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Standard & Poor's Indices Versus Active Funds Scorecard, Midyear 2009

2009-08-27T13:09:00.001-04:00

Standard & Poor's Indices Versus Active Funds Scorecard, Midyear 2009

Abstract:
The S&P Indices Versus Active Funds (SPIVA) Scorecard reports performance comparisons corrected for survivorship bias, shows equal- and assetweighted peer averages, and provides measures of style consistency for actively managed U.S. equity, international equity, and fixed income mutual funds. The CRSP Survivor-Bias-Free U.S. Mutual Fund Database provides the underlying data. To accommodate CRSP release schedules, SPIVA is now published semi-annually with a 6 to 8 week lag. As a result of the market volatility over the past year, domestic and international equity funds have performed in line or marginally ahead of benchmarks. However, both taxable and tax exempt fixed income funds’ assetweighted returns trail benchmarks by large margins. The latest five-year SPIVA data for equity funds can be interpreted favorably by proponents of both active and passive management. Passive management believers can point out that indices have outperformed a majority of active managers across all major domestic and international equity categories, with real estate being the lone exception. Proponents of active management can point to asset-weighted averages suggesting a more level playing field, with active managers level or ahead of benchmarks in most categories, with the exception of midcaps and emerging markets. The five-year data is unequivocal for fixed income funds. Across all categories except emerging market debt, more than three-fourths of active managers have failed to beat fixed income benchmarks. Similarly, five-year assetweighted average returns are lower for active funds in all but two categories. The turmoil of the past year saw 9% of domestic equity funds, 5% of international equity funds and 6% of fixed income funds merge or liquidate.

Standard & Poor's, Index and Portfolio Services, ,Standard & Poor's Indices Versus Active Funds Scorecard, Midyear 2009(August 27, 2009). Available at SSRN: http://ssrn.com/abstract=1462712

Who Should Save in a Roth 401(K)? (It’s Not Just About Tax Rates)

2009-07-22T14:01:00.002-04:00

Hu, Wei-Yin, Who Should Save in a Roth 401(K)? (It’s Not Just About Tax Rates) (May 27, 2009). Available at SSRN: http://ssrn.com/abstract=1410821

Abstract:
The advent of the Roth 401(k) significantly expanded opportunities for tax-preferred retirement saving, but at the same time it created much confusion for individual savers regarding whether to save in the form of pre-tax or Roth dollars. The financial community’s conventional wisdom is based on comparing current and future tax rates. We show how relying solely on the conventional wisdom can be wrong. We first show that comparing different saving strategies requires making an apples-to-apples comparison, which can be achieved by keeping take-home pay constant. An individual currently saving pre-tax can maintain the same take-home pay by switching to a lower amount of Roth saving. However, some important rules imposed by either 401(k) plans or the IRS encourage “tax illusion” by treating pre-tax and Roth dollars as if they were equivalent. First, moderate savers need to take care to understand how switching to Roth saving could lose them free money through employer matching contributions. Second, the IRS limit on annual 401(k) contributions means that aggressive savers who save Roth dollars can save more in a tax-advantaged way than those who save pre-tax dollars. For both of these groups, the conventional wisdom can be completely reversed under fairly normal circumstances

The Microstructure of a U.S. Treasury ECN: The Brokertec Platform

2009-07-19T13:58:00.002-04:00

Fleming, Michael J. and Mizrach, Bruce, The Microstructure of a U.S. Treasury ECN: The Brokertec Platform (July 13, 2009). Available at SSRN: http://ssrn.com/abstract=1433488

Abstract:
This paper assesses the microstructure of the U.S. Treasury securities market using tick data from the BrokerTec electronic trading platform. We examine trading activity, bid-ask spreads, and depth for the on-the-run 2-, 3-, 5-, 10- and 30-year securities and find that liquidity is markedly greater than that reported by earlier studies using data from GovPX. We analyze the price impact of trades and find that the effects are overstated if order book changes are ignored, and that order book changes affect prices by themselves. We also explore a novel feature of this platform, the ability to enter 'iceberg' orders, and find that such orders are more common when price volatility is higher, as'predicted by theory.

