Private Equity’s Diminishing Returns

Investors can’t get enough of private equity. According to research firm Preqin, private equity firms’ assets under management ballooned from $580 billion in 2000 to $2.4 trillion by June 2015 (the latest date for which numbers are available).

Private equity investing has become de rigueur for big money managers ever since The Yale Endowment made piles of money in the funds years ago — making private equity a fixture for money managers trying to emulate Yale’s model.

Current expectations for low returns on U.S. stocks and bonds, at a time when many hedge funds are stumbling, has also left many investors seeking private equity returns to breathe life into their portfolios.

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Does Buffett Really Love the S&P 500?

Warren Buffett crooned one of his greatest hits for groupies attending Berkshire Hathaway’s annual meeting in Omaha last weekend: “Just buy an S&P index fund and sit for the next 50 years.”

Buffett has a well-deserved reputation as a legendary investor, but if ordinary folks want to mimic the master, the last place they should be parking their funds is the S&P 500.

Buffett is a big fan of the S&P 500. He has already declared that 90 percent of the money he leaves to his wife will be invested in Vanguard’s S&P 500 index fund. He also wagered a million dollars that Vanguard’s S&P 500 index fund would beat a basket of hedge funds over ten years from 2008 to 2017. (The S&P 500 index fund is currently crushing the hedgies.)

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Don’t Let McKinney Scare You Millenials

Poor millennials. Up to their ears in student debt. Facing stagnant wages. Beset by obscene housing costs in the big cities where they are most likely to land a job – if they can land a job, that is.

And now a high-profile consulting firm, McKinsey & Co., is adding to millennials’ woes with a Debbie Downer report that warns that millennials will have to work seven years longer or save twice as much in order to live as well in retirement as their parents. The reason, according to McKinsey, is that returns for U.S. and Western European stocks and bonds will be far lower over the next 20 years than they were over the previous 30 years.

Well, take heart Millennial Investors. Your futures are better than McKinsey would have you believe.

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Smart Beta Investing Awaits Its Advocate

Smart beta is going through some growing pains, and Rob Arnott, co-founder of smart beta shop Research Affiliates LLC and one of smart beta’s pioneers, is a natural candidate to help lead it past these early hurdles. 

The financial industry is littered with fake “innovations” that claim to be a godsend for investors, but in reality are just the latest cash cow for financial institutions. Smart beta, however, may actually be the real thing — if it can deliver on its promise of automating the best of traditional active management and then bring that service, affordably, to investors.

That is precisely what Arnott is attempting to do at Research Affiliates, in collaboration with index provider FTSE Russell. Using the timeless principles of value investing, Arnott has developed indexes that mimic what value investors have attempted to do for generations: beat the market by buying cheap stocks. (Arnott’s smart beta indexes go by the acronym RAFI.)

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Stop Blaming Central Bankers

“My investment returns stink and it’s your fault, central bankers!”

That seems to be the battle cry of long-suffering investors navigating a world of zero interest-rate policies and more recently — gasp — negative interest-rate policies of central banks around the world.

With all the bellyaching about negative interest rates, you would think that investors have nowhere to turn for positive expected returns, but nothing could be further from the truth. The reality is that the returns are out there to be harvested, but investors don’t want to invest where those returns are likely to be. That’s hardly the fault of central banks.

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Fidelity Should Make Smart Beta Smarter

This, I think, was inevitable: Fidelity Investments — the money management behemoth that turned fund managers into rock stars — is entering the smart beta exchange traded fund business with a large-cap, value ETF.

Okay, so it’s not exactly a trailblazing debut. Fidelity spokesman Charlie Keller acknowledged as much, saying that the move merely brings Fidelity “in line with the industry.”

But Fidelity needn’t settle for another me-too lineup of smart beta ETFs. It has the resources and the reach (and the active management cred) to realize the promise that smart beta holds but has yet to deliver to most investors: low cost active management across asset classes and styles. Fidelity should seize the opportunity, for itself and the industry it represents.

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Go Ahead and Hedge the Dollar, Silly

Despite its recent stumbles, the dollar has had the hot hand for much of the last two years. The U.S. Dollar Index, which measures the value of the dollar relative to a basket of foreign developed market currencies, has advanced 18 percent since April 2014.

Conventional wisdom suggests that the dollar isn’t done yet. The Federal Reserve is looking for any excuse to raise interest rates, while Europe and Japan are desperately trying to reboot their economies — a recipe for a stronger dollar.

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Who’s Afraid of Robo-Advisers?

The Massachusetts Securities Division recently fired a shotheard around the robo-adviser world when it declared that the online financial advisers may not be up to snuff as fiduciaries for investors. If that’s the case, it means they may not qualify as investment advisers in Massachusetts.

Regulators must of course hold all financial advisers to a high standard, but robo-advisers – the most investor friendly financial innovation since the index fund – are on the frontlines in the fight for better outcomes for investors. It’s worth considering whether it would be better to improve robo-advisers’ shortcomings rather than discouraging their proliferation.

Massachusetts is the first regulator to suggest that the bots are a problem, but that move follows a growing chorus of commentators and regulators who have raised similar questions. The Securities and Exchange Commission and the Financial Industry Regulatory Authority, for example, jointly cautioned last year that robo-advisers may not provide advice that is right for investors’ financial needs – which is a cornerstone of the fiduciary standard.

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Can Calpers Live With Responsible Returns?

The California Public Employees’ Retirement System recently opened a new chapter in socially responsible investing (also known as environment, social and governance, or ESG, investing) when its investment committee decided to start requiring that the boards of the companies it invests in include climate change experts.

With this move, Calpers is attempting to turn ESG investing on its head. Rather than divest from companies it deems undesirable, it will engage those companies and attempt to improve them from the inside.

Which begs the question: What’s causing Calpers to rethink the traditional levers of ESG investing?

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About Those Hidden Fees Investors Pay

The Department of Labor is soon expected to issue its much-ballyhooed, much-anticipated, and, in some circles, much-loathed “fiduciary rule.”

This rule will require brokers who work with retirement accounts to act as, well, fiduciaries -– in other words, to put their clients’ interests ahead of their own. (Registered investment advisers are already held to a fiduciary standard.)

What could be simpler or less objectionable?

Yet brokers have fought the DOL’s fiduciary rule since it was first proposed last April. The rule is a small part of a larger sea change underway in financial services that will ultimately improve the quality and reduce the cost of investment advice, and brokers who are attempting to buck the trend will end up on the losing side of history.

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