirement portfolio.  Don't get hung up on choosing funds, instead focus on low cost funds that will deliver your desired stock/bond mix.


Note: despite my goal of getting all fees below 0.1%, I note that TIBFX has an expense ratio of 0.3%.