The Case for Tips: An Examination of the Costs and Benefits

2009-07-17T14:08:00.005-04:00

Dudley, William, Roush, Jennifer E. and Steinberg, Michelle, The Case for Tips: An Examination of the Costs and Benefits (July 1, 2009). Economic Policy Review, Vol. 15, No. 1, July 2009. Available at SSRN: http://ssrn.com/abstract=1434111

Abstract:
Slightly more than a decade has passed since the introduction of the Treasury Inflation-Protected Securities (TIPS) program, through which the U.S. Treasury Department issues inflation-indexed debt. Several studies have suggested that the program has been a financial disappointment for the Treasury and by extension U.S. taxpayers. Relying on ex post analysis, the studies argue that a more cost effective strategy remains the issuance of nominal Treasury securities. This article proposes that evaluations of the TIPS program be more comprehensive, and instead focus on the ex ante costs of TIPS issuance compared with nominal Treasury issuance. The authors contend that ex ante analysis is a more effective way to assess the costs of TIPS over the long run. Furthermore, relative cost calculations, whether ex post or ex ante, are just one aspect of a comprehensive analysis of the costs and benefits of the TIPS program. TIPS issuance provides other benefits that should be taken into account when evaluating the program, especially when TIPS are only marginally more expensive or about as expensive to issue as nominal Treasury securities.

Standard & Poor's Indices Versus Active Funds Scorecard, Mid Year 2008

2008-11-14T10:24:00.003-05:00

Standard & Poor's Indices Versus Active Funds Scorecard, Mid Year 2008

􀂉 The S&P Indices Versus Active Funds (SPIVA) Scorecard report performance comparisons corrected for survivorship bias, shows equal- and asset-weighted peer averages, and provides measures of style consistency covering actively managed U.S. equity, international equity and fixed income mutual funds.
􀂉 Starting with this report, we reintroduce an enhanced SPIVA with broader asset class coverage. Data for enhanced SPIVA is from the CRSP Survivor-Bias-Free U.S. Mutual Fund Database. To accommodate CRSP release schedules, the new SPIVA will be published semi-annually with a fourteen week lag.
􀂉 Over five years ending June 2008, S&P 500 outperformed 68.6% of actively managed large cap funds, S&P MidCap 400 outperformed 75.9% of mid cap funds and S&P SmallCap 600 outperformed 77.8% of small cap funds.
􀂉 Among global equity funds, five-year results show S&P Global 1200 outperforming 70.1% of global equity funds, S&P 700 outperforming 86.5% of international equity funds, and S&P IFCI
Composite outperforming 73.9% of emerging market funds.
􀂉 Among fixed income funds, indices outperformed twelve of thirteen categories over a five-year horizon. Only emerging market bond funds outperformed their benchmark index.
􀂉 Funds disappear at a meaningful rate. Over five years, 26.8% of U.S. equity funds, 22.5% of global equity funds and 24.7% of fixed income funds have been merged or liquidated. This highlights the importance of addressing survivorship bias in mutual fund analysis.

ARE RETIREMENT SAVINGS TOO EXPOSED TO MARKET RISK?

2008-10-24T03:08:00.005-04:00

ARE RETIREMENT SAVINGS TOO EXPOSED TO MARKET RISK?

by Alicia H. Munnell and Dan Muldoon

IB#8-16

Introduction

The stock market, as measured by the broad-based Wilshire 5000, declined by 42 percent between its peak in October 9, 2007 and October 9, 2008. Over that one-year period, the value of equities in pension plans and household portfolios fell by $7.4 trillion. Of that $7.4 trillion decline, $2.0 trillion occurred in 401(k)s and Individual Retirement Accounts (IRAs), $1.9 trillion in public and private defined benefit plans, and $3.6 trillion in household non-pension assets.
This brief documents where the declines occurred. This information is interesting and important in its own right. But the declines also highlight the fragility of our emerging pension arrangements. Today the declines were divided equally between defined benefit and defined contribution plans, but in the future individuals will bear the full brunt of market turmoil as the shift to 401(k)s continues. Much of the reform discussion regarding private sector employer-sponsored pensions has focused on extending coverage. But the current financial tsunami also underlines the need to construct arrangements where the full market risk does not fall on pension participants.

