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Smart Beta: Nothing New Under the Sun

5,341
by Mark Hebner and IFA Contributors
Tuesday, November 18, 2014

In our daily perusal of investment-related articles, we came across this article1 from the Financial Times claiming that “smart beta is eating active managers’ lunch.” As we have previously noted, smart beta is just another term for exposure to the ...Read More

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  • The Funded Ratio: An Actuarial Approach to Retirement Spending

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    by Mark Hebner and IFA Contributors — Monday, November 17, 2014

    In a recent Financial Professional Outlook, Russell Investments surveyed 234 financial advisors across 145 investment firms nationwide. According to their results, 60% of advisors said that more than half of their clients are near or in ...Read More

  • Understanding the Different Types of Retirement Plan Fiduciaries

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    by Mark Hebner and IFA Contributors — Friday, November 14, 2014

    The Employee Retirement Income Security Act (ERISA) defines the roles and responsibilities of various fiduciaries for defined contribution retirement plans. In this article, we will attempt to clarify what some people consider to be a confusing ...Read More

  • Popularity: An Elegant New Paradigm for Understanding Risk and Return

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    by Mark Hebner and IFA Contributors — Thursday, November 13, 2014

    The recently published 40th anniversary issue of the Journal of Portfolio Management features an article titled “Dimensions of Popularity” by Roger Ibbotson and Thomas Idzorek. Ibbotson is perhaps best known for his iconic Stocks, Bonds, Bills, and Inflation which he ...Read More

  • Q&A with IFA: Is Private Real Estate Superior to Publicly-Traded REITs?

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    by Mark Hebner and IFA Contributors — Wednesday, November 12, 2014

    Question: I have heard that private real estate deals offer higher yields or better returns than publicly-traded real estate investment trusts (REITs). Is it worth my time to seek out private real estate investments for that portion of my portfolio? Answer: It is our opinion ...Read More

  • When a "Happiness Letter" Is Not Cause for Celebration

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    by Mark Hebner and IFA Contributors — Tuesday, November 11, 2014

    One of our favorite financial columnists, Jason Zweig of the Wall Street Journal, wrote this piece warning clients of brokerage firms to beware of “happiness letters”. Even though we thought we knew pretty much everything there is to know about brokerage firm ...Read More

  • Pimco Continues to Bleed Cash

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    by Mark Hebner and IFA Contributors — Monday, November 10, 2014

    Since the departure of Bill Gross from Pimco on September 26th, its flagship Total Return fund has suffered investor withdrawals of $51 billion, according to this excellent Wall Street Journal article by Kirsten Grind. For the month of October, $27.5 billion departed, and it ...Read More

  • A Great New Video: How to Win the Loser's Game [VIDEO]

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    by Mark Hebner — Friday, November 7, 2014

    Here is a full-length landmark documentary by SensibleInvesting.tv, How to Win the Loser’s Game.  It is well worth your time to watch every minute of it.  It is about 80 minutes long and contains interviews with some of the biggest names and brightest ...Read More

  • The 40th Anniversary of a Classic Investment Article

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    by Mark Hebner and IFA Contributors — Friday, November 7, 2014

    We have recently marked the 40th anniversary of Nobel Laureate (and father of random walk theory) Paul Samuelson’s Challenge to Judgment which originally appeared in the Journal of Portfolio Management. This was one of two articles from Samuelson that provided the ...Read More

  • The Darkest of Days for Active Management

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    by Mark Hebner and IFA Contributors — Thursday, November 6, 2014

    “Active management has never been in worse repute—this is the darkest of days.”                         --John Rekenthaler, Vice President of ...Read More

  • Christopher Dennistoun

    Livermore and Cutten—Rarer than Lions in Tennessee

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    by Christopher Dennistoun — Wednesday, November 5, 2014

    Edwin Lefevre’s, Reminiscences of a Stock Operator, is possibly the greatest book on the stock market ever written. But while every trader knows it by repute, most of us fail to appreciate its lessons. It was first published in The Saturday Evening Post appearing in 11 ...Read More

