Endowment Policies - Education, Investment Company, Market news: Endowment Policies

Stanford to Purge $18 Billion Endowment of Coal Stock

ridodirected@gmail.com (RIDO) — Sat, 10 May 2014 00:45:00 +0000

By MICHAEL WINES
Posted on MAY 6, 2014
Article from http://www.nytimes.com/

Stanford University announced Tuesday that it would divest its $18.7 billion endowment of stock in coal-mining companies, becoming the first major university to lend support to a nationwide campaign to purge endowments and pension funds of fossil fuel investments.

The university said it acted in accordance with internal guidelines that allow its trustees to consider whether “corporate policies or practices create substantial social injury” when choosing investments. Coal’s status as a major source of carbon pollution linked to climate change persuaded the trustees to remove companies “whose principal business is coal” from their investment portfolio, the university said.

Stanford’s associate vice president for communications, Lisa Lapin, said the decision covers about 100 companies worldwide that derive the majority of their revenue from coal extraction. Not all of those companies are in the university’s investment portfolio, whose structure is private, she said. Over all, the university’s coal holdings are a small fraction of its endowment.

“But a small percentage is still a substantial amount of money,” she added.

The trustees’ decision carries more symbolic than financial weight, but it is a major victory for a rapidly growing student-led divestment movement that is now active at roughly 300 universities.

At least 11 small universities have elected to remove fossil-fuel stocks from their endowments, but none approaches Stanford’s prestige or national influence. Tuesday’s decision seems likely to increase the pressure on other major universities to follow suit.

Among other universities, Harvard has resisted student pressure for divestment, and one student was arrested on Thursday after pro-divestment activists blockaded the entrance to the school’s administrative offices.

Stanford’s trustees acted after Fossil Free Stanford, the campus branch of the movement, petitioned the board to re-evaluate the university’s holdings in energy companies, Ms. Lapin said.

Yari Greaney, 20, a Fossil Free Stanford organizer, said the group was “very proud of Stanford taking this leadership position.” Nationally, leaders of the divestment movement praised the school for its decision.

As a global institution, Stanford “knows the havoc that climate change creates around our planet,” Bill McKibben, the president and co-founder of the environmental group 350.org, said in a statement. “Other forward-looking and internationally minded institutions will follow, I’m sure.”

Maura Cowley, the executive director of Energy Action Coalition, an assemblage of groups active on climate change issues, called the decision “a huge, huge victory.”

“Their decision, coming from such a major university and from such a huge endowment, shows that the coal industry and other fossil fuel industries are quickly becoming relics of the past,” she said in an interview.

The trustees began studying divestment after Fossil Free Stanford petitioned them to re-evaluate their holdings of energy companies. An advisory panel that included students, faculty, staff and alumni spent roughly five months studying the issue before recommending that coal stocks be sold, Deborah DeCotis, the chairwoman of the board’s special committee on investment responsibility, said in an interview.

Among other deciding factors, Ms. DeCotis said, the panel noted that coal produces the most carbon per British thermal unit of any widely used fossil fuel, that practical alternatives to burning coal are available, and that the university was not dependent on coal or coal-derived products.

Other fossil fuels did not meet some of those criteria, but “this is not the ending point. It’s a process,” she said. “We’re a research institute, and as the technology develops to make other forms of alternative energy sources available, we will continue to review and make decisions about things we should not be invested in. Don’t interpret this as a pass on other things.”

Ms. Lapin said the school is already asking its investment advisers to review endowment holdings and sell stocks of coal companies. The order covers mutual funds with coal stocks as well as investments in individual companies, she said.

MICHAEL WINES
Posted on MAY 6, 2014
Article from http://www.nytimes.com/

Where Big Money Endowments Are Investing Now

ridodirected@gmail.com (RIDO) — Sat, 03 May 2014 04:57:00 +0000

Kenneth Rapoza, Contributor
Posted on 4/30/2014 @ 10:24AM
http://www.forbes.com/sites/kenrapoza

Even though the U.S. economy slowed to a crawl in the first quarter, managers in charge of large endowment and foundation funds are in good spirits. Their favorite portfolio investments spots this year include emerging markets, and for hard assets — real estate. And they are more bullish about alternative and foreign investments than U.S. securities.

A first quarter survey of endowment and foundation managers conducted by industry consulting firm NEPC showed that 75% of respondents feel the economy is in better shape now than a year ago. The survey gives financial advisors a sense of investor sentiment in one of the most prized clientele segments for wealth management firms.

“Overall confidence is reflected in more than half of endowments and foundations polled saying the markets will show high single-digit returns and their strong conviction that equities, both U.S. and emerging markets, will be the top performers in the year ahead,” said Cathy Konicki, a partner at NEPC in Boston. The survey was conducted this month, so respondents were already aware of a slowdown in China, the Russia-Ukraine crisis, and a less-stunning S&P. U.S. equities in the S&P 500 rose around 1.3% in the first quarter, beating out emerging markets, the MSCI Europe and Japan.

According to NEPC survey of endowment and foundation investment trends, allocating to emerging markets and alternative investing now trump U.S. equities.

The U.S. economy expanded just 0.1% in the first quarter due to weaker than expected exports, the Commerce Department said on Wednesday. GDP growth, while still positive, is a stark contrast from the 2.6% gain in the fourth quarter.

Economists polled by Reuters expected growth to come in at 1.2%. Commerce blamed the slowdown on consumers hibernating this cold winter, and construction crews buying less material for outdoor projects as a result.

Big money endowments have lived through the cycle and it doesn’t phase them one bit.

One of the more interesting takeaways from the survey is the interest in emerging market equity. Emerging markets have been getting clobbered much of the year, thanks primarily to the continued round of lackluster economic news out of China, the preferred punching bag of financial pundits.

Year-to-date, the MSCI Emerging Markets Index is down 1.62%, while the MSCI China is down 9.39%.

Nevertheless, endowment and foundation money say emerging market equities will be one of the strongest performers of 2014. It tied for first with domestic equities when asked for this year’s top performing asset class, each earning 22% of the vote.

The poor man’s emerging markets, the so-called frontier markets, will an underweight. However, 42% of survey respondents said they are considering an allocation to frontier specialty funds in the future.

Allan Conway, head of emerging market equities at London-based investment bank Schroders told FORBES recently that investors should follow their lead and start buying emerging markets now. ”I’m expecting a big bounce later this year into next year,” he said.

While flow data does not suggest a shift in asset allocation, NEPC’s survey said there continues to be a migration of capital from traditional equity and fixed income strategies to non-traditional assets, including specialty funds and hedge funds, limited liability corporations, and private equity.

More importantly, only 4% of respondents said they’ll be putting more money to work in the U.S. stock market through traditional means. But 81% said they were planning to increase exposure to multi-strategy funds, credit-linked funds and specialty hedge funds.

Then there’s private equity, which continues to be the favorite “alternative investment” for endowments and foundations. Some 38% said they’ll be investing more in private equity this year, up from 32% last quarter.

Despite overall market confidence, 50% of respondents said that a slowdown in global growth was the single greatest risk to investment performance, down from 60% who said so in the fourth quarter.

For those who demand more dour news about the U.S. market at least, there is Marc Faber of the Gloom, Boom & Doom Report. He said on CNBC today that the Nasdaq is due for a “dramatic correction” this year, especially social media stocks like LinkedIn and Facebook. On the other hand, he likes emerging markets.

“U.S. investors have to now choose what to buy. I believe it is too late now to buy the U.S. stock market,” he said. ”I’m not ruling out a further bond rally…but in general I think that individual investors are excessively optimistic about their future returns.”

Kenneth Rapoza, Contributor
Posted on 4/30/2014 @ 10:24AM
http://www.forbes.com/sites/kenrapoza

Endowment mortgages: Legacy of a scandal

ridodirected@gmail.com (RIDO) — Tue, 22 Apr 2014 09:41:00 +0000

By Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT

Nearly 25 years ago, Christine Taylor took the plunge and bought the first and only house she has ever owned.

Now, more than two decades on, she admits that paying off the resulting debt has been a constant worry.

That is because she was sold an endowment mortgage - a monthly savings plan, usually invested in shares and property, which was designed to pay off the home loan at the end of the term.

Like millions of other home buyers, she was also told that the policy might bring her a nice lump sum when the endowment matured after 25 years. In her case, the surplus was expected to be at least £10,000 in August 2013.

"I hadn't any fancy ideas about going on a spending spree," says the 55-year-old.

"I just thought I would be comfortable, with the mortgage paid off."

As it is, Mrs Taylor is among the hundreds of thousands of people who will receive final confirmation this year of a shortfall in the expected payout of the endowment.

"I've been struggling to get my mortgage down, but I'm glad we chipped away at it," she says.

"There will be people in a lot worse situation than I am."

'Optimistic' expectations

The rise and fall of endowment mortgages has been a feature of one of the most notorious mis-selling scandals in the last few decades.

Continue reading the main story

“Start Quote

The industry grew as a result of tax breaks, and hit its peak towards the end of the 1980s when it became the fashionable home loan for those getting on the property ladder. The estimated peak was more than a million policies sold in a single year.

The extent of the subsequent decline is clear from the fact that only 27 sales of this product were completed in 2011-12, according to the City watchdog, the Financial Services Authority (FSA)

At the end of the 1980s, there was a boom in both the housing market and stock market, prompting those selling these products to make very high predictions of investment growth in endowment savings plans.

By the middle of the 1990s, it became obvious that these expectations were overblown.

"The original growth estimates on these policies were simply way too optimistic, while the funds just didn't perform as expected," says Phillip Bray, of independent financial advisers Investment Sense.

"In the coming years we'll see just how bad the endowment mortgages mis-selling scandal is."

In the late 1990s, regulators told insurance companies to write "traffic light" warning letters to policyholders to explain the level of shortfall that might occur. A "red letter" meant there was a high risk of the policy paying out less on maturity than the target amount.

Many thousands of people cut the link between the endowment and their mortgage, making alternative plans to pay off their home loan with other savings, investments, or a tax-free lump sum from their pension. Others have switched their mortgage to a repayment model.

Switching mortgages

But Steve Wilkie, managing director of Responsible Equity Release, says his business sees many older people who have not made any plans and may need to downsize where they live.

They are receiving letters asking them how they intend to pay off their mortgage, so suddenly the poor performance of their endowment has become a critical matter.

One issue to their advantage, he says, is that the value of their property has often risen, so there is sufficient equity in the home to pay off the loan, if they choose to sell.

This, clearly, is not the scenario many of these people would have wished for. They wanted the mortgage to be paid off and the property owned outright, ready for their family to inherit in due course.

Houses There are options for homeowners who have still to address a potential shortfall

There are other options for those facing a critical point in their finances, who face a shortfall, and who have not decoupled their endowment and their mortgage, according to Danny Cox, of financial advisers Hargreaves Lansdown.

He suggests people can switch to a repayment mortgage, or part endowment and part repayment - although they should check with their lender that there are no penalties or costs for doing so.

Others may consider cashing in their endowment and using the proceeds to pay down the mortgage, before paying the rest through a repayment method. Again there might be penalties, and there is a judgement to be made here over the future performance of the endowment.

Alternatively people could switch to saving in a more tax-efficient product such as an Individual Savings Account, rather than an endowment.

Compensation

While considering what to do next, many people who were sold endowment mortgages and face a shortfall might feel somebody else was to blame.

But they could face fresh disappointment because of a deadline on claiming for compensation for any apparent mis-selling.

Policyholders can make a claim to the Financial Ombudsman Service if they believe they were mis-sold the policy, and their endowment provider turns down their claim. Grounds for complaint may include:

Not receiving a full explanation that there could be a shortfall at the end of the mortgage term
Being told that the endowment would definitely pay off the mortgage
The fees and charges were not explained
An adviser did not complete an assessment of finances and attitude to risk
Sales staff failing to ensure that income was available if the policy ran into retirement years
Receiving advice to cash in an endowment and being sold another

These rules led to complaints to the ombudsman about mortgage endowments totalling nearly 70,000 a year at their peak in the middle of the last decade.

The latest figures show that 2,109 complaints were made between April and September 2012.

However, about half of all the complaints received by the ombudsman are turned down because of a deadline. Claims must be made within three years of the householder realising that the policy was mis-sold.

That date is generally taken three years from the point at which policyholders received their red warning letter from their provider.

Time, it seems, has dealt these people another blow.

Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT

China's red-hot property market shows no signs of slowing

ridodirected@gmail.com (RIDO) — Mon, 20 May 2013 10:45:00 +0000

THE RISE OF CHINA
By Charles Riley @CRrileyCNN May 20, 2013: 1:12 AM ET
Article from http://money.cnn.com/2013/05/20/news/economy/china-property/index.html

Property prices in China increased again in April.

HONG KONG (CNNMoney)

Property prices continued to rise last month in China, defying policymakers who have sought to cool the housing market while preserving robust economic growth.

Housing prices rose in 68 of 70 Chinese cities in April when compared to the previous month, according to the National Bureau of Statistics. Compared to last year, prices were higher in all but two of the 70 cities tracked by the government.

Prices in the capital, Beijing, registered one of the largest increases, rising 10.3% over the previous year. In the southern manufacturing hub of Shenzhen, prices jumped 11.3%.

On average, new home prices across the cities increased 4.3% over the previous year.

Fearing the development of a real estate bubble, China has sought to stem rising property prices in recent months. But policymakers have also been forced to consider the broader impact of such policies as China's economy shows signs of slower economic growth.

"This [data] suggests that polices aimed at cooling the property market have not yet tightened sufficiently," said Zhiwei Zhang, an economist at Nomura. "We believe this will add further pressure on the government to tighten monetary policy in the months ahead."

China's urban housing costs have grown for much of the last decade, sparking a cycle of government reaction. Earlier this year, the central government directed local governments to rein in housing prices by April 1.

Authorities in Shanghai told banks to stop issuing loans to individuals attempting the purchase of a third home.

Beijing announced that single residents will now be allowed to purchase only one home. Both cities said they would strictly enforce a 20% capital gains tax on income earned in property sales.

The announcements set off a fresh wave of buying to beat the restrictions, and some couples even hatched schemes to skirt ownership restrictions by obtaining a divorce.

Yet additional measures may be required if the market does not soon show signs of deceleration.

Citing rampant speculation and poor planning, some China analysts are worried about the development -- and possible deflation -- of a housing bubble. Chinese citizens have limited investment options, and real estate is a popular choice for those looking to expand their portfolio.

Yet other analysts insist that fears of a bubble are overstated. Hundreds of millions of Chinese are expected to move from rural areas to cities over the next decade, they say, and demand is likely to remain strong.

Charles Riley @CRrileyCNN May 20, 2013: 1:12 AM ET
Article from http://money.cnn.com/2013/05/20/news/economy/china-property/index.html

Study Confirms College Endowment Drop

ridodirected@gmail.com (RIDO) — Fri, 17 May 2013 08:20:00 +0000

By TAMAR LEWIN
Published: February 1, 2013
Article from http://www.nytimes.com/

On average, college and university endowments’ investments lost 0.3 percent in the last fiscal year, a sharp drop from the average return of 19.2 percent in fiscal 2011, according to a study by the Commonfund Institute and the National Association of College and University Business Officers, known as Nacubo.

The returns were dragged down mostly by the dismal performance of international equities, whose returns declined by 11.9 percent, attributable in good part to the economic turmoil in Europe and the slowdown in China. Domestic stocks had an average return of 2 percent, and fixed-income assets 6.8 percent.

The study, based on data from 831 American colleges and universities with a total of more than $400 billion in endowment assets, showed more positive long-term results. Preliminary results were released in late October.

“Over the last 10 years, the average rate of return was 6.2 percent,” said John D. Walda, the president of Nacubo. “That’s a good number when you compare it with various indices.”

In the fiscal year that ended in June 2011, the average 10-year return was 5.6 percent.

The study, which includes large and small institutions, public and private, found that those with the largest endowments had the greatest returns last year. Among universities with endowments greater than $1 billion, the average return was 0.8 percent. Those with endowments of $25 million to $500 million had negative returns, and those with endowments under $25 million had a return of 0.3 percent.

Altogether, 71 institutions have endowments greater than $1 billion, and 145 have more than $500 million.

The colleges and universities in the study spent an average of 4.2 percent of their assets last year to support their operations, down from 4.6 percent the previous year. But while the spending rate had declined somewhat, the average dollars spent per institution grew by about 7 percent. Most colleges and universities have a policy of spending 4 percent to 5 percent of their average endowment value over the previous three years, so the sharp rises in endowment values in 2010 and 2011 increased the amount paid out last year.

The institutions with the largest endowments, which get a significant portion of their operating budgets from endowment spending, spent an average of 4.7 percent last year. The institutions with the smallest endowments spent slightly under 4 percent.

“The long-term goal of most endowments is to exist in perpetuity and grow with the rate of inflation,” said Verne O. Sedlacek, president of Commonfund.

To do that while paying out 4 percent to 5 percent a year, he said, would require annual returns of at least 8 percent, given that the higher education price index has been rising about 3.8 percent a year over the last decade. “Universities are still not back to where they need to be,” Mr. Sedlacek said.

This article has been revised to reflect the following correction:

Correction: February 6, 2013

Because of an editing error, an article on Friday about a study of university endowments misstated the change in their investment returns. On average, college and university endowments lost 0.3 percent in the fiscal year ending in June, a sharp drop from the average gain of 19.2 percent in the 2011 fiscal year; the returns on endowments did not decline by 0.3 percent.

TAMAR LEWIN

Published: February 1, 2013

Article from http://www.nytimes.com/

Community Endowment Fund awards $100,000 in local grants

ridodirected@gmail.com (RIDO) — Wed, 15 May 2013 07:52:00 +0000

Ukiah Daily Journal Staff
Updated: 05/15/2013 12:00:32 AM PDT
Article from http://www.ukiahdailyjournal.com/news/

Ukiah Daily Journal

One hundred thousand dollars in local grants were awarded at the March 5 meeting of the Community Foundation. These grants were made possible through the Community Foundation's "Community Endowment Fund."