The Hewitt 401(k) Index™ Observations

2008-10-24T03:02:00.002-04:00

The Hewitt 401(k) Index™ Observations

Amid the market turmoil, 401(k) participant activity was high and transfers were significant out of equities during September, according to the results of the Hewitt 401(k) Index™. A total of $921 million moved out of equities and into fixed income investments during the month. The directions of the transfers were fixed income oriented during 76% of the total days, and nearly all of the days in the second half of the month.

While activity was relatively high, the vast majority of 401(k) participants stayed calm. The overall transfer activity level in September was only slightly higher than the average transfers of the trailing 12 months — 0.06% of balances were transferred on a net daily basis in September versus 0.05% of balances transferred during the past year.

Five days of the month had above normal* level of transfers, with four out of the five days showing up in the latter half of the month. All four days were strongly fixed income oriented and followed significant market drops. On September 16th, the day following the news of the collapse of Lehman Brothers and the credit-rating downgrade of AIG, the index transfer activity was nearly three times as high as the usual level — with 0.13% of balances transferred. On September 29th, the financial rescue plan was defeated on Capitol Hill and the markets broadly dropped, and participant transfers were 2 to 3 times the normal levels on the following two days.

The three fixed income asset classes received nearly the entire inflows (96%) in September. Approximately $733 million moved into GIC/stable value funds, representing 68% of the net transfers in September. Bond and money market funds also received $178 million (16% of net transfers) and $133 million (12% of net transfers), respectively.

As the MSCI EAFE Index declined over 14% in September, international funds experienced the largest outflows, with nearly $330 million transferring out of this asset class. Large U.S. equities also experienced $234 million in outflows, followed by lifestyle funds ($141 million) and balanced funds ($137 million).

For the third quarter, a total of $1.9 billion moved from equities to fixed income investments, mainly from international funds ($700 million) and U.S. equities ($478 million) into stable value funds ($1.7 billion).

Due to both participant transfers and market decline, participants' overall equity exposure has dropped to its lowest level since April 2003, at 58.8%. It was down by 3.7% for the quarter.

Employee equity contributions (participant discretionary contribution) also declined 2.9% during the quarter to 62.4% by the end of September.

*A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A "high" relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

The Impact of PPA on Retirement Savings for 401(k)Participants

2008-07-09T00:07:00.003-04:00

The Impact of PPA on Retirement Savings for 401(k)Participants

By Jack VanDerhei and Craig Copeland, EBRI

• Modeling of auto-enrollment results: This Issue Brief simulates (under several assumptions) the likely impact of 401(k) plan sponsors switching from voluntary enrollment systems to automatic enrollment designs with automatic escalation of contributions for a significant portion of workers (not just current 401(k) participants or those eligible to participate).
• PPA implemented a concept long studied: The concept of auto-enrollment has been studied since the mid-1990s. Support for the concept grew as various studies showed relatively low participation rates among young and low-income workers, and as more defined benefit plan sponsors began freezing their plans for future (and sometimes current) employees. The Pension Protection Act of 2006 (PPA) created incentives for plan sponsors to implement this concept with its 401(k) safe-harbor auto-enrollment and auto-escalation provisions.
• Significant impact, especially for low-income: This analysis indicates that even under the most
conservative assumptions for auto-escalation of contributions, switching 401(k) plans to auto-enrollment is likely to have a very significant positive impact in generating additional retirement savings for many workers, especially for low-income workers.
• Range of increases under auto-enrollment: When results are aggregated across all income categories, the increase in the value of 401(k) accumulations at age 65 as a multiple of final earnings for those currently ages 25–29 would be approximately 2.4 to 2.6 times final salary by switching from voluntary enrollment to automatic enrollment.
• Higher-paid unlikely to benefit as much: Although the aggregate results favor automatic enrollment, distributional analysis of the differences between the two systems indicates that the higher paid are not likely to benefit as much from such a change.
• Lowest-paid likely to see significantly higher 401(k) accumulations: The median 401(k) accumulations for the lowest-income quartile of these workers (assuming all 401(k) plans were voluntary enrollment) would only be 0.1 times final earnings at age 65 (this is largely due to the fact that 41 percent of workers—as opposed to participants—were assumed to have zero balances at age 65). However, if all 401(k) plans are assumed to be using the auto-enrollment provisions under PPA, the median 401(k) accumulations for the lowest-income quartile jumps to 2.5 times final earnings under the most conservative assumptions and 4.5 times final earnings under the most beneficial assumptions. Even for the top 25 percent of these workers (when ranked by 401(k) accumulations as a multiple of final earnings), there are large increases: the multiple under a voluntary enrollment scenario is 1.8 times final earnings, whereas auto-enrollment provides multiples ranging from 6.5 to 10.4, depending on auto escalation of contributions.
• For many, higher assets from auto-enrollment will still not be enough: Comparing income replacement targets generated in previous EBRI work with these simulated 401(k) accumulations shows that, even with the large increases that can be expected for many workers under the safe harbor auto-enrollment plans introduced by PPA, and with current-law Social Security benefits, additional resources will still be needed for some of them.

