the revamped Google Finance

I hadn’t realized how dependent I’ve become over the past ten years on the Google Finance page.  Google Finance’s debut coincided closely with my retirement from my job as a global equity portfolio manager.  I found that GF met enough of my personal money management needs that I didn’t miss my $26,000/year Bloomberg terminal much at all.  (The ability to see a company income statement dissected in a way that revealed major customers and suppliers–and their relative importance–came to
Bloomberg later.  Assuming it’s still there, that’s a really useful feature for a securities analyst.)


What I liked about the old GF:

–everything was on one page, so I could take in a lot of information at a single glance

–it contained information about stocks, bonds and currencies, so I could see the main variables affecting my investment performance grouped together

–there was a sector breakout of that day’s equity performance on Wall Street

–I could add new stocks to a portfolio list easily, and thereby be able to see what was going up/down for a large group of stocks I was interested in

–I could compare several stocks/indices on a single chart, and vary the contents of that chart–and its timeframe–easily.


The charts themselves were not so hot.  But I could either live with that or use Yahoo Finance.  (I have a love/hate relationship with charts, in any event.  My issue is that stretching the price and/or time axes can change a bump in the road into a crisis and vice versa.)


The new Google Finance?


–All of the stuff on my “likes” list has disappeared.

–The Dow Jones Industrials–a wacky, irrelevant index whose main positive point is that it’s easy to calculate–features prominently in coverage of the US.

–The Sensex has been consistently listed as a top-five world index, even though India is an insiders market that’s extremely difficult for foreigners to access.  Same for Germany, where there’s no equity culture and little of the economy is publicly listed.  No mention of Hong Kong or Shanghai or Japan or (most days) the UK.  Yes, the UK economy is smaller than Germany’s.  But London’s significance comes from its being the listing hub for many European-based multinationals.


My conclusion:  the new page has been put together by people who, whatever their tech smarts, have no clue at all about what an investor needs/wants.  Its overall tone seems to be to provide information that an investor will like to hear, based on browsing history.  Put a different way, the new page strives to turn users into the prototypical “dumb money.”  Actually, now that I’ve come to this realization, maybe the new page isn’t so counterproductive after all.  Just don’t use it.



$4.95 trading commissions: a good deal?

Yes, both for you and me and for Fidelity, which initiated the move down from $7.95.  Fidelity has quickly been followed by other discount brokers.

The reason for the reduction is the increasing popularity of ETFs with individuals who have been traditional buyers of no-load mutual funds–and who, because of this, aren’t used to paying commissions.  (Yes, the functional equivalent of trade commissions end up being deducted from mutual fund results through administrative expense charges, but people generally don’t notice this.)   Apparently, though, $4.95 is an acceptable number.

Fidelity, as a market maker in ETFs, will also earn a bid-asked spread on transactions.   In addition, the reports I’ve read suggest that the sponsor of an ETF can earn as much as 0.5% of assets annually through stock lending.  So forfeiting $3 on each trade won’t dent Fidelity’s bottom line, especially if this stimulates sales of in-house ETFs.

I think the main results of the move will be to lower our costs modestly and to hasten a bit the demise of traditional brokers.






candidate Trump vs. President Trump on banks

During his presidential campaign, Donald Trump repeatedly accused Hillary Clinton of being in the pocket of the big banks and brokerage houses.  He suggested that, unlike himself, she would act as president in the banks’ favor and against the interests of ordinary Americans.  That made her “Crooked Hillary.”

So it’s at least very surprising that in his first flurry of activity as President, Trump is advocating changes in government policy that are very favorable for big bank profits, while potentially harming customers and the financial system as a whole.

eliminating fiduciary responsibility

His first action has been to derail implementation of the mandate, recently instituted by President Obama, that financial advisers handling individuals’ retirement investments act as “fiduciaries.”  Put in the simplest terms, fiduciaries have a legal obligation to act in the client’s best interest rather than in their own.  This implies not recommending products that have a history of bad performance, but which pay high sales commissions to the salesman.  Apart from the Obama exception about pension assets, stockbrokers and insurance salesmen have no such requirement today.  (Congress has repeatedly refused to enact the necessary legislation.)

an example

Donsider three investment products:

–Product A is a Vanguard index fund.  It charges 0.08% of the assets per year as a management fee.

–Product B is an XYZ brand fund that is for all practical purposes the same as an index fund. Buyers pay a commission of 5% of the assets invested to acquire shares. The fund charges 1% of assets as a management and pays your broker 0.50% of your assets yearly as what amounts to a retention fee.

–Product C is just like Product B, except that its managers have underperformed the index by 2 percentage points for each of the past ten years.

