Your Junk-Bond Worries Are All Wrong

There are reasons to be skeptical about high-yield bonds, but not for the ones investors have been worried about lately.

For starters, there’s little indication that investors are fleeing risky bonds for good. Yes, two of the biggest U.S. junk-bond ETFs have experienced outflows this month. Investors pulled $1 billion from the SPDR Bloomberg Barclays High Yield Bond ETF through Friday and $600 million from the iShares iBoxx High Yield Corporate Bond ETF.

But there’s nothing unusual about those outflows. The SPDR ETF experienced outflows in 30 of the 71 months since 2012, and the iShares ETF experienced outflows in 33 of those months. Both funds have also had bigger monthly outflows since 2012 than they’ve had so far in November. None of those occasions appear to have dimmed investors’ fondness for junk bonds. In fact, there are indications that money is already flowing back in.

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Calpers Needs to Think a Few Moves Ahead

The largest U.S. pension fund, the California Public Employees’ Retirement System, is chasing investing’s holy grail: Buy low and sell high.

Calpers is considering whether to reduce its stock allocation to as little as 34 percent from 50 percent and discussed it at a board workshop on Nov. 13.

The temptation to lighten up on stocks is understandable. The MSCI ACWI IMI Index — a collection of large-, mid- and small-cap companies from around the world — is up 40.2 percent since its low in February 2016 through October, including dividends. That’s well above the index’s average 20-month return of 14.7 percent since inception in June 1994.

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This Wealth Plan Beats Death and Taxes

As House and Senate Republicans pursue competing tax overhaul plans, one big disagreement is the estate tax. House Republicans want to repeal  it in 2024 while their Senate colleagues  want to preserve it.

The House’s repeal plan would be a windfall for a small number of the richest Americans. My Bloomberg View colleague Al Hunt notes that the estate tax affects only 0.5 percent of all estates. Both the Senate and House plans would double the estate tax exemption to $11 million from $5.5 million per individual, which would further shrink the percentage of affected estates.

Nevertheless, average Americans dislike the estate tax. A variety of polls over the years have shown that most Americans want to repeal it. Ipsos recently conducted a survey for National Public Radio and found that 65 percent of respondents favor repeal.

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Poor Housing Investment Gets Worse in Tax Plan

One of the more scrutinized parts of the House Republicans’ tax plan is the proposal to reduce the mortgage-interest deduction. Taxpayers can now deduct interest on mortgages of up to $1 million. The proposal would reduce the cap to $500,000.

A lot has already been written about the policy implications of such a move. It’s also worth asking, however, how it would change the financial case for owning a home. National Economic Council Director Gary Cohn told Bloomberg on Friday that the ability to deduct interest “is not what drives you to buy a house.” But it should.

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TIAA’s Devotion to Investors Can Start With Fees

No other mutual fund company enjoys the Vanguard Group’s well-deserved reputation for looking after investors’ interests. But if anyone comes close, it’s the Teachers Insurance and Annuity Association, or TIAA.

The New York Times recently questioned TIAA’s “reputation as a selfless steward of its clients’ assets.” The Times cites a lawsuit and a whistle-blower complaint that accuses TIAA of pushing “customers into products that do not add value and may not be suitable but that generate higher fees.”

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Bezos Is the Rich King of a Slippery Hill

Jeff Bezos is the world’s richest person. But he shouldn’t get too comfortable on the throne just yet.

Bezos rode a post-earnings rally in Amazon.com Inc.’s shares on Friday to take the top spot in the Bloomberg Billionaires Index. It wasn’t the first time. Bezos was king for a brief moment on July 27, but Amazon shares slid before the market closed and Bezos ended the day in second place.

The top spot on the Forbes 400 — an annual list of the richest Americans  — has been held by just two people for the last 25 years: Bill Gates and Warren Buffett. Gates made his first appearance at No. 1 in 1992. Buffett made his first appearance a year later.

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The Fault in Morningstar’s Stars

It’s time for Morningstar to scrap its fund ratings.

The Wall Street Journal took issue with Morningstar’s rating system for mutual funds on Wednesday. Morningstar awards funds up to five stars based on their risk-adjusted performance relative to peers.

The problem, according to the Journal, is that investors assume erroneously that “the number of stars awarded to a mutual fund is a good guide to its future performance.” Stephen Wendel, Morningstar’s head of behavioral science, agrees that “Morningstar’s star ratings for funds are clearly used in the industry to imply that funds that performed well in the past will do so in the future.”

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Playing by the Taylor Rule

President Donald Trump fancies himself a disruptor, so it’s not surprising that Stanford economist John Taylor is on his shortlist to head the Federal Reserve.

But whether or not Trump taps Taylor for Fed chief, Taylor’s rules-based approach to monetary policy is in the Fed’s future.

The so-called Taylor rule is a formula that he proposed in 1993 for setting the federal funds rate — the overnight bank lending rate used by the Fed to fight inflation or stimulate the economy. It challenges the Fed’s traditional reliance on the Federal Open Market Committee’s ad hoc judgment.

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Fidelity’s Fee Fix Comes Up Short

As investors lose faith in active managers, Fidelity Investments CEO Abby Johnson is trying to stem their flight to index funds. I doubt her plan will work.

Johnson, head of the money manager that built its name and fortune on traditional active management, wrote in the Financial Times last week that the growth in index funds “in part reflects investors’ desire for value and clarity around what they are paying for, and active managers have to respond.”

Here’s the problem — active managers fail to beat their benchmarks primarily because their fees are too high. If managers want to deliver more value to investors, the easiest way is to lower their fees.

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