  • The Wisdom of a Stock Operator

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    by Mark Hebner and IFA Contributors — Sunday, November 2, 2014

    “Stock operator” is a term that is now obsolete. It essentially describes someone who makes a living by trading or speculating in individual stocks. Given the computerization of trading with the competition to obtain information whose age is measured in nanoseconds, ...Read More

  • Towers Watson Revisits the Gotrocks Family

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    by Mark Hebner and IFA Contributors — Friday, October 31, 2014

    In his 2005 shareholder letter, Warren Buffett envisioned a hypothetical family (the Gotrocks) who just happened to own all the companies in America. While each family member could have been content to simply collect their dividends, some of them hired “helpers” to ...Read More

  • Investors Continuing to Be Their Own Worst Enemy—Evidence from the Fed

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    by Mark Hebner and IFA Contributors — Thursday, October 30, 2014

    With the S&P 500 Index up about 170% from its low point in March of 2009, investors should have cause for rejoicing. Unfortunately, it now appears that many investors were there for the risk but did not stick around for the return, according to the Federal Reserve’s ...Read More

  • Enhancing Returns in Passively Managed Bond Funds

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    by Mark Hebner — Wednesday, October 29, 2014

    While the title of this article may seem like an oxymoron, it definitely does not refer to the activity of seeking out mispriced bonds, for the bond market is efficient, with prices incorporating investor expectations of future cash flows and the risk-adjusted discount rates ...Read More

  • Can Managers Pick Managers?

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    by Mark Hebner and IFA Contributors — Tuesday, October 28, 2014

    Your mother may have taught you that cheaters never prosper, but what about copycats? When it comes to mutual fund managers, the answer is sometimes, but not for long, at least according to three researchers from the US and the UK who released this paper quantifying the ...Read More

  • More Troubled Waters for Hedge Funds

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    by Mark Hebner and IFA Contributors — Monday, October 27, 2014

    A few months ago, we published this article about the difficulties faced by hedge funds and alternative strategy mutual funds in delivering acceptable returns to their shareholders. Since that time, the situation appears to have worsened for hedge funds, according to this ...Read More

  • Memo to Pimco: Don't Mess with St. Jack!

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    by Mark Hebner and IFA Contributors — Friday, October 24, 2014

    Those of us who follow the financial media have been treated to a verbal slugfest featuring the Father of Retail Index Funds, Jack Bogle, going against Pimco Managing Director James Moore. It began with Mr. Bogle stating that Pimco investors who had chosen to withdraw their ...Read More

  • IRS Increases Allowed Retirement Plan Contributions for 2015

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    by Internal Revenue Service — Thursday, October 23, 2014

    The Internal Revenue Service today announced cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index ...Read More

  • Pension-Gate: The Repercussions of CalPERS' Hedge Fund Decision

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    by Mark Hebner and IFA Contributors — Thursday, October 23, 2014

    About a month ago, we published this article about the $300 billion California Public Employees’ Retirement System (CalPERS) deciding to terminate its $4 billion hedge fund program. Today, we were pleased to see this article in the Wall Street Journal indicating that other ...Read More

  • When a White Paper Should Be Ignored

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    by Mark Hebner and IFA Contributors — Wednesday, October 22, 2014

    In the investment industry, a claim that is backed up by a white paper takes on an aura of invincibility or unassailability. We at Index Fund Advisors find this to be an unfortunate state of affairs, for as we have previously noted, white papers are not necessarily ...Read More

  • How to Improve Your Economic Forecast

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    by Mark Hebner and IFA Contributors — Tuesday, October 21, 2014

    Knowing that we at Index Fund Advisors do not engage in economic forecasting, you can safely assume that the above title is meant to be facetious, just like this Wall Street Journal opinion piece titled “Government Forecasters Might as Well Use a Ouija Board” by ...Read More

  • The Google Effect?