Of these three, a fiduciary can legally only recommend A.  Because a broker or other financial adviser must only do things that are good for you, not what’s best for you, he can likely recommend both B and C if he believes you won’t lose money from them.  That’s even though C will likely perform 3.5 percentage points worse than A each year.

In a world where stocks gain an average of 8% a year, the holder of C makes 4.5%.   In nine years, the holder of A will have   doubled his money.  The holder of C will probably be up by 40%.

the Trump rationale

Trump administration official Gary Cohn, formerly a high executive at Goldman Sachs, explains that Mr. Trump believes the Obama rule is bad.  Why?  …because it may reduce consumer choice by potentially driving the purveyors of high-cost, poor performance products out of business.  That is, the Obama rule somehow “hurts” people by increasing the amount of money they’ll have at retirement.  This is sort of like saying we should eliminate car safety inspections because they prevent used car dealers from selling autos with no brakes–thereby limiting consumer choice.  Media reports say the analogy Cohn actually used is that the Obama rule is like having supermarkets that can only sell food that’s good for you.  Huh?

More tomorrow.


seeking outperforming funds

Earlier this morning I ws reading a Wall Street Journal article on the Janus fund group.  What  especially caught my eye was the part on the performance of Janus bond funds.

Over the past one and three years, only 9% and 15% of Janus bond fund assets ranked in the top half of their Morningstar categories.  The corresponding figures from twelve months ago are 75% and 100%.

This home-run-or-strikeout approach to fund management is what I saw when I was competing against Janus equity products ten or twenty years ago.  The idea, which I think is never successful over long periods, is to run portfolios that are built for large deviations from their benchmark indices, in the hope of achieving eye-popping relative returns that will result in large asset inflows.

One problem with this approach is that it’s extremely hard to be very right in a big way on a consistent basis. A second is that, while the freedom to make big bets may be emotionally satisfying for portfolio managers, clients don’t necessarily want the resulting large relative ups and downs.  As one of my former bosses (often, as it turns out) put it, “The pain of underperformance lasts long after the warm glow of outperformance has disappeared.”

That is also, in a nutshell, the basic appeal of index funds:  while there are no sugar highs, there are no heart-attack lows that force the holder to periodically evaluate whether the fund manager knows what he’s doing.   Since there’s really no easy way of knowing, staying with an underperforming fund requires a leap of faith most investors are leery of making.  Better to avoid being put in this position in the first place.


This is probably also the gound-level reason Janus is selling itself to Henderson.  It will be interesting to see whether Janus changes its stripes under new ownership.  By the way, achieving such a cultural change is easier than one might think–just change the bonus structure to strongly emphasize batting average and defense instead of Dave Kingman-like power.

hedge funds and uncorrelated returns


One of the initial topics in my first investment course in graduate school was beta, a measure of the relationship ( generated from a regression analysis) between the price changes of an individual stock and those of the market.  A stock with a beta of 1.1, for example, tends to move in the same direction as the market but 10% more strongly.  One with a beta of 0.9 tends to move in the same direction as the market but 10% less strongly.  The beta of a stock portfolio is the weighted average of the betas of its constituents.

the beta of gold stocks

At the end of the class, the teacher posed a question that would be the first item for discussion the following week.  Gold stocks have a beta of 0.  What does that mean?

The mechanical, but wrong answer, is that gold stocks lower the beta, and therefore the riskiness, of the entire portfolio.  If I have two tech stocks, their combined beta may be 1.2.  For two utility stocks, the beta might be 0.8.  For all four in equal amounts, then, the beta is 1.0, the beta of the market.  Take two tech stocks and add two gold stocks and the beta for the group is 0.6. But this doesn’t mean the result is a super-defensive portfolio.

A beta of 0 doesn’t mean the stock is riskless.  It means that the stock returns are uncorrelated with those of the stock market.  So adding one of these doesn’t lower the risk of the portfolio.  Instead, it introduces a new dimension of risk, one that may be hard to assess.

a painful lesson   

Portfolio managers who embraced beta in its infancy didn’t get this. They assumed uncorrelated= riskless, learned the hard way that this isn’t true when their supposedly defensive portfolios imploded due to sharply underperforming gold issues.

uncorrelated redux      

I’ve been looking at marketing materials for financial planning firms recently.  Allocations to hedge funds are being touted with the idea that their returns are uncorrelated to those of stocks or bonds. This is substantially different from the original claims for this investment form. Over the past fifteen years or so, the hedge fund pitch has gone from being one of higher-than-market returns, to low-but-always-positive returns, to the present uncorrelated.

The reason is that in the aggregate hedge fund returns have consistently been lower than those for index funds for many years and that they do have years where their returns are negative.  What’s left?   …uncorrelated, just like zero-beta gold stocks.  I guess it has been revived because the last “uncorrelated” investment disaster is so far in the past that few remember it.

why hedge funds?

