blog07sep2008

Hot Off the Web- September 7, 2008

AP’s Dave Carpenter reports that “Tough economic times forcing people to work until later in life” . In 2006 29% of people in their 60s were working compared to 18% in 1985. Pressures causing this trend are a combination of insufficient savings and impact of market drop on retirement savings. One recent study indicated that annual retirement income increases 7% for each extra year worked; working 3 extra years and continuing to save 15%/year raises annual income by 22%.

James Stewart writes in WSJ’s “Harvard’s endowment offers an education in asset allocation”  that Harvard University’s endowment fund returned between 7-9% for fiscal 2008, while S&P 500 lost 15% over the same year. This tremendous return was achieved by unorthodox asset allocation. “U.S. equities constitute 12% of the portfolio; developed foreign equities are 12% and emerging market equities are 10%. Total foreign equities account for 22% of the portfolio, up from 19% in 2007, compared with 12% domestic. Real assets, including commodities, are 33%, up from 31%. Fixed income dropped to 9% from 13%.” Hedge funds allocation was 18% and private equity 11%. (For those of you who are counting that adds up to 105%, so they have borrowed the equivalent of 5% of the assets.) You can go to the Harvard Management Company’s website and on their Investment Management tab  you can view their (asset allocation) Policy Portfolio Evolution over the years, their Neutral Asset Allocation and their Alpha Generators (i.e. how they add value over a passive portfolio). Clearly a (small) individual investor can’t easily participate in many of the asset classes (hedge funds and private equity) that Harvard can, but with the advent of ETFs it is quite easy to participate in most (e.g. commodities).

WSJ reports that “PIMCO to offer actively managed ETFs”  . Ian Salisbury writes that PIMCO, one of the world’s largest and best known fixed income managers has announced that they plan to offer active bond and possibly active equity, commodity and asset allocation ETFs. PIMCO’s expertise in active management of bond funds is well known and they also have a few non-bond funds to build ETFs on. (This is another nail in mutual funds’ coffin.)

Globe and Mail’s Neil Reynolds has two articles in the past week arguing that we may be in for a significant pullback in inflation over the next year “Upset about inflation? Speak to the central banks”  He argues that since most of the now observed inflation rate was the result rapid increase in commodity prices, which represent only part of the consumer basket, but the average cost of living does not necessarily increase if the consumer’s income does not increase, then she just spends less on ‘other things’. He quotes economist Shostak “Irrespective of people’s expectations, people’s monetary expenditures on goods cannot increase without an increase in the money supply. No general strengthening of price increases can take place without an increase in the pace of monetary pumping [by central banks].” (Has this not been happening in the past couple of years at least in the U.S.?) In his second article he writes that despite what you may have heard before, deflation is not necessarily bad for you in “Rejoice, don’t despair, at looming deflation”  . And he suggests that we need to prepare for the coming of deflation. (Hmmmm…interesting…I have to think more about this.)

And finally, WSJ’s Zuckerman and Karmin report that “Hedge funds get rattled as investors seek exits” While institutional investors stay put, some high net worth investors have started asking for their money back from hedge funds. This is partly due to loss of nerve, partly because they know that those who are first out of underperforming funds take lower losses and partly because some were leveraged and they need to reduce leverage. (This does not help the market or the funds since it forces hedge funds- which are often leveraged- to sell more and more assets into a falling market to keep up with redemptions.) “Hedge funds overall lost slightly more than 3% through July, compared with a drop of more than 12% for the stock market in the same period. But certain brand-named funds lost much more, raising concerns about how they will survive.”

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