"The Community Endowment has been built by contributions that vary from a check for twenty-five dollars to an estate gift valued at several hundred thousand dollars," says Board President Jim Mayfield. "By giving to the Community Endowment, our donors know their gifts will be used here in Mendocino County, doing good, for the long term."

Megan Barber Allende, the Community Foundation Director of Grants and Programs, notes that the Community Endowment Fund has been built by donors with various interests, and all of these are reflected in the grants. "We awarded grants for youth, to help the poor, for the arts, to preserve the natural beauty of this place, and for many other areas of interest. We do it all through the big umbrella of the Endowment Fund."

The grants funded through the Community Endowment Fund are reviewed by regional volunteers, as well as a Board Committee. Grants are made in all regions of the county, and fund grassroots as well as more established non-profit organizations.

Countywide

Cancer Resource Centers of Mendocino County$4,800: To develop and implement program management modules aligned with CRCMC's Salesforce platform, convert CRCMC's website toa non-HTML platform, and train CRCMC staff to use and maintain both of these systems.

Mendocino County Public Broadcasting$5,000: For a new digital, remote-controllable console at the KZYX studio in Philo, ensuring continuous radio service for all of Mendocino County.

Ukiah

Alex Rorabaugh Center$2,000: To hire a community liaison/program developer for the "Open ARC Night" pilot program, opening the Alex Rorabaugh Center for use by neighborhood residents at no cost.

Ford Street Project, Inc.$5,000: To implement NonProfit EASY to improve the website and develop communication and data management tools to integrate donor and volunteer databases, improve the Food Bank data collection process and enable workshop enrollment and on-line scheduling.

Mendocino County Youth Project$5,000: To assist with rent and utilities for the 2bu Clothes Closet while MCYP integrates it into its program and funding structures, maintaining the current program while simultaneously expanding its services.

Redwood Valley Outdoor Education Project$4,000: To develop a business plan, expand fundraising activities, and engage new donors--immediate and long term-- in order to sustain RVOEP's unique program and ensure that outdoor learning opportunities are available for generations to come.

School of Performing Arts and Cultural Education (SPACE)$2,500: To purchase a new computer and two mini-servers to improve SPACE's administrative capacity.

TLC Child & Family Services$1,500: To prepare the ground for an outdoor play area for neglected and abused children at TLC's short-term emergency shelter in Ukiah.

Ukiah Symphony Orchestra$1,500: To purchase 42 music stands for use during Ukiah Symphony Orchestra rehearsals and concerts, enabling more flexibility for concerts and fundraising events and eliminating the organization's current dependence on Mendocino College.

For more information about the other 21 grants or how you can make a gift to the Community Endowment Fund, visit www.communityfound.org.

Anderson Valley

Anderson Valley Health Center$4,000: To restore the Anderson Valley High School track to a multi-season fitness space useable to promote health and fitness among students and community members alike.

Anderson Valley Land Trust$5,000: To conduct a series of educational workshops that will provide tools and strategies for farmers, ranchers, forestland owners, local resource organizations, and professionals to preserve working rural lands in Anderson Valley.

Laytonville/Leggett

Laytonville Unified School District$5,000: To purchase supplies and additional instructional hours for the music teacher in order to expand, diversify and sustain the art and music program at Laytonville Elementary School.

North Coast

Community Center of Mendocino$4,000: To outfit the dance studio with folding mats and exercise equipment in order to enhance the Community Center of Mendocino offerings of classes and activities for all ages, including Brain Gym, tumbling, Pilates, and step aerobics.

Gloriana Musical Theatre$2,000: To reconstruct and redesign approximately 20 pages of the Gloriana Musical Theatre website with video clips and improved interfacing to support promotion of future productions, events, and educational programs.

Lighthouse Foursquare Church$2,000: For a dishwasher and new countertop to enhance the meal program provided by Lighthouse Foursquare Church to poor and homeless coast residents.

Mendocino Film Festival$4,000: To retain a graphic arts consultant to create templates for annual print publications, assemble templates into a user-friendly "cookbook", prepare volunteers to use these new tools, and aid MFF in sharing approach with other non-profits.

Mendocino Woodlands Camp Association$3,000: For marketing materials and local outreach activities to elementary schools, home school programs, and colleges to encourage participation in Mendocino Woodlands environmental education program.

Pacific Textile Arts$4,000: To assist with the installation of a translucent roof over a courtyard on the Pacific Textile Arts campus, providing a protected space for outside classes, a raised bed garden of dye plants and a rain water collection system.

Renewable Energy Development Institute$4,000: To expand the existing Home Energy Link Program (HELP) to low income families on the Mendocino Coast, providing access to a wide variety of free energy and money saving programs.

Round Valley

KYBU: Round Valley Community Radio$3,500: To purchase remote broadcasting equipment for KYBU Round Valley Community Radio and provide training for youth and adult community volunteers to broadcast live from local events and meetings.

Round Valley Indian Health Center/Family Resource Center$1,000: To purchase computers to assist with the establishment of a Community Computer Center in the new Round Valley Family Resource Center.

South Coast

Acorn Independent Learning Center$2,500: To deliver three 4-6 week sessions of garden-based education programs to approximately 60 children from local South Coast elementary schools, fostering an appreciation and understanding of our local environment and food systems.

GED Program of Point Arena$1,000: To purchase computers to better prepare students for the upcoming online GED testing requirement.

Point Arena High School$5,000: To enhance the newly built track with the purchase of 80 hurdles, 8 starting blocks, sand for long jump, and fencing for shot put allowing the PAHS track & field team to train for and host meets for their parents and the broader community to enjoy.

South Coast Seniors$3,300: To purchase and install an ice maker which will be used to maintain the freshness of food served during senior congregate dining, fundraisers, and in the Meals-on-Wheels program, creating substantial organizational savings over the long-term.

Willits

Charter School Association of Willits$3,000: To purchase a two-door commercial refrigerator for Willits Elementary Charter School, enhancing food safety at the site.

Nuestra Alianza de Willits$4,000: To assist with office rent and utilities during the organization's transition from Mendocino College to self-sufficiency, enabling it to develop a business plan and the Board leadership skills necessary to cover these costs well into the future.

Willits Daily Bread$3,400: To purchase a new commercial refrigerator in order to improve food safety and reduce energy costs.

Willits Community Theatre$1,000: For the costs associated with initiating and recording a series of workshops designed to inspire interest in theater from community members traditionally outside the scope of committed theater "regulars", thereby expanding WCT's volunteer base.

Willits Kids Club$4,000: For tree protection and staking for over 70 new trees in the Willits Kids Club Discovery Park and Playground, providing children and adults with a safe place to play, learn, and grow.

Ukiah Daily Journal Staff
Updated: 05/15/2013 12:00:32 AM PDT
Article from http://www.ukiahdailyjournal.com/news/

KAHLER: Good, bad and ugly of whole life insurance

ridodirected@gmail.com (RIDO) — Mon, 13 May 2013 08:25:00 +0000

by Rick Kahler
Article from http://rapidcityjournal.com/business/

It's impossible for a financial columnist to please all of the readers all of the time. My recent column criticizing the Be Your Own Banker scheme drew the ire of several fans of whole life insurance. Two of them in particular, whose responses were published in the Rapid City Journal, disparaged my integrity, my professional qualifications, and my math skills.

Part of the problem is that these readers interpreted my warning about BYOB, which I called "one step from being a scam," as an attack on whole life insurance in general. That was not the case.

Admittedly, I'm not a fan of whole life as an investment. The purpose of life insurance, in my view, is not to provide retirement income or cash value, but to replace income when someone dies. For most people, the best and cheapest way to do this is through term life insurance. Obviously, someone who sells insurance will have a different opinion.

The insurance agent who tried to show that my math didn't add up accused me of misrepresenting a Modified Endowment Contract (MEC). He wrote that no insurance professional using what he called the "banking concept" would ever sell an MEC. He's right about that.

An MEC is a classification under 1988 federal tax law that is intended to limit the use of life insurance policies as tax-advantaged investments. If the cumulative premium payments exceed certain amounts, the IRS defines a policy as an MEC. This means withdrawals from the cash value are taxed as ordinary income and subject to a penalty.

What the BYOB salespeople promote are "blended whole life" policies. These combine term and whole life in order to keep the policies from qualifying as MECs. The calculations presented in my article were actual numbers taken from a blended whole life policy sold by a BYOB promoter, so of course they didn't add up when viewed through the lens of an MEC.

Is a blended whole life policy ever a worthwhile option? Like any insurance products, there are certain situations where they make perfect sense when they are represented honestly and transparently.

However, anyone considering such a policy needs to know two things. First, insurance agents are compensated by commissions on the products they sell. They have no fiduciary responsibility to act in the best interests of their customers.

Second, whole life insurance pays some of the highest commissions of any financial product on the planet. The typical commission ranges from 50 percent to 70 percent of the first year's premium.

With commissions like this, it's easy to see how insurance agents might feel challenged by any criticism of whole life insurance. As a fee-only financial planner, if I discover that a particular type of whole life insurance isn't good for consumers, that's simply useful information to pass on to my clients. The same discovery for a commissioned insurance agent, however, is a potential threat to that agent's livelihood.

Even with these tempting commission rates, there are many legitimate life insurance professionals whose intent is to serve customers rather than exploit them. These honest agents do their best to sell products they believe will promote consumers' financial well-being. Comparing whole life insurance sold by reputable agents to the schemes pushed by BYOB sellers is like comparing apples and rotten apples.

It's too bad that more insurance professionals are not stepping up to protect their industry from the rotten applies engaged in this type of shady marketing. Numerous honest life insurance salespeople would agree that the BYOB spin is not only harmful to consumers, it is also hurting the life insurance industry as a whole.

Rick Kahler, CFP, is a fee-only financial planner and author. Find more information at www.KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

Rick Kahler
Article from http://rapidcityjournal.com/business/

How Cooper Union’s Endowment Failed in Its Mission

ridodirected@gmail.com (RIDO) — Sat, 11 May 2013 06:40:00 +0000

By Marcus Mabry and James B. Stewart

Common Sense: The Fight for Cooper Union: Cooper Union, once a premier institution of higher learning with free tuition, will begin charging students. The Times’s James B. Stewart and Marcus Mabry discuss how it mishandled its endowment.

By JAMES B. STEWART

Published: May 10, 2013

Article from http://www.nytimes.com/2013/05/11/business/how-cooper-unions-endowment-failed-in-its-mission.html?pagewanted=all&_r=0

Since Peter Cooper’s heirs gave the Cooper Union for the Advancement of Science and Art the land under the Chrysler Building in 1902, the school’s endowment has enabled it to offer students a high-quality, tuition-free education through two world wars, the Great Depression and multiple stock market crashes and financial crises.

So why does Cooper Union now find itself forced to charge tuition of an estimated $20,000 a year, abandoning what many consider its most important legacy?

This week, angry students were occupying the president’s office in protest. They might be even angrier to learn that some of their future tuition dollars could be going to support wealthy hedge fund managers who oversee some of the school’s $666.7 million endowment.

Cooper Union may be an extreme example, but it’s hardly the only college suffering from a combination of decades of bad decisions and recent treacherous markets. Its endowment was typical of the many endowments and pension funds that took the plunge into so-called alternative investments like hedge funds, which have lured investors with the promise of generous and steady returns in both good times and bad. And compared with many universities, Cooper Union did a good job managing its endowment through the recent financial crisis. As recently as 2009, the school maintains, it ranked first among all American universities for endowment performance.

Even so, hedge funds couldn’t solve the college’s dire financial problems, and many hedge funds have been far more successful at lining the pockets of their managers than beating market averages. (The typical hedge fund manager charges a fee of 2 percent of assets plus 20 percent of any gains.) In fiscal year 2009, which ended June 30, 2009, Cooper Union’s hedge funds and other managed assets lost 14 percent, and the returns since then have lagged the stock market’s recovery. Today, Cooper Union’s endowment is lower than it was at the end of fiscal year 2008, even as the Standard & Poor’s 500-stock index has hit new highs. From 2009 to 2012, a simple, low-fee mix of 60 percent stocks and 40 percent bonds far outperformed hedge fund indexes.

Weak hedge fund performance is hardly Cooper Union’s only financial problem. Today’s crisis has been brewing for decades if not longer, and comes after years of what looks like bad management decisions with little accountability or supervision by New York’s attorney general, who oversees nonprofit institutions. Over the decades, Cooper Union has sold off assets piecemeal, failed to diversify its endowment, taken on debt and built a lavish new building. After the 2000-1 stock market plunge, the managed endowment, excluding the Chrysler Building, lost half its value. The school never cultivated its potential donor base, leaving most graduates with the impression that it was wealthy and didn’t need alumni contributions.

In some ways, it’s surprising that the school’s trustees managed to stave off charging tuition as long as they did. “We’ve only been one step ahead of the bailiff for decades,” said John C. Michaelson, a trustee who runs an investment firm and has been chairman of the investment committee since 2012, as well as from 2005 to 2008. “We were pulling rabbits out of hats.”

The simplest rule of asset management, one familiar to even novice investors, is diversification. Yet Cooper Union’s endowment is highly unusual in that it’s concentrated in a single asset — the land under the Chrysler Building — which accounts for nearly 84 percent of its assets, according to its most recent financial statement.

By contrast, Emory University in Atlanta, which as recently as 2001 had 60 percent of its main endowment in Coca-Cola stock, has since sold all of it and diversified into other assets.

Having so much of the endowment in a single asset “is against everything I stand for,” Mr. Michaelson said. He and other trustees said they considered selling it in 2006, when the college was facing mounting financial deficits, but concluded that would be impractical. Cooper Union receives annual lease payments of $9 million from the owner of the Chrysler Building, Tishman Speyer Properties, and $18.2 million in so-called tax equivalency payments that would otherwise go to New York City. The right to the tax revenue couldn’t be transferred to a buyer.

But assuming a 5 percent return, a $27.2 million annual revenue stream would be generated by selling the Chrysler Building land for $544 million, which doesn’t seem so far-fetched a price. Tishman Speyer sold 666 Fifth Avenue, which hardly compares to the landmark Chrysler Building, for $1.8 billion in 2006, and bought the MetLife building in 2005 for $1.72 billion. And the Chrysler site might have been highly appealing to a sovereign wealth fund or other major real estate investor looking for a trophy asset. (A Cooper Union spokesman said the trustees needed to generate annual revenue of $55 million, which the lease is expected to produce beginning in 2018. The amount necessary to generate that revenue at a 5 percent return would be $1.1 billion.)

Still, it doesn’t seem the trustees made any serious attempt to even determine its market price, and the college seems to have had a nostalgic attachment to it as a part of its heritage. In 2006, Cooper Union defended the decision not to sell the land by describing it as “a gift from the children of Peter Cooper,” that is “the heart of the Cooper Union.”

Instead, Cooper Union renegotiated the lease with Tishman Speyer, which was not due to expire until 2047. The college negotiated an increase to $32.5 million in 2018, which rises every 10 years thereafter. But it still had to make it to 2018, five years into the future.

At the same time that Cooper Union decided not to try to sell the site, it borrowed $175 million, using the Chrysler site as collateral, to build a new engineering and art building and “to meet future operating deficits,” as the school acknowledged in court papers seeking permission for the loan. The term of the loan was 30 years, at an interest rate of 5.875 percent, which amounts to more than $10 million in interest payments a year. By today’s standards, 5.875 percent is exorbitant, but the college said it couldn’t refinance the loan at a lower rate.

Hardly anyone disputes Cooper Union’s need for new engineering facilities. Whether it needed that particular building, at such high cost — about $166 million — remains a matter of dispute. Trustees told me that the college’s development consultants told them that a signature building with a marquee architect — in this case, Thom Mayne of Morphosis Architects — would attract a large donor eager to have his or her name on a trophy building.

But no such donor materialized, and experts I consulted said Cooper Union had it backward — the first step is to attract the donor, who then is involved in choosing the architect and designing the building. “I’ve never heard of a case where you build the building first and hope a donor comes along,” said Kenneth E. Redd, director of research and policy analysis for the National Association of College and University Business Officers. Trustees I spoke to agreed that the assurances they got that donors would materialize proved to be wrong. “We were supposed to raise another $125 million,” a trustee told me. “We didn’t. Maybe we were over-optimistic, but we had these professional development people who told us someone would want to put their name on the building.”

Of the loan proceeds, $34 million was turned over to the school’s endowment. According to Mr. Michaelson, all of that was held in cash and used over the next few years to cover the school’s mounting operating deficits. “I never would have borrowed money to invest in the market,” Mr. Michaelson said. “It’s against everything I believe in; I don’t believe in leverage. Leverage is great on the upside. It destroys you on the downside. We couldn’t afford to lose money.”

But the endowment aside, the large loan did have the effect of adding a large amount of leverage to Cooper Union’s balance sheet at what turned out to be an especially bad moment. And the cash freed up other money for alternative assets at what turned out to be the top of the market. In 2006, the school had $19.4 million in hedge funds. In 2007, that had ballooned to $75.6 million, which amounted to more than 60 percent of the managed portfolio, excluding the Chrysler site and cash. By 2008, the hedge fund investments amounted to almost $103 million. That’s a very high concentration of the non-real estate assets in a single asset class.

Cooper Union’s heavy reliance on hedge funds “strikes me as irresponsible,” said Simon Lack, an investment adviser and author of “The Hedge Fund Mirage,” which questions many of the premises of hedge funds. “Of course, it was forced upon them by a long series of what look like bad decisions. But there’s no way that hedge funds could deliver the returns they wanted after their high fee structure.”

Mr. Michaelson said he anticipated there might be a market downturn, and that the hedge funds included so-called long-short funds and absolute return strategies intended to protect against declining markets. But by the end of fiscal year 2009, Cooper Union’s hedge funds amounted to just $18.8 million, in part because of market declines and in part through liquidation.

Mr. Michaelson said he was aiming for a 10 percent annual return, which may have been attainable in the early days of hedge funds, when they had much less capital to invest. Today, “such returns are simply unrealistic,” Mr. Lack said.

