Departing Goldman Sachs Employee Has His Jerry Maguire Moment

Folks were greeted this morning to a Goldman Sachs banker's op-ed piece published in the New York Times. While there are many kamikaze-like departures where an employee will suddenly hit his former company with a scathing critique of their business practice, this one was different. It came from Goldman Sachs, a firm with an almost cult-like atmosphere amongst its employees. An aura where the pride is just as strong being called alumni, as it would be to be called an employee. Secondly, the social media dimension was unique. It hit my Facebook Newsfeed and Twitter from sources not in the habit of posting happenings in the financial industry.

The focal point of the piece was that Goldman Sachs does not care about their clients but making as much money as possible for themselves. Honestly, this was hardly a revelation to many folks following the firm. He goes on to say that the firm is damned, if it does not start to do so. I am not entirely certain of that. As long as Goldman Sachs plays the role as market maker and continues to be on the forefront of financial innovation, there will be institutional investors clamouring to invest in their products. As long as Goldman Sachs plays the role they do in the financial markets...As long as it is their game, the clients will be there. People like to liken the financial markets to a casino. Well, croupiers and casino management do not have their patrons best interest at heart. Their priority is to make money. And the best of people clamour into the casinos despite the odds of winning constantly being against them. They love the game, and it's the best place to play.

As an institutional investor, if you want to "play," your interests not being a priority is a sacrifice you will have to make. Goldman Sachs is a leader in financial innovation. For example, Jim O'Neill, chief economist of Goldman Sachs Asset Management, came up with BRICs as we know it today. He pegged Brazil, Russia, India and China as the emerging markets of the future and Goldman Sachs created investment products that combined the markets of those four countries. Today, the BRICs as an investment is a portfolio decision that needs to be made by all investors. However, a decade ago, the Goldman Sachs clients that had been around then would have been the first to invest in this asset class and could have been paid off handsomely for it. Would a client take their business elsewhere with the risk of taking away such a potential edge? I think not.

Am I defending Goldman Sachs? Hardly. But, Greg Smith's Jerry Maguire moment was directed at the plight of institutional investors. The money managers of sovereign wealth funds, hedge funds and pensions have been educated and attuned to the contradictions of the industry they work in. Relatively speaking, they have it better than retail investors...the average joes of the world, who are not as qualified. Perhaps we should start there.

All that being said, my hat goes out to him for putting himself out there.

'Z'

Useful LinkedIn Poll...

Steadyhand Investment Fund's Chris Stephenson recently concluded a poll on LinkedIn. The question:

What is your biggest challenge regarding your finances?

a) Cash Flow - Saving Vs. Spending

b) Managing Debt

c) Choosing the right product/service

d) Finding a trustworthy advisor

"Cash Flow - Saving Vs. Spending" won with 58% of the vote, although I thought it would be much higher. Regardless, I thought I would share my vote and subsequent comment on the page:

Saving Vs. Spending. Figuring out your balance goes as much as to figuring out you and who you are. What is your relationship with money? Everything else regarding personal finance can honestly be figured out. With this, Spending Vs. Saving becomes the age old question of "Who am I?" Are you that generous friend who picks up the check for dinner? Does that become your image and then you feel you always have to? Or are you that cheapskate who can only buy a birthday card on a loved one's birthday? Does saving involve sacrifice? Such a well-educated and hard working society, do we feel we deserve to sacrifice?

Or is out of the easiness of being able to take on so much debt that the blame should rest on the financial institutions or on our governments for allowing it to happen? Yes, one can legitimately make these points and pray they bail us out should we require it because how could they allow this to happen? That being said, if we can figure out ways to save, at the end of they day, we will come out on top.

Honestly, I think not only is it the greatest challenge regarding our finances but the greatest challenge for our age. As our world sees some of the biggest economic issues to erupt in a generation, it all comes down to the fact that the developed world has to save more, be less dependent on credit and spend less. And, yes, hopefully, the middle class will emerge in the emerging markets and pick up the slack...(not through racking up debt!)...

