Bring Harvard and Yale Investing to the People

Lots of people want to invest like elite university endowments, but securities laws don’t allow it. It’s time to remove those barriers.

But it’s worth asking whether investors should aspire to the so-called endowment model in the first place. According to numbers compiled by the National Association of College and University Business Officers, universities with the biggest endowments generated an average return of 9.7 percent annually over the last 30 years through June 2017 — the longest period for which annual returns are available — slightly edging out the S&P 500 Index’s return of 9.6 percent, including dividends.

Admirers of the endowment model are quick to point out that it’s less volatile than the stock market. The better comparison, they say, is a traditional 60/40 portfolio of stocks and bonds. That mix, as represented by the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index, returned just 8.6 percent over those three decades, or 1.1 percentage points a year less than endowments.

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Funds Like Magellan Need Gamblers Like Bill Gross

I know why investors don’t care about Fidelity Magellan’s comeback.

As Bloomberg News reported on Monday, the mutual fund made famous by hall-of-fame stock picker Peter Lynch is enjoying a resurgence after years of mediocre performance. The fund fell into a “15-year funk” after Lynch’s successor, Jeffrey Vinik, left in 1996. But ever since current manager Jeffrey Feingold took over in September 2011, “Magellan has bested the S&P 500 index every full year but 2016.” The fund has also “outdone more than 90 percent of funds with a similar investing style over the past one, three, and five years.”

Despite Feingold’s apparent success, however, investors are yanking money from the fund. The knee-jerk explanation is that investors have lost faith in active management, no matter what the results. A more accurate one is that investors no longer need the vast majority of actively managed funds, including Magellan.

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Emerging-Market Currency Fears Aren’t Wrong, Just Misplaced

There’s a reason to worry about emerging-market currencies, but not the one investors have in mind.

Some developing countries are stumbling, and their currencies aren’t taking it well. Turkey’s lira is down 16 percent against the dollar since its peak on Feb. 1 through Wednesday, and Brazil’s real is also down 16 percent since Jan. 24.

The declines have recently spread to other EM currencies. The MSCI Emerging Markets Currency Index — a basket of currencies that tracks the country allocations in the MSCI Emerging Markets Index — is down 3.5 percent since its peak on April 3 through Wednesday.

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Welcome to the Alternative-Investment Party. You’re Late.

If you want to get rich, here’s one way to do it:

  1. Find an investment that few investors know about.
  2. Write a pitch book laying out why that investment is likely to work.
  3. Sell your idea to rich institutional investors.
  4. Charge absurd fees.
  5. Let everyone know that your investment made lots of money for lots of investors.
  6. When your investment becomes too crowded to produce outsized returns, sell it to unsuspecting individuals.

Steps one through five are a brief history of so-called alternative investments, such as hedge funds, private equity and real estate. And now, thanks to JPMorgan Chase & Co., step six is underway.

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No Need to Panic About Emerging Markets

No, it’s not 2008 for emerging markets — at least not in the way investors fear.

Harvard economist Carmen Reinhart stoked investors’ anxiety last week, saying that emerging markets are in worse shape now than during the 2008 financial crisis. Among Reinhart’s long list of concerns are a stronger dollar, mounting debt and various and sundry problems in Brazil, Chile, Argentina, Turkey, sub-Saharan Africa and the Middle East.

In response, Bloomberg News looked at a group of developing countries and found that they are, in fact, worse off now than during the financial crisis in some important ways. The group, for example, has a modest current-account deficit, whereas it boasted a big surplus in 2008. The countries’ economic growth is also lower than it was during the crisis, and their government debt-to-GDP ratio is higher.

It all sounds worrisome, but the relevance of Reinhart’s concerns to investors is questionable. For starters, most investors dabble in emerging markets through mutual funds and exchange-traded funds, and most of those investments are in stocks. There’s $588 billion invested in emerging-market stock funds and $92 billion in bond funds, according to Morningstar data.

Those stock funds have nominal exposure — or none at all — to the countries that Reinhart is concerned about. The biggest emerging-market stock fund is the Vanguard FTSE Emerging Markets ETF, with $66 billion in assets. Sixty percent of the fund is invested in China, Taiwan and India. Its combined exposure to South America, Turkey and the Middle East is just 13 percent, and 8 percent of that is in Brazil. (Disclosure: I own Vanguard funds and my asset-management firm buys them for investors.)

