Trovena Weblog

Securities Lending...You Should Know

I know this is a fairly esoteric topic but I do think it's something investors should pay attention to. I'm very happy to see that Mr. Zweig at the WSJ has written about it. Without going into the details, many people in the investment world, like hedge funds, need to borrow stocks to make bets on the direction of the price of the shares. They typically look to long term investors like pensions and mutual funds as a source of shares to borrow.

Now, do these funds loan the shares for free? No. They charge interest to the borrowers that the owners  of the stocks, you, should recieve as additional return. Unfortunately, many fund companies keep the income for themselves and never tell their investors about it. This is no small amount of money, especially for small company stocks which are hard to find because they have fewer shares outstanding.

Find out your mutual fund company or advisor's policy regarding these fees.

Christopher

Is Your Fund Pawning Shares at Your Expense?

• By JASON ZWEIG

Imagine you hire a real-estate agent to sublet your house. Now imagine he keeps 30% to 50% of the rent for himself. Finally, imagine that the real-estate agent makes you pay for the damages that resulted when the tenants he brought in trashed your house.

If you think that sounds unfair, get a load of how the mutual-fund industry has milked investors through the arcane practice of securities lending. Like subletting your house, securities lending is sensible and beneficial in the right hands -- but can wreak havoc when it is done wrong.

Continue reading "Is Your Fund Pawning Shares at Your Expense" »

Equity markets are way up, but you wouldn't know by listening to the media

With economic pessimism becoming a growth industry, it's interesting to note that the glummest of the glum work in a field with the most potential to influence how everyone else is feeling: the media.

Pollsters Ipsos MORI recently asked the people of Britain to cite the most pressing issue facing their country. Out front by a country mile was 'the economy', with two thirds citing it as the most important challenge.¹

And in terms of occupations, Ipsos found journalists were the most negative, with 96 per cent of that grouping believing the economy would get worse.

"Out of all the audiences we look at—businesses themselves, consumers, employers, the people who are most negative are the journalists," Ipsos managing director Ben Page told the Financial Times.²

Increase in FDIC limit extended through 2013.

Here's the statement from the FDIC:

On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013. This extension of the temporary $250,000 coverage limit became effective immediately upon the President's signature. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014.

To see the full press release, visit the FDIC web site.

Your Bonds And Inflation?

This is a nice article on what they call the "bond bear trap". Many investors, I've noticed, have abandoned their balanced portfolios and placed their money into bonds. They did this, of course, after their stocks declined last year so the yields on the bonds they did buy are 2% or less because lots of other folks did the same thing at the same time.

Partly because they don't understand, and partly because bond salesmen can make more money, investors are reaching out into the future and buying longer term bonds in an attempt to add yield to their portfolios. (the bid ask premiums bond dealers get are much easier to conceal over a longer period so bond brokers have a financial incentive to push longer term bonds)

The problem is that if stimulus-driven inflation hits and/or investors jump back into stocks, these investors will be left holding the bag. If they don't jump quickly, they will suffer huge capital losses in their bond prices.

What's the answer? Return to a balanced portfolio and stop chasing returns.

Christopher

Beware 'bond bear trap,' experts warn the unwary

Going long now is tempting but risky, they say

By Dan Jamieson
May 24, 2009

Financial advisers are at risk of getting caught in a classic “bond bear trap” — reaching for yield in a low-interest-rate environment, then getting hammered when rates ultimately rise.

“We see this time and time again — when the Fed lowers rates, people go out very long [on the yield curve] and lower the bar on credit quality,” said Dave Pequet, president of MPI Investment Management Inc. in Hinsdale, Ill., which runs about $210 million in short-term bond money for high-net-worth investors.

“When rates turn, they just get crushed. It's a bear trap,” Mr. Pequet said.

Continue reading "Beware 'bond bear trap' experts warn the unwary" »

Fudging The Numbers

Jason,

I enjoyed reading today's article on commodity futures trading as a possible addition to our portfolios. You rightly point out the survivorship bias that is present in commodity indexes such as the Barclay CTA Index. However, if 15% of the managers "disappear" from the data each year (the worst managers no doubt!), I suppose that the bad return that made them do so does too.

Furthermore, if you have to have 4 years of returns to get into the index, what happens to the performance of all the funds started that flame out in years 1, 2, and 3? (this group would be the worst of the worst) I don't think those numbers are in the returns either. Both of these omissions are not small and would have tremendous impact the the returns they are reporting.

Imagine if 15% of the companies in the S&P 500 dropped out each year and their performance was "disappeared" from the returns of the index. It would overstate returns hugely.

Does CTA stand for the commodity traders association? I think this index data may have been invented by commodity traders to help them market these high cost funds.

Christopher P. Van Slyke, CFP®

Should Managed Futures Be in the Cards for You?

• By JASON ZWEIG

Is your email in-box, like mine, suddenly full of pitches for "managed futures"?

The returns on this commodity-trading strategy don't look good -- they look spectacular. The average managed-futures program, as measured by the Barclay CTA Index, was up 14% last year -- beating the stock market by a staggering 51 percentage points. Run by commodity-trading advisers, or CTAs, these funds manage an estimated $199 billion and may traffic in anything from corn, cotton and crude oil to interest rates, currencies and stock indexes. They often use technical analysis and mathematical formulas to trade on price patterns.

Continue reading "Should Managed Futures Be in the Cards for You?" »

Estate Planning, Estate Planning, Estate Planning

Every few months one these outrageous stories comes out about a very wealthy person who never deemed it important to have a proper estate plan. I have been following this story about "Little Sweetie", a Hong Kong heiress, for the last few years.

