Saturday, July 19, 2014
Thursday, June 19, 2014
The wall of investment-management fees has been crumbling for some time. Wealthfront, another firm offering basic, pre-set ETF portfolios, last year said it would manage up to $1 million for 501(c) nonprofit organizations for free. Fees after the first million: 0.25%. The firm recently surpassed $1 billion in assets under management.
These efforts turn the typical model of the financial-advice business on its head. Advice is a scale business. The wealthier you are, the lower your fees. But it’s arguably the smalltime investor who could benefit the most from being freed of high fees.
In that regard, advisors often charge 1% or more a year to manage your money, on the theory that you won’t do it yourself, they can’t do it for much less and you can’t get a better deal elsewhere.
But if, like me, you don’t expect more than 6% annual long-term gains from stocks, an advisor who puts you in expensive mutual funds after laying in his own fee is siphoning away perhaps a third of each year’s expected return. Of course, he takes none of the risk. That’s reserved for you.
Compound lost returns over 20 or 25 years to see why your advisor drives a Jaguar and you drive a Honda.
Covestor’s program entails no management fee, just the underlying ETF expense ratios, which are measured in fractions of a percentage point, and trading commissions, which the firm estimates to be $20 a year.
So what about the portfolios? They’re about as basic and low-cost as the ETF market offers.Covestor Core Balanced Portfolio, targeting the Dow Jones Moderate Index, is invested in four funds from Vanguard Group and one from BlackRock’s (BLK) iShares.
That’s 33% in Vanguard Total Stock Market ETF (VTI), 24% in iShares Core U.S. Aggregate Bond ETF (AGG), 15% in Vanguard FTSE Emerging Markets (VWO), 13% in Vanguard FTSE Developed Markets ETF (VEA), and 5% in Vanguard REIT ETF (VNQ). Those ETFs’ combined weighted expense ratio is less than 0.08%.
This is no threat to the high-end financial advisor. But I expect to be a threat to the ones who charge smalltime investors 1% or more.
Posted by Bud Fox at 1:36 PM
Monday, June 16, 2014
Sunday, June 08, 2014
New Short Squeeze ETF Coming to Market http://www.
Posted by Bud Fox at 6:34 AM
What is the biggest country in the world by market cap now? The U.S., with nearly half of global stock-market capitalization.
Figure 5 shows the cheapest and most expensive countries in the world. Notice that the U.S. is one of the most expensive countries in the world.
Figure 5 – Five Cheapest and Five Most Expensive Countries, May 2014
If you look at where we stand today with world valuations in the chart below, the U.S. is actually above the upper end of the range for expensive countries. This chart could be used to help guide when to allocate more to the U.S. versus the rest of the world. The U.S. was cheap relative to the rest of the world in the early 1980s, which also happened to be the start of the long bull market. The late 1990s saw the U.S. near the top of the range, which preceded the bear market that began in 2000.
Will the current overvaluation signal another bear or perhaps a time to shift more assets to foreign markets? Time will tell.
Figure 6 – CAPE ratios of expensive, cheap, USA and all countries
I examine how to form portfolios of the cheapest countries in a new book, Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market.
The bad news is the U.S. stocks are expensive, although not in bubble territory. I expect U.S. stocks to return about 4% per annum for the next 10 years. The good news is most of the rest of the world is quite cheap. Here are a few actions investors can take to improve the future returns of their equity portfolio:
- At a minimum, allocate your portfolio globally reflecting the global market-cap weightings. For a U.S.-based investor, that means allocating 50% of your portfolio abroad.
- To avoid market-cap-concentration risk, consider allocating along the weightings of global GDP. This would mean closer to 80% in foreign stocks.
- Ponder a value approach to your equity allocation. Consider overweighting the cheapest countries and avoiding the most expensive ones. Currently, this would mean a low or zero allocation to U.S. stocks. This does not mean simply picking one or two countries, but rather a basket of the cheapest countries – 10 is a reasonable number.
For U.S. investors, how many of your stocks are in the domestic market? Once you account for the fact that the U.S. is one of the more expensive markets around the globe, it could be a good time to rethink your stock allocation.
Posted by Bud Fox at 6:22 AM
Friday, May 30, 2014
Emerging markets have been on quite a tear this year. Just as pretty much everyone gave up on the asset class, the emerging markets ETF (EEM) made a low in December and has rallied by over 16% since.