A Hilarious Animated Take On The Federal Reserve: Xtranormal (VIDEO)

To be perfectly honest, I don't feel really qualified to explain how Quantitative Easing will help employment. I'm not sure that it will exactly. Of course as you know, the idea behind QE is to drive long term interest rates down and raise the price of bonds to drive investors back into equities (by making bonds more expensive, it will yield less compelling folks to invest in stocks to have a chance for a decent return). It's a play on behavior and it's a risk.



I have no academic source to cite but that seems to be happening with both the bond market and the equity market (they have been climbing). Retail investors are climbing back in, and with folks investing again and with businesses better able to raise capital...



You're right...How is this serving the end game of getting people back to work? Getting businesses hiring again? Listen, I'm not certain that QE is the solution or is being sold as such...Bernanke embarked on an even more intense QE round beginning in early 2009 and we've seen where employment has been during that time.



All I'm responding to is the populist backlash against a legitimate idea (which may fail) by competent people with good intentions.



Discourse is really bashing this measure (and perhaps rightfully so), but it'd be great to see a couple more pundits speaking of its merits. What if this does bring confidence back?
About Ben Bernanke
Read the Article at HuffingtonPost

A Hilarious Animated Take On The Federal Reserve: Xtranormal (VIDEO)

Alright, that's pretty hysterical, but I must say with so much QE and extraordinarily low interest rates, inflation should be significantly higher than it is right now. The economy is broken.



More shockingly, folks seem to be leaving fixed income and being driven back into equities (the purpose of QE that nobody, including Bernanke, was certain would happen).



The subjective 'maybe' of confidence returning seems to be happening (yes, for all the criticizing, QE is working), and very well might if this sovereign debt crisis in the PIIGS and potential currency war doesn't serve to be leading reasons for bringing the pessimism back.



We're only in the first month. There's still a lot left to be seen, but hey, Bernanke might just deserve some credit. As I have been, I still am pessimistic, but I'm shocked he and company [Treasury and the rest of the Fed] have gotten this far. Folks have forgotten the armaggeddon mentality that was present just 2 years ago September.
Read the Article at HuffingtonPost

Barton Biggs the Hedgehogger Part 2 -- The Pulse of the Markets Before the Credit Crisis of 2008

Why was Hedgehogging on my reading list in the first place?

While the common reason to pick up this book would probably be Biggs being a longtime hedge fund manager, it was also really when the book was published that caught my eye: Although published in 2006, most of it seemed to have been written in the summer of 2005, three years prior to the infamous Credit Crisis of 2008. While much will be made of the rumblings that were taking place in the summer of 2007 and perhaps a little earlier, the year 2005 was a year rife with the fingerprints of a bull market in the eyes of a lot of folks (including the forecast of Biggs himself).

The value of reading a candid book by a hedge fund industry insider (probably the least transparent area of the investment industry) really brought a sense to the tone of the world at that time. Although Biggs himself was bullish, he did cast doubt on that sentiment. In particular, talking about the housing bubble and conceding the trillion dollar point on derivatives, stating “…it is true that derivatives, which are designed to mitigate specific risks, at the same time may actually be increasing systematic risk because every financial institution is entwined in the web.” (Biggs 123) As he just described the vehicle that really exacerbated what took place, such arguments being made as early as 2005 do suggest that folks did have enough to work with to draw the credit crisis as a reasonable conclusion.

The argument was out there. While folks might say, “Of course, of course but who would have known that liquidity would dry up as it did. That banks would cease lending, not just to businesses to allow them to grow or ordinary folks, but to each other.” Yes, a valid point, but the enablers…the causes to this effect…were well known, and it seemed actively discussed as problems that could cause a bear market. Hedgehogging helped illustrate that it wasn’t as much as a blind side a great many have suggested.

Moreover, David Swensen, who, as Biggs tells it, saved the Yale Endowment since he took over as Chief Investment Officer in 1985, didn’t “…believe that the lows of this bear market have been made.” (Biggs 160) In addition, oddly enough, he did also speak of “Vince” (pseudonym), who gave quite the apocalyptic vision of the downfall of the US.