ICI: 2008 Investment Company Factbook

2008-06-19T11:46:00.002-04:00

ICI 2008 Investment Company Factbook

The 2008 Investment Company Fact Book provides an entry point to our extensive body of research and statistics on retirement savings, as well as statistics on, and analysis of, all types of registered investment companies and their investors, collectively referred to as funds and fund investors.

Iboxx Rebalancing Report: June

2008-06-19T01:55:00.003-04:00

Iboxx Rebalancing Report: June

Asia
Euro
Euro High Yield
Inflation-Linked
Sterling
U.S. Dollar

Iboxx Rebalancing Reports:May

2008-05-19T02:04:00.001-04:00

Iboxx Rebalancing Reports: May

Contents

Asia
Euro
Euro High Yield
Inflation-Linked
Sterling
U.S. Dollar

The Hewitt 401(k) Index™ Observations

2008-04-28T00:09:00.002-04:00

The Hewitt 401(k) Index™ Observations (March)
401(k) participant transfers remained fixed income oriented in the month of March, according to the results of the Hewitt 401(k) Index™. Participants moved assets from equities to fixed income investments during 80% of the days. As a result, a total of $864 million shifted out of equities throughout the month.

In fact, during the first quarter of 2008, participants transferred $2.8 billion from equities to fixed income investments on a net basis, which is the largest quarterly equity outflow during the history of the Hewitt 401(k) Index.

In March, fixed income asset classes received nearly 100% of the net transfers. GIC/stable value funds received approximately two-thirds of the inflows, with $608 million moving into this asset class. Bond and money market funds split the rest of the inflows. GIC/stable value funds have been the biggest winner during the past three months, with $1.7 billion flew into these funds, which led to a 2.5% increase in overall allocation in this asset class.

On the other hand, large U.S. equity had $277 million transferring out in March. During the first quarter of 2008, this asset class lost $879 million in net transfers. The asset allocation in large U.S. equity declined from 20.6% at the end of December 2007 to 18.8% at the end of the first quarter of 2008.

As the performance of international funds lagged behind recently, we saw significant amount ($193 million) transferring out of these funds in March. A total of $756 million moved out of international equity during the quarter.

In March, the overall transfer activity level was slightly above the 12 month trailing average — 0.05% of balances were transferred on a daily basis. Five days of the month experienced above normal* transfer activity.

During the first quarter of 2008, employee discretionary equity contribution went down slightly each month. By the end of March, 66.7% of discretionary contributions were made to equities compared to 68.4% at the end of 2007.

We observed a much larger declined in total equity allocation versus participant contribution during the first quarter of 2008, due to market weakness and participant transfers. Participant overall allocation to equities went down 3.8% by the end of March.

*A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A "high" relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

Iboxx Rebalancing Report (April 2008)

2008-04-02T05:15:00.002-04:00

Iboxx Rebalancing Report (April 2008)

Asia
Euro
Euro High Yield
Inflation-Linked
Sterling
U.S. Dollar

Should the SEC Rid Mutual Fund Investors of 12b-1 Fees?

2008-04-02T05:01:00.001-04:00

Should the SEC Rid Mutual Fund Investors of 12b-1 Fees?

Haslem, John A., (March 31, 2008).

Abstract:
The stated and objective empirical findings in this study (and others) are generally consistent. There is no evidence that mutual fund shareholders benefit from Rule 12b-1 plans, which provide a serious conflict of interest.

The promise that 12b-1 fees would be used to increase mutual fund assets and thereby lower fund shareholder expenses appears to have been a cynical industry effort to gain SEC approval, while the intended beneficiary was (and is) fund management - and what a bonanza it has been.