Hedge funds did help cushion the market decline in fiscal year 2009, when the S.& P. 500 dropped about 26 percent. But they have hurt the endowment’s performance since then. Mr. Michaelson said Cooper Union’s returns for the managed endowment, excluding the Chrysler asset and cash, were negative 14 percent in fiscal year 2009, 10 percent in 2010 and 17 percent in 2011. Cooper Union’s portfolio lost 5 percent in fiscal year 2012. That portion of the endowment fell to about $85.9 million at the end of fiscal year 2012, from about $169 million in 2008, and the total endowment dropped to $666.7 million from $710 million in 2008.

By comparison, a simple mix of 60 percent stocks, as measured by the S.& P. 500, and 40 percent bonds, using the Dow Jones corporate bond index, performed far better: down 11.7 percent in 2009, and up 14.5 percent in 2010, 20.8 percent in 2011 and 7.9 percent in 2012. Yet investors keep pouring money into hedge funds — a record $15.2 billion in this year’s first quarter. Hedge funds now have $122 billion under management, a new high, according to Hedgeweek, a trade publication.

Cooper Union’s costs, especially health care costs, kept mounting inexorably. In 2008, the college was $4.6 million short in cash. Last fiscal year, the cash-flow deficit was $13.2 million.

Aside from endowment income, universities have only limited options for increasing revenue: donations, tuition and, for research universities, government grants. Alumni contributions have long been a weak spot at Cooper Union. Thomas R. Driscoll, a trustee and member of the alumni council, said: “There was never any sense of giving back. Cooper never asked. We always thought Cooper didn’t need the money because it had the Chrysler Building. Forty years ago, I would have stressed to students that someone had to make it possible for you to come here for free.”

With few donations, that left Cooper Union only one option: charging tuition. On April 23, the college announced that it would cut the full-tuition scholarship in half beginning with the entering class in 2014, and would continue to offer full-tuition scholarships to students with demonstrated need. “Our priorities have been and will continue to be quality and access, so that we will remain a true meritocracy of outstanding students from all socio-economic backgrounds,” the college’s trustees said in a statement.

Mr. Michaelson conceded that the school could have continued to use the endowment to cover deficits and would have survived until 2018, when the higher payments from the Chrysler lease start. “But what kind of school would you have had by then?”

A version of this article appeared in print on May 11, 2013, on page B1 of the New York edition with the headline: How Errors In Investing Cost a College Its Legacy.

By JAMES B. STEWART
Published: May 10, 2013
Article from http://www.nytimes.com/2013/05/11/business/how-cooper-unions-endowment-failed-in-its-mission.html?pagewanted=all&_r=0

The Hottest Trend for Wealthy Do-Gooders

ridodirected@gmail.com (RIDO) — Thu, 09 May 2013 06:46:00 +0000

The Rockefeller Foundation's Judith Rodin explains impact investing. But she warns: "This is not the solution to less government funding."

By Sophie Quinton
Updated: May 7, 2013 | 12:24 p.m.
May 7, 2013 | 10:10 a.m
From http://www.nationaljournal.com/

Can capitalism be the solution for easing pressing social problems? These days, the concept of "impact investing" is all the rage among high-powered do-gooders. It's an emerging field that allows investors to make money and make a difference at the same time. The Rockefeller Foundation has spent some $40 million funding the kind of network needed to make impact investing possible--from supporting social entrepreneurs to developing new metrics. And it has put $140 million of its own endowment into impact investments.

National Journal's Sophie Quinton recently talked with Rockefeller Foundation President Judith Rodin about how private capital can help alleviate government budget pressures and address some of the challenges that weigh on our economy and society. Edited excerpts follow.

First things first: What is impact investing?

We hosted a conference in 2007 where the term was coined. It was to refer to investments that were designed to deliver both financial and social or environmental returns. Impact investors are making an active decision to invest in a company, or in a fund, for both profit and for social good.

Who—or what—are impact investors?

The most interest, so far, has been from large family wealth management companies, high-net-worth individuals, and pieces of funds that have a specific designation for double bottom-line returns. I think the field is starting to develop enough data that more people are going to come into the space. An early analyst report that we did with J.P. Morgan suggests that ultimately, if this continues to move and accelerate at the pace it is now, it could unleash somewhere between $400 billion and $1 trillion in capital markets. That’s a long-term, optimistic analysis. But there are billions being invested right now.

How do we measure social impact, in addition to financial impact?

Many potential investors say, "I know how to do the financial due diligence; I don’t know how to do social due diligence because I don’t know what social impact looks like." We funded several grantees that have created standards, like GIIRS and IRIS: One rates the financial and social return of funds, and one rates the social impact of companies the funds are invested in. That will accelerate investment opportunities, but it’s a really important step for public policy. We want a uniform set of standards that policy can be built around to enable this field to grow.

Where are we seeing this kind of investment? Are we seeing more activity in developing countries, or domestically?

The U.S. is the best market, actually. The developed world is clearly the best market—there are reams of opportunities, and much more experience. In the U.S., the earliest use of this has been around affordable housing, where there have been many investment funds that have invested alongside government or in place of government.

Here’s one innovation: In the 2000s, New York City wanted to build more affordable housing. They needed to get new land acquired and the preconstruction costs done by developers, but without tax credits it was hard to get commercial financing. So we and other foundations put in about $40 [million] to 50 million of the riskiest capital.

Because we were guaranteeing the first tier of risk, the commercial lenders came in with several hundred million, and then New York City came in with loans and debt capacity.

Other than housing, what other opportunities exist for impact investing in the United States?

Clean energy is one area. The interesting thing about impact investing is, it exists in every asset class from public equity to private equity, from public debt to private debt. That makes it available for a wide variety of applications.

Another impact-investing innovation is the social-impact bond, and they’re being used to address a broad range of things—homelessness, recidivism, health. In his budget, the president announced for the third year that the U.S. government is going to put money behind what he calls pay-for-success bonds. He also proposed a $300 million pay-for-success fund in the Treasury Department, for loan guarantees to undergird investors or banks to participate. We think that’s important, and critical, at this stage of evolution, but we think that’s a way station to a point where government or philanthropy shouldn’t have to backstop the private investor.

What will it take to make impact investing mainstream?

The first and most important thing is long-term data. Until the real range of rates of return for each of the impact investing asset classes—both equities and public debt—can really be calculated with long-term experience, the biggest money will sit on the sidelines.

The second thing is an enabling policy environment. One policy that has been transformational has been the evolution of benefit corporation legislation, which allows companies to register themselves differently. Also, several big auditing firms want to add an impact investing assessment to their auditing practice. Once you have an auditing practice, you’ll get an even further refinement of the standards and further standardization of the metrics, and that’s going to accelerate the field.

What’s the Rockefeller Foundation currently focused on?

Our focus is on impact financing for infrastructure. There’s huge pent-up demand for infrastructure investment, and we’ve been working with states and regions to help them understand what kinds of laws, policies and actions are going to be necessary to crowd in private capital.

We have seen much more significant private investment in infrastructure in other developed countries than we see in the U.S. When we talk to those infrastructure funds, they say the U.S. doesn’t have the right policy environment for us to invest as heavily as we have elsewhere. Canada is crowding in a lot of private investment, without giving up public control.

We’re working with the West Coast Infrastructure Exchange, which is California, Washington, Oregon and British Columbia. They estimate that they’re going to need about $1.5 trillion in new investment over the next ten years. They’re looking for public private partnerships, and we’re working with them on the policy framework that would enable that to happen.

Young people, in particular, are excited about impact investing. Do you have any advice for young people who want to enter the field?

The advice is that we shouldn’t move too quickly. This is not a panacea, and it is not the solution to less government funding. But there’s a way to kind of bring Wall Street to Main Street, for social good. If we get this right, that’s a phenomenal outcome. But it’s not for everything, and one size doesn’t fit all.

By Sophie Quinton
Updated: May 7, 2013 | 12:24 p.m.
May 7, 2013 | 10:10 a.m
From http://www.nationaljournal.com/

Endowment policies: should I cut my losses?

ridodirected@gmail.com (RIDO) — Tue, 07 May 2013 05:24:00 +0000

Endowment holders face another cut in payouts. Is it better to stay in for the long haul or cash your policy in early?

Patrick Collinson
The Guardian, Saturday 2 March 201
From http://www.guardian.co.uk/money/

Some endowments, such as Standard Life, contain guarantees, but if there is no guarantee or final bonus, you might consider cashing in. Photograph: Murdo Macleod

There are still millions of endowment policies in force, with some 2m alone maturing this year. So if you have one of these, what are your options?

• Should I carry on paying the monthly premium or would that be throwing good money after bad?

First, you should contact your provider for a projection to see what your policy is worth now (its "surrender value") and what it might be worth at maturity. Make sure you update the company if you have changed address. Then ask the following questions:

• Are there any guarantees in the endowment? Some policies, such as older contracts at NPI, have guaranteed annual bonuses of 4%, which is better than anything you will find on deposit at a bank. Some funds at Zurich and Standard Life also contain guarantees.

• Is there an "estate distribution"? Some of the grand old insurers have built up reserves (known as estates) beyond what is needed to pay policyholders. The financiers and shareholders are desperate to grab them, but the regulators insist they share the cash with policyholders. Britannic, Scottish Mutual, Scottish Provident and Pearl are all distributing residual estates. It's one reason why Pearl is one of the few major companies to have increased payouts this year. But these only apply if your endowment is with-profits rather than unit-linked.

• Will I pay a penalty to get out of my endowment? Probably. Insurers call it the market value adjustment or MVR and it can be over 5%. Ask if the policy has an MVR-free date when you can cash in without penalty.

• Is there a decent final bonus? If you have a unit-linked policy, it rises and falls in line with the underlying investments and doesn't offer a final bonus. But if your policy is with-profits there is likely to be an element of final bonus, although this varies enormously. Most Phoenix policies are paying near-zero annual bonuses but are paying relatively large final bonuses. For example, on a Scottish Provident 25-year, £50 per month policy, almost a third of the £33,810 maturity value is made up of a £10,000 terminal bonus. But a Sun Alliance policy paying out £24,634 has a terminal bonus of just £3,104.

• What is the endowment invested in? Some endowment funds have almost sold out of shares. So if the stock market jumps, the value of the endowment barely rises. Typically, only around a third of an endowment is in shares but some are higher. Patrick Connolly at AWD Chase de Vere is a fan of Prudential, which has some of the highest endowment payouts. He said: "The financial strength of the product provider, its ability to invest in growth assets such as equities and its commitment to paying competitive bonuses should be important considerations. Prudential is the market leader in all these respects."

• Can I claim any compensation for mis-selling? Most policyholders are now outside the time limit for making a complaint – which has to be three years after the date you received the first letter warning of a high risk of a shortfall on the policy (and at least six years since taking the policy out).

• So should I cash it in? Take the surrender value, add in the remaining payments you have to make, and compare it to the projected maturity value. Calculate the additional savings you'll make by paying off most of your mortgage now. If it's anywhere near the maturity value, then it's probably best to cash in.

Case study: From sure fire to sure loser

It was the "sure fire" way to pay off a mortgage, said the Legal & General salesman to first-time buyers Gideon and Anne in 1991. They'd even get an extra lump sum at the end, to spend on a new car or holiday. All they had to do was pay £123 a month into an endowment for the next 25 years, and their £77,900 interest-only mortgage could be safely forgotten about.

But what the adviser did not say was that he'd pocket a commission of around £1,700, and that his projections were hopelessly optimistic. "At no point was there any suggestion this would fail to pay off the mortgage, or any talk of fees or charges," says Gideon, an architect from West London.

Yet within just nine years it emerged that the endowment was falling far short of expectations. L&G wrote to the couple, warning of a potential shortfall of £20,000. Three years later it also admitted that the projections given at the outset would never have been met – because the premiums were based on "industry standard charging assumptions" when in truth, L&G's charges were higher.

In 2006 the couple complained to L&G, by phone, about the performance of the endowment, but were told the blame lay in stock markets rather than mis-selling. "I got a mealy-mouthed letter in reply and no suggestion that we could take it further," says Gideon.

He now regrets shuffling the papers to the back of the family's filing cabinet. Last April he tried to make a formal complaintabout the endowment, but was told by L&G he was "out of time".

This January, with the endowment shortfall now projected at £26,000, the couple took the opportunity of the stock market rally to cash in. They received £43,937 – after £31,416 of payments over more than 21 years.

Gideon says: "We would have done a lot better putting our monthly £123 in a building society, especially given the high interest rates in building societies in the 90s and early 2000s. Add to this all the money we have paid on our interest-only mortgage – it was in the seven and eight percents for much of the time – and – we have lost hand over fist. The only thing saving us now is the drop in interest rates in the past few years, so at least we are able to overpay our mortgage"

Patrick Collinson
The Guardian, Saturday 2 March 201
From http://www.guardian.co.uk/money/

HNIs can look at startup firms as good investment options

ridodirected@gmail.com (RIDO) — Thu, 12 Apr 2012 17:43:00 +0000

By Vivek Karwa Apr 11 2012

Article from mydigitalfc.com

Income levels of individuals in our country have increased, and so has the risk-taking ability of the middle class. They have now started investing in riskier products like equities, knowing very well that the markets can deliver superior returns over a period of time.

A large part of the credit for this transformation goes to the financial planners. Financial planners now-a-days are seriously focusing towards self skill development and have started giving need-based advice. The focus on asset allocation also depends on the hierarchy of needs of an investor. These needs are adding up, particularly in the middle and top-end of the hierarchy who are ready to venture into other asset classes also.

The assets which you may find in the portfolios of a regular investor today may be as under:

>> Lower level: Endowment insurance plans, fixed deposits (FDs), gold, >> Middle level: In addition to portfolio of lower level, they will have unit-linked insurance policies (Ulips), equity mutual funds systematic investment plans (SIPs), house property and equities.

>> Higher level: In addition to the above, they will surely be holding real estate, structured products, e-commodities and will be involved in equity derivatives and commodities markets.

Many equity market investors have one common doubt today, should they be involved in commodities market and the currency market. The answer is ‘yes’. But three caveat’s: 1) Unless you know how these markets work, don’t risk your money. 2) If you have no knowledge, then take advise from a qualified adviser. 3) Enter these markets with hedging in mind and not for making quick money.

Research has proved that equities, commodities and currencies have both positive correlation and negative correlation with each other. Hence, one can always hedge or may find a trading opportunity across market segments.

The biggest drawback of these markets is the lack of understanding and, hence, investors need to take the right step of going through financial planners. Since these markets are still largely unknown to the retail investors, they are often lured into schemes which promise to pay above normal returns. Clear understanding can provide a great opportunity towards better asset allocation. One cannot be sure which will be the next best performing asset in the next cycle and, thus, exposure to multiple market ensure we don’t miss out the cycle.

One such investment opportunity which not many people understand and the top-end high networth individuals (HNI) can look seriously at is investing in the startup companies. Companies like Facebook, Linkedin became big in no time, creating huge wealth for the investors. Also, we have success examples of Flipkart and Snapdeal in India.

Many entrepreneurs have ideas which can be huge success, but most of these startup are money-hungry to fuel up the growth process. These companies are initially started with promoters’ own funds.

India will be the largest consumer market in the world by the year 2025. It, at present, has around 120 million internet users and the number is rising rapidly. Most of the companies which have made big in short duration are in the field of technology and internet. Investors like Rakesh Jhunjhunwala have made big money in this way. A2Z maintenance is one of the examples.

Investing in startup is called the ‘angel funding’. These investors are termed as ‘angel investors’ since they act as the saviors when the company is requiring money. There are many angel investors (read HNI investors) who have come forward and formed groups like Mumbai angels and Chennai angels to source such opportunities where they can invest and make big money. The process is angel investors — venture capital — private equity — initial public offering (IPO). IPO is the final thing where everyone unlocks the real money if the company makes a huge success.

Right company and right valuations is the key. Many HNIs are investing in startups these days, but this requires expertise. There are advisers who have enough knowledge in this segment and can help you choose the right companies.

------------------------------------------------------------

are personal, and do not necessarily represent that of the organisation. PSB India is the sole marks licensing authority

for the CFPCM marks in India)

Article from mydigitalfc.com

With-profits unlikely to revive

ridodirected@gmail.com (RIDO) — Wed, 11 Apr 2012 13:03:00 +0000

April 8, 2012 4:09 am

By Pauline Skypala

Article from ft.com

With-profits policies turned out to be the best investment he ever made, an industry contact told me recently (not a fund manager). He paid £80 a month over 30 years (£28,800 in total) and got back £205,000 when he took the money in 2002.

By contrast, the £350,000 he has paid into a defined contribution (DC) pension plan for him and his wife since 1988 is now worth £500,000.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/f4201454-7f39-11e1-b3d4-00144feab49a.html#ixzz1rjioepkG

Shame he did not stick to the with-profits approach – or maybe not. The annual with-profits survey by Money Management, an FT publication, shows my contact cashed out at the right time.

The average payout at maturity on a £50 a month 25-year with-profits endowment has more than halved since 2002, falling from £87,169 to £38,299. Payouts peaked in 2000, when the average was £98,370.

Had my contact cashed in his policies in 2000, he would have made 10 per cent more, he says. Timing is everything in investment – even in with-profits, an approach that is supposed to smooth out stock market fluctuations.

The with-profits sector in the UK is practically moribund, with few companies still open for new business.

The approach was felled by the dotcom bust that brought the long bull market of the 1990s to an end, and by the expensive guarantees life companies had incorporated into policies. They did not have enough capital to support them, having blithely mismatched assets and liabilities for many years by being heavily exposed to equities.

Instead of being steady-as-she-goes investments, supported by balanced portfolios, they became racy growth investments betting on equities to outperform over the long term. Instead of cautiously increasing policy values by annual bonuses, the focus moved to paying big final bonuses when policies matured (which many policyholders did not get, having cashed in early).

And instead of remaining mutual (as most with-profits insurers were), they converted to plcs, paying out large amounts to policyholders in compensation.

Looking back at what went wrong with the with-profits approach is instructive, as there appears to be talk of reviving it in the pensions sector.