Furthermore, another bubble is about to burst. Existing home prices have been rising 7% to 8% a year, financed by Fannie and Freddie. Luxury real estate values from Park Avenue to Beverly Hills and from Southampton to Aspen will collapse. In the aftermath of every burst financial bubble in history, paper wealth of all types evaporates. (Biggs 103)

And, he went on to say:

Secondary consequences take time--years--to happen, particularly when central banks cut interest rates drastically and flood the system with liquidity. But they can only be postponed not averted. In three years, the American economy will be in depression, the S&P 500 will be at 500, and there will be a revolution in America. (Biggs 103)

Not bad, eh? Reading the book at the time, it seemed like the obscene prediction, but he nailed the Great Recession (except the S&P never went lower than the high 600s) and the dramatic cutting of rates. I don‘t know about a “revolution,” but the Tea Party movement does sometimes seem a little irksome. ;)

Source:
Biggs, Barton. Hedgehogging. Hoboken: John Wiley & Sons, 2006.

Barton Biggs the Hedgehogger Part 1 -- A Review

This long weekend, with the facebook newsfeed rife with exciting activities, I decided to spend some time getting some of my overdue “assigned” reading done. I picked up Hedgehogging by Barton Biggs, a hedge fund industry veteran. Biggs joined Morgan Stanley in the early 70s as a partner responsible for setting up, at the time non-existent, research and investment management departments at the firm. He stayed there for 30 years before leaving to co-found Traxis Partners.

While it isn’t Gatsby, the book is entertaining. Biggs begins the book speaking of his experiences with the Triangle Investment Club, a monthly meeting of 25 hedge fund and aggressive long-only money managers. Using that anecdote as an anchor, he goes on to a series of other stories relating to his conversations with money managers while also sharing his personal journal entries detailing his thoughts as he went about raising money for his hedge fund. Biggs had no reservations about sharing his perspective and those of others in his circle. His outlook on everything from the markets [bullish] to gold [doesn’t like it] were openly shared.

As for drawbacks, I found the book mildly discursive where Biggs went from point to point without any sort of noticeable fluidity. The upside to that is he did cover a lot of ground. To name a few:

• Jewelry as a currency in apocalyptic situations

• The quality and history of the Yale endowment

• His thought on art as an investment

• Private equity as an investment vehicle

• Fibonacci’s numbers and the unlikelihood of using them to track the markets

• Money managers liking golf

The wide array in topics indicate that Biggs really wanted to get out everything in his mind from the past few decades. Although a creative writing major at Yale, this was his first publication. Prior to his career in financial services, he attempted a career writing short stories. So, to finally have a debut book, you can tell the passion to lay it all out there was evident. He is genuine from start to finish.

Although it can easily be argued that he overdid it a little with the anecdotes, it brought charm to the book. Unfortunately, anecdote is the operative term for these stories. There really couldn’t have been considered proper case studies as we really couldn’t get an academic sense of these folks investment styles. He basically started each story describing a manager with several adjectives, including always “attractive” or “handsome,” and ending it giving us a sense that managing money is a really tough job. However, there were useful subjective snippets that we were able to take from these stories.

An odd thing about the book, aside from using too many exclamation marks, is how he ended it. He basically went into this bio about John Maynard Keynes, who he admired as a hedge fund manager. Don’t get me wrong. An incredible figure in our history, but it just came out of nowhere, and the book ended after detailing Keynes life. The last line being “It’s an incredible story!” Yeah, it is. But, so what? What does that have to do with anything?

That being said, considering reading this book has inspired four blog posts, who am I to judge? The following blog entry will not cover the entire book, but a concept from the book that got me thinking. If that isn’t an endorsement to read this book, then I don’t know what is…

Coming Up:
Part 2: The Pulse of the Markets Before the Credit Crisis

Toronto and the G20

Although this blog is meant to be the corporate blog to my company, Onus Consulting Group, I feel today I'm going to write, rather extemporaneously, about something not financial services related.