The opportunity to prohibit 12b-1 fees, as both abusive and costly conflicts of interest to mutual fund shareholders, will never be better than now. The major question is not so much whether Chairman Cox is determined to prohibit or drastically change 12b-1 fees for the better, but, rather, if he will be able to prevail over the opposition of the industry's supporters in Washington.

The Subprime Credit Crisis of 07

2008-03-26T11:35:00.004-04:00

The Subprime Credit Crisis of 07

Crouhy, Michel and Turnbull, Stuart M., (March 5, 2008).

Abstract:

This paper examines the different factors that have contributed to the subprime mortgage credit crisis: the search for yield enhancement, agency problems, lax underwriting standards, failure by the rating agencies to identify a changing environment, poor risk management by financial institutions, lack of transparency, the limitation of extant valuation models and the failure of regulators to understand the implications of the changing environment for the financial system. The paper addresses the different issues and offers suggestions on how to move forward.

Preferred Stock: Some Insights into Capital Structure

2008-03-26T11:07:00.001-04:00

Preferred Stock: Some Insights into Capital Structure

Liu, Crocker H., Kallberg, Jarl G. and Villupuram, Sriram V., (March 18, 2008).

Abstract:

Capital structure theory and empirical analysis has focused almost exclusively on the choice between debt and equity. Preferred stock has received relatively little attention, in contrast, even though this market, in the U.S., represented $868 billion in new capital during the period 1999 to 2005. This empirical study focuses on the reactions of equity holders through an event study analysis and of debt holders through a default spread analysis to the announcement of 427 preferred issues. We find that the equity abnormal announcement returns are positive for straight preferred stock announcements, when they are combined with convertible preferred announcements, the equity abnormal returns are -0.65%, which is much closer to zero than to the magnitude of SEO announcements; furthermore, these returns are higher for firms with greater earnings potential and lower financial distress risk. We also find that credit default swap spreads decrease upon announcement of a preferred issue. These results are consistent with the hypothesis that equity holders interpret the preferred issue, on average, as debt, since the magnitude of the usual negative reaction to seasoned equity issuance is not found and bondholders interpret the preferred issue as equity, since the issuance does not increase the firm‘s default risk.

The Shareholder Base and Payout Policy

2008-03-26T10:51:00.004-04:00

The Shareholder Base and Payout Policy

Bodnaruk, Andriy and Östberg, Per, (February 2007)

Abstract:

Merton's (1987) investor recognition hypothesis implies that there should be a negative relationship between the size of the firm's shareholder base and its cost of capital. Consistent with this, we find that firms with smaller shareholder bases payout less of their net income, have higher cash holdings and lower capital expenditures. Additionally, Merton predicts that a reduction in the shareholder base has a higher price impact on firms with small shareholder bases. We find that firms with small shareholder bases are less likely to undertake a repurchase (reduce the shareholder base) and repurchase a lower fraction of shares outstanding.

The Cost of Active Investing

2008-03-18T04:53:00.001-04:00

The Cost of Active Investing

French, Kenneth R., (March 13, 2008)

Abstract:
How much do investors spend trying to beat the market? I compare the fees, expenses, and trading costs paid to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. If the expected real return on U.S. equity is roughly 6.7% and we assume these costs will not continue to grow with the market, society's capitalized cost of price discovery is about 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio

Normative Transparency of Mutual Fund Disclosure

2008-03-14T04:14:00.001-04:00

Normative Transparency of Mutual Fund Disclosure

Haslem, John A., (2008)

Abstract:

The Investment Company Act of 1940 states that the interests of shareholders are compromised when mutual funds are operated in the interest of fund managers. In this regard, one of the Act's major objectives is to ensure investors receive adequate and accurate information. For this reason, Congress, the SEC. individual funds, and the fund industry must focus on the goal of requiring and attaining normative transparency of disclosure. Normative transparency of disclosure is defined as the degree of mutual fund voluntary and proactive disclosure and also new and revised legal and regulatory disclosure required for shareholders to be able to make information efficient fund investment decisions. The attainment of normative transparency of disclosure requires major changes and prohibitions in current fund practices, laws, and regulation that are inconsistent with or contrary to this goal.