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    by Jim Parker — Monday, October 20, 2014

    What can’t Google do? Free email, customized searches, maps, apps, browsers, video—the list goes on. Now researchers claim to have found a link between Google searches and future stock market movements.Researchers at Warwick Business School in the UK and Boston ...Read More

  • The Five Qualifications of a Risk Premium

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    by Mark Hebner and IFA Contributors — Monday, October 20, 2014

    How can we determine whether or not we have identified an exploitable risk premium—a source of higher expected returns that we can implement in our portfolios? To understand the concept of a risk premium, imagine that the only available investment is Treasury Bills, widely ...Read More

  • Year-End Fund Distributions & Portfolio Management

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    by Tom Allen and Mark Hebner — Friday, October 17, 2014

    At Index Fund Advisors, it is standard operating procedure for us to tailor how we manage client portfolios at year-end in anticipation of dividend and capital gains distributions from the mutual funds that we buy. Dimensional Fund Advisors (DFA) provides us with their estimates ...Read More

  • When Stock Speculation Was Rampant in San Francisco

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    by Mark Hebner and IFA Contributors — Tuesday, October 14, 2014

    About a decade after the California Gold Rush came a silver rush resulting from the discovery of the Comstock Lode in Nevada. What distinguished the latter from the former was that the bulk of the people who expected to get rich from it did not go out there with ...Read More

  • Supreme Court: Time Doesn't Heal All Wounds

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    by Mark Hebner and IFA Contributors — Monday, October 13, 2014

    We are quite pleased to learn about two recent court rulings on a topic that is very important to us, fiduciary protection in retirement plans. Both rulings rejected arguments that the plan sponsor defendants were protected from compensating plan participants for imprudent fund ...Read More

  • The Little Known Retirement Savings Vehicle – Cash Balance Plans

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    by Tom Allen and Mark Hebner — Friday, October 10, 2014

    Saving for retirement always seems like a monotonous topic of discussion – the party killer if you will. Terms like 401(k), Safe Harbor, salary deferrals, Roth contributions, do not draw the same amount of excitement as celebrity gossip, the upcoming weekend of football, ...Read More

  • A Summary of the 2005 SEC Study of Pension Consultants

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    by Mark Hebner and IFA Contributors — Friday, October 10, 2014

    In 2005, the Securities and Exchange Commissions (SEC) published a study of investment consultants who are hired by pension plans to pick managers for them. The SEC conducted focused examinations of twenty-four pension consultants, representing a cross-section of the pension ...Read More

  • Do Investment Consultants Add Value?

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    by Mark Hebner and IFA Contributors — Thursday, October 9, 2014

    Large institutional investors such as foundations, endowments, and pension plans spend billions of dollars on investment consultants on whom they rely to pick active managers. Recently, three researchers (two from Oxford University and one from the University of Connecticut) ...Read More

  • Yet Another Problem with Active Investing: Manager Turnover

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    by Mary Brunson and Mark Hebner — Thursday, October 9, 2014

    The surprise exit of Bill Gross from PIMCO likely has scores of investment committee members scratching their heads, wondering how to handle their fixed income mandates. Gross had fostered a stunning reputation for active bond management, racking up more than 26 years at the ...Read More

  • A Second Look at the Indian Mutual Fund Landscape

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    by Mark Hebner and IFA Contributors — Wednesday, October 8, 2014

    About eight months ago, one of our contacts in India (Jatin Visaria) sent us an analysis of fifty of the largest mutual funds domiciled in India that had at least fourteen years of returns data. We published this article discussing the results of that analysis. Recently, Jatin ...Read More

  • Is Diversification Still Your Buddy?

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    by Mark Hebner and IFA Contributors — Monday, October 6, 2014

    The title above refers to a famous quote from Nobel laureate Merton Miller, who was a teacher to the Father of Modern Finance, Eugene Fama. It also refers to the fact that for the first three quarters of 2013, most of the diversifiers we use with respect to the ...Read More

  • The Third Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Thursday, October 2, 2014

    In the third quarter of 2014, equities pulled back around the world, particularly for international developed markets. Portfolios tilted towards small cap and value companies performed worse than portfolios tilted towards large cap and growth companies. During the quarter, the ...Read More

  • The Value of Following IFA's Advice

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    by Mark Hebner — Wednesday, October 1, 2014

    What is the value of staying invested in a globally-diversified risk-appropriate portfolio regardless of what happens in the financial markets? Admittedly, this is very difficult to quantify because there is no clear alternative to test it against. This problem was noted by ...Read More

  • Q&A with IFA: How Well Have the Funds in My 401(k) Performed?