The G20 summit hit Toronto this weekend, and it has been the talk of the town. As early as the week before, RCMP, OPP and municipal officers were seen walking the streets of Toronto. The town was definitely abuzz with expectation. Although the G20 is a new forum with Toronto being their fourth summit, it seemed just yesterday the enormous impact the anti-globalization protests brought to the WTO talk in Seattle. It was clear that these thoughts had not been lost on many.

In the interest of full disclosure, I am not anti-G20 and the only activist cause I've ever really embraced is investor advocacy. I had really nothing to protest or march against. Although perhaps a "down with the Deferred Sales Charge on mutual funds" might have crossed my mind, I realized that if it sounded ridiculous to me, just imagine the thoughts on the minds of the public I'd be catering to.

My academic interest in the demonstrations against the G20 summit was just too much for me to stay away. Of course not being a "plugged in" activist, I didn't really know where to begin, so of course, I grabbed the latest issue of NOW Magazine. Old reliable, distributed each week, it has been Toronto's first free weekly and is going on 30 years. A left-leaning newspaper with very much an activist streak, their twitter feed was ripe with protests in the city and other updates as early as the Monday of the week of the summit. NOW ended up being the perfect resource. They had released a special summit issue with a headline reading, "G20: GET SERIOUS." I discovered I could stay at a protester's camp complete with a pancake breakfast. As well, there were an adopt-an-activist program where you could put up a protester for the night.

Picking the right protest was almost like picking an entree on a menu: There was quite the selection each with their own nuance. There was one focused on channeling your protest using the power of "music, speakers and global meditation." As well, there were a few where confrontation was encouraged. No thanks. Of course, I went with the house special. The People's First Rally was organized by the Council of Canadians, Greenpeace, Oxfam, Ontario Federation of Labour and the Canadian Labour Congress. I don't know who taught me that rule, but when choosing to observe a well run demonstration, the ones put on by organized labour certainly will never be a bad bet.

On Saturday morning, I woke up excited. Recharging the battery to my video camera, I then wondered if the pouring rain outside would hurt the turnout. Whatever. I had to check it out. The next thing that crossed my mind was should I go prepared? Do I need a gas mask or at least a hankerchief? Maybe a book of band-aids? Thinking about the power of stereotypes, I realized it might be a little more useful if I just carry an umbrella and wear a soccer jersey and some nice dress shoes coupled with a satchel (not a backpack) of scholastic magazines. Hmmm...Would it be enough? Perhaps instead I should don a red sweater with a large yellow letter on it wrapped around my neck? Large, black, round plastic rimmed glasses? Khakis? A white Lacoste polo shirt? Okay, I know I'm getting carried away, and I don't have any of that stuff.

I got there and was impressed to see the number of people. Literally, thousands enveloping the entire area. Not only the unions, but a slew of other causes were represented by a sea of flags and incredibly done banners...Campaigning for human rights in Iran...Bring Al-Khadr back to Canada...Anti-capitalism...Pro communism. You could tell it was every activist's dream. I did notice, at this time, that there were a group in black with bandanas covering their face. But, quite frankly, at the time, I was thinking they were the most boring of the lot. They weren't saying anything.

Another thing I noticed that I wasn't the only individual that was drawn to the event simply by its intrigue. They were dozens, if not hundreds, of people not chanting...not marching...just holding cameras and taking pictures. The spectacle of the occasion was simply too much to pass up. Where there were rows of riot police, people got up close and took pictures, some having their friends pose in front. It was quite amazing actually. The police for their part looked quite nervous, as best I could tell. For all the training, this must have been as new to them as it was to the demonstrators.

The whole thing was really quite harmless. We started at Queen's Park (College and University) moved south to Queen. Once we got to Queen and University, we couldn't go anywhere but either back where we came from or west. As we walked, there was a line full of police on the south side of the street in their regular attire except they were wearing yellow jackets and behind them was a row of police in riot gear. The police in the front didn't seem to be holding a line, and people, mostly the touristy folks like myself, were taking pictures of the riot gear police. We could have been at a museum and the riot police were the exhibits.