Pensions minister Steve Webb has put forward the idea of “defined ambition/aspiration” pensions, a halfway house between defined contribution and defined benefit, modelled on the so-called collective DC approach pioneered in the Netherlands.

Mr Webb has yet to put flesh on the bones of this idea but it is not a new one. I wrote about it two years ago, when investment consultants were lobbying for importing CDC to the UK. Maybe they successfully persuaded Mr Webb of the merits of this plan.

The Department for Work and Pensions poured cold water on the idea in a report published in December 2009, despite its modelling showing average outcomes would be 20-25 per cent better under CDC schemes than under conventional DC. It cast doubt on the ability to manage risk successfully so as to be fair to different generations of scheme members.

This is the key issue with any scheme that relies on intergenerational risk sharing. It is essentially where with-profits broke down.

And because of that breakdown, it is doubtful whether pension savers in the UK would trust financial institutions to be fair, even if they thought they were capable of managing risk successfully.

The fairness problem leaps out from the Money Management survey. The best result for 25-year endowments is Phoenix Assurance’s £185,115 payout, representing a 16.8 per cent annualised return. That may sound impressive, but it is down from £342,949 in 2007.

Such huge payouts are not due to fantastic returns from skilled investment managers; they are simply because there are only a few thousand policyholders left (Phoenix closed to new business in 1986) and they are getting the benefit of the division of the estate – which is the money in the fund surplus to that needed to meet policyholder commitments.

Phoenix Assurance is one of 13 closed with-profits funds taken over by Phoenix Group (sharing a name is coincidental), most of which paid out £20,000-£32,000 on 25-year endowments this year.

Kevin Arnott, director of with-profits management at Phoenix Group, says Phoenix Assurance is unusual and such high payouts are unlikely to be on offer from other closed funds as they wind down. Some funds have no surplus assets, and need support from Phoenix Group just to meet policyholder commitments.

It looks like a lottery.

Risk-sharing is a nice idea in theory, and may work well in some places. Mr Arnott’s judgment is that the world has moved on from with-profits and the cross-subsidies involved are no longer acceptable to UK savers.

Mr Webb’s defined ambition schemes will have to be different in design and practice if they are to fly.

pauline.skypala@ft.com

Article from ft.com

Keys to Thinking About Keynes

ridodirected@gmail.com (RIDO) — Sat, 07 Apr 2012 08:03:00 +0000

April 3, 2012, 7:00 AM

By Jason Zweig

Article from The Wall Street Journal

My column this past weekend about the remarkable investing record of John Maynard Keynes provoked an outpouring of comments – and incidentally provided an object lesson on a couple of basic principles from behavioral finance.

Investors succumb to the halo effect when they let their general evaluation of a person or situation cast a warm glow over their assessment of specific aspects of the same person or situation. If you love your iPhone or iPad, you may well love Apple’s stock price, too, no matter how high it might go. Likewise, liberals who admire Keynes’s interventionist economic theories rushed to defend him as an investor.

But Keynes was neither a good nor a bad investor because you agree or disagree with his investment policies. His track record as an investor should be judged just as any other investor’s should be: by the numbers. And, as my column pointed out, Keynes’s investment results were extraordinary – regardless of whether you love his economic theories or you hate them.

Another, related effect: Investors exhibit confirmation bias when they tend to view all new evidence through the old lens of their existing beliefs. They disregard whatever might tend to disprove what they already believe, even while they point eagerly to any information that reinforces the views they already hold.

Thus, several commenters ridiculed the notion that Keynes could have had access to inside information on interest rates and currency values without trading on it. Others insisted that he was front-running his own economic policies, buying gold before he debauched the value of the British pound.

But, to paraphrase Keynes’s friend Bertrand Russell, it’s important to distinguish what you wish were true from what you believe is true.

You may wish that Keynes traded on privileged information, but that doesn’t make it true. There is zero evidence that he ever traded on inside information; furthermore, as my column pointed out, Keynes’s investing performance improved when he stopped relying on his own macroeconomic forecasts.

You may also wish that Keynes was somehow front-running his own policies, but that doesn’t make it true, either. His play on gold-mining shares was motivated by the devaluation of the South African rand, which had nothing to do with his own policies. And his strategic shift into mining stocks played out over the course of six or seven years, hardly the sort of timescale over which anyone would try a front-running scheme.

It’s also worth reemphasizing that the Keynes portfolio analyzed in the new research wasn’t his personal fortune; it was the endowment fund of King’s College at the University of Cambridge. To suggest that Keynes was effectively lining his own pockets with the misfortunes that his bad policies inflicted on other people doesn’t wash.

In short, what you think about Keynes as an economic theorist should have nothing to do with the question of how good an investor he was.

Similarly, investors should always be on guard against the halo effect and confirmation bias. When you ask a question about an investment, make sure you don’t end up answering a different question entirely.

Article from The Wall Street Journal

A third of a million families may be forced to sell their homes this year as endowment policies fail to deliver

ridodirected@gmail.com (RIDO) — Thu, 05 Apr 2012 09:20:00 +0000

By SYLVIA MORRIS
PUBLISHED: 23:00 GMT, 27 March 2012 | UPDATED: 15:36 GMT, 29 March 2012
Article from This is Money

Under lock and key: Most endowments

are failing to cover many mortgages

Up to 360,000 families may be forced to sell their home this year because record numbers of endowment policies have failed to deliver.

In many cases, these homeowners are seeing endowments fall £100,000 short of what they were promised.

Many who have saved loyally for 25 years will get a payout of little more than £25,000 — far short of the capital they owe on their home.

With banks and building societies increasingly reluctant to lend to those approaching retirement, many will be forced to sell their homes or dip into savings to clear their mortgage debts.

These homeowners will have seen their properties increase in value by up to 250 per cent since they bought them. But tapping in to their equity means leaving the family home, and often moving to a different area.

Up to two million may end up in the same situation over the next five years.

Payouts on endowment policies have been falling for years. With some companies, the majority of policies coming to the end of their term this year won’t provide a sufficient sum to pay off the home loan.

More...

Endowments: Were you mis-sold?

How endowment payouts have crashed

A third of a million families may be forced to sell their homes this year as endowment policies fail to deliver

It comes as Martin Wheatley, a director of the Financial Services Authority, raised fears that up to 1.5 million homeowners in their 50s with interest-only mortgages are sitting on a time-bomb and won’t be able to pay off their loans.

Patrick Connolly, from independent advisers AWD Chase de Vere, says: ‘Payouts have fallen over the past few years and this is likely to continue. The risk of savers having to sell their home to pay off the home loan is increasing.’

Insurance companies will see a record number of policies mature this year, a result of the endowment mortgage sales frenzy in the late Eighties.

More than six million policies were taken up, bringing in annual premiums of more than £2.3 billion for insurers.

They were sold to home buyers as a way to pay off their mortgage — and provide an extra lump sum if investment returns were good.

Homebuyers paid interest to the lender but none of the capital they had borrowed.

Instead, they put monthly payments into stock market-linked with-profit policies.

These were supposed to smooth out the stock market returns and add an extra bonus each year — called a reversionary bonus — to boost the value of the policies.

Policyholders could also expect an extra final bonus at the end of the term.

But the promised investment returns did not materialise, leaving homebuyers with a shortfall between what their policies will pay out and what they still owe their mortgage lender.

In just the past five years, payouts on policies have fallen by as much as 44 per cent. Five years ago, a maturing 25-year policy paid out £42,133 with Norwich Union.

On a similar policy maturing now, policyholders can expect £23,465. The figures are based on a £50-a-month saving by a man who took out a policy nearing his 30th birthday.

Aviva — which includes the old General Accident, Commercial Union and Norwich Union — has 71,000 endowments maturing this year. It expects just one out of every 100 policies to meet its target.

An Aviva spokesman says: ‘We’ve been through poor investment periods in the past five years and this is reflected in the payouts.’

At Scottish Amicable, part of Prudential, only 3 per cent are expected to come up to scratch, leaving more than 34,000 with a shortfall. Five years ago, 95 per cent met their target.

Standard Life has 106,000 endowments maturing this year. Nearly 104,000 — 98 per cent — will show a shortfall. Five years ago, 88 per cent of its policies were unsuccessful.

At Legal & General, 40 per cent of policies missed their target five years ago. This year 86 per cent of the 41,000 maturing — or more than 35,000 homebuyers — will see less than they expected.

The Financial Services Authority demands firms write to policyholders each year to tell them how their policies are progressing.

You have three years after receiving your first warning letter in which to complain you were mis-sold the policy — for example, if you did not understand the underlying risk of stock market investment.

But nearly half of those registering complaints with the ombudsman have missed this deadline.

Martyn James, from Financial Ombudsman Services, says: ‘Some consumers told us they thought they would be covered by final bonuses, only to find that these were low or not made at all. Others thought things might improve if they held out for a bit.’

Article from This is Money

Now, shell out more premium for insurance

ridodirected@gmail.com (RIDO) — Mon, 02 Apr 2012 20:42:00 +0000

K. VENKATASUBRAMANIAN
Article from Business Line

The budget has made insurance products of all types costlier. Expect premiums in all insurance products - unit linked insurance plans(ULIPs), traditional endowment and term policies to get more expensive.

Here we examine how much more you need to fork out for the life insurance policies that you hold or may wish to buy.

We also suggest an alternate investment plan for you to derive better returns.

Costlier ULIPs:

Life insurance companies offering ULIPs charge you expenses under many heads.

The premium allocation charge is 6.75-7.5 per cent of your premiums in the first year and around 4-5 per cent till the fifth year. After the fifth year, the charges are in the 2.5-3.5 per cent range across insurance companies. Apart from these, you will have policy administration charges of Rs 30-50 per month and fund management charges of 0.7-2 per cent. For a 35 year old, Rs 1.73-2 is charged per 1000 of life insurance cover per month.

Service tax was earlier payable only on mortality charges and fund management charge.

Now, all the above mentioned charges will be added for calculation of service tax.

To illustrate, for a Rs 1 lakh premium, in the first year, there will be Rs 6750 charged for premium allocation, Rs 360 for policy administration, Rs 700 for fund management and Rs 2076 as mortality charges.

Currently, you would have paid 10.3 percent service tax on Rs 2776(2076+700), amounting to Rs 286. Now, that amount would be Rs 1221 (12.36 percent tax on all charges together – Rs 9886).

That means paying Rs 985 more for the first year!

Expensive traditional plans:

Traditional endowment or whole-life or money-back plans, those that give you returns of 5-7 percent returns, do not give the split between various charges.

So, you would be charged a flat 3 percent on the first year premium (up from 1.5 percent currently) and 1.5 percent in the subsequent years.

If you paid Rs 155 on the first year premium, a new policy would entail an Rs 309 payout. This would bring down the already low returns offered by these products.

Term plans, those that offer just a risk cover and no return, would be costlier to the extent of the increase in service tax.

So, if you took a term policy by paying an annual premium of Rs 10000, the service tax would be Rs 1030. Starting April, that would be Rs 1236.

Easy investment strategy:

It is prohibitively expensive to terminate a ULIP product in the first few years. You need to have a 10-15 year horizon for you to derive maximum benefit in light of the expensive nature of the product. The increase in service tax makes it even more costlier.

For an investment horizon of 10-15 years, you might as well start SIPs(systematic investment plan) in high-quality diversified equity plans, which have much lower management charges, no entry load and superior returns over longer timeframes.

To protect yourself and your financial goals, take a term plan for sufficiently large value. This is both inexpensive and effective.

Endowment plans too with their poor returns may not be the ideal vehicles for long-term investment. If you extremely risk averse, you can invest periodically in PPF, where interest rates and limits have been enhanced. This would fetch you both tax benefits and better returns compared to traditional plans. The PPF can also be extended in two blocks of five years each. Again do not fail to take a term cover for protection.

Article from Business Line

Children of the Sixties hit by faulty finances, as pension uncertainty, rising debts and need to support kids looms

ridodirected@gmail.com (RIDO) — Sun, 01 Apr 2012 09:31:00 +0000

By STEPHEN WOMACK

PUBLISHED: 21:02 GMT, 31 March 2012 | UPDATED: 07:59 GMT, 1 April 2012

Article from This is Money

More than 860,000 men and women in Britain will celebrate their 50th birthday this year – a record.

And the numbers turning 50 will grow over the next few years, with almost 900,000 due to pass that milestone in 2014.

But they reach this landmark age facing more financial challenges and uncertainties than previous generations.

Endowment hit: Stephanie and Ray Wilton with Emily, left, Elizabeth, William and Edward, have found their policy falling £25,000 short.

Traditionally, your 50s was the final stage of working life before retirement. With children leaving home, and often mortgages finally repaid, fiftysomethings had surplus cash to save and, often backed by generous final salary pensions, could start to plan towards a long and relatively comfortable retirement.

But the family and financial dynamics of turning 50 have changed, with many children of the Sixties starting their families later in life.

Philippa Gee of Philippa Gee Wealth Management in Church Stretton, Shropshire, says: ‘Today’s 50-year-olds are more likely to have teenagers and young adults still in the house as well as caring responsibilities.’

On top of this, higher housing costs and increased family break-ups mean that mortgages remain a big challenge. Almost half of those aged 50 are repaying mortgages and expect to be doing so until 58 on average.

The generation burned by investments

Today’s 50-year-olds have often been disappointed by investments and savings – they are the ones whose mortgage endowments have failed to deliver. Pension and investment company MetLife calls this age group the uncertain generation, U-Gen for short, and has conducted research into its financial situation.

Dominic Grinstead, managing director of MetLife UK, says: ‘The past few years have seen unprecedented stock market volatility, making planning difficult.

‘This volatility comes at a time when 50-year-olds are seeing the big switch from defined benefit to defined contribution pensions, where they have to take on all the investment risks.’

Underperforming investments are one extra challenge for Stephanie and Ray Wilton.

She is 50 in October while he is already 51.

The couple have 18 months left on the mortgage on their home in Cheltenham, Gloucestershire. Stephanie, a specialist in handling insurance asbestos liability cases, says: ‘I feel that paying off my mortgage is going to be one of the major achievements in my 50s.’

But she and Ray are facing an estimated £25,000 shortfall on the loan because their endowments may not pay enough. This means that Ray, an engineer, and Stephanie may have to take on a further loan for a few years to clear their shortfall.

Stephanie says: ‘We paid £80,000 for the house and it is now worth about £400,000, so in relative terms we can cope with the shortfall. But I know that the previous generation saw their endowments deliver with extra profits besides.’

Gee says many of those in their 50s are focused on clearing mortgages quickly. ‘The bigger the mortgage, the longer you are going to have to work to clear it,’ she says.

‘I now see clients downsizing their homes earlier in life, often as soon as children have moved on, allowing them to pay off the mortgage and concentrate on saving.’

Once their mortgage is repaid, the next financial challenge for Stephanie and Ray is helping their children with the cost of further education.

The couple have four children living at home – Emily, 16, William, 15, Elizabeth, 13, and Edward, 11. Their eldest daughter Daisy, 24, has severe learning difficulties and is in a residential care home.

The Wiltons could potentially have three children in university at the same time, all of them facing big tuition costs.

Stephanie says: ‘I’m not keen on asking the children to start life with a big debt hanging over them, so helping with university fees will be the second big hurdle of our 50s.’

Putting a financial plan in place is essential to meet the new challenges. Gee says: ‘Your 50th birthday is a good excuse to review matters. It might well be the last opportunity you have to do a major overhaul and change of strategy for your finances.’ Grinstead says: ‘You really need to plan and chart a path towards your own retirement. You can no longer trust to luck that you are going to get there in good shape.’

More than half of those turning 50 this year who were interviewed by MetLife said they wanted financial advice to help them take the right course. But only one in ten had sought any.

Michele and David Lees have a clear plan of how they want to steer their finances through the next decade. David, a foreman in an insulation factory, is 51. Michele, a customer assistant at a building society, was 50 in February.

She says: ‘Our view of life has always been that if you can’t afford it, then don’t have it.’

The couple took a deliberate decision to stay in the first home they bought after they got married, a three-bedroom terrace house in Oldham. They concentrated on repaying the mortgage, rather than trying to move up the ladder to a bigger, more expensive property.

The strategy paid off. They cleared the mortgage in 2009 and can now do other things with their money.

Their biggest financial focus in the next decade is on building up savings. Michele says: ‘David is due to retire a year before me, but neither of us wants to go on working until we’re 67. Ideally, I would like to retire at about 63 or 64.’

The couple both pay the maximum they can into their company pensions and are also saving hard into deposit accounts.

Michele says: ‘Each month we set a budget and then anything spare goes into savings. We don’t want to stay in Oldham in our retirement. We want to have the option of buying another house so that we can move, even if we can’t sell this one.’

A study by Aviva last month found that four out of ten of those aged 55 or over had given money to help family with essential bills over the past year. Parents had gifted an average of £1,400.

And even though their children have long flown the nest, David and Michele are still supporting their family. Their daughter, Nicola, 25, is married and has two children, Connor, 6, and Olivia, 5, while their son, David, 27, had his first son with his partner in February. Michele says: ‘We know that bringing up children is expensive, so we try to help out with things such as buying school uniform and shoes. We recently paid out for some extra after-school science lessons to help Connor.’

They also pay half the cost of car insurance for Nicola and her husband, Aaron Dockerty. Michele says: ‘Having paid the mortgage, we have the flexibility to support the rest of the family when it is needed.’

I am using my experience in a job I enjoy

Longer lifespans and rock bottom annuity rates have put paid to the dream of retiring in your early 50s for all but the wealthiest few.

Philippa Gee of Philippa Gee Wealth Management in Church Stretton, Shropshire, says: ‘The expectations of early retirement have gone. Many of my clients reach 50 and see themselves working for another 15 to 20 years.’

Those who are turning 50 this year were due to collect their State pension at age 66 in 2028. But under Government plans announced last November, which have yet to be confirmed by Parliament, most will now have to wait until age 67. And many expect these retirement ages will be put back further as the Government tries to balance its books.