If Congress and the SEC were to enact and require, respectively, laws and regulations requiring normative transparency of disclosure, these mandates would be all that should be required. While additional laws and regulatory disclosure are likely to be forthcoming, it is most unlikely that the political process will achieve normative transparency. However, the political obstacles are much more likely to be overcome if individual mutual funds and funds collectively work vigorously and proactively in cooperation with Congress and the SEC.

Thus, the achievement of normative transparency of disclosure requires mutual fund managers and independent directors to work vigorously, proactively, and collectively to achieve this goal. However, it is also highly unlikely that these efforts will be collectively optimized as normatively transparent. Further, what is normative transparency of disclosure today will evolve over time as individual fund, fund industry, shareholder, and legal and regulatory conditions change. Thus, there is need to continually benchmark normative transparency in order to maintain normative and improve fund disclosure.

The goal of normative transparency disclosure at the fund level requires stated prohibition of inappropriate fund and fund industry practices and actions, including those permitted by regulations, such as 12b-1 fees, soft dollars, and revenue sharing. Further, it requires supplementary disclosure of those regulations that currently provide incorrect accounting, incomplete, missing, misleading and perfunctory disclosure.

To attain normative transparency of disclosure, mutual fund managers and independent directors must begin by voluntarily and collectively becoming vigorously proactive in serving and protecting shareholders. But, the initial move towards this goal, pending action by Congress, the SEC, fund managers and the fund industry, rests with proactively motivated independent directors empowered to pursue vigorously their fiduciary mandate of shareholder "watchdogs."

The Hewitt 401(k) Index™ Observations (February)

2008-03-13T10:47:00.002-04:00

The Hewitt 401(k) Index™ Observations (February)
In February, the weak stock market again led 401(k) participants to move balances away from stock investments and into fixed income funds, according to the results of the Hewitt 401(k) Index™.

401(k) participant net transfers were fixed income oriented during 70% of the days in February. However, overall participant activity slowed down significantly as compared to January. Only 0.04% of plan balances transferred on a daily basis in February, which was in line with the twelve month trailing average, and much lower than the 0.09% daily transfer experienced during January 2008. For the entire month of February, transfer activity was above normal* level on merely two days.

By month end, nearly $219 million in balances transferred out of equities and into fixed income investments on a net basis. Approximately 80% of the net transfers flowed into GIC/stable value funds.

Interestingly, lifestyle funds received the second largest net inflow of $46 million. During times of significant market volatility, these pre-diversified funds may help to protect participants' assets against large swings.

Similar to January, large U.S. equity funds took the biggest hit as a total of $80 million transferred out on a net basis during the course of February. However, the activity was much less significant than the $521 million net outflows experienced in January. International funds, which attracted nearly $1.2 billion in 2007, also experienced net outflows of $74 million in February, following its substantial January outflows of $489 million. Company stock funds had $68 million transferring out in February.

Participants' discretionary equity contribution, another measurement of participant sentiment, went down by 0.8% to 67.0% by the end of February.

As for participants total equity allocation, it also declined slightly to 64.0%, which was the result of both market weakness and participant transfers. This is now back to nearly the same level as experienced in July 2004.

*A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A "high" relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months

What Do We Know About the Universe of State and Local Plans

2008-03-06T23:43:00.001-05:00

What Do We Know About the Universe of State and Local Plans

by Alicia H. Munnell, Kelly Haverstick, Mauricio Soto, and Jean-Pierre Aubry SLP#4

Introduction

Several surveys report data on public pension plans, but they tend to focus on the 120 major state systems and some include a sampling of locally administered plans. The Census of Governments is the only source that reports on the entire universe of state administered plans, in addition to more than 2,000 locally administered plans. This brief describes that population, reports on the investment performance of different types of public plans, and compares the investment performance of public and private plans.

Iboxx Rebalancing Reports: March 2008

2008-03-06T23:37:00.002-05:00

Iboxx Rebalancing Reports: March 2008

Asia
Euro
Euro High Yield
Inflation-Linked
Sterling
U.S. Dollar

Evaluating and implementing target-date portfolios: Four key considerations

2008-03-06T23:31:00.002-05:00

Evaluating and implementing target-date portfolios: Four key considerations

Michael Hess
John Ameriks, Ph.D.
Scott J. Donaldson, CFA, CFP
Vanguard Investment Research & Counseling

The recent growth in popularity of target date funds (TDFs) has led to greater product differentiation and complexity. Target date offerings are becoming more specialized and vary significantly in terms of investment methodology and portfolio construction.