When I got to Queen and Spadina, there certainly was a restlessness within the crowd. With Queen blocked off from going any further west and the south of Spadina blocked off. There was nowhere else to go, but back to Queen's Park, which was not a far walk at this point. It was while I was making note of this that a flare went off. It was the group that I noticed before wearing the black (and would later become infamous as The Black Bloc or anarchists), but it was at this point that they started either lounging at the intersection or making their way back east on Queen. Again, I didn't put two and two together... that the flare was a signal, but it seemed, in retrospect, that was indeed the case.

By the time I got back to Queens Park, everything seemed quite merry. The large masses of people had evolved into a more dispersed crowd. Protests were still going on, but in a much more decentralized fashion. Okay, well, what else could there possibly be to see? Noting that I did have some work to do, I decided to call it a day. I might as well catch the last few minutes of the Ghana Vs. US game. I made my way to my brother's place to watch the game. I guess he didn't miss much. Glibly explaining to him that Toronto was a great place to respectfully demonstrate, the sidebar in the soccer match started reporting the violence literally minutes after I entered. I can go into all that, but quite frankly, so many others have done that rather well.

I am glad my entire experience of the G20 summit was one of peaceful demonstrations. It was impressive to be of the opinion for a few hours that Toronto was a great place to respectfully reflect your displeasure on a grassroots level. The importance of such an institution (and I'll call it that) is vital to our democracy. And, honestly, the police officers working the streets were great, as best as I could tell. For such a pain of a job, they did really well.

Of the demonstrations, they were some great stories and some ones that just made me roll my eyes. The team at the Canadian Labour Congress was by far the most organized, but their neon orange with yellow striped security vests initially confused me as to whether they were working the summit or protesting it. One demonstration I do want to give respect to are the Vietnamese. Their protest against human rights violations in Vietnam and persecution of bloggers was a story I, myself, had not been familiar with. Quite frankly, their grievances were quite similar to the ones put forth by the Iranians, who were also being represented. While we are always conscious of Iran, the Vietnamese story is not one we hear about.

Although it might not seem that way to some, learning of an injustice makes me realize that the peaceful protests did bring victory this G20 weekend.

Who are you going to call? Ponzi Busters!

There was an article in the Toronto Star today about a Canadian Ponzi buster, Vedant Rajput, who managed to harness an investor uprising, aided in capturing the perpetrator and, as well, located a portion of that man's wealth.

The story is incredible. When investors are hard done by, they are so shell shocked it takes time for it to even sink in. He not only sought restitution for himself, but he proactively took off on an odyssey across the world to seek justice. It is an impressive story, and my hat is off to the man's tenacity.

http://www.thestar.com/news/world/india/article/826182--canadian-helps-crack-alleged-ponzi-scheme-said-to-be-india-s-biggest

Veritat Advisors -- Worthy of Praise

Every once in a while I run into a financial services company that really impresses me. I feel it would be almost irresponsible to not be public about my praise. Based in the United States, Veritat Advisors was brought to my attention by the insightful Chris Stephenson of Steadyhand Investment Funds.

Veritat Advisors quite basically is a financial planning service offered online. Now, wait! Before I lose you, I'd like to recognize that it is an uncomfortable dynamic for a lot of folks. To take a professional service that is offered online seriously might be tough for some people.

That being said, Veritat Advisors set their company up in a manner in which a financial advisor can take on a client anywhere in the US, not just the city they’re a resident of. They have a virtual console in which a client can see their advisor on a webcam and be presented slides, presentations, etc. Their fees are low, and they offer the fee-only compensation arrangement charged monthly ranging from $25-$40/month after a $250 initial fee. Even their most basic service guarantees a financial plan, which they go over once every quarter. They say they are legal fiduciaries, which is amazing.

For financial advisors to become a fiduciary is something I’ve been really passionate about seeing in Canada. As it stands, Canadian financial advisors can’t legally just become a fiduciary, but many like to deputize themselves as such (do you ever hear “we hold ourselves to a fiduciary standard?”)…it is something, but we can do better.