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    by Mark Hebner — Tuesday, September 30, 2014

      Question: I was recently informed by my company that the majority of the funds in our 401(k) plan have beaten their benchmarks as of 8/31/2014. I find myself somewhat skeptical. Can you please help me analyze the performance of these funds to determine if, going forward, ...Read More

  • Hedge Fund Shenanigans Uncovered by the SEC

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    by Mark Hebner and IFA Contributors — Tuesday, September 30, 2014

    While perusing the Wall Street Journal, we came across an article1 (“SEC Criticizes Hedge Funds”) that caught our attention. The Securities and Exchange Commission (SEC) recently completed examinations of 185 hedge fund firms and found deficiencies such as firms ...Read More

  • The Bond King Leaves PIMCO for Janus Capital

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    by Mark Hebner and IFA Contributors — Monday, September 29, 2014

    We were as shocked as everyone else when we learned that Bill Gross had resigned from PIMCO, and we were doubly shocked to learn that he was going to Janus Capital, a company not known for its bond funds. In prior articles such as this one, we have discussed ...Read More

  • Is Indexing the End of Capitalism? We Don't Think So!

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    by Mark Hebner and IFA Contributors — Thursday, September 25, 2014

    Political commentator Jonathan Russo wrote an interesting article on Huffingtonpost.com called “Indexing and the End of Capitalism.” Although it had a great start by noting the arrival of the tipping point for passive over active, it unfortunately went downhill from ...Read More

  • Marlena Lee

    How Much Income Do You Need in Retirement?

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    by Marlena Lee — Wednesday, September 24, 2014

    The answer, of course, is different for every person. In the video, Marlena Lee of Dimensional Fund Advisors explains how someone who is close to retirement can arrive at a reasonable estimate of what they will need in ...Read More

  • Frontier Markets—Tread Carefully Says FINRA

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    by Mark Hebner and IFA Contributors — Monday, September 22, 2014

    The frontier markets consist of developing countries that have not yet made it to or have dropped out of the category of emerging markets. Some examples would be Argentina, Lebanon, Nigeria, Slovenia, and Vietnam. If these names conjure up images of hyperinflation, debt default, ...Read More

  • Pension-Gate: Some Good News from CalPERS

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    by Mark Hebner and IFA Contributors — Thursday, September 18, 2014

    According to this press release, the $300 billion California Public Employees’ Retirement System (CalPERS) will eliminate its hedge fund program which currently consists of $4 billion spread over 24 hedge funds and six hedge fund-of-funds. For the fiscal year ending ...Read More

  • The Nature of Capital and Income: A New Addition to IFA's Library

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    by Mark Hebner and IFA Contributors — Wednesday, September 17, 2014

    According to Joseph Schumpeter, the father of “creative destruction,” Professor Irving Fisher of Yale University was the greatest economist the United States ever produced.1 James Tobin, another Yale Professor of Economics and 1981 Nobel laureate called2 Fisher ...Read More

  • The Curse of the Five-Star Rating

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    by Mark Hebner and IFA Contributors — Tuesday, September 16, 2014

    A recent Wall Street Journal article (“Mutual Funds’ Five-Star Curse”, 9/8/2014) should give pause to investors who only pick managers with the coveted five-star rating from Morningstar. As we have pointed out on many occasions, above average performance (which ...Read More

  • IFA's Ever-Expanding Hedge Fund Manager Hall of Shame

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    by Mark Hebner and IFA Contributors — Monday, September 15, 2014

    Last year, Index Fund Advisors inaugurated its Hedge Fund Manager Hall of Shame. Since then, quite a bit has happened with what Forbes called The Sleaziest Show on Earth. On September 8th, Mathew Martoma of Steven A. Cohen’s SAC Capital (now called Point72 Asset Management ...Read More

  • Do Target-Date Investors Behave Better in Times of Market Turmoil?