Why have hedge funds at all in a managed portfolio?  They must have some marketing appeal, sort of like tax shelter partnerships or huge fins on the back of a car, that are aimed at the ego–not the wallet–of the client.  A darker reason is that the sponsoring organization may also run the funds, and would miss the huge fees they generate for their managers.







brokers, IRAs and the fiduciary standard

a fiduciary

Being a fiduciary basically means putting your client’s financial interest ahead of your own.

A practical example:  

…given the choice between two products, one with a checkered performance record and high costs, but which makes payments (cash or trips or dinners…) to a financial adviser for selling the product, and a second with stellar performance and lower costs, and which makes no such payments, a fiduciary is required to recommend the second over the first.  At the very least, the fiduciary is required to disclose the facts of the situation, including the payoff from product #1, and allow the client to choose.

A brokerage firm registered representative, on the other hand, is not a fiduciary.  So he’s not required to alert the customer in advance if he’s recommending an inferior product, which is ok, but not great for the client and which–oh, by the way–pays him more.

For a long time consumer advocates have been trying to get Congress to change the laws so that brokers are redefined as fiduciaries.  Their push has intensified since the financial crisis.  But, although the change seems to me to be just common sense, and is in line with the standard of service customers already assume they are receiving, the financial industry lobby is still strong enough to have stymied these efforts.

retirement funds

The Labor Department, however, has recently used its administrative authority to issue guidelines for retirement investments which require advisers to act as fiduciaries, that is, to give investment advice that is in the client’s best interest.

Today, I heard the first reaction to these guidelines–other than general disapproval–from the brokerage industry.  According to the Wall Street Journal, the Edward Jones brokerage firm is withdrawing its mutual funds from retirement products affected by the Labor Department rules.  I looked on the Edward Jones website for clarification, but there’s no press release I can find.

To me, this means one of two things:

–EJ thinks its business practices run afoul of DOL guidelines and it is choosing to withdraw from this market rather than change them, and/or

–it thinks that 401k/IRA providers that sell Edward Jones products have potential compliance issues and prefers not to be involved.

Either way, this all seems to me evidence of how reliant the traditional brokerage profit model must be to offering investment “advice” that can’t pass the fiduciary test.



mutual fund and ETF fund flows

away from active management…

There’s a long-term movement by investors of all stripes away from actively managed mutual funds into index funds and ETFs.  As Morningstar has recently reported, such switching has reached 2008-era levels in recent months.  Surges like this have been the norm during periods of uncertainty.

The mantra of index proponents has long been that investors can’t control performance, but they can control costs.  Therefore, all other things being more or less equal, investors should look for, and buy, the lowest-cost alternative in each category they’re interested in.  That’s virtually always an index fund or an ETF.

Active managers haven’t helped themselves by generally underperforming index products before their (higher) fees.

…but net stock inflows

What I find interesting and encouraging is that stock products overall are receiving net inflows–meaning that the inflows to passive products are higher than the outflows from active ones.

why today is different

Having been an active manager and having generally outperformed, neither of these negative factors for active managers bothered me particularly during my investing career.  One thing has changed in the current environment, though, to the detriment of all active management.

It’s something no one is talking about that I’m aware of.  But it’s a crucial part of the argument in favor of passive investing, in my opinion.

what is an acceptable net return?

It’s the change in investor expectations about what constitutes an acceptable net return.

If we go back to early 2000, the 10-year Treasury bond yield was about 6.5%, and a one-year CD yielded 5.5%.  US stocks had just concluded a second decade of double-digit average annual returns.  So whether your annual net return from bonds was 5.5% or 5.0%, or whether your net return from stocks was 12% or 11%, may not have made that much difference to you.  So you wouldn’t look at costs so critically.

Today, however, the epic decline in interest rates/inflation that fueled a good portion of that strong investment performance is over.  The 10-year Treasury now yields 1.6%.  Expectations for annual stock market returns probably exceed 5%, but are certainly below 10%.  The actual returns on stocks over the past two years have totalled around 12%, or 6% each year.

rising focus on cost control

In the current environment, cost control is a much bigger deal.  If I could have gotten a net return of 6% on an S&P 500 ETF in 2014 and 2015, for example, but have a 4% net from an actively managed mutual fund (half the shortfall due to fees, half to underperformance) that’s a third of my potential return gone.

It seems to me that so long as inflation remains contained–and I can see no reason to think otherwise–we’ll be in the current situation.  Unless/until active managers reduce fees substantially, switching to passive products will likely continue unabated.  And in an environment of falling fees and shrinking assets under management making needed improvements in investment performance will be that much more difficult.