Harvard Should Ignore the Freshman Slump

It’s becoming an annual tradition. Harvard is coping with another disappointing year for its $37.1 billion endowment.

In a recent letter to the Harvard community, the newly installed chief executive officer of the Harvard Management Company, Nirmal P. Narvekar, reported that the endowment returned 8.1 percent for the fiscal year ended June 2017. He called the performance “disappointing and not where it needs to be.”

It’s a refreshingly candid assessment. The endowment lagged a traditional 60/40 portfolio of U.S. stocks and bonds by 2.2 percentage points last year, including dividends. And while many college endowments have not yet reported their 2017 results, early indications are that Harvard fell behind many of its peers. MIT’s endowment, for example, returned 14.3 percent last year, and Dartmouth’s returned 14.6 percent.

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U.S. Stock Records Are Nice But Pale Against the World

It has been a year of milestones for U.S. stocks. The S&P 500 closed above 2,500 for the first time on Friday. The Dow Jones Industrial Average topped 20,000 in January. And let’s not forget the countless highs this year.

As my Bloomberg Prophets colleague Ben Carlson pointed outlast week, the market is on track for another feat. The S&P 500 has suffered at least one negative month every year since 1927, the first full year for which numbers are available. But the index is up every month this year, including dividends, and it’s up again in September through Tuesday.

Don’t pop the champagne corks just yet, however, because devotees of U.S. stocks are poorer for their affection this year. Yes, the S&P 500 has returned 13.6 percent this year through Tuesday. But overseas markets have done even better. The MSCI World ex USA Index — a collection of stocks in developed countries — is up 19.6 percent, and the MSCI Emerging Markets Index is up 31.3 percent.

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Investing Hot Shots Can’t Time, Either

The forecast calls for a market correction. The hard part is figuring out what to do about it.

On Tuesday, billionaire hedge fund manager Leon Cooperman joined a long list of money mavens who foresee trouble for U.S. stocks. Cooperman told the CNBC Institutional Investor Delivering Alpha Conference in New York that a market correction could start “very soon.”

Many others have expressed similar concerns in recent months, including Paul Tudor Jones, Scott Minerd, Philip Yang, Larry Fink, Jeffrey Gundlach, Howard Marks and fund companies Pacific Investment Management Co. and T. Rowe Price Group Inc.

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Private Assets Are the New Hedge Funds

Hedge funds are dead. Long live private assets.

Remember when hedge funds were the envy of investors? The returns were magical. The managers were gods. And they bestowed their bounty on a select smart-money set.

Investors happily paid absurd fees for the privilege, typically a 2 percent management fee and 20 percent of profits. Some investors paid an additional “2 and 20” to so-called funds of funds — hedge funds that invested in other hedge funds.

It all started with a spectacular run for hedgies in the 1990s. The HFRI Fund Weighted Composite Index — an index of hedge funds — returned 17 percent annually from its inception in 1990 to 2000. It beat the S&P 500 by 1.6 percentage points annually with half the volatility. Hedge funds seemed invincible.

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Steven Cohen’s Dubious Rerun

Don’t call it a comeback just yet.

As Bloomberg News reported on Tuesday, hedge fund manager Steven A. Cohen is preparing to raise as much as $10 billion from outside investors in 2018 for a new fund. Combined with his personal fortune of $11 billion, the fund could oversee more than $20 billion, which would make it the largest U.S. hedge fund launch in history.

It would also mark an extraordinary turnaround for Cohen. Just four years ago, he made history in all the wrong ways. His hedge fund firm at the time, SAC Capital Advisors LP, was charged with insider trading. The firm pleaded guilty and paid a record $1.8 billion penalty.

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Gundlach Faces Battle to Keep Star From Fading

Times are tough for active managers, even for Hall of Famers such as Jeffrey Gundlach, manager of the DoubleLine Total Return Bond Fund.

As the Wall Street Journal reported on Sunday, the fund’s assets have declined 13 percent to $53.6 billion in July from a peak of $61.7 billion in September.

It’s not hard to see why. Some investors love to chase hot active managers, and Gundlach’s returns have cooled in recent years. The fund measures its performance against the Bloomberg Barclays U.S. Aggregate Bond Index, despite the fact that the fund’s strategy doesn’t always resemble the index. Thanks to some savvy bets on mortgage-backed securities around the 2008 financial crisis, the fund’s total return beat the index by 5.6 percentage points annually during its first three years from May 2010 to April 2013.

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Fiduciary Rule Critics Cry Wolf

It’s early days for the Department of Labor’s fiduciary rule, but its critics are already wagging their fingers and saying “we told you so.”

The main thrust of the rule — the requirement that brokers put their clients’ interests ahead of their own when handling retirement accounts — took effect on June 9. Money managers must comply with the rule’s remaining requirements by Jan. 1, 2018, although the Labor Department sought last week to extend that compliance deadline to July 1, 2019, presumably to consider revisions to the rule.

There’s no going back, however. The rule has exposed an intolerable conflict of interest: Brokers are paid by the mutual funds they recommend to clients. For many investors, that neatly explains why they’ve been sold high-priced actively managed funds that routinely fail to keep up with the market. And those investors have had enough, as evidenced by the huge flows to passive and low-cost funds in recent years.

Wall Street has received the message, and it isn’t waiting around for the Labor Department. Brokers are paring high-priced funds from their mutual fund offerings to retirement savers. They’re also moving those investors from commission-based accounts — which charge a fee for each transaction — to fee-based accounts — which charge an annual fee based on assets.

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Investors Cloud the Crystal Ball

The money mavens have peered into their crystal balls and they foresee trouble. Just don’t ask how much  because investor behavior has turned a new shade of unpredictable.

Jeffrey Gundlach, the co-founder and chief executive officer of DoubleLine Capital LP, said on Tuesday that risky assets are overvalued and that investors should be “gradualistically moving toward the exits.” Just two weeks earlier, Howard Marks, the co-chairman of Oaktree Capital Group LLC, warnedthat investors are engaging in “risky behavior.”

On Wednesday, Pacific Investment Management Co. and T. Rowe Price Group Inc. joined the chorus with fresh warnings. Pimco urged investors to move money from U.S. stocks and high-yield bonds to less risky assets. T. Rowe Price is paring its investments in stocks and high-yield  and emerging-market bonds.

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U.S. Zigs Passive, so Vanguard Zags Active Overseas

The Vanguard Group is getting active.

As my Bloomberg News colleagues Rachel Evans and Dani Burger reported last week, Vanguard wants to expand its footprint in Europe and Asia-Pacific. Roughly 94 percent of the company’s assets under management are now in the U.S.

Vanguard, however, won’t be peddling the market-cap index funds for which it’s famous in America. Instead, according to incoming Chief Investment Officer Greg Davis, it will “offer low-cost, high-quality, active products.” Davis forgot to mention old-fashioned. The mutual funds will feature real-life stock pickers as opposed to the robots that run the new generation of active funds known as smart beta.

The old countries apparently prefer the old methods. In Europe, traditional active management accounts for 86 percent of assets, compared with 65 percent in the U.S. And it isn’t cheap. European active funds charge an average of 1.02 percent in annual fees.

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Rise of the Portfolio Allocators

It’s a stunning turn. Fidelity Investments — the mutual fund powerhouse that made its name and fortune on high-priced active management — now charges less for its own stable of index funds than the Vanguard Group.

Fidelity boasted in a press release on Monday that “100% of Fidelity’s stock and bond index mutual funds and sector ETFs will have total net expenses lower than their comparable Vanguard fund.”





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