This new Vanguard® white paper provides a road map for plan sponsors in selecting the best target date products for their participants. Authored by Vanguard Investment Counseling & Research, this paper identifies and explores four key considerations for plan sponsors when evaluating and implementing TDFs:

The right asset allocation glide path for plan participants.
The pros and cons of indexing versus active management.
The choice between packaged and customized solutions.
The impact of TDFs on participant portfolios and adoption rates.

Removing the Long-Only Constraint:he Appeal and Challenges of Implementing 130/30 and Other Long-Short Strategies

2008-03-06T23:21:00.003-05:00

Removing the Long-Only Constraint: The Appeal and Challenges of Implementing 130/30 and Other Long-Short Strategies

Christopher B. Philips, CFA
Francis M. Kinniry Jr., CFA
Vanguard Investment Research & Counseling

Executive summary. Since the 1990s, the investment management industry has witnessed unprecedented change in the portfolio management process. Technological and computing advancements, increases in the number and quality of competitors, lower leverage costs, innovations in financial engineering, and changes in regulatory structures have led portfolio managers to implement new processes for trading, security and strategy analysis, and implementation. As a result, quantitative investment strategies have taken off, fueled by the ability to screen, manage, sort, and evaluate thousands of securities at previously unavailable frequencies. The combination of widely available technology and seemingly limitless investment strategies has not only given rise to quantitative investing, but has also naturally led to an expansion of the traditional long-only portfolio to include shorting, leverage, derivatives, and alpha porting. For many investors, these new strategies are most often recognized as one of a range of new products including, but not limited to, market-neutral, 130/30 (or 120/20, 150/50, etc.), and long-short funds.

In this paper, we explore the rationale behind moving from a traditional long-only active quantitative portfolio to a similar strategy that permits short selling1 and leverage. We also explore the challenges associated with such a strategy, including the risks, costs, and implementation hurdles. We conclude that:
• Removing the long-only constraint theoretically permits managers to apply information more symmetrically and efficiently.
• The decision to remove the long-only constraint is grounded in the expectation that a given manager will consistently produce excess returns, net of cost.
• Because of the higher costs and implementation risks associated with short selling and leverage, diligent risk control is necessary, and even then long-only managers may still outperform unconstrained managers.

Economics Approach to Financial Planning

2008-02-29T18:51:00.004-05:00

Economics’ Approach to Financial Planning
by Laurence J. Kotlikoff, Ph.D., FPA Journal, March 2008

Executive Summary

Economists long have shown that when it comes to consuming lifetime economic resources, households seek to neither splurge nor hoard, but rather to achieve a smooth living standard over time. Consumption smoothing not only underlies the economics approach to spending and saving, it is central to the field’s analysis of insurance decisions and portfolio choice.
Smoothing a household's living standard requires using a sophisticated mathematical technique called dynamic programming to solve a number of difficult and interconnected problems. Advances in dynamic programming coupled with today's computers are permitting economists to move from describing financial problems to prescribing financial solutions.
Conventional planning’s targeted liability approach has some surface similarities to consumption smoothing. But the method used to find retirement- and survivor-spending targets is virtually guaranteed to disrupt, rather than smooth, a household’s living standard as it ages. Moreover, even very small targeting mistakes will suffice to produce major consumption disruption for the simple reason that the wrong targets are being set for all years of retirement and potential survivorship.
But with this economics approach, planners can not only smooth their clients’ living standards, but also raise them. For example, they can determine precisely by how much living standards will rise if their clients wait to take Social Security, contribute more to a retirement account, choose job A over job B, or invest in more education—or how much their living standards will decline if they retire early, have another child, buy a cabin cruiser, or make regular gifts to their kids.
Finally, the economics-based living standard risk/reward diagram will replace the conventional mean-variance diagram as the standard framework for seeing the potential pain and pleasure from risky investing. In focusing on what can happen to a household’s living standard as opposed to what can happen simply to its financial assets, the new diagram incorporates the risk of other economic resources such as labor earnings and Social Security benefits.