There are two things about this story that I think are relevant to many of my clients. Firstly, you need a recently updated estate plan, done by a reputable lawyer, no matter how old you are. I don't know how old Mrs. Wang's husband was when he was kidnapped in 1990, but I'm sure he thought he'd live forever so he didn't have a bulletproof estate plan in place.

The same goes for Mrs. Wang, who died a few years ago. She left her Mr. Wang's money to a charitable foundation, but then her feng shui adviser produced another will claiming he was the sole heir to Mr. Wang's money. It was also learned that Mrs. Wang had given the feng shui advisor $688 million before she died. What a sleazeball he is for trying to claim the charity money!

The lesson here is that you may want to leave your money to care for your loved ones in trust, rather than directly. Using this method, pool boys, feng shui masters, and other con persons will be unable to usurp the wishes of those who made the money in the first place. Imagine how the kidnapped and likely murdered Mr. Wang would feel if he knew his fortune went to the former unemployed bartender and feng shui master rather than his heirs and charities.

The Fight for Little Sweetie's Billions Is Getting More Than a Little Weird

Feng Shui Master: I Was Her Secret Lover; Puppet Show: Don't Believe It

By JONATHAN CHENG

HONG KONG -- Lawyers began arguments this week to determine whether Tony Chan, a bartender-turned-feng shui master, will become one of the richest men in the world.

His lawyers say Mr. Chan, 49 years old, is the rightful heir to the fortune of the late Nina Wang, a billionaire whose pigtails, miniskirts and bobby socks earned her the nickname "Little Sweetie." Ms. Wang's charitable foundation is fighting his claim with, among other things, a puppet show.

It's the latest chapter in a convoluted tale of money, love, kidnapping and allegations of forged wills.

Continue reading "The Fight for Little Sweetie's Billions Is Getting More Than a Little Weird" »

Back in Black

Are we in the early stages of a prolonged bear market?  I certainly do not know.  What I am sure of however, is that the past two months, ending April 30, 2009, have been some of the best months in recent history.  It is hard to believe that less then 60 days ago most of the “experts” were predicting that the latest market bottom on March 9th was “just the beginning.”  They got one part correct, it was the beginning, but not of the continued major market slide they were predicting.

Below are the results for the two months ending April 2009 for all of Dimensional Funds Advisor’s equity mutual funds with fifteen years or more of data.  (I have selected to show their live results since they are one of the best, if not the best, measures of performance for different asset classes around the globe.  I believe Dimensional’s performance is a better proxy to investors’ experience then using the outdated index concept.)  For ten of the thirteen funds, total returns for the most recent two-month period was the highest among all two-month time periods since each fund’s respective inception.

Two Month Returns as of April 30, 2009 vs. Rolling Two-Month Returns since Inception

 

¹ Rank of the latest two-month return against all two month periods in the portfolio's history.  Past performance is no guarantee of future results.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.  All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed.

Is He Kidding?

The President has identified $17B in cuts out of a $3.4 trillion budget that is $1.7 trillion more than we brought in from taxes. Nice try. I'll let you draw your own conclusions about how this might impact future Americans.

The White House budget director, Peter Orzag, says, "$17 billion a year is not chump change by anyone's accounting." What is he thinking? $17 billion out of 3.4 trillion. Seems chumpy to me.

To put this all in perspective, the total federal debt, if you include social programs, is $80-100 trillion. That is 8-10 times the entire national output.

Christopher

Obama Releases $3.4 Trillion Budget Plan

By Lori Montgomery, Amy goldstein and William Branigin
Washington Post Staff Writers
Thursday, May 7, 2009 12:18 PM

The Obama administration today unveiled details of a $3.4 trillion federal budget for the fiscal year beginning in October, a proposal that includes substantial increases for a number of domestic priorities as well as a plan to trim or eliminate 121 programs at a savings of $17 billion.

In a statement delivered at the White House after the budget details were released, President Obama defended the cuts from critics on both sides -- those he said would fight to preserve the targeted programs and others who consider the reductions insignificant.

"We can no longer afford to spend as if deficits don't matter and waste is not our problem," he said. "We can no longer afford to leave the hard choices for the next budget, the next administration -- or the next generation."

Continue reading "Obama Releases $3.4 Trillion Budget Plan" »

The best thing about separate accounts is...

...that you can't really find out what performance is. With every account technically having different performance, it makes it much easier for these managers to "adjust" the truth about performance. Duh.

Christopher

Pitfalls of Hedgies Doing Splits
By GREGORY ZUCKERMAN

Hedge funds may have discovered a way to reclaim their mojo. But their innovation creates almost as many problems as it solves.

A growing number of funds are introducing separately managed accounts for investors, hoping to appease disgruntled clients and rekindle interest in their flagging business.

By keeping money in a distinct account, an investor can see how it's being managed, position by position. In theory, that provides an early warning if a manager shifts into risky or illiquid investments. Investors also can place their own value on their account, addressing complaints about how some managers "mark" their positions, particularly those that don't trade regularly. And separate accounts are owned by the investors, so a manager can't restrict withdrawals, as happened too often last year.

Continue reading "Pitfalls of Hedgies Doing Splits" »

Gotta Wonder Bout These Laws Against Vacancy...

This is from bubbleinfo.com

I thought California had a housing shortage. Imagine all the poor people watching these houses being torn down.

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