Bursting with energy: Angela McConnell, with partner Gary Sawtell, is her own boss, running several businesses in between training for half marathons

Dominic Grinstead, managing director of pension and investment company MetLife UK, says: ‘The whole pattern of retirement is changing.

People are moving away from this idea of a cliff-edge where you are working one day and then retired the next, and looking at a gradual transition into retirement perhaps though doing a different job or working for yourself.’

Gee says: ‘If you are carrying on working for so long, you might as well do something you enjoy. I often see clients making a change of career and doing a completely different job in their 50s.’

Angela McConnell is embracing the chance to be her own boss, running not one but two businesses.

Angela, who turns 50 in July, has set up the Happy-Lappy computer training company, which specialises in helping older people to use technology. She also helps small businesses with website design.

Angela, from West Lulworth, Dorset, says: ‘I got to the stage in life where I wanted to be using my experience in a job I enjoy. I was fed up with younger people who had lots of qualifications but no experience or common sense telling me what to do.’

So she and a business partner started out on their own, visiting people in their own homes to help them get to grips with computers.

She also runs amycottage.co.uk, a bed & breakfast business from the 17th Century thatched cottage she shares with her partner, Gary Sawtell, also 49, who is an engineer.

Angela is a keen runner, taking part in ten-kilometre runs and half marathons. ‘My mind and my body aren’t telling me that I am going to be 50 this year,’ she says.

The couple share their home with her two sons, Tom, 18, and Harry, 16.

Angela, who served 19 years in the Army in administrative roles, will collect an Armed Forces pension when she is 60, but she is not saving for any other pensions.

‘The business will hopefully be my pension and I can carry on doing the B&B as much as I need to, even after stopping other work,’ she says. ‘I have avoided loans or credit card debt so I feel we are in a strong position.’

Article from This is Money

Budget takes us back to basics

ridodirected@gmail.com (RIDO) — Fri, 30 Mar 2012 07:14:00 +0000

By: Nick Battersby
29 Mar 2012 10:55
Article from Bizcommunity.com

Tax: Considered by many a different form of "capital punishment" - or at least a lifelong sentence. So investors would have paid keen attention to the tax amendments put forward in National Treasury's 2012/13 Budget and would have watched as further judgment was handed down.

Investment-related tax hikes included an increase in the maximum effective Capital Gains Tax (CGT) rate for individuals from 10 to 13.3 percent. This will have a direct impact on investors effecting transactions within any discretionary product, but individuals invested in endowment policies will feel the impact of the increased CGT rate announced for companies as well. With this maximum effective rate up from 25 to 33.3 percent, the additional expense incurred by the company underwriting the policy will eat into the overall investment pool and indirectly impact ultimate investment returns.

Secondary Tax on Companies replaced

In addition, 1 April will see Dividend Withholding Tax (DWT) replace Secondary Tax on Companies (STC). Whereas investors previously received the full divided declared to them (and companies paid STC over and above their dividend distributions), DWT will be now be deducted from dividend payments at a rate of 15 percent (higher than the 10 percent originally anticipated). This will be withheld from the dividend distribution and paid directly to SARS, so unless exempted from DWT or from paying the full DWT rate, an investor will only receive 75 percent of any dividend distributed.

But all is not as gloomy as it appears. In particular, having always offered very welcome tax relief, your personal pension or retirement annuity (both known as an RA) is looking even more attractive now.

RAs not subject to income tax

As RAs are not subject to income tax, CGT or DWT, they offer investors a very welcome tax break up front. In addition, annual RA contributions remain tax deductible for the greater of 15 percent of non-retirement funding income, R3500 less pension fund contributions or R1750. And should an investor contribute more than this maximum amount in any given year, excess contributions are carried forward to the following year of assessment or, should the maximum tax deductible contribution still be exceeded, to the first year in which the excess can be taken into consideration. This benefit can roll over until retirement, in which case an investor will be allowed a proportionally greater tax-free lump sum benefit than the stipulated amount otherwise provided for.

Although the government has indicated that it will cap these annual deductions from March, 2014, it is currently proposed that maximum deductions are set at R250 000 and R300 000 for investors under the age of 45, and 45 years and older, respectively. These caps will, therefore, only apply to investors who earn above R1.67m and R2.33m, respectively. And even should these investors' contributions exceed these thresholds, their tax benefit will, in essence, simply be deferred, as excess contributions will be tax exempt on retirement if they are taken as either part of a lump sum or as annuity income.

Increased accessibility

The increased accessibility of new-generation, unit-trust based RAs also means that investors stand to benefit not only from a more flexible and transparent retirement savings solution, but also from one that is likely to incur significantly lower fees. Unlike old-generation, policy-based products, new-generation RAs generally allow investors to reduce or stop contributions, to transfer out of the product or to switch between underlying asset managers without incurring transaction costs.

Finally, it should also be kept in mind that it is widely anticipated that in order to compensate individual investors for the dividend reduction that DWT will result in, companies will distribute proportionately higher dividend amounts. While this would negate the impact of DWT in investments subject to the tax, it will hold the significant advantage of boosting dividend income in exempt investments, such as retirement annuities.

So, if you have not yet met your financial intermediaries to conduct an annual review of your investment portfolios, now, having entered the new tax year, may be a good opportunity to do so. Not only will this allow perspective on whether you remain on track to target your personal investment objectives successfully, but it will also offer the chance to evaluate whether your portfolios are structured in the most tax efficient manner.

Article from Bizcommunity.com

What investors can learn from Norway

ridodirected@gmail.com (RIDO) — Tue, 27 Mar 2012 21:30:00 +0000

March 27, 2012 7:30 AM

By Larry Swedroe

Article from CBS News

(MoneyWatch) While the Yale Endowment Fund is probably the best known institutional fund, many people might be surprised to learn what is the largest fund on the planet -- the Norwegian Government Pension Fund Global (GPFG). It's also highly rated for its professional, low-cost, transparent, and socially responsible approach to asset management.

In fact, institutional and individual investors would do well to consider Norway as a model for managing financial assets. The country was ranked No. 1 among 53 sovereign wealth funds in 37 nations. The "Norway Model" contrasts with the Yale model in that it relies almost exclusively on publicly traded securities. It's also constrained to a low tracking error, has a rigorous asset allocation that allows little deviation from the policy portfolio, and avoids private equity.

The Norwegian finance ministry decides on the fund's level of acceptable risks, constructs the benchmark (regional allocation, asset classes), sets the rules and criteria (such as maximum ownership levels), and defines the overall investment universe. The main factors driving their strategy are:

A belief that markets are largely efficient.
A focus on low costs. For the past decade, GPFG's costs have ranged from 0.08 percent to 0.14 percent.
The long horizon makes the fund more tolerant of volatility than many investors, enabling it to lean toward earning higher risk premia, notably through a stock focus.
As a long-horizon investor with relatively stable risk preferences over time, the fund can serve as an opportunistic liquidity provider through contrarian transactions in liquid markets and through buying unpopular asset classes.
The fund's strategic benchmark is 60 percent equity/35 percent fixed income/5 percent real estate. Each asset class consists of three regional indexes: Europe, America, and Asia, weighted broadly by global market capitalization.
Wherever possible, the GPFG uses portfolio rebalancing by allocating the monthly revenue inflows to the asset class/region with the largest negative deviation from the benchmark.
As long as oil remains a significant underground resource, the fund has less need for inflation-hedging than do most investors, and a deflation scenario is a more damaging tail risk than an inflation scenario. Since nominal government bonds are the best deflation hedges, it's reasonable to hold government bonds despite their low expected returns.

The GPFG has also decided to diversify its thinking about risk factors beyond the traditional view of focusing on the equity risk premium.

Diversifying the sources of risk premia

While investors have traditionally focused on the equity risk premium as the key source of excess returns, there's a growing consensus in the academic literature that multiple return sources appear to influence asset prices. The main guidance from theory is that required risk premia should be high for investments that tend to lose money in "bad times" -- recessions, financial crises, liquidity shortages, and so on. And while academics still debate whether excess returns are determined by rational or irrational behavior by investors, both sources of return probably matter.

In sum, the long-term objectives of the GPFG suggest a tilt towards patient, liquidity-supplying, and market-stabilizing value strategies, holding assets that have typically experienced price declines (instead of performance chasing) and waning investor interest.

The strategies listed above are basically all replicable not only by other institutional investors, but also by individuals. All investors should have well-defined investment plans, including rebalancing tables that set forth the amount of acceptable style drift, and they should always rebalance whenever funds are available to do so. Even the low costs of the GPFG can be approximated through the use of low-cost, passively managed funds such as index funds and ETFs.

All investors can now diversify globally and across multiple sources of risk. All investors can also avoid the moral hazards and principal-agent problems inherent in using hedge funds and private equity. There is much less opportunity for agency problems when portfolio holdings are marked-to-market, centrally custodied, transparent, and observable.

Photo courtesy of Flickr user Alexandre Dulaunoy

Larry Swedroe

Larry Swedroe is a principal and the director of research for The Buckingham Family of Financial Services, comprised of Buckingham Asset Management, LLC, BAM Risk Management, LLC and BAM Advisor Services, LLC (and its network of independent registered investment advisor firms). He has authored or co-authored 10 books, including his most recent, The Quest For Alpha. Follow him on Twitter at http://twitter.com/larryswedroe. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

Article from CBS News

Hike in service tax makes traditional plans unviable

ridodirected@gmail.com (RIDO) — Sun, 25 Mar 2012 20:27:00 +0000

Published on Sat, Mar 24, 2012 at 15:23 | Source : Moneycontrol.com

Updated at Sat, Mar 24, 2012 at 15:27

Article from moneycontrol.com

Pankaaj Maalde, Head - Financial Planning, Apnapaisa.com

Traditional insurance plans are sold heavily, historically, since LIC came into existence. Traditional plans are a combination of insurance cover and saving element coupled with tax benefit. Previously only LIC was pushing for these products but now private insurance companies have also aggressively launched many traditional plans due to ULIP products becoming difficult to sell now as the stock prices have corrected. Birla Sun life, which is the pioneer of unit-linked plans in India, also had to come out with traditional plans to survive and sustain in the market. Traditional plans are very easy to sell as they are not complex as compare to ULIPs. Endowment plans, money back plans, whole life plans and children's plans are different genre traditional plans available in the market. Traditional insurance plans are mostly sold as tax saving instrument therefore nobody calculates the returns while buying these products.

Traditional plans are neither flexible nor give good returns in the longer run. They offer lower insurance cover vis-�-vis premium paid. Under the traditional plans you have to pay the premiums for longer terms. Any default in premium payments will lead to cessation of your risk cover. There are heavy surrender charges associated with traditional plans if policy is terminated during the term. Most of the people are under the impression that there are no charges in traditional plans, but the reality is far from this perception. All the charges including insurance cost, office expenses and commission charges are built-in in the premium. The same cannot be identified separately as they are included in premium and are not shown separately like as in case of ULIPs. The traditional insurance plans neither are insurance plans in proper meaning of the term as they offer very limited sum assured nor are they investment products, as they are unlikely to beat even the inflation.

Investment decisions in respect of your money are absolutely vested with the insurance company in all the traditional plans and the policyholder has no say in any investment decision under these plans. The regulator has prescribed limits and composition for investment under these plans. A minimum of 85% is required to be invested in govt. and semi govt. securities, corporate bonds and it is the balance 15% that is allowed to be invested in equity market. The point is whether traditional plans are investor friendly or not or they are agent friendly. We need to agree that insurance distribution is agents driven. In other words insurance in India is sold and not bought. The agents sell only those products where they will earn more commission. Agents are promoting traditional plans heavily because traditional plans pay around 35% commission in the 1st year and 5% renewal commission thereafter till the premiums are paid. Traditional plans are easier to sell as compared to ULIP, as sum assured and bonus declared are guaranteed since there is no market risk under these plans.

Now there is another bad news in the budget presented last week. It has proposed to increase service tax on traditional plans of life insurance plans from 1.55% to 2.06%. This proposal will very badly hit the traditional plans as the overall returns will come down. Just 3 years back, service tax on traditional plans was 1.03%, last year it was increased to 1.55% and is doubled to 2.06% in this budget. Traditional plans are debt oriented plans as substantial investment is done in government and corporate bonds and only 15% is invested in equity. If one has to compare the returns of this combination of heavy debt and defensive equity then mutual fund's Monthly Income Plans (MIP) score better. One can expect around 10% average return from this product of mutual funds. IRDA has put a cap on maximum expenses in ULIP plans at 3% and as traditional plans have more charges inbuilt and are around 5%. If you earn 10% return on investment corpus under traditional plans and 5% is paid towards commission and other administrative expenses than you will be left with 5% return only. Now suppose you have to pay more premiums because of the hike in service tax, your return will come down further by 50 bps. I feel that the average annual returns on the traditional plans will come down to below 5% in coming days. It is much better to take a term plan and invest balance in PPF as PPF also gives tax benefit and maturity is tax free. This combination of term and PPF will give at least 1.5% to 2% more returns as compared to traditional plans.

LIC presently does not charge service tax to its policy holders but is absorbing it at its own. Even If it continues with the same strategy then bonus rate will come down or at the end loyalty bonus will not be paid. All private players are already levying service tax on its policy. IRDA is silent and not taking any steps to reduce charges in traditional plans. One should also note that DTC proposes to reduce the life insurance premium exemption limit from present Rs. 1 lakh to 50,000 and is also clubbed with health insurance and tuition fees paid for two children. Investors have to be cautious while buying expensive traditional plans. We strongly advise our clients not to mix insurance requirement with investment and always follow need based theory while calculating life insurance need.

ApnaPaisa helps Indian consumers take informed decisions - for example, should I pre-pay my existing loan? How much life insurance cover do I need? What must I look for before buying health insurance? Author can be reached at www.facebook.com/apnapaisa

Article from moneycontrol.com

50for50: Mike Webb

ridodirected@gmail.com (RIDO) — Fri, 23 Mar 2012 21:26:00 +0000

Rathbones Unit Trust Managers chief executive Mike Webb tells us his first investment was an endowment mortgage and that he used to be a stand-up comedian

By Geordie Clarke | Published 11:02 |

Article from FT Adviser

Mike Webb, chief executive of Rathbones Unit Trust Managers, says the internet is the single most imporant event of the past 50 years and that the most important thing for companies to learn is to put the client first.

What was your first ever investment? A standard life endowment policy backing a mortgage. It’s due to mature in 2016 and the last statement they sent to me had a red alert all over it. I think it’s worth half as much as the term assured. If nothing else, it at least forced me to put a certain amount away each month.

What’s the most significant non-financial event in the past 50 years? Without question the internet. It has changed the way everybody works. It means that small companies can become global without even thinking about it and that has certainly reshaped our lives. It’s just an immensely positive thing.

Where were you when Lehman’s collapsed? I was at Hermes pension fund management and I remember staring out of the window thinking, well, three of the four horsemen of the apocalypse were there, when will the the fourth to arrive? It was an extremely frightening period.

If I had one piece of advice for the industry 50 years ago it would be… Put the client first. I don’t think it was done enough in the past and you still see bad practice in investment banks and other areas of the industry where it was more about the profit and loss than the importance of the client. If you look after the client the profits will work themselves out.

If I was not in financial services I would be… In trouble probably. I used to be a stand-up comic in my youth, so I guess the only other thing that I’m good at is acting. I’d probably be a poor out-of-work actor.

If I could put £50,000 into an investment now and only take it out in 50 years, I would put it… I would put it in emerging markets. While they’re extremely volatile and places like China will have problems moving from being a developing economy to a developed one the balance of economic power is undoubtedly going to move from the west to the east.

My worst investment was… The worst one undoubtedly was a private business called Ecotek Technology, which was a business that had discovered a means of producing a catalytic converter for cars that reduced fuel consumption and improved CO2 emissions. I knew I was in trouble when the chairman wrote to me after six months to tell me the person who had I thought invented the device wasn’t him but in fact was his son and they fallen out. At that moment I realised my investment was going nowhere.

Article from FT Adviser

A look into the price of a Vassar education

ridodirected@gmail.com (RIDO) — Thu, 22 Mar 2012 00:41:00 +0000

By Ruth Bolster

Features Editor

Published: Wednesday, March 21, 2012

Updated: Wednesday, March 21, 2012 16:03

Article from The Miscellany News

The chart above breaks down Vassar's sources of income. Tuition only makes up only half of the College's total revenue.

Second only to Columbia University on U.S. News and World Report’s 2012 list of most expensive private schools, Vassar has undoubtedly acquired a reputation for being pricey. Although such lists do not consider the amount of financial aid individual students receive, they serve as an indicator of the amount of money required from each student to help keep these respective institutions going. Ultimately, the process behind establishing the price of a Vassar education is done with an attempt to best meet the needs of the campus community.

The process of establishing a comprehensive tuition fee begins the fall prior to the upcoming academic year. Armed with information on the health of the national economy as well as the expected costs of continuing the various programs and services offered by Vassar, the Board of Trustees reviews expenses, other sources of income and ultimately decides upon a figure that it believes would appropriately cover the school’s costs.

This is done in an attempt to establish the school’s budget for the fiscal year.

In addition to the 49 percent of total revenue generated through tuition, Vassar also receives 33 percent of its income through interest generated by its financial assets, nine percent through private gifts to the College.

Additionally, six percent of Vassar’s income is generated through any additional fees that the College charges, such as childcare fees at Wimpfheimer Nursery School and the Infant and Toddler Center or cash sales for food at the Retreat, and three percent of its income is generated through government grants.

When deciding the budget, Budget Director and Assistant Vice President for Finance and Administration David English and his staff begin by assessing the College’s current budget and overall finances.

“The Budget Director and his staff do this by looking at what is being charged to the accounting system, but they also have conversations with people, whether it is the director of financial aid, or the director of dining operations,” said Vice President for Finance and Administration Betsy Eismeier.

“A lot of different offices know things that would affect revenue and expenses that you can’t see when you’re just looking at the accounting system.”

