Tuesday, May 21, 2013

Apple wants a tax break...

In my MBA class last night, we talked about corporate tax rates and in particular why some companies don't seem to be paying taxes anywhere close to the listed rate.  Case in point, in the most recent year, Apple paid an average tax rate of about 25%, while it is clearly in the 35% bracket.   Of course what is happening is that Apple (and many other firms) take advantage of off shore tax shelters.  In Apple's case, this is Ireland.

One of my students asked the question - "how is Apple going to get its money back to the US?" and in today's news we have a possible answer - as  Tim Cook (Apple CEO) says he'll repatriate these off shore dollars if the US Government taxes them at a single digit rate.

Monday, May 6, 2013

Increasing alternative investments in public pension plans

The NC State legislature is considering increasing the pension fund's allocation to alternatives to 40%. As reported in Pension and Investments magazine, the state is also looking to allow the fund to hold on to assets if they exceed the allocation target.  The idea here is to avoid selling assets whose weights have increased because of high performance.

As Andrew Stilton (in his blog) notes, increasing the allocation to alternatives may not be such a great idea.

The problems are pretty simple:
1. Alternatives are very expensive - they have fees that can easily exceed 2%
2. The fee structure is such that you pay higher fees when performance is good, but you don't get a fee refund when performance is bad.   From the manager's point of view this is "heads I win, tails you lose".
3. Alternatives are very illiquid.
4. There is no free lunch in terms of performance.  To think that you will get higher performance from alternatives without some additional risk is pure folly.
5. Did I mention that these investments are expensive?

I personally think that relying more on alternatives is the wrong approach - a more conservative approach that focuses on traditional assets while paying the lowest fees possible makes more sense.

Underlying this move is a problem that plagues all state pension plans - that the expected return is set too high.   Given that long term bond rates are less than 2%, there is little chance that most funds will achieve their return objectives which are typically in the 7-8% range.   Of course the other options (higher taxes, higher payroll contributions, lower benefits) are all politically unacceptable.  (I've blogged on return assumptions in the past here.)

Incidentally - Stilton's blog "Meditations on Money Management" is excellent - highly recommended.

5/7/13:edited - to note that the legislation hasn't passed the house yet.

Twitter hoax flash crash and algorithmic trading?

Was the recent twitter hoax market crash due to algorithmic trading?

More on high frequency trading here, the flash crash and me on the radio talking about it a while ago.

Incidentally - the WSJ "Money Beat" blog aggregation is very good.

Top 10 highest paid college majors.

Engineering, computers and finance.