Has the Death Knell of Active Management Been Rung Too Soon? [Financial Times]

Coauthored with Theresa Hamacher

The death knell of active portfolio management has been rung. But with recent studies suggesting that the costs of passive management are rising, has the bell tolled too soon?

Last year, Charles Ellis seemed to predict the imminent demise of active management when he wrote that “the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing”. Mr Ellis, a longtime commentator on asset management trends, suggested that investors would be better served if investment professionals shifted their focus toward financial planning and away from stock picking.

Mr Ellis’s comments only reflected what was happening in the investment world. Investors have been steadily shifting assets from actively managed funds into passive. At the end of 2013, index funds accounted for one dollar of every five invested in U.S. mutual funds overall and, stunningly, more than one-third of the assets in US equity funds.

While the interest in index funds is understandable, the disdain for active management is ironic. Active management is what makes index funds attractive in the first place.

How is that? Proponents of passive investing argue that index funds are the only logical alternative when markets are efficient, meaning that asset prices accurately reflect all information. Active managers have a tough time making money in efficient markets because asset mispricings are rare. In efficient markets, index funds generate the same returns while costing less.

Read more at ft.com

How to Not Outlive Your Retirement Savings [Real Clear Markets]

The U.S. Treasury recently amended its rules to encourage workers with retirement plans to purchase life annuities within these plans. Life annuities generally make fixed monthly payments from the date of retirement until the death of the purchaser.

For years, many economists have recommended that workers use all their retirement savings to buy life annuities in order to avoid outliving their savings. Nevertheless, few workers want to put their whole retirement nest egg into a life annuity.

Why? In one word, optionality. Retired workers want to have substantial resources available to deal with medical emergencies or unexpected disasters during their retirement years. Alternatively, retired workers want to bequeath any remaining savings at death to their families, friends and favorite charities. However, if workers buy a life annuity, all payments typically end at death — even if it occurs shortly after retirement.

To achieve their multiple retirement goals, workers should use PART of their assets within their retirement plans to buy a deferred life annuity that starts paying out at age 75,80 or 85. Then they would have the rest of their retirement assets available to deal with medical emergencies or to make bequests at their death.

Read the rest at realclearmarkets.com…

If Facebook Overpaid For WhatsApp, It Did So With ‘Cheap Stock’ [RealClearMarkets.com]

It’s easy enough to conclude that Facebook overpaid for WhatsApp –the Internet texting service with a subscription fee of $1 per year (after an initial free year). The $19 billion purchase price paid by Facebook seems extravagant for a company with no profits, modest revenues and only 55 employees.

But Facebook paid this price mainly in its own “cheap” stock, and the price per user for WhatsApp is lower than the implied valuation of users in other social media companies. In the final analysis, whether this acquisition makes economic sense for Facebook will depend on how effectively it can monetize the rapidly growing user base of WhatsApp.

Read the complete article at RealClearMarkets.com…

US hedge funds rules relaxed by accident [FT.com]

Co-authored with Theresa Hamacher

Earlier this month, President Obama signed into law the Jobs Act, short for Jumpstart Our Business Startups. This Act won bipartisan support because it purports to create jobs by making it easier for small businesses to raise capital. However, the Jobs Act will also significantly loosen the regulatory requirements on hedge funds – whether or not this was the intent of Congress.

Read the rest at the FT.com

Public-pension pitfalls: What municipal budget troubles mean for bond investors [Washington Post]

Government workers’ pensions may sound like an obscure topic, but it’s front and center in some of the most rancorous of today’s political discussions. Retirement benefits for public workers are at the heart of the conflict between state and local governments and the unions representing their workers — and how that conflict gets resolved will affect investors in the municipal bonds issued by those states and cities. Let’s take a look at the looming public pension crisis, its effect on municipal finance and how accounting reform might help.

Read the rest in the Washington Post