After carefully considering the College’s operating expenses, the Board of Trustees approved a budget of $152 million last fall, which ultimately can be broken down to an average cost of $67,125 per student. This cost is subsidized by both Vassar’s endowment and gift funds, resulting in the lowered comprehensive fee of $55,135.

However, with approximately 60 percent of the student body receiving varying amounts of financial aid, this fee is further tailored in consideration of each student’s ability to pay.

The effects of the need-blind policy, which allows the school to admit students regardless of their ability to pay, must also be considered when establishing the school’s budget.

Before this policy was implemented, a fixed portion of the annual budget would be set aside each year specifically for financial aid. However, with the need-blind policy, the overall amount of financial aid needed is less controlled than before, making this aspect of the budget less predictable.

As Eismeier explained, “In general we want to have student tuition be stable, if not growing a little bit to support cost pressures. The first year we implemented need-blind in 2008-2009, net tuition, or the amount we collect after financial aid, went down slightly.”

However, Eismeier also noted that the enactment of the need-blind policy also occurred during the height of the economic recession, and that it is very likely that this also contributed to the decrease in net tuition during that particular fiscal period.

She continued, “Because of our implementation of the policy change, net tuition hasn’t grown. The plan now is to have stability and a little bit of growth going forward. But the financial aid policy means that establishing the budget is less predictable than it has been in the past when we were targeting a certain amount of financial aid each year.”

The College adjusted to the pressure on net tuition after financial aid by reducing or controlling the growth in college expense budgets and by relying on investment return to endowment and gifts by alumnae/i to the Annual Fund. However, drawing heavily from endowment carries long-term consequences.

“They call it ‘intergenerational equity.’ The long-term consequences of drawing from it is that generations in the future might not have the same level of benefit from the endowment,” Eismeier said.

Despite this, Vassar’s budget in terms of where exactly these finances are directed has remained relatively stable. 65 percent of all operating expenses, for example, go toward compensating members of the faculty, staff and administration. For the 2011-2012 school year, this $68,752,000 went specifically to employee salaries and wages, while $27,187,000 went to employee benefits.

One of the most costly aspects is providing health insurance for each of Vassar’s employees.

“Like so many organizations, Vassar sponsors plans for our faculty, and we also contribute to a union plan, which covers dining and Buildings and Grounds employees,” said English.

“There is the potential that employer-based plans will have to cross subsidize the uninsured or under-insured. There is a lot of uncertainty of how national health care reform will impact our cost base, but we have to provide every year in the budget that there has been a significant increase in costs, just to keep going.”

The College also sponsors two separate retirement plans for union and non-union employees, as well as workers’ compensation and various levels of tuition benefits for employees and children of employees.

“The College also pays for disability insurance, life insurance, and we are required to contribute to FICA, Social Security and Medicare,” stated English.

“Although it is hard to call Social Security and FICA ‘benefits’ because all employers are legally mandated to pay for it,” he admitted.

“The College will provide employee benefits when there is a tax advantage. This allows us to create benefits for employees, such as pre-tax savings pension plans,” said Eismeier.

Vassar offers many of these benefits in competition with other employers who may also attract the type of faculty members Vassar wishes to have.

Eismeier said, “You take some companies like Google, for example, who put together a package of employee benefits that they think appeal to the kind of people they want to hire. Then it becomes a competition among employers for a particular talent base.”

As Eismeier explained, companies could offer benefits that range from various recreational activities to having exotic food available in the cafeteria, all with the intention of attracting a particular type of employee.

Eismeier continued, “When potential faculty members are looking at other employers, we have to think about what kind of benefit structure they are looking for. And to retain our faculty, we have to be able to say that we offer a comparable benefit array as the employers that may seek to take our best people.”

Vassar compares their compensation rates to 21 peer institutions through data collected in the American Association of University Professors’ annual “Report on the Economic Status of the Profession.” This survey contrasts data regarding benefits provided by various institutions of higher learning across the nation.

Additionally, The College and University Personnel Association collects data by job title for all other college employees, including administrators and staff.

“If you could think about it for faculty, the job titles are straightforward—professor, assistant professor, associate professor. For the rest of the jobs, the schools design these jobs somewhat differently and pick somewhat different titles,” stated Eismeier.

“So it is a little bit harder to know exactly what the job is. It is a little bit more difficult to do the comparative analysis, but we have the same comparative goal with all of our employee groups.”

The second largest aspect of the budget, which comprises 25 percent of the budget’s total, is reserved for consumable expenses. These include utilities, fees for visiting lecturers, various dining expenses, library acquisitions and athletic team expenses.

As a result of the recent recession, Vassar has been exerting various “cost control efforts” in these particular areas of spending.

For the 2011-2012 school year, consumable expenses ultimately totaled $44,104,000.

Plant and equipment expenses, which are reserved for the upkeep of the College’s physical facilities, accounted for $7.4 million, or five percent of the budget.

Additionally, the remaining five percent of the budget is reserved for paying interest on debt incurred for renovations and improvements to the physical plant.

Despite being tagged as one of the highest costing colleges in the nation, Vassar’s budget hopes to provide all employees with equitable compensation and providing students with the best possible college experience.

Article from The Miscellany News

Endowment policies need health warnings

ridodirected@gmail.com (RIDO) — Sat, 17 Mar 2012 19:55:00 +0000

Jeremy Clarkson reckons that if they invented the motor car today, it would never be allowed on the road. "Too dangerous, too environmentally unfriendly and generally antisocial," politicians would shout.

Article from the Business Live

So now we tax fuel at R43-billion a year. And then add VAT, excise duties and carbon-emission taxes. Call me Bob if that's not R70-billion a year all in.

If someone suddenly invented booze today, the health authorities would ban it on the spot. But if you put an age restriction on the bottle, South Africa can collect R14-billion a year in sin tax, plus VAT. And smokers pay R12.5-billion a year in sin tax - plus VAT.

By justifying the unjustifiable, the state must collect R100-billion a year. So, if VAT only amounts to R210-billion in 2012, it would require a 50% increase in the VAT rate to replace sin taxes on cars, booze and smokes.

Now imagine if some bright spark said, "I've got a killer new concept for investment. Why not invest through an insurance policy. We can call it an endowment policy! We can tell investors their returns are tax-free. But actually returns will be paid through the individual policyholders' fund of the insurance company at a flat rate of 30% and capital gains tax at 10%.

"We can sell the product to buy out of after-tax income. When they could be making tax-deductible contributions to retirement funds where investments grow tax-free.

"Advisers will make fortunes. And when investors get tired of the sport, we can buy the policies back and sell them second-hand. And hit the investor with commission and capital gains tax again."

The 2012/13 individual taxpayers' tax table shows that the 30% tax bracket only kicks in at R250000 taxable income a year. And the 35% rate, at which level a tax saving is actually achieved after costs, only applies from R346000 a year.

There are only about 500000 South Africans who earn that much.

Ten years ago, taxpayers attained a 30% tax rate very quickly. So investment through insurance policies was fair game for many. But recent tax reforms have changed that for most.

If booze and cigarettes must carry health warnings, then so should endowment policies: "Not for sale to anyone who has taxable income below R346000 a year." And advisers should have to sign a declaration that they have examined the taxpayer's most recent tax assessment before the investment is placed.

Article from The Business Live

Private Equity’s Foreclosures for Hot Rentals Net 8%

ridodirected@gmail.com (RIDO) — Wed, 14 Mar 2012 21:18:00 +0000

By Edward Robinson - Mar 13, 2012 11:37 PM GMT+0800

Article from Bloomberg

Ken Major climbs the steps of a county courthouse in a San Francisco suburb with $500,000 in cashier’s checks in one hand and a list of addresses in the other. Major is a buyer for Waypoint Real Estate Group LLC, an Oakland-based investment firm that’s scooping up foreclosed homes in California.

On this December afternoon, he joins a dozen house flippers as an auctioneer starts hawking the latest batch of defaulted properties to hit the market. Major bids on a three-bedroom house in Antioch, and after other buyers counter, he wins at $147,600.

“We got it,” he mutters into a mobile-phone mic dangling from his ear. The house was valued at more than $400,000 in 2006, Bloomberg Markets magazine reports in its April issue.

Waypoint, a private-equity real-estate fund with $150 million in assets, is pioneering a new approach to making money from the housing crash. Since 2007, investors have been trolling the cratered suburbs stretching from California to Florida (SPCSMIA) for cheap houses to flip. And firms such as PennyMac Mortgage Investment Trust have sought value in subprime-mortgage-backed securities.

Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit. Other firms, such as Landsmith LP in San Francisco, are now cropping up and pursuing the same strategy in Arizona, California and Nevada.

‘Yields Are Awesome’

With many suburban homes selling for half their peak values and demand for rentals from prospective tenants climbing, Waypoint was earning an 8 to 9 percent return on its capital as of Dec. 31, according to a quarterly report it sends to clients. That beats the 6.3 percent gain in the BI NA Multifamily REIT (BRFREITC) Index, which tracks the performance of 27 apartment building operators.

Should property values rebound, Waypoint may earn at least 20 percent from appreciation in an eventual sale of the houses, says Colin Wiel, who co-founded the firm in 2008 after backing technology startups as an angel investor.

“I never thought I’d be rolling up single-family homes,” Wiel says. “But the yields are awesome.”

Wiel and Waypoint co-founder Doug Brien make an unlikely pair of real-estate entrepreneurs. Wiel, 45, is a mechanical engineer who designed braking systems for jetliners at Boeing Co. (BA) in the 1990s. And Brien, 41, is a former placekicker who won a Super Bowl with the San Francisco 49ers in 1995 before earning a postgraduate degree in business at Tulane University in New Orleans.

$3 Trillion Market

In starting Waypoint, Wiel and Brien set out to show institutional investors that by using technology they could amass single-family homes the same way Sam Zell’s Equity Group Investments Inc. (EQR) and other real-estate giants gather apartment units in cities from New York to San Francisco.

The home rental market boasts a total property value of $3 trillion, according to Morgan Stanley (MS) housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable.

Wiel and Brien are using cloud computing, proprietary algorithms and iPads to create a virtual assembly line for buying, renovating and renting houses on a large scale. They’re also betting that many former

homeowners who have jobs but couldn’t afford their mortgages will still want to live in the same communities as renters.

“The economics never made sense for a big investor to come into the market, and the technology for managing all that complexity didn’t previously exist,” says Brien, who still possesses the steely stare of a field goal kicker. “The confluence of those two events has provided a window of opportunity for large investors to enter this space.”

Acquire And Convert

Last year, Columbia University’s $8 billion endowment invested $25 million with Waypoint. In January, GI Partners, a Menlo Park, California-based private-equity firm that manages money for the California Public Employees’ Retirement System and other pension plans, agreed to invest up to $400 million with Waypoint and acquire a minority stake in the firm.

The same month, Oaktree Capital Management LP, the Los Angeles investment firm co-founded by billionaire Howard Marks, announced a $450 million deal with Santa Ana, California-based Carrington Capital Management LLC to acquire and convert foreclosed single-family homes into rental properties. Carrington already rents out more than 3,000 houses in California and other states.

Labor Intensive

Starwood Capital Group LLC (HOT) is poised to enter the foreclosure-to-rental market, according to an investor familiar with its plans. So, too, is Zell and the real-estate arm of Apollo Investment Management LLC.

Spokespersons for Zell, Apollo and Starwood declined to comment.

“Until last year, single-family-home rentals was a mom and pop market,” says Stephen Duffy, an investment banker at Moss- Adams Capital LLC, an Irvine, California-based firm that finances real-estate investments. “Now, it’s grabbed the attention of institutional private equity because foreclosures haven’t cleared and these properties can generate high yields for years.”

Waypoint and its rivals may eventually spin off pools of single-family home rentals into real estate investment trusts. Still, even the best technology cannot replace the labor- intensive process of acquiring and leasing thousands of houses scattered across scores of zip codes.

Nascent Market

Waypoint’s researchers must plumb school desirability ratings, crime statistics and other hyperlocal data to ascertain the income value of each house. Its title agents must often disentangle foreclosures from second mortgages and liens. And leasing representatives have to find qualified renters in communities struggling with high unemployment rates.

“This is a nascent market, and the model still hasn’t proved out,” says Rick Magnuson, executive managing director of GI Partners, which has $6 billion under management. “But we believe this rental strategy will produce good economic returns for our investors and help arrest the housing market’s slide.”

The Obama administration is poised to tap the foreclosure- to-rental approach as officials struggle to turn around the housing market. The president’s push to have mortgage providers make loans more affordable for homeowners has done little to stem foreclosures, says Ginna Green, a spokeswoman for the Center for Responsible Lending, a Durham, North Carolina-based consumer advocacy organization.

Worst Is Over

There were almost 2 million U.S. foreclosures in 2011, down 31 percent from 2010. As many as 10 million borrowers may default over the next few years if the markets continue to deteriorate, says Laurie Goodman, an analyst at Amherst Securities Group LP in New York. Even though mortgage rates are hovering at a historic low of 3.8 percent, consumers bought only 324,000 new homes last year, the poorest annual performance since 1963.

On Feb. 9, the U.S. Department of Justice and 49 states agreed to end a probe into abusive mortgage practices at Bank of America Corp., JPMorgan Chase & Co. and three other banks after striking a $25 billion settlement with the companies. The landmark agreement, which will provide debt relief to homeowners, should help rescue many delinquent borrowers and buoy the confidence of would-be homebuyers and lenders that the worst is over, says Ivy Zelman, CEO of Zelman & Associates LLC?, a Cleveland-based research firm.

Repossessed Homes

Even so, the settlement may not be large enough to reboot a housing market saddled with $700 billion in underwater mortgages. She says institutional investors eyeing the rental market have the capital to absorb thousands of dwellings and slow the market’s decline.

Investors are already having an effect: The supplies of homes for sale in Phoenix (SPCSPHXS), Orlando, Florida and other hard-hit markets have fallen more than 60 percent from their post-crash highs as bargain hunters scoop up foreclosures.

“Investors are aggressive about buying these homes in front of the government program,” Zelman says.

In August, the Federal Housing Finance Agency asked investors for input on setting up a foreclosure-to-rental program to offload some of the 180,000 repossessed homes held by Fannie Mae and Freddie Mac, the troubled government-sponsored mortgage giants. Barclays Capital, Deutsche Bank AG (DBK), Fortress Investment Group LLC (FIG) and Waypoint were among the hundreds of firms that submitted proposals to the FHFA spelling out how investors could participate in such an initiative, according to information obtained by Bloomberg News through a Freedom of Information Act request.

Investors’ Zeal

Wiel says the agency may auction pools of properties to investors, perhaps coupled with federally guaranteed financing that lowers their cost of capital significantly. The Resolution Trust Corp. employed a similar policy in the early 1990s to sell off mortgages held by failed savings and loan banks.

On Feb. 27, the FHFA unveiled a pilot program to sell repossessed houses in Los Angeles, Phoenix, Florida (SPCSMIA) and other hard-hit markets to investors who qualify with the agency. Waypoint submitted an application. “This could be a total game changer for us,” Wiel says.

It’s striking that Washington is looking to Wall Street for answers after investors’ zeal for subprime mortgages helped foment the housing morass, Green says. She says a boom in rentals may encourage mortgage lenders to foreclose on delinquent homeowners instead of reworking their loans to be more affordable.

Still, she says, leasing defaulted houses does reduce the corrosive impact they have on communities. “Nobody wins when houses are empty,” Green says.

Shoe-Leather World

Wiel and Brien, both graduates of the University of California, Berkeley, met at an angel investing conference Wiel was hosting in San Francisco (SPCSSF) in 2008. They talked about the housing crash and agreed that plunging property values in the Bay Area’s bedroom communities presented an irresistible opportunity. So they set up a company with $1 million of their own money and acquired 26 houses during the next six months.

From the outset, the duo applied technology to a business rooted in the shoe-leather world of appraisals, home inspections and foreclosure sales on courthouse steps.

“We asked, ‘How do we systematize and automate everything? How do we scale?’” says Wiel, an upbeat man who’s fond of techie lingo. By 2011, they had hired almost 100 employees and raised more than $90 million from investors in seven funds. It’s midmorning on Dec. 14, and Waypoint’s office in a downtown Oakland high-rise is bustling with activity.

Most Desirable

In a warren of cubicles, leasing reps sporting telephone headsets talk with potential renters. A half dozen members of the home-acquisitions team are crammed into a bullpen outfitted with a brass bell that’s rung with gusto every time a new house is bought. Doug Pankey, a longtime appraiser who helps run the team, reviews the foreclosures slated for auction this afternoon on two computer screens.

Waypoint uses a combination of its own proprietary algorithms and business software from San Francisco-based Salesforce.com Inc. (CRM) to turn potential acquisitions into rentals. Pankey zeroes in on a three-bedroom residence in a middle-class subdivision of Antioch, a San Francisco suburb of 102,000 residents.

The house appears in the center of a red, pulsing orb on a Waypoint heat map that highlights the town’s most-desirable blocks. The house needs $20,000 in renovation, has no liens and earns a 92 out of 100 on Waypoint’s Geographic Scoring System.

Home Rescue

This proprietary program ranks potential acquisitions by factoring in location, proximity to freeways and commuter trains and the home’s historical property-value performance. Pankey watches as the program calculates that with a maximum bid of $150,293, Waypoint can rent the residence for $1,799 a month and earn a 7.7 percent annual return.

Pankey’s buyer, Ken Major, is looking at the same Antioch house profile on his iPad outside the Contra Costa County courthouse, 27 miles (43 kilometers) away, ready to bid. Waypoint maintains all of its property profiles on an online cloud database so agents in the field and supervisors at headquarters can access and update them in real time.

A month after buying the house for about $2,700 less than that maximum bid, Waypoint outfitted it with a new kitchen, carpeting and landscaping.

Many of the firm’s conversions don’t go as smoothly. On a warm January morning, James Gordon sets out to visit almost a dozen Waypoint houses that may still be occupied. Gordon, a former mortgage broker, is a home rescue specialist who negotiates with occupants to determine whether they can be converted into renters, paid $1,000 to move out or be evicted.

