Britain is leaving the EU. Now what? Jared Kizer on what the Brexit vote means for the markets and your portfolio.
This recap of a new study by Moody’s on public pension funding reveals three important points, as well as the impact of pension funding on the municipal bond market.
Ken French’s recently updated global factor data shows the global size and value premiums were basically flat for the past 10 years (the value premium was actually about –1 percent per year over this span). This long-term historical result has surprised many people and naturally led some to ask whether these premiums can be expected in the future. Figure 1 graphs the one-, three-, five-, 10-, 15- and 20-year average size and value premiums using the global data set.
International diversification has come under attack over the last couple of years as both international developed and emerging markets have underperformed U.S. stocks. Figure 1 illustrates this underperformance by looking at the growth of $1,000 invested in U.S. and international developed market stocks over the period from January 2008 through November of this year.
Last year, a piece by Michael Kitces and Wade Pfau made the claim that mechanically increasing the equity allocation during retirement — which they term a “rising glidepath” — could reduce the likelihood that a retiree outlives his or her assets and could decrease the magnitude of shortfall when capital market returns disappoint. Specifically, the paper stated:
“We find, surprisingly, that rising equity glidepaths in retirement … have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.”
I held off writing about smart beta strategies as long as I could. The world, after all, is awash in such pieces. I couldn’t ignore it any longer, though, because virtually every piece I’ve read that’s critical of smart beta misses one fundamental point: The term “smart beta” may be new (and has certainly been effective from a marketing perspective) but the underlying strategies themselves are not.
I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.
In spending significant time talking to clients and wealth advisors about fixed income, one common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The logic basically starts and ends with the observation that individual bonds can be held to maturity while bond funds don’t necessarily hold all bonds until they mature. Because all individual bonds can be held to maturity, as the logic goes, it doesn’t matter if their prices go up or down in the interim. This does indeed sound logical, but as it turns out, laddered individual bond portfolios and bond funds with similar-maturity bond holdings have almost identical exposure to interest rate risk. There simply isn’t much of a difference, yet the incorrect point of view is all too common within the industry and can lead investors to take excessive interest rate risk in individual bond portfolios without understanding the implications.
The initial academic work on the returns of private equity investments generally found underperformance relative to public market benchmarks like the S&P 500. More recent research, which apparently uses higher-quality data, is coming to the opposite conclusion. But is it really? Professor Ludovic Phalippou from the University of Oxford argues that while this recent research appears to be valid, the S&P 500 isn’t the right benchmark.
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