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Can Managers Pick Managers?

9,364
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

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  • 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

    6,690
    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

    8,832
    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?

    6,806
    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?

    5,339
    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

    5,179
    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

    6,139
    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?

    6,116
    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

    9,100
    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

    6,372
    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

    7,469
    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?

    6,017
    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?

    5,505
    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

  • The S&P 500 Index Closes Above 2,000 and So What?

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    by Mark Hebner and IFA Contributors — Friday, August 29, 2014

    On August 26th, 2014, the S&P 500 Index closed above 2,000 for the first time by the skin of its teeth (2,000.02). To us at Index Fund Advisors, it is just a number and nothing to get excited about. We are reminded of what one of our favorite authors ...Read More

  • Q&A with IFA: Do Index Funds Contribute to Mispricing?

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    by Mark Hebner — Friday, August 29, 2014

    Question: Index funds buy stocks "blind" without regard to company fundamentals. Do their activities contribute to mispricing of securities? Note: The question above was originally addressed in DFA’s Fama/French Forum. Professor Fama gave his typical terse but to the ...Read More

  • Q&A with IFA: Unwinding a Large Stock Position

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    by Mark Hebner — Thursday, August 28, 2014

    Question: I hold a large stock position in the company that I used to work for. Can IFA help me unwind that position so that I can invest the proceeds into a diversified portfolio? Answer: In the past, we have helped many clients liquidate large stock positions which resulted ...Read More

  • International Bond Investing: To Hedge or Not to Hedge Currency Risk?

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    by Mark Hebner and IFA Contributors — Wednesday, August 27, 2014

    As with international equities, bonds issued in foreign currencies constitute more than half of the taxable bond market, and adding international bonds to a U.S.-only portfolio provides a diversification benefit that results from exposure to the yield curves and the economic ...Read More

  • Tough Times Continue for Stock Picking Fund Managers

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    by Mark Hebner and IFA Contributors — Tuesday, August 26, 2014

    In two recent Wall Street Journal articles1, Kirsten Grind detailed the continuing ascent of passive funds over active funds. Her first article began by noting Vanguard’s record in-flows which have brought its assets under management to almost $3 trillion. She partly ...Read More

  • Vanguard Quantifies the Impact of Performance-Chasing

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    by Mark Hebner and IFA Contributors — Monday, August 25, 2014

    For many years now, IFA has called attention to the dismal performance of individual investors. The chart below shows the results of the DALBAR study which details how the average individual fund investor has severely lagged the S&P 500 Index. Insert most recent DALBAR chart ...Read More

  • Q&A with IFA: Reducing Risk with Options

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    by Mark Hebner and IFA Contributors — Friday, August 22, 2014

    Question: Can put or call options be used to achieve a more predictable risk-return tradeoff? For example, should I purchase put options to minimize equity portfolio losses? Note: The question above was originally addressed in DFA’s Fama/French Forum. They gave the ...Read More

  • Reaching for Yield—Non-Traditional Bond Funds

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    by Mark Hebner and IFA Contributors — Monday, August 18, 2014

    In late 2011, a few years after the beginning of the current era of very low interest rates, Morningstar launched the non-traditional-bond category. According to Morningstar’s Eric Jacobson, this category includes funds that pursue strategies that diverge in some way from ...Read More

  • Active vs. Passive—Have We Tipped Over the Tipping Point?

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    by Mark Hebner and IFA Contributors — Friday, August 15, 2014

    Regarding this question, a recent article on Morningstar.com caught our attention. John Rekenthaler, a Vice President of Research at Morningstar, questions whether active funds have a future in light of recent cash flow data. As the chart on the left-hand side below shows, for ...Read More

  • Pension-Gate: Some Good News and Bad News

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    by Mark Hebner and IFA Contributors — Thursday, August 14, 2014

    The recent good news from the Wall Street Journal (summarized here) is that the California Public Employees’ Retirement System (CALPERS) is planning to drop the level of its hedge fund investments this year by 40% to $3 billion. This retreat comes in the aftermath of many ...Read More

  • Fidelity Agrees to Settle 401(k) Lawsuits

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    by Mark Hebner and IFA Contributors — Thursday, August 14, 2014

    A little less than a year ago, we published this article about Fidelity facing a class action lawsuit by its employees alleging that the firm put them into costly proprietary funds in the firm’s profit-sharing plan, even though cheaper options were available. One of the ...Read More

  • Invest Like a Hedge Fund? Thanks but No Thanks!

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    The Wall Street Journal recently featured an article, How Individual Investors Can Invest Like a Hedge Fund, that caught our attention. In light of recent poor performance which we have documented here and here, it is simply beyond us why anybody would want to emulate hedge ...Read More

  • State Pension Plans - A Deeper Look at Performance

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    Index Fund Advisors expended a large amount of time and effort in putting together the data that reveals the failure of active management for state pension systems. As of now, there is no central repository of information on state pension performance, so each state’s ...Read More

  • Quantifying the Value of Tax Loss Harvesting

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    by Tom Allen and Mark Hebner — Tuesday, August 5, 2014

    Tax loss harvesting is one service provided by most financial advisory firms and is one of the hardest to quantify in terms of value added. The professional opinion on this topic ranges from the “do it every chance you get” to the “never, ever.” At Index ...Read More

  • Weston Wellington on Dimensional's Philosophy

    13,142
    by Weston Wellington — Tuesday, August 5, 2014

    Weston Wellington, Vice President of Dimensional Fund Advisors, explains how he came to embrace Dimensional's scientific approach to investing. Weston explains how the ideas discussed at Dimensional had almost a "gravitational pull" on him... "sort of like a Black Hole ...Read More