Family Pictures

About a third of Waypoint’s homes are occupied by the former homeowners themselves, with one out of four staying on as tenants. Waypoint offers to set aside a percentage of any tenant’s rent so that money can later be used toward a home purchase.

Most of the time, occupants have to leave within 15 days of Waypoint’s purchase because they can’t afford the rent or choose to go. Gordon returns to one residence where a family has refused to move out for six months as they pursue a legal claim that they’re the victims of mortgage fraud. No one’s home, but two brand-new radio-controlled toy cars sit under the Christmas tree and family pictures line the mantle. Gordon sighs. It’s going to take more time before Waypoint earns a return on this property.

At another house, a woman refuses to open the door for Gordon. It turns out she’s one of six different tenants renting rooms there. Speaking through the door, Gordon says she may be able to stay on as a Waypoint renter, but she rebuffs him.

Fiscal Stress

“I’m not trying to be a bad guy, but if you don’t come to an agreement with us, we’ll have to move forward with the eviction process,” Gordon says as he slips his business card under the door.

For all of the cloud computing, the business of converting foreclosures into rentals is often about dealing with households under enormous fiscal stress. Waypoint employs former financial counselors from nonprofit organizations to help tenants repair their credit and even set up household budgets so they don’t fall behind in their rent.

As Waypoint triples the number of houses it buys daily and expands in California and possibly Nevada, Arizona and Illinois, it will have to hire dozens of appraisers, leasing agents and other personnel. The firm will have to shoulder these upfront labor costs before its new funds can earn a profit.

New Industry

“That pulls a lot of inefficiencies into the strategy and that can be expensive,” says Chris Hentemann, managing partner of 400 Capital Management LLC, a New York-based hedge fund with $350 million in assets that invests in mortgage-backed securities.

In April, Waypoint launched a fund to reboot foreclosures in Southern California, and in the third quarter, it recorded $324,327 in operating expenses on $23,920 in rental revenue.

A few days before Christmas, the mood is festive at Waypoint’s holiday party. Wiel and Brien hand out thank-you cards with bonuses as employees pile barbecue, chili verde and brownies onto paper plates. Taking the floor, Wiel says the housing market has only worked through half its backlog of foreclosures and the firm will double its head count as it opens new offices.

“We are at the birth of a new industry,” he says to applause.

Worth the Trouble

Such enthusiasm can be found at many startups anticipating explosive growth. While Waypoint’s strategy is now drawing interest from Wall Street and Washington, Wiel and Brien still must bring order to the inefficient business of turning around foreclosures. And they’ll have to show investors that the endeavor is worth the trouble.

To contact the reporters on this story: Edward Robinson in San Francisco at

To contact the editors responsible for this story: Laura Colby in New York at lcolby@bloomberg.net

Article from Bloomberg

What Would Impact Investing At Scale Look Like? $20 Trillion for Good

ridodirected@gmail.com (RIDO) — Mon, 12 Mar 2012 20:47:00 +0000

3/09/2012 @ 12:32PM
Article from Forbes

Recently, I interviewed Ben Thornley of InSight and author of a new study on impact investing, which demonstrates that institutional investors, such as pension funds and endowments that invest for social and environmental outcomes are also earning a competitive rate of financial return. Launched a few weeks ago in New York by InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard and funded by The Rockefeller Foundation, the report, Impact at Scale: Policy Innovation for Institutional Investment with Social and Environmental Benefit, reveals numerous government strategies that catalyze private investment for public good, including laws in 20 states that allow or encourage “economically targeted investments” where a public pension system invests in its home state to support local economic growth while also targeting a financial return to the fund.

Ben Thornley is the Director of InSight – the thought leadership practice in high-impact investing at Pacific Community Ventures (PCV). PCV is a preeminent San Francisco-based Community Development Financial Institution and growth equity manager deploying $60 million in three funds with the aim of creating quality jobs in low-income areas of California.

Ben is responsible for PCV’s policy research and non-financial performance evaluation initiatives, working with prominent institutions including the California Public Employees Retirement System (CalPERS), The Rockefeller Foundation, and The California Endowment. InSight assesses the social impact of over $1.2 billion of private equity investments by 40 individual money managers and $17 billion invested by CalPERS in California, across asset classes.

Rahim Kanani: What was the motivation behind publishing Impact at Scale: Policy Innovation for Institutional Investment with Social and Environmental Benefit?

Ben Thornley: The motivation was twofold: first, it was an important next step in our efforts to document how governments can support the growth of impact investing. In an initial report published in January 2011, we worked with the Initiative for Responsible Investment at Harvard to frame the manner in which government can grow the supply of impact investing capital (for example by co-investing alongside private investors), develop demand (for example by providing technical assistance to the recipients of capital), and direct capital to social impact (for example by offering tax credits for affordable housing, clean energy, and other markets of interest). We wanted to hone in on a particularly important group of stakeholders –US institutional asset owners – in order to explore the relationship between the public sector and private investors in more detail.

Second, we wanted to broaden the discussion about impact investing more generally to include the largest players. US pension funds, insurers and endowments control over $20 trillion and could potentially change the game by bringing markets with intentional social and environmental benefit to scale.

Rahim Kanani: In the report, you discuss locating the role of policy in impact investing markets. What role do you propose the government play in this new space?

Ben Thornley: Institutional asset owners face a number of challenges when investing for impact. Fiduciary duty requires that institutions invest capital with the expectation of earning a competitive rate of financial return commensurate with risk. And because institutions deploy large sums of capital, usually through third-party intermediaries, the vehicles they invest in must be scalable and relatively conventional, with the requisite track record of performance. Against this backdrop, impact investing looks idiosyncratic on a number of levels – which is precisely why government support is needed. Specifically, our report documents three policy strategies for engaging institutional asset owners in impact investing. Where impact investing markets are small and unconventional, but of interest to institutions, government can use an “enabling” strategy to help make idiosyncratic opportunities match conventional markets more closely.

For example, this might include using loan guarantees. Where, because of limited capacity, institutions simply do not have the bandwidth to consider making investments with secondary social or environmental benefits (and most do not; the practice tends to be more arduous than when making traditional investments), government can use an “integrative” strategy to build social impacts into mainstream markets. This might include by mandating social performance through environmental standards in real estate, or by using tax credits to favor subsectors like affordable housing. Finally, where markets are nascent in sectors like health care or education, the government can use a “developmental” strategy to provide additional infrastructure through R&D and technical assistance.

Rahim Kanani: Towards that end, what are some examples of particular policies around the world that encourage or align with the world of impact investing?

Ben Thornley: There are literally hundreds to choose from, particularly in the United States. This includes everything from the Community Reinvestment Act, Low Income Housing Tax Credits, New Markets Tax Credits, and Community Development Financial Institutions (CDFI) Fund program that support primarily real estate investments in low-income communities, to the over 20 state laws mandating or encouraging economically targeted investing by public pension funds. In Hawaii, for example, the Hawaii Employer’s Retirement System is required to consider the impact of all prospective venture capital investments on the state economy and local job creation, among other factors.

India has been catapulted to the forefront of developments in corporate social responsibility, with the National Voluntary Guidelines for the Social, Environmental and Economic Responsibilities of Business – a very detailed set of non-financial performance metrics that, while voluntary, will enable investors to better screen for impact. And in South Africa, the Pension Funds Act was recently amended to encourage institutional asset owners to “give appropriate consideration to any factor which may materially affect the sustainable long-term performance of the fund’s assets, including factors of an environmental, social and governance (ESG) character”. Policymakers are also considering extending the amendment to allow institutional asset owners to deploy up to 5% of their portfolios to targeted investments, defined as investments in areas where gaps or backlogs in economic development and job creation have not been adequately addressed by financial markets.

Rahim Kanani: What are some other key findings of the report?

Ben Thornley: We were surprised to discover that, even within the constraints of fiduciary duty and the strictures of conventional portfolio management, US institutional asset owners have been very creative in finding ways to support regional economies and deliver the other secondary social or environmental impacts of priority to beneficiaries.

In other words, our report takes a set of subterranean activities more commonly ascribed to “responsible investing”, “economically targeted investing”, “mission-related investing”, or “ESG integration” (rather than “impact investing”, although the goal of creating secondary social and environmental impacts remains the same), and simply makes them explicit.

For example, the State of Wisconsin Investment Board has provided over $350 million of senior and subordinated debt financing to companies headquartered or operating in the state since the 1960s. The Florida Growth Fund was created by the Florida State Board of Administration to invest $500 million in local businesses. CalPERS, the California Public Employees Retirement System, invests over $130 million in the Alternative Investment Management (AIM) Environmental Technology Program, targeting environmental or clean technologies that are more efficient and less polluting than existing or legacy products, services, or technologies. And operating from its headquarters in Illinois, the General Board of Pension and Health Benefits of the United Methodist Church has invested over $775 million since 1990 in affordable housing and community development, primarily through CDFIs.

Impact investing by institutional asset owners is not some theoretical practice, but a reality that can be supported and scaled, including by policymakers.

Rahim Kanani: How would you like this report to be read and understood?

Ben Thornley: Public policy is ubiquitous in financial markets, not least when it comes to impact investing, whether we like it or not. This report is further evidence that government plays a key role as underwriter, co-investor, regulator, procurer of goods and services, or provider of subsidies and technical assistance. Presuming that a holistic discussion about impact investing should therefore incorporate elements of policy, the need for translation and intermediation becomes more urgent, which is where our report fits in. Governments need help understanding how private investors see the world and the types of policies likely to be effective in catalyzing private capital for public good. Investors need help understanding how their activities intersect with policy (sometimes unwillingly) and the proven options that governments have to be supportive. We would like the report to be understood as a tool for facilitating cross-sector collaboration.

Rahim Kanani is a writer, advocate, strategist and entrepreneur for global social change. His articles, opinions, and interviews with global leaders can be found at www.rahimkanani.com. Follow him on Twitter @rahimkanani and on Facebook. Have an idea for a great interview? Email rahim@rahimkanani.com.

Article from Forbes

Life Insurance: Surrendering policy? Think again

ridodirected@gmail.com (RIDO) — Sun, 11 Mar 2012 09:00:00 +0000

March 09, 2012 12:22 PM |
Raj Pradhan
Article from Money Life

Many are stuck with wrong life insurance plans. Financial planners often advice you to surrender the policy and use the money for better investments. Raj Pradhan finds that is wrong advice in most situations. Find out when and how you should surrender life policies

Many people are unhappy with their life insurance choices. They want to get out of the policy and even whine about having been mis-sold a product. What should they be doing? Open a newspaper, a magazine or watch business channels and you will find many so-called experts casually advising people to surrender their dud insurance policies. Some may suggest that you turn your policy into a ‘paid-up’ one without even explaining its implications. Exhorting readers or viewers to bite the bullet by ending your insurance policy and showing dreams of investing in better instruments is common. But is it sound advice? Do you really know what surrender value you would get for your policy? Also, after taking a beating on your policy, do you know how much the new option would have to generate to really be a better choice? If not, don’t listen to the babble of the experts. Talk is cheap. Following them blindly will surely lead you to disaster.

If you have already invested in a traditional policy or a unit-linked insurance plan (ULIP) and are unhappy, think hard before surrendering it. After all, it’s your hard-earned money. Moneylife gets several such queries from readers and, in most cases, they are tempted to surrender the policy because something else appears to be more attractive—equities, real estate or gold/silver—depending on which has run up. You have better options, as this article will explain. For starters, if you have an insurance policy for ‘cum-investment’ purpose, why not benefit from rupee-cost averaging, disciplined investment and long-term savings? After all, these products have already squeezed the high charges from you in the initial years and surrendering will only benefit the insurance company. Moreover, what happens to the tax benefit you have taken under Section 80C when you surrender the policy? Is the surrender amount taxable? Read on.

How did you get stuck with a traditional insurance policy or ULIP in the first place? Listening to experts or biased media? Moneylife had done a product review of Kotak Invest Maxima ULIP (12 January 2012). We wrote: “Zero premium allocation charge but hefty policy admin charge.” Recently, we came across a review of the same product in another magazine. Its view: “One of few products in the market with zero premium allocation charge.” The product has 7.2%pa policy admin charge, which is killing. The company is extracting your money one way or the other. In another article, the actuary of Kotak Life Insurance admitted that removal of the premium allocation charges amounts to ‘repackaging’.

Here are examples of the kind of advice offered by experts for surrendering your insurance policy and what we think would be the right approach.

• Traditional products offer low insurance: While this is true, what happens to your investment component when you surrender? It takes a beating. Why not compensate for low insurance by buying a term plan without giving up the existing traditional policy?

• Traditional products offer low returns: It is true in many cases, but long-term (over 16 years) endowment policies from LIC (Life Insurance Corporation of India) have given decent returns on investment—7%-8% tax-free. If you have to exit and get a pittance as surrender value, your new investment has to offer such high returns that it compensates for the loss you incurred with the traditional policy. Can you put down the actual numbers on paper to prove this? Generic advice of surrendering may not benefit your particular investment situation.

• Traditional products give special surrender value: While this is true for many traditional products, it is not guaranteed. It depends on the insurer. The guaranteed surrender value (GSV) is low which entails losses for you. Moreover, you have to find out what the special surrender value (SSV) really amounts to in your policy. This may depend on how many years your policy has been active, the policy term, the product, the company’s performance and so on.

• Surrender traditional products early or hold them if the term is almost over: For starters, surrendering within three years of a policy will give you nothing. After three years, you get 30% of the premium paid minus first-year premium plus partial bonus. Hoping to make it up with a big gain in a new investment is impossible in most cases. Moreover, traditional products are not like fixed deposits (FDs) where breaking it makes sense early in the term. There are options like negotiating with the insurance company to reduce the policy term, in case you want to get rid of the policy sooner. It does work in many cases, if you just ask.

• Traditional products have high charges: This is a fact, but once you have bought a policy, you have already gone past the high charges since the charges are front-loaded. Surrendering it will only help the insurance company, not you. If you are facing a financial crisis, partial withdrawal or loan is an option.

• Convert your traditional policy to ‘paid-up’ if in the middle of policy term: Have you found out what will be the paid-up value that will be given at policy maturity or death? Considering the amount of premium paid till now, how much is your rate of return? You need to see the numbers before converting the policy to paid-up.

• ULIP has exposure to equities and the market is volatile: This was the advice given on a TV business channel which may have left many flabbergasted. How about switching to a debt funds option? Experts are dime a dozen; what do they have to lose with free advice on TV? Nothing.

• Poor fund performance of ULIP: It is possible that markets are doing much better than your ULIP’s performance. What do you do if the fund management is poor? Depending on the number of years in the policy, you may have minimal or no surrender charge. If so, you can discontinue the policy. If the policy surrender charge is high, you can decide whether you want to shift to a debt fund option and hope the fund is better managed. You can make new investments in equity mutual funds to balance your total investment.

• ULIP does not offer capital guarantee: The equity option will not guarantee capital; it is for the long-term investor with some risk appetite. The debt option of ULIP too will not guarantee capital, but it is unlikely you will have any loss if you remain in the policy over a period. Capital guarantee is offered by traditional products but you will be jumping from the frying pan into the fire.

• Old ULIP surrender: A well-known financial planning website advised a Moneylife reader to surrender an old ULIP even though the required three premiums were not paid. They ignored the fact that surrender of an old ULIP within the lock-in period may yield next to nothing.

• Use ‘cover continuance’ feature of ULIP: The new ULIPs don’t offer this feature. If you stop paying premiums after the lock-in period, the policy will be discontinued and funds returned to you. The ‘cover continuance’ feature was available in old ULIPs wherein you could stop paying after three premiums and continue with the policy. The funds would remain invested in your choice of fund option. The mortality charges will be deducted to maintain the insurance component. It was a great feature, but was done away with in the new ULIPs.

This was due to mis-selling by intermediaries. Using cover continuance also means you are not a long-term, disciplined investor interested in rupee-cost averaging of your investment.

• Better product in the market: This is the pitch from intermediaries to churn your portfolio. They egg you on to surrender your policy and to put the proceeds in a new product even if it is not in your interest. Traditional products are front-loaded—the intermediaries get instant gratification from the first year’s commission of the new product. It is a completely wrong advice to boost the agent’s revenue.

• Go for term life insurance: It is true that term life insurance is the best insurance you can buy, but is it worth surrendering your policies to buy term life? A Moneylife reader has 22 LIC policies in his family. The total insurance component is still lower than the necessary risk cover for his family. He realises the importance of term life and is now tempted to surrender all his LIC policies and go for term life insurance. Is it really worth the losses, considering that today online term insurance comes at incredibly low premiums?

• If the policy doesn’t meet your objective, it is better to let it lapse even though you stand to lose the premium: This is the advice from an expert in a leading newspaper. It sounds sophisticated like ‘people should buy bonds instead of investing in FDs’. What objectives do people really have? They want decent insurance and investment instruments to grow their savings. It’s true that some people may have short-term needs, but why did they invest in traditional insurance, which is a long-term product? Most of these products, especially endowment plans, have a loan feature wherein 90% of the surrender value can be taken as loan @9%pa (the current LIC rate) instead of surrendering the policy.

Private insurers may charge a higher rate of interest on the loan. Kotak Life is charging between 12%-12.5%pa.

According to Girish Malik, vice-president-life insurance, Nandi Insurance Broking and Risk Management Services Pvt Ltd, “Taking a loan against an insurance policy is sometimes a deliberate strategy of businessmen. LIC’s Bima Bachat is a single premium endowment plan with 80C tax savings as an incentive. After taking the tax benefit, businessmen take loan on 63% of the investment @9%, which is a great feature. The GSV is available only after completion of at least one policy year. After completion of one year, you can take loan on 81% of the investment.”

Stay Married or Divorce?

You have to evaluate your situation to figure out if you need to stay married to your insurance policy or take a divorce. Work out your returns. What is really your specific situation? What is the surrender value your policy is offering? What is the expected rate of return from your existing policy? Does your existing policy offer a loan? How much is the revival period in case you skip premium payment? How many premiums are paid and how many remain? Does it offer a ‘paid-up’ feature? What is your alternative investment plan? What kind of returns will it give? What are the ratings of new investment and, hence, risks associated with it? Are those assured returns or expected returns? If you give up on your existing insurance policy, you will need some insurance to cover your risk. What would that be?