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    by Mark Hebner and IFA Contributors — Friday, September 12, 2014

    Due to the auto-enrollment requirements of the Pension Protection Act of 2006, target-date funds have gained significantly in popularity in recent years. To gain the full benefit offered by a target-date fund, investors (or participants in defined contribution retirement plans) ...Read More

  • Q&A with IFA: ETFs vs. Tax-Managed Funds

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    by Mark Hebner and IFA Contributors — Thursday, September 11, 2014

    Question: I have heard that exchange-traded funds (ETFs) are more tax-efficient (have lower tax costs) than index mutual funds. For a taxable account, should I prefer to hold ETFs? Answer: There is a widely held belief among investors that exchange-traded funds (ETFs) are ...Read More

  • Two More Hedge Funds Bite the Dust

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    by Mark Hebner and IFA Contributors — Tuesday, September 9, 2014

    In a recent Wall Street Journal article1, we learned of the closing of Rinehart Capital Partners LLC which specialized in emerging markets stock picking. Interestingly, the manager (Andrew Cunagin) blamed high-frequency trading (HFT) for the shutdown: “This is a circus ...Read More

  • The Glide Path

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    by Mark Hebner — Monday, September 8, 2014

    IFA recommends a Glide Path strategy for all clients. This strategy reduces one index portfolio per year (1% less in asset allocation to stock indexes), based on the 100 Index Portfolio ...Read More

  • A Look Back at a Classic (and Prescient) Investment Speech

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    by Mark Hebner and IFA Contributors — Monday, September 8, 2014

    “Trying Too Hard” is the title of the 1981 keynote speech delivered by Dean Williams of Batterymarch Financial Management to the Financial Analysts Federation Seminar. Unlike most other investment speeches whose age is measured in decades, this one is 100% relevant ...Read More

  • Help Wanted: Stock Pickers Need Not Apply

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    by Mary Brunson, Vice President — Friday, September 5, 2014

    “The debate about whether you should hire an “active” fund manager who tries to beat the market by buying the best stocks and avoiding the worst — or a “passive” index fund that simply matches the market by holding all the stocks — is ...Read More

  • CAPE Fear: Valuation Ratios and Market Timing

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    by Weston Wellington — Friday, September 5, 2014

    As broad market indices such as the S&P 500 have set new record highs in recent weeks, many investors have become apprehensive. They fear another major decline is likely to occur and are eager to find strategies that promise to avoid the pain of an extended downturn while ...Read More

  • It's the Disclosure, Stupid!

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    by Mark Hebner and IFA Contributors — Friday, September 5, 2014

    In  perusing today’s press releases (9/2/2014) from the Securities and Exchange Commission (SEC), we received a reminder of the fact that just because a registered investment adviser has a fiduciary duty to act in the best interests of its clients does not mean that ...Read More

  • A Textbook Case of Insider Trading

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    by Mark Hebner and IFA Contributors — Thursday, September 4, 2014

    When we hear about someone being charged with insider trading, the first thought that usually comes to mind is that of company executives or hedge fund sharpies that illegally profited from their access to private information like the folks portrayed in this insider trading ...Read More

  • Q&A with IFA: Is There Any Type of Market Where Active Management Shines?

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    by Mark Hebner and IFA Contributors — Wednesday, September 3, 2014

    Question: Does Passive management make sense in all market conditions? Note: The question above was originally addressed in DFA’s Fama/French Forum. Professors Fama and French began their response with William Sharpe’s conclusion that the average active dollar must ...Read More

  • Q&A with IFA: Do Fundamentals Tell Us When Stocks Are Overpriced?

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    by Mark Hebner and IFA Contributors — Tuesday, September 2, 2014

    Question: In their book Valuing Wall Street published in early 2000, Andrew Smithers and Stephen Wright claim that the Q ratio popularized by Nobel laureate James Tobin reliably identifies periods of extreme overvaluation and undervaluation in stock prices. ...Read More