This is just from what I can see. They say their financial plan is comprehensive, but I haven’t seen it myself. The FA whose profile I was able to look at is well educated (CFP and MBA) and certainly is qualified to write a comprehensive financial plan. They have an optional portfolio managementfee of 0.5%, which is low. It’s really amazing value, but they don’t give any suggestions on to what investment counselor they may be using (my guess it has to be a strong indexing approach as, although US has cheaper management fees than Canada, they aren’t that low).

That all being said, the service is based online and over the phone. If you feel face-to-face meetings are important, they would certainly be under par in that department. However, their online client console does seem like quite an able substitute.

It must be pointed out that I’ve never been a client of Veritat nor have I formally evaluated their service as I would an advisor for the Onus roster. My conclusions are based strictly on observations made in the manner in which they present themselves on their website. However, with a 14 day free trial and 30 day money back guarantee, they’re putting their money where their mouth is, as a client can walk after the financial plan is done for them. That’s quite a risk and illustrates confidence.

The bottomline is if these guys are as advertised, this is a pretty amazing service, and Canada would be well served to have a similar shop like this.

‘Z’

Now, Canada, there are better ways to seek retribution

A recent Reuters news segment shows a group of German pensioners appearing in court for kidnapping their financial advisor! Now, remember, folks, if you feel hard done by there are a number of ways to seek retribution. ;)

It's pretty funny. Check it out.

http://www.reuters.com/news/video/story?videoId=60847190&videoChannel=-9991

Get in the spirit! It's RSP season.

For financial advisors out there, it's just that time again. "That time." ... A period where everything just makes sense for a people or person. For bears, it's springtime when they come out of hibernation with plenty of food and no hunting allowed. For Brazilians, it's whenever there's a World Cup to be won. For Jay Leno, it's whatever time he successfully usurps the latest successor of The Tonight Show.

For financial advisors, that time of the year where the glory and significance of their profession is felt by the masses is RSP season. A time when personal finance and retirement goals is at the forefront of all baby boomers' minds. We, as Canadians, are an engaged bunch. During the summer, kids are on summer vacation, the sun is shining and the BBQ is waiting to be lit up. In the fall, it's back-to-school shopping, work speeds up and the latest of whatever is on TV. During Christmas, it's Christmas.

And after the holiday season, that 6 weeks between mid January and the first day of March, Canadians are on high alert. Their credit card bill from this past holiday season has come back and wait... your deadline to contribute to your RSPs is fast approaching. Now, the thing about RSPs is that you can contribute to them throughout the year, but for reasons mentioned in the previous paragraph, many wait until the deadline is coming up. During such a time, it's time to think about financial goals. Spending. Saving. Maybe you don't feel that way, but between the half dozen TFSA vs. RSP articles you keep bumping into and the relentless advertising on TV, you know you should.

One such ad features a couple sitting at a Scotiabank office in which the husband for the life of him can't look at his financial statement. We all chuckle (and I say that loosely) as the wife darts the statement in front of her husband's eyes, who keeps looking away. Maybe we're chuckling or maybe we're rolling our eyes, but the theme of the commerical does bring some truth. A good many of us hate seeing how much we've spent. A good many of us hate seeing how little we've saved... And by merely avoiding these uncomfortable emotions, many of us procrastinate dealing with these important issues.

As much as one might dread a meeting where all such things are acknowledged, one could very well come out of such a meeting feeling cleansed. The more you know, the more confident you become. Just talking will bring clarity. The lady ends the commercial by making a legitimate point: The fact that you're here is a great first step.

This will be my only plug for the retail investment industry this season and since I always lament about everybody itching to be pitching... Let this plug carry some legitimacy. Talk to your financial advisor. If you don't have a financial advisor, poke one's brain (or many). They might try and win your business, but if you're not interested, it can easily be repelled. If you're self-directed, talk to a person at your discount brokerage where you can ask questions about your account or a new service...

I guarantee there's something new to be learned and just talking about this stuff could very well bring some added clarity to these issues in your head. Clarity could be incredibly useful after these last couple years.