There are other issues as well. Are you short of funds for investment for getting the 80C rebate? Are you heavily in equity investment and need debt exposure to balance? Do you have an investment option which would fetch you the returns to compensate for the loss due to surrender? What is your tax bracket? Is the existing premium miniscule or hefty?

Traditional Plans: Bad Partner, Worse in Divorce

Intermediaries get 30%-40% commission in the first year of selling a traditional plan. The unwritten understanding is that they share a good part of what they pocket with the client. That should not be an incentive to buy a traditional plan, but it shows why insurance companies cannot give a decent surrender value on a traditional plan during the initial years of the policy. On the other hand, this is exactly the reason why intermediaries are willing to share the commission. They know you are stuck with the policy.

The persistency ratio of insurance policies after two years is hardly 60%, i.e., in two years, the premium on 40% policies remain unpaid. In case you are unable to pay premium due to any financial constraint, traditional plans allow revival of policy usually within five years of first unpaid premium by paying arrears of premium together with the interest and possibly a medical test. The revival period for some traditional plans may be between two and five years.

According to Shrigopal Jhunjhunwala, a veteran LIC agent, “Many LIC plans allow decrease in policy term. A policy term of 25 years may be reduced to 17 years by paying premium difference along with interest. If the policyholder does not want to pay differential premium, the SA will be appropriately reduced.” Some private insurance companies do not allow reduction of policy term. The argument is that there is not much demand for such a feature. Why can’t the policy term be extended? This is because the underwriting was done based on the circumstances prevailing at the time of policy issuance.

Let us take the example of an actual policy and see whether the customer benefits by surrendering. LIC’s endowment plan is a decent traditional plan especially if you take a view of 25 years or more. In this example, we assume policy term of 17 years and that a couple of premiums have been paid. If the customer is now contemplating surrender of the policy and foregoing the couple of premiums and starting a fresh investment in PPF (Public Provident Fund) currently offering 8.6%pa returns, is it a right decision?

Look at the risk factor in your plan to be able to compare the two investments. Surrendering your LIC endowment in the example to invest in PPF @8.6%pa does not make sense for a policyholder who is 25 (needs tax-free 8.62%) and is positively illogical for a policyholder aged 42 (needs tax-free 8.53%). Moreover, you can only put maximum of Rs1 lakh per year in PPF and if you already have funds available for it, does it make sense to surrender a traditional policy? Buying a bank FD at 9%pa will not be an option as the post-tax returns will be only 6.3% (assuming you are in the 30% tax bracket).

This is why you have to think twice before surrendering your traditional insurance policy. According to Girish Malik, “If you are stuck with a toxic traditional product which does not give returns in line with other traditional products in the market, you may have to look for exit. Turning your policy into paid-up will make more sense than just surrendering which only helps the insurance company. If you are bent on surrendering the policy, you need to get a quote for surrender value of the insurance policy before actually giving a go-ahead for surrender.”

If you are close to the end of policy term, do whatever it takes to complete the policy term. Many traditional products offer final additional bonus (FAB) as an incentive to stay with the policy. You can also take a loan from your PPF account to pay the premium of insurance policy to help in completing the policy term. There may be instances where you need funds due to some financial constraint or say investing in PPF for 80C tax savings. Most traditional products offer a loan feature wherein 90% of surrender value can be taken as loan. In these cases, you can take a loan to put money in PPF.

How much is the actual GSV?

This will vary with traditional products and insurance companies. In general, if you don’t pay three premiums, you will not get anything back. There are certain exceptions like LIC Shree Policy which will give you the surrender value even after one policy payment. This is an exception and being able to return surrender value at any time also means that the insurance company makes up money somewhere, i.e., higher premium.

As per the Insurance Act 1938, after three premium payments, the GSV works out to 30% of the premiums paid minus first year premium. While the policy document may not talk about partial bonus payment during the time of surrender, possibly because the insurer wants to discourage surrender, internal LIC circulars do mention it for many traditional plans. LIC should publicise it instead of keeping it covert. It is called cash value of any existing vested simple reversionary bonus. This is something the media never talks about probably because it is unaware of it.

According to LIC sources, “Customers do not realise that cash value of bonus (partial bonus) is added in the GSV. It is also considered while coming up with special surrender value (SSV) which is offered in many plans. The customer gets the higher of SSV or GSV. Moreover, the longer you stay with the policy, the higher is the amount of partial bonus added. It means your GSV as well as SSV will start looking better when you stay for a longer period with the policy.”

For example, if a policyholder takes LIC’s endowment plan in January 2009 for 20 years with SA of Rs1 lakh, the premium will be Rs4,881pa. After four premium payments, the policyholder would have paid premium of Rs19,524. In this example, the GSV is Rs7,910, even though, going by the actual policy wording the GSV is only Rs4,392. What explains the difference between Rs7,910 and Rs4,392? It is the cash value of existing vested bonus (partial bonus). The SSV offered by LIC is Rs9,099. Do you still want to take a 50% cut in your investment even after taking SSV and expect to make big profits in new investments?

According to Vijay Sinha, senior vice president and head, marketing of Tata AIG Life Insurance, “The surrender value (referred to as cash surrender value or SSV) is calculated on the basis of paid-up value and accrued bonuses multiplied by the applicable surrender value factor as per plan/product. The longer the customer stays invested in the policy, the greater is the surrender value factor which results in better SSV.”

What are the tax implications of policy surrender?

Tax savings on entry: If you do not pay any additional premium after buying a regular premium policy, not only do you not get any surrender value, you will also have to reverse the Section 80C tax savings you have taken. The amount of deduction allowed under Section 80C in earlier years shall be deemed to be income of the customer and liable to tax in the year of surrender of policy. It will be a double whammy for you. According to 80C rules, tax savings will have to be reversed if you do not keep single premium policy in force for two years after the date of commencement of the policy or regular premium policy premiums are not paid for two years.

Tax savings on exit: On receipt of surrender or paid-up value, you will not have to pay taxes. This is similar to tax treatment of policy on maturity or death of policyholder. As per the existing rule, exemption of taxes on corpus is allowed as long as insurance component of the policy is five times the premium.

Traditional Paid-up: Neither Married nor Divorced

According to Vijay Sinha, “One should only convert one’s traditional life insurance plan into a paid-up one, if one has strong reasons to believe that the originally purchased product is a mismatch for him. The important point is that when the policy is converted to paid-up, your SA has been effectively reduced. It means you have reduced your life insurance protection and you will have to compensate it by buying another life insurance policy. One needs to remember that with increase in age, the risk premium increases and one will have to pay more for the same cover as time passes. Hence paid-up or policy surrender are to be done only as a last resort.”

Many traditional products offer paid-up option in case you want to remain invested after paying three premiums, but do not want to pay future premiums. The paid-up value bears the same ratio to the full SA as the number of premiums actually paid bear to the total number of premiums originally stipulated in the policy. It means that if you pay premium for five years when the policy term is 10 years, the paid-up value is half of the original SA.

The policy so reduced is free from future premium payment, but is not entitled to the future bonuses. The FAB given at the end of the policy term will not be given for paid-up policies. The existing vested reversionary bonuses, if any, remain attached to a paid-up policy. This paid-up value along with the vested reversionary bonuses are payable to the policyholder at the end of the policy term or on death, whichever is earlier. Accident benefit and critical illness riders do not acquire any paid-up value.

Does it really help to turn your policy into paid-up? For example, in the case of LIC’s endowment policy, a policyholder of age 25 years with a policy term of 10 years pays a premium of Rs1,03,032 for sum assured of Rs10 lakh. If the policyholder converts the policy to paid-up after paying five premiums, he would have paid Rs5,15,160. The paid-up value will be half the SA, which is Rs5 lakh. The paid-up value along with bonus declared till converting the policy to paid-up will be paid on death or end of policy term. The total bonus based on current bonus rate (of Rs34 per thousand of SA) is Rs1,70,000. The total paid on death or after completing the policy term of 10 years is Rs6,70,000. The bonus amount will depend on the actual declared rate. The return on premium at the end of 10 years is 3.33%. If you had continued premium payment till the end of policy term, the return on premium would have been 4.73%. Paid-up policy is not the best solution, but better than policy surrender which will amount to financial hara-kiri.

According to Shrigopal Jhunjhunwala, “Why do customers prefer single premium or limited premium payment term of three to five years? This is due to uncertainties in life and especially customers with high-ticket premium are not sure of their capacity to pay premiums regularly over a period of time. People are looking for a back-up plan in case they miss on paying a premium. Most of the LIC’s traditional products do offer the flexibility of revival within five years of first unpaid premium. SSV, turning policy into paid-up, reducing policy term and so on are some of the exit options. A policy can be split into multiple parts (subject to conditions) and you can continue to pay premium for one or more parts and wait for your financial conditions to improve so that you can revive the remaining policy parts. There are options like loan-cum-revival of policy wherein you can avail of loan to help revive your policy by paying arrears.” Every traditional product from LIC and private insurance companies is different. Features offering flexibility of exiting the policy will differ.

Soured Marriage for Old ULIPs

Surrender Charges: Insurance companies had a dream run in mid-2000 with huge revenues from ULIPs surrendered within the three-year lock-in period. Many of these products had hefty surrender charges if you surrendered within the lock-in period. For example, Bajaj Allianz New UnitGain ULIP had surrender charge of first year’s allocated premium, if the regular premium of first three years was unpaid.

Some of them, like ICICI Pru LifeTime Super Pension, gave 96% of the fund value after completion of three years, 98% after four years and 100% after five years. At the other extreme, there are a few old ULIPs, which penalise you almost till the end of policy term. They literally want to squeeze you till end of the policy term. Check what surrender value your policy offers and judge whether it is worth surrendering.

One Moneylife reader had completed three years of premium payment for Bajaj Allianz New UnitGain ULIP and wanted to surrender. He was deterred by surrender charge formula. [1 - (1/1.06)^N ] * first years’ annualised premium (where N is 10 years, less the elapsed policy duration in years and a fraction thereof). The policyholder finally decided to keep the policy for 10 years as there is no surrender charge after 10 years. The insurance regulator found another Bajaj Allianz ULIP (Capital Unit Gain) complicated and not customer-friendly. It asked the insurer to withdraw the product.

Policy Revival: Because old ULIPs paid next to nothing if you surrendered without paying three premiums, these policies are allowed to be revived within two years of non-payment of premium. You may need to undergo a medical test.

Cover Continuance: This is similar to the paid-up concept in a traditional plan, but not exactly the same. It was an excellent feature available in old ULIPs, but was a double-edged sword as it was used for mis-selling—telling customers only to pay for three years. With the charges front-loaded, it makes sense to continue with the policy beyond the mandatory three years to get the benefits of long-term investment and rupee-cost averaging.

Cover continuance does not reduce your sum assured for death benefit, unlike the paid-up concept which proportionately reduces sum assured depending on the number of premiums you paid and the policy term. If you are not satisfied with your old ULIP, you can have a separation without divorcing the policy with cover continuance feature. Under this, if one is not able to pay the premiums any time after the first three years (lock-in period), the policy would not lapse and the life cover continues. The funds invested in equity/debt will continue to remain invested in the policy. The life cover sustains because of the mortality charges that continue to be deducted from your fund value along with other charges as per the policy contract. It ensures that the sum assured is payable in the event of the policyholder’s demise, even if all the premiums have not been paid.

New ULIPs Are Easier To Divorce

Surrender Charges: In new ULIPs, there are no surrender charges after five years. If the policy is surrendered before the lock-in of five years, the surrender charge will depend on the year of surrender as well as premium amount. In the worst-case scenario, if you surrender after paying only one premium, the maximum surrender charge as per IRDA will be Rs3,000 (premium up to Rs25,000) or Rs6,000 (premium above Rs25,000). Some insurers may charge less. LIC Endowment plus (new ULIP) has surrender charge of Rs2,500 (premium up to Rs25,000) and Rs6000 (premium above Rs25,000). The surrendered amount will be returned only after completion of five years of policy, but you will get 4%pa interest.

Policy Revival: The policy wording of LIC Endowment Plus gives details of policy revival which is similar to what other new ULIPs will offer. It says if you fail to pay premiums under the policy within the grace period, a notice shall be sent to you within a period of 15 days from the date of expiry of grace period to exercise one of these options within a period of 30 days: a) revival of the policy, or b) complete withdrawal from the policy. If you do not exercise any option within the stipulated period of 30 days, you will be deemed to have exercised the option of complete withdrawal from the policy. In short, unlike old ULIPs, you do not have the luxury of two years to revive the new ULIP.

Cover Continuance: New ULIPs don’t offer cover continuance. Premium discontinuance after completion of the fifth year (the new lock-in period) will give the policyholder the option to revive a policy within the eligible period. The other option is a complete withdrawal without any risk cover; you will get fund value. Unlike the old ULIPs, where you can stop premium payment after three years and get cover continuance to keep insurance protection and keep the funds invested, the new ULIPs offer poor options if you stop premium payment after five years.

Is the premium payment term (PPT) in new ULIPs similar to cover continuance? The difference is that in the case of new ULIPs that are offering PPT you will have to declare upfront how many years you wish to pay the premium for. The insurer will accept payment only up to the declared PPT, but allow the policy to remain in force till the end of the policy term—as long as premiums till the end of the PPT are paid. The flexibility of cover continuance is offered with PPT in new ULIPs, but the onus is on you to make an informed decision that cannot be changed later. The option to discontinue the policy without any penalty anytime after five years is available for all new ULIPs.

The Clock Is Ticking

Go through the policy document in detail and understand the fine print. If you are unhappy with anything, cancel the policy within the free-look period. The clock starts ticking from the moment you buy life insurance. You will receive your premium net of charges for stamp duty, medical tests (if applicable) and proportionate risk premium charge to cover you for the time until cancellation.

If you have missed the free-look period, complete three premium payments to ensure that you don’t lose everything in traditional plans and in many old ULIPs. New ULIPs carry a cap on surrender charges and you will get your discontinued fund along with 4% interest after five years. After completion of three years, a traditional plan acquires paid-up value and old ULIPs offer cover continuance.

Remember, a traditional plan offers two to five years for policy revival in case you miss premium payment and old ULIP offers two years for the same. Taking a loan against 90% of a traditional policy’s surrender value and reduction of policy term are good options, if you need the money. ULIPs may not offer high loan value, but its flexibility beats a traditional policy. Use the switch option from equity to debt, if you are conservative.

If you have already purchased a non-toxic traditional or ULIP, stay with it; you will benefit from disciplined savings and rupee-cost averaging. If you are looking for pure risk protection, term life insurance is the best option. It does not offer any maturity or surrender benefit and, hence, there is no question of being stuck with the policy. Make the right choice before buying life insurance. The clock is ticking. Insuring one’s life is not optional.

Strange Anomaly

One Moneylife reader wanted to surrender his Aviva Freedom Life Plan (old ULIP) after completing five years. He was asked to pay surrender charges which was contradictory to the benefit illustration in its own policy document. It showed no surrender charges after completing five years. Unbelievably, another page of the same policy document showed surrender charges till 20 years. We unearthed the product brochure which also indicates that they are no surrender charges if five years are completed. How can such a blunder be made by an insurance company and more specifically by IRDA in approving a policy document which has obvious discrepancy? Why did the policy surrender quote given by the insurer levy surrender charges when there is such a blatant discrepancy in its own documentation? After pointing out the discrepancy, Aviva returned all the premiums paid without any deduction or addition to the policyholder. It was like giving interest-free money to the insurer for a period of five years.

Moneylife Survey:37% Feel Stuck with Their Policies

But they have not explored options other than surrender—the reason for this article

Our survey on surrender of life insurance policy indicates that readers are savvy about wanting sufficient term life insurance, but alas they are stuck with a traditional policy or ULIP. Online term plans are inexpensive and, hence, you don’t need to surrender a traditional policy or ULIP to be able to complete your insurance needs. Moneylife’s online survey received responses from 617 readers. Almost 80% of the respondents are paying premiums towards traditional policies while 50% pay for ULIPs. It is in line with the penetration of insurance-cum-savings products which are popular with Indians. The trend of buying a term plan, which will give nothing if you survive, is slowly but surely catching on as awareness of risk protection increases.

Two out of three respondents were aware of policy revival rules in case of missed premium payment. It is surprising that almost one in four does not know about the switch option in ULIPs—to move funds from equity to debt option and vice-versa. Some 37% of the respondents feel they are stuck with life insurance policy and want an exit. This should not happen if a life insurance product is purchased with the right intention of disciplined savings and awareness of returns a product can yield. Unfortunately, the grass is always greener on the other side and the urge to exit can be wrong but overwhelming.

The top three reasons for traditional policy surrender are: low bonus or benefits, wanting to get proper insurance through term life and better investment options. Online term life insurance is affordable; hence, do you really need to surrender your policy? The top three reasons for ULIP surrender are: poor fund performance, high charges and wrong selling by agents. Old ULIPs were front-loaded with charges. The new ULIPs spread the charges over the years. In effect, the total charge over five years or more is almost the same and does not really reduce. Mis-selling by agents with big promises was prevalent in old ULIPs and we hope it has reduced with customer awareness and reduced upfront incentives for agent to push ULIPs. Well, agents can push traditional products to generate high commission and they surely do it.

Almost 30% of respondents have already surrendered life insurance policy and, of those who surrendered, 28% did not analyse alternate investment options. It shows that surrender decision is often whimsical and without any sound logic. As much as 57% of the respondents are aware of the surrender value of a traditional policy while almost 50% are aware of surrender charges of old/new ULIPs, which is encouraging. Of those for whom policy surrender was applicable, more than 50% had not considered the paid-up option for traditional policies, cover continuance for old ULIPs as well as the loan feature for their immediate financial needs. This is not surprising as life insurance policyholders are unaware of the options they have. Our Cover Story will help these investors.

Article from Money Life