The new bailout agreement for Greece comes at a time when manufacturing is slowing throughout Europe, raising fears of a region-wide recession.
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While avoiding the region may be the most prudent step for most, some investors may be interested in companies with stock prices that appear to be depressed due to the debt crisis.
Morningstar Inc. searched for actively managed funds run by value-oriented stock-pickers tilting more heavily toward Europe than the related index.
The company named Oakmark International (OAKIX) and Tweedy Browne Global Value (TBGVX) as promising funds that meet the criteria. Oakmark is up 15% so far this year, and Tweedy Browne has beaten its category average by at least four points for four straight years.
While the average diversified emerging-market fund has risen 13% so far this year, several single-country funds have soared far beyond that level.
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Kate Moore, senior global equity strategist at Bank of America Merrill Lynch Global Research, tells the Wall Street Journal her unit is “making more country calls and fewer sector ones.”
China region funds have seen inflows exceeding $530 million so far this year, while India-only funds have gained $160 million.
Of course, no one is advising investors to abandon diversification strategies for single-country bets. Rather, some analysts are saying it’s a good time to tilt the balance a bit toward single-country funds, because emerging markets are expected to grow more than the United States this year. They also argue that the European debt crisis is weighing down developed nations more than emerging ones.
Investors are placing more money with direct-investment firms such as Fidelity Brokerage Services, The Vanguard Group Inc., Charles Schwab & Co. and TD Ameritrade Inc. Many of these investors also have relationships with financial advisors, who may not know about the outside accounts.
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Assets placed with direct-investment firms rose 19% between 2008 and 2010, compared with a 14% increase in traditional accounts with financial advisors, according to Cerulli Associates Inc.
While the $3.7 trillion total in direct-investment accounts remains far less than the $12.5 trillion in advisor channels, it’s a growing piece of the pie.
The direct-investment firms have widened the range of clients they serve by adding higher-quality financial advice to their services.
“The platforms are becoming more advice-driven," Katherine Wolf, associate director at Cerulli, told InvestmentNews. “And that's where we see the threat to the advisory model.”
That advice tends to be highly standardized, allowing advisors to continue to offer far more personalized advice and services. Even so, some investors who already have advisors want to self-direct a portion of their assets for various reasons.
As the Commodity Futures Trading Commission "harmonizes" its regulations with the SEC, lawyers warn that CFTC advisors and those who simply work with CFTC products should be on their guard.
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For retail advisors, the biggest concern that Sutherland Asbill & Brennan is flagging revolves around making sure investor collateral is tracked effectively.
Funds that do not segregate each investor's money out run the risk of creating MF Global-style headaches, the lawyers say.
Given the number of due diligence claims against other "alternative" products in the last few years, no advisor wants to expose his or her clients to the prospect of a commodity fund losing the assets -- much less deal with the backlash.
SEC-registered advisors who also have to register as a CPO or CTA will also need to file a new Form PF starting in the current quarter.
For those advisors who primarily operate under CFTC rules -- maybe running their own commodity pools or ETF-like structures -- the lawyers have more detailed suggestions.
While they are probably not applicable to most A4A readers, the underlying message is clear for all. Due diligence. Transparent custody. Know where the assets are at all times.
Target date funds are difficult to evaluate because they gradually reduce risk, i.e. equity exposure, through time. In evaluating these funds, therefore, two questions are relevant: What is the “right” amount of risk at a point in time, and has that risk been rewarded?
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At least you would think that these would be the important questions. The reality is that few questions are asked when choosing a target date fund, because most advisors select their bundled service providers without vetting them.
Fidelity, T. Rowe Price and Vanguard own 75% of this $400 billion industry, which would be just fine if there were no better choices. But there are.
The following scorecard compares and contrasts the risk-reward results for the “Big Three” to each other and to an alternative – the SMART Funds®. SMART Funds dominate with higher returns and less risk.
SMART Funds are collective investment funds (CIFs) from Hand Benefit & Trust in Houston. The benefits of CIFs are competitive fees (SMART institutional funds are 58 basis points all in) plus the trust company serves as a fiduciary to the 401(k) plan, unlike mutual funds.
SMART Funds use the patent-pending Safe Landing Glide Path® that integrates the tenets of Modern Portfolio Theory (MPT) with the disciplines of Liability Driven Investing (LDI), emphasizing safety at the target date. Other target date funds are far more aggressive at the target date, averaging 40% in equities versus the Safe Landing Glide Path’s 5%.
There is no fiduciary upside to taking risk at the target date – only downside.
At longer dates, the Safe Landing Glide Path equity allocation is similar to other glide paths except the risky asset allocation is substantially more broadly diversified, encompassing global stocks, bonds, commodities and real estate.
So here’s what we see in the past five years, and what we expect to see going forward. Near-dated SMART funds have outperformed in the past five years because of their rigorous risk controls. In normal (positive) stock market environments, near-dated SMART Funds will lag in performance. This is the opportunity cost of emphasizing safety near the target date.
Longer-dated SMART Funds have outperformed in the past five years because of their broad diversification, and we expect this to continue into the future.
The usual risk-reward trade-offs will apply to all SMART Funds, so we expect that the reward-to-risk ratios of the SMART Funds will dominate those of the industry at all target dates. We also think that over a full market cycle the longer-dated SMART Funds will continue to dominate the industry on both a return basis and a reward-to-risk basis, because of the broader diversification employed by the SMART Funds.
There are better target date funds. Please see our humorous video at Satire and Bloomberg’s report at Bloomberg.
