A Bull Market Quandary: Your Clients or Your Convictions

The U.S. stock market is dominating again this year, and money managers may soon face some unpalatable choices.  

It’s not even close. The S&P 500 Index is up 9.9 percent in the eight months through August, including dividends. Meanwhile, overseas stocks, as measuredby the MSCI ACWI ex-USA Index, are down 3.2 percent. U.S. bonds, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, are down 1 percent. And hedge funds, as tracked by the HFRI Fund Weighted Composite Index, are up a modest 1.7 percent.

It’s too soon to know how private assets, such as venture capital, private equity and real estate, have done because their results are generally reported on a multi-month lag. But it’s not likely to matter. Even the most ardent admirers of private assets, such as elite university endowments, allocate only a portion of their portfolios to them. So the results, however good, are unlikely to make up for the drag from other assets.

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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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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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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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