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Investors Can Miss the Forest for the Smart Beta Trees

A battle is raging among finance theoreticians, and investors should stay out of it.

There’s a growing recognition that a handful of active investing styles — also known as factor investing or smart beta — can be expected to beat the market over time. Among them are value (buying cheap stocks), quality (buying profitable and stable companies), momentum (following the trend) and size (buying small companies).

The evidence is compelling. The cheapest 10 percent of U.S. stocks — sorted on price-to-book ratio and then weighted by market capitalization —  returned 11.9 percent annually from July 1926 through March, including dividends, according to numbers compiled by Dartmouth professor Kenneth French. That’s 1.8 percentage points a year better than the S&P 500 Index during those nine decades and 3.1 percentage points a year better than the most expensive 10 percent of stocks.

Value also won over shorter periods. The cheapest 10 percent of stocks beat the S&P 500 roughly 72 percent of the time over rolling 10-year periods, and they beat the most expensive 10 percent of stocks 73 percent of the time.

The results are similar for stocks sorted on profitability, momentum and size.

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Stocks’ Fundamental Swings Still Apply as Time Goes By

U.S. stocks have been shaky lately. Volatility spiked in February after years of calm, and the market continues to be bumpy. Meanwhile, the S&P 500 Index has gone nowhere this year, down 1 percent through Monday.

Investors, however, needn’t fear that the recent volatility will turn into a rout because “the fundamentals are strong.” Or at least, that’s the refrain Wall Street analysts never tire of crooning for investors.

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Stock Buyers Lose Bond Foundation for Steep Valuations

Apologists for high U.S. stock prices just lost their favorite defense.

Ten-year Treasury yields rose above 3 percent on Tuesday for the first time since 2014, and bond investors are hysterical. Chris Verrone, head of technical analysis at Strategas Research Partners, told Bloomberg Television on Monday that breaching 3 percent would ring in “a 35-year trend change in bonds” in which investors in long-term bonds would stop making money.

Let’s take a breath. For one thing, no one knows where interest rates are headed. Moreover, bond investors need not fear rising rates. Yes, bond prices decline when interest rates rise, but higher rates also mean higher yields on new bonds. Over time, those higher yields should more than offset lower prices.

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Financial Advisers Need Steady Learning to Keep Earning

It’s time for financial professionals to become a profession in substance, not just in name.

The Securities and Exchange Commission proposed new rules for brokers and financial advisers last week. Observers have understandably focused on the big change, which requires brokers to disclose their conflicts and look after clients’ best interests.

But a more modest proposal deserves discussion. Namely, the SEC would subject financial advisers to continuing education requirements.

It’s a wise move. Financial innovation is happening at a dizzying pace. More investment options are available today than ever before, spanning many different types of assets, geographies and investing styles, and new products are coming to market all the time.

That’s a challenge for an aging industry. The average age of financial advisers is 50, according to Cerulli Associates, and just 11.7 percent of advisers are younger than 35. Whatever advisers learned when they were trained for the job decades ago is most likely outdated.

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The SEC Just Did Brokers a Huge Favor

The Securities and Exchange Commission just threw brokers a lifeline. They should grab it.

Brokers’ troubles began in April 2015, when the Department of Labor first proposed its so-called fiduciary rule. The rule, which was issued a year later, requires brokers to act as, well, fiduciaries — or to put their clients’ interests ahead of their own — when handling retirement accounts.

It was a big departure from business as usual. Fund companies and other purveyors of financial products typically pay brokers to sell their wares, which means brokers are incentivized to recommend those that pay them the most, not necessarily those that are in their clients’ best interests. The naked conflict doesn’t exactly promote trust, so brokers aren’t quick to disclose it to clients.

All of that would obviously have to change under the fiduciary rule, and brokers fought back. They insisted they’re merely salespeople, dutifully executing orders for clients. And because they don’t give financial advice, there’s nothing wrong with selling the products that hand them the biggest bounty.

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