A few things today.There is a new frontier market CEF from Morgan Stanley that has ticker FFD. Here is a little bit of info, here is a little more but for now the MS page has no info to speak of.
According to the Yahoo News release, linked above, frontier can include Bahrain, Bangladesh, Botswana, Bulgaria, Croatia, Ecuador, Estonia, Ghana, Jamaica, Jordan, Kazakhstan, Kenya, Kuwait, Latvia, Lebanon, Lithuania, Macao, Mauritius, Namibia, Nigeria, Oman, Panama, Qatar, Romania, Saudi Arabia, Serbia, Slovenia, Sri Lanka, Trinidad and Tobago, Tunisia, Ukraine, United Arab Emirates and Vietnam.
The money was just raised so the fund owns nothing yet. It may take a while to deploy the assets and for now it has a premium to NAV to pay for the sales charge that will likely erode over the next couple of months.
Frontier will become an increasingly important asset class to access. For now there is no way to know whether FFD will be any good or not. Generically speaking this space might lend itself to active management. For example an active fund could avoid Latvia for now, which could add value versus its benchmark. Further value could then be added by adding Latvia back in at some opportune time in the future.
When the fund populates and MS discloses I will write more about it.
Here is an interesting idea from James Picerno over at The Capital Spectator about benchmarking a portfolio against the yield of the ten year TIPS which he cites for the purposes of the article as 1.69%. It does not sound like a high hurdle but he makes an interesting observation that has fascinating implications. He said that five years ago the ten year TIPS yield was 2.43%. Five years ago to the day the S&P 500 closed at 1026.27. Yesterday it closed at 1274.98. Using simple math that averages out to 4.8% per year plus 2% (which is generous) for the dividend.
2003 was a great year for equities but most of the lift was in by the time September rolled around. The numbers for equities would look a lot better going back five years and a few months but at the same time there many people missed 2003 as they did not trust equities yet.
Additionally it would have only taken a couple of bad mistakes (panicking out at the wrong time or making an incorrect sector decision) for someone to have missed out on that 4.8% number in the last five years.
What makes this interesting is that I think the post helps to better conceptualize what benchmarking is about and although not mentioned by James I think it stresses the importance of dividends. 6.8% total return is low historically. Anyone who increased his yield in the time either had better returns or got the same returns without having to work as hard.
James Stewart had a post in the WSJ about investing like the Harvard Endowment. A caveat; you really need to be be careful reading this guy's stuff.
He says "Individual investors can emulate the principles, if not the exact returns, of Harvard's approach....But you too can achieve similar -- maybe even better -- results by embracing a variety of asset classes."
I say "No you can't."
Don't get me wrong I can't either, not with any regularity (applies to you and me). The point here might be granular but it is important. Access to many of the sorts of asset classes are now available in exchange traded vehicles. However I don't think it is a stretch to say that in addition to the asset classes available to the super endowments they also have a little bit of know how for when to make changes to these holdings that other people may not have.
As long commodities as we think these funds are, something tells me they did not take the full brunt of this summer's decline. If one of the endowments was 25% commodities on June 1 and somehow you knew that, took your position up to 25%, the market then corrects with much velocity which they sidestepped; they are fine. Would you have likely taken the same evasive measures? In real life did you take evasive measures?
If you had 25% or thereabouts you better hope you did. If you had a moderate weight then you didn't need to.
Learning from and being influenced by these funds (like owning some commodities as opposed to 25%) is plausible and unlikely to leave anyone holding the bag.
Finally, congrats to Charles Kirk on five years of blogging.
6 comments:
Thanks for calling out the agility (and I'd add lack of transparency) of the endowment funds, Roger. I love the stories and find the results very seductive, but for all I know, they made a fortune shorting pork bellies and are now overweight U.K homebuilders. I'm always the last one to the party.
I think it's also important to note that the TIPs benchmark, while seemingly low, is real return after inflation. That raises the annual hurdle by some arguable 2-3% for S&P investors, doesn't it?
Besides, I have to think that endowment funds pay a lot less for their exposure to uncorrelated assets than individual investors, especially considering that the expense ratio floor for most commodity ETFs/ETNs is about 75 bp. Seems like endowments moving around millions/billions at a time could get that for less.
Assume you believe in the "theory" of diversification.
Assume you understand de-leveraging and that all asset clases are declining in value.
What would be a well diversified portfolio? What would that mean?
20% SDS
20% DXD
20% QID
10% FXP
10% SKF
In theory that should be as valid an approach as a diversified long portfolio?
In other words, barring the theory that markets have an upside bias, one should be able to build an EQUAL short only portfolio as a long only one?
Anon 3:37/3:42, your example is exclusively equities which would make it more of a parody of real diversification short or long but I assume you knew that and were just tossing it out by way of example; e.g., there are a couple macroeconomic scenarios in which every one of those names could be sinking and, with leverage, sinking faster and deeper than the markets whose indexes they track.
I guess in theory you might have a point but in practice I don't believe it would work even if you had a robust allocation model to enforce buy/sell discipline and all the instruments (etfs, etns, etc) you needed so you could diversify appropriately and avoid the actual mechanics and expense associated with shorting at the retail level.*
So regardless of theoretical interest the better question might be why would you want to take the route you propose when, as you state, the long-term bias of the markets tends to be upward and more products are available at reasonable cost to access a diverse range of sectors and asset classes with similar access to a smaller universe short or paired products suitable for use as a hedge when your model calls for it?
*Rant: Wall Street accommodates shorts because it generates fees and they can charge for carry but they make easier money generating and selling stuff and shorts have a tendency to toss crap on the rose colored glasses so shorting requires strong upstream swimming skills (is Bill Cara the only one out there who publicly points out that an institution selling you stuff with concomitant access to your order flow and also buying that stuff for their own portfolio while simultaneously acting as your banker is so utterly riddled with conflict of interest as to suggest the fox who persuaded the farmer to let him watch the hen house was a short-sighted piker?). end-rant
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