The question now is whether or not the sector has reversed its multi-year downtrend relative to the United States. The chart below shows the relative strength of emerging market equities compared to the S&P 500 using the ratio of ETFs EEM (emerging market ETF) and SPY (S&P 500 ETF) as a proxy. When the line is rising, it indicates that emerging markets are outperforming the S&P 500 and vice versa when the line is falling. In spite of the big run in emerging markets over the last four months, it barely registers when looking at a two-year chart of the sector's relative strength versus the S&P 500. Additionally, the recent high in the ratio still has yet to clear the low in the ratio from 2013. That being said, the downtrend from the late 2012 peak has indeed been broken. While you should probably wait until the prior low in the ratio from late 2012 is cleared, if the turn for emerging markets is truly here, there is a lot of room for additional upside just to erase the relative weakness from 2013.
Posted by Bud Fox at 5:32 AM
Thursday, May 29, 2014
Posted by Bud Fox at 9:34 AM
Today we’re going to talk about the boom in hedge fund-like mutual funds .
I once looked at a “liquid alternative fund” from Natixis – liquid alts are products that purport to offer hedge fund strategies in a ’40 Act mutual fund wrapper – and I couldn’t understand a word of what the wholesaler was talking about.
It was early 2011 and they were pushing this Dr. Andrew Lo vehicle called ASG Diversifying Strategies Fund. The idea what that Dr. Lo, perhaps one of the most brilliant quantitative scientists and academicians in finance (MIT, Harvard, all kinds of awards, PhDs out the ass, etc), would be incorporating a variety of approaches to manage the fund using all asset classes, derivatives and trading methodologies that he and his team saw fit to apply. As the strategies were explained to me, I nodded as though I understood – but it was Greek, locked in a black box, dumped into a river, in the middle of the night, as far as I was concerned.
Regretfully, I declined to get myself involved. But I promised the nice man from the mutual fund company to watch it and perhaps feel foolish in hindsight.
But that’s not what ended up happening.
What actually did happen was this: Andy Lo, maybe one of the smartest men in the history of finance, managed to invent a product that literally cannot make money in any environment. It’s an extraordinarily rare accomplishment; I don’t think you could go out and invent something that always loses money if you were actually attempting to.
Since its inception in August of 2009 – weeks after the generational bottom – the ASG Div Strat Fund lost money during almost every quarter. It’s compounding at something like negative 7% a year since 2010. It managed to lose money in a bad market (2011, negative 2.75%), a good market (2012, return was negative 7.69%) and a raging bull market (2013, in which it lost another 8%, inexplicably). It’s hard to say that it’s meant as a bear market vehicle or a short fund, because it actually earned 8% in 2010 with the S&P up 15. So if you ask “What is the ideal environment for this strategy?” the answer is that there isn’t one.
By the way, it’s actually somehow down another .73% year-to-date – with stocks, commodities and bonds all higher so far in 2014. I have no idea what the hell is in this thing. I don’t think I’ve ever seen anything like it.
In the meantime, this fund – and other alternative funds like it – takes a net internal expense ratio of close to 2% of assets while the brokers who sold their clients the A shares have been paid 5.75% upon purchase.
In other words, if this is the “alternative”, the real thing probably ain’t all that bad in comparison. Actually, just for the hell of it, let’s look at the alternatives to the alternative since this fund’s start date:
We won’t even get into the turnover and tax consequences here…
And yes, this is an extreme example – but again, coming from an extremely well-pedigreed management team, perhaps the best you could find. You would write Dr. Lo a check ten seconds after seeing him speak somewhere, trust me.
So this is why you rarely see fiduciary advisors getting excited about black boxes and unorthodox strategies – even when wrapped inside a friendly mutual fund casing.
But brokers on the other hand…
Wall Street Journal:
In 2013, liquid-alternative funds made up half of the net sales at firms like Bank of America Corp.’s Merrill Lynch and Morgan Stanley that sell mutual funds to investors, up from 38% in 2011, according to a report from Dover Financial Research, a Boston-based consulting firm, on behalf of the Money Management Institute, a trade association.But despite that growth, investor portfolios have less than 5% of assets in liquid-alternatives funds, compared with as much as 20% recommended by banks.One of the reasons money managers like the funds is the same reason financial advisers don’t: high fees. Because they use more complicated trades, the average expense ratio for a liquid-alternative fund is 1.9%, compared with 1.3% for a typical mutual fund and 0.8% for an index fund, according to Morningstar. An investor would pay $190 for every $10,000 invested in a liquid-alternative fund, versus $80 for every $10,000 in an index fund.
Posted by Bud Fox at 9:29 AM