'Z'

The problem with a Shariah Index Fund

Standard & Poors announced yesterday it is launching a Shariah compliant version of the S&P/TSX 60, which, while their first in Canada, will be their 52nd Shariah compliant index fund. For Standard and Poors to come out with investment products sensitive to a large demographic of individuals (Muslims) is a wise move and should be applauded. Shariah is the body of Islamic religious law, which is the third most prevalent legal system in the world after common and civil law. The term "Shariah compliant" suggests that the holdings in this index represent holdings that meet the criteria as prescribed by Islamic law. However, I do want to cast some healthy doubt on this idea of Shariah compliant indices.

Standard & Poors has a "Shariah Supervisory Board" composed of Islamic scholars that decide what investments do or do not qualify. This is where the confusion arises. For one, there are five schools of law in Sharia (four in Sunni Islam and one in Shia Islam). How likely is it that the group adequately represents the proportional sentiment of each school of thought? "Shariah law is open to interpretation and religious boards frequently hold different views on key Shariah issues," El Waleed M. Ahmed writes in the Arab Times.

For example, companies, whose business consists of alcohol, gambling or pornography, would not qualify for the index. This is probably a universal sentiment. However, they go further. "Companies which have high levels of debt or high levels of interest earnings are also screened out," Alka Banerjee, S&P Index Services Vice President, tells CTV. As most public companies (if not all) have either debt, income derived from interest earnings or both, who decides what is considered "high?" In this case, a group of Islamic scholars decided that, currently, companies that have debt under 33% of market capitalization qualify for the index.

How did they come by 33%? Why not 40%? Or 20%? Each number would have an effect on the resulting portfolio. The idea of a group of layman (and I'm sure they are incredibly pious individuals yet unqualified in portfolio management) picking companies out of an index based on a subjective criteria that might differ from one school of thought to another...perhaps we could be chucking darts at a dartboard?

Therefore, it feels like active management without the active management! An actively-managed investment by a group of people that are religious scholars not financial professionals.

Of course, what's important to keep in mind here is the intention of Standard and Poors, which is to the best of their ability to create an investment product that Muslims can invest in. Muslims, for their part, actually might forego investing in such products based on the fact that they could be investing in companies not compliant with their beliefs. Taking advantage of this effort does, at least, give them an opportunity to illustrate they are trying.

Click "announced today" or "Alka Banerjee" to read yesterday's news release.

Why it is important to tell if your mutual funds are 'closet indexers' and 3 ways to identify it

Pundits and casual observers will debate the pros and cons of mutual funds. Mutual funds are probably the most mainstream vehicle of active management, at least as far as retail investors are concerned. It is the appropriate strategy for critics of the efficient market theory, which is the idea that prices on assets, such as stocks and bonds, reflect all known information. The idea is to take advantage of mispricing in the market. As the strategy is in the hands of a money manager, volatility can be managed by investing in less-risky, high quality companies rather than in the market as a whole. It can also allow investors to take on additional risk to exceed higher-than-market returns. Furthermore, investments that are not highly correlated to the market help diversify a portfolio. This is the argument for active management, and this is where a problem arises.

Closet indexing is a when an active manager doesn't stray too far from the benchmark in their stock selections. They are "...pretending to be a stock-picking manager when you're [they're] really putting together a portfolio not much different from whatever index is the benchmark for your category of fund." (Stoffman 218) With a closet index fund, the MER is more than 2%, which is whopping considering that an index fund or exchange-traded fund charges significantly less.

Money managers are assessed by their ability to beat their relevant benchmark, which is the market index that best represents the portfolio they are managing. Trying to beat their index by a significant amount carries greater risk, so there are mutual fund managers that will fill their portfolio up with investments that make up their index, which means they'll never significantly underperform or overperform by a significant amount.

I'll try and update this blog entry with a more recent static but over 5 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. (Dash, Pane) The index has outperformed the majority of active managers. Therefore, following the index will mean outperforming a majority of their peers (also known as their competition), making it easier for the fund company to sell their funds. This does not provide value for the client and undermines a reason for pursuing an active management strategy in the first place, which is to do better than what the markets are doing. It's the reason a client pays a higher fee in the first place.

Following me? The investments and their allocation are incredibly similar between the fund manager 'actively-managing' and the benchmark he or she is being compared to. Therefore, if you're invested in a mutual fund that is a closet indexer, you will see far more value if you invest in an index fund or ETF that tracks these benchmarks themselves. With this, you are paying a significantly lower fee to get a similar result.

A mutual fund manager is guilty of being a closet indexer when (Stoffman 107):

1) It has a high R-squared (gives you a correlation between a fund and its benchmark index). The closer the R-squared is to 1, the more likely a closet indexed fund.

2) Check the annual report of an actively managed and its benchmark index fund. Check to see if similar stocks are held with similar proportions.

3) Compare recent returns of your actively managed fund and its benchmark. Do the returns of the managed fund regularly trail the index by its MER?






Sources:



Dash, Srikant and Roseanne Pane. “Standard & Poor’s Indices Versus Active Funds Scorecard, Mid Year 2008.” Standard & Poors McGraw Hill Companies November 18, 2008.

Stoffman, Daniel. The Money Machine. Toronto: Macfarlane Walter and Ross, 2000, p. 202.

Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 3)

Now, my concern isn't of the Jim Cramers of the world being given a high enough platform. It is of professionals giving their suggestions and foresight on what's happening with genuine intentions. Yes, I believe those people are out there. Personally, I would like to nominate PIMCO"s Bill Gross and Mohammed El-Erian, who run the world's largest bond fund. More obvious examples are Warren Buffet and George Soros, who at many times have conflicting assessments. But, these assessments are explained, and these explanations give viewers at home added insight, a more practical education and, with time, a sharper filter to decipher useful information from the static.

While this populist rage against financial news continues, in blogs like Solin's for example, its merits shouldn't be lost.

About Financial Crisis
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Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 2)

A couple years ago, it would have seemed unthinkable for me to orchestrate a defence of the financial news media. The thesis of Solin's blog entry could easily have been mine.

Granted, pundits try and predict where the market is going and what the public should be doing with their money. They peddle their education as a means to win credibility and identify themselves not just by their names, but the firms they are promoting. With this, the public gets their perspective, and, although the hard way, they fortunately are learning to take it with a 'grain of salt.' Bob Doll at Blackrock, Solin's example, does put himself and his firm out there with every prediction. A blown call reflects, not just on him, but on Blackrock. People cannot be chastised for putting forth their opinion to the public. Whether they're talking rubbish or not, their credibility is put on the line. And, as we listen to their opinions, we develop a filter of our own of who speaks with the most merit. For examples, viewers of Mad Money, including Jim Cramer's more ardent followers, will take his suggestions with a greater trepidation. I will be shocked if I meet anybody who regards him as an oracle.

About Financial Crisis
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Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 1)

Two occurrences last Friday made me come back to this Huffington Post blog entry by Dan Solin. One, it was the 20th anniversary of CNBC's founding. The second was Jim Cramer's highly spirited retort to Mr. Solin's public mockery of "In Cramer We Trust" on CNBC. Cramer was so incensed that he interrupted Solin's interview to give him a piece of his mind. Where was that energy during his interview on The Daily Show, I wondered? Unfortunately, Cramer took the opportunity to attack John Bogle and defend his own prowess. It is with thoughts of financial news and their market-timing pundits, such as Cramer, that I write today.

Mr. Sorin's contribution to empowering Americans to take control of their financial future is nothing short of exemplary. While I haven't read "The Smartest Investment Book You'll Ever Read," I have heard great reviews. To him, I say, stay passionate.

However, in the great zeal seemingly everyone has taken in bashing pundits and financial news; I feel somebody needs to hear a rebuttal. While, undoubtedly in a perfect world, we would like to see the type of investigative journalism that would bring a greater credibility to outfits like CNBC and Bloomberg, if we had the option between the manner in which media coverage is conducted today or no coverage at all, which should we go with? If trashing the pundits that make bold predictions dissuades them from presenting their thoughts on the market, will it be worth it for us?

About Financial Crisis
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