Category: In the News

Article Link: http://vanguardadvisorsblog.com/2016/05/18/mind-fund-details-not-labels/

Summary

• Frank Kinniry, a principal in the Vanguard Investment Strategy Group, discusses why it is important to understand the details of an investment rather than simply painting an entire category with the same brush.
• The line between so-called active investments and so-called passive investments has blurred. Hundreds of ETFs and “smart beta” funds have come to market in recent years. While many ETFs are traditional market-capitalization weighted index funds, many (including so-called smart beta funds) are not.
• The author believes much of the above may be occurring in order to “cloak higher-cost actively managed offerings under the secularly trendy banner of indexing.”
• He believes low-cost actively-managed funds can outperform the average index fund. In turn, he believes that it can be better “by far” to invest in a low-cost active fund when compared to a high-cost index fund or ETF.
• In summary, he states that it is overly simplistic to say that “indexing outperforms active management,” or that index funds are “low-cost” or “broadly diversified.”

Our Take

• Investors (individual investors and financial representatives alike) need to do their homework. The search for a simple answer by applying generalities is commonly a fool’s errand.
• We completely agree that many ETF’s and smart beta products are misunderstood, and in turn, typically masquerade as low-cost passive investments.
• We also agree that a key criterion for all investments, active or passive, is the direct (expense ratio) and indirect cost (turnover/trading costs) of the strategy. The lower the cost of the strategy, the less ground the active manager has to “make up” relative to its target benchmark.
• We utilize actively-managed and passively-managed investment products in client portfolios at Entasis. Read more about Our Process to understand our use of each.

 

See chart below

Summary

• The chart shown above was provided by T. Rowe Price in a recent investment theme paper.
• T. Rowe Price notes that some investors may be questioning the need for international investments in their portfolios considering the U.S. stock market has consistently outperformed foreign markets over the past nine years.
• They note that out/under performance of the U.S. stock market compared to developed foreign equity markets tends to run in cycles. The current cycle of U.S. stock market outperformance over developed foreign markets is the longest period in the last 40+ years.

Our Take

• We are firm believers that many types of investments, investment products, segments of the market, etc. tend to move in cycles.
• Unfortunately, this commonly causes investors to abandon investments that have not necessarily “been working” (i.e. performing well vs. other areas) in the short- to intermediate-term and instead invest in areas of the market that have been performing well. This is a behavioral bias referred to as “recency bias.” This bias reflects the belief that whatever has happened in the recent past will continue to work in the future.
• At Entasis, we believe investors should hold a diversified portfolio of investments for the long-term. However, we will commonly invest in areas of the market and with investment managers that have struggled in the near-term, with the expectation of a “turn” in results. A significant amount of research needs to be performed in advance of those decisions, but we often find underperformance to precede purchases as opposed to sales.

 

Article Link: http://www.marketwatch.com/story/when-financial-advice-is-really-a-sales-pitch-2015-09-15

 

Summary

• The article discusses differing views on the Department of Labor’s effort to increase transparency and accountability in the financial services industry regarding investment advice.
• A table in the article separates providers of financial advice into four categories; 1) brokers; 2) registered investment advisers; 3) insurance agents; and 4) dually registered advisers. The table provides a good summary of the products/services offered, how each group is paid, the regulatory standard followed and the primary regulator.
• The article recommends that investors remain vigilant and should question or interview individuals that provide recommendations on financial products and conduct background checks of financial representatives on regulatory websites.
• NOTE: this article was posted in the latter half of 2015, but we believe it remains relevant today.

 

Our Take

• We firmly believe that all investment professionals should be required to act in the best interest of their clients. How financial representatives are compensated (and how much they are compensated) should be clearly disclosed to clients.
• We encourage prospective investors to spend a significant amount of time interviewing and questioning their financial representative prior to hiring that individual to manage their money. Additionally, clients should interview a number of financial representatives for comparison purposes – how they are compensated, services offered, sample portfolios, etc.
• Ask us about our questionnaire. We have developed an outline of key questions to ask when you are seeking to hire a financial representative and we have filled it out ourselves.

Article Link: http://www.bloomberg.com/news/articles/2016-05-12/your-retirement-savings-might-not-go-as-far

 

Summary

• 10-year U.S. Treasury bonds pay less than 2.0% per year. In other parts of the world, yields on government bonds are effectively negative if held to maturity.
• The U.S. equity market has produced significant gains since the market low in March 2009.
• Low yields on fixed income investments combined with large recent gains in the U.S. equity market means that investors should expect lower returns in the future. As a result, retirees may need to adjust their annual withdrawal rate lower, while younger workers may need to save more or work longer prior to retirement.

 

Our Take

• Starting point plays a large part in determining total return for investments over various time frames. Considering we have been in a favorable environment for attractive total returns over the past 7+ years, we believe investors should be prepared for inevitable short- to intermediate-term bouts of market declines and increased market volatility.
• Considering the heightened possibility of lower future returns, investors need to pay particular attention to the fees being paid in their accounts and to the individuals managing their accounts. These include the fees paid to their advisor, the commissions generated through the sale of investment products by their broker/insurance agents, trading expenses and expenses (expense ratios) on their underlying investments, etc. The importance of managing costs is one of our core beliefs. Ask us about our fee transparency.

Article Link: http://www.planadviser.com/Plan-Participants-Need-Understanding-of-Roth-Accounts/

 

Summary

• According to a Willis Towers Watson survey, the percentage of plan sponsors offering a Roth option has increased in recent years; however, very few plan participants that have this option are actually making use of it.
• Unlike traditional 401(k) contributions, Roth 401(k) contributions are made using after-tax dollars, which allow for tax-free withdrawals at retirement.
• Contributions to a Roth 401(k) may help to diversify a participant’s exposure to taxes in retirement.

 

Our Take

• Investors (in this case, retirement plan participants) need to examine all options available to them in their plan.
• A Roth 401(k) account can be a helpful tool to manage unknown, future tax liabilities. However, not every option available in a retirement plan is for everyone. If investors are unsure whether or not to utilize an option, they should seek out additional help from the plan’s provider. Or please call us and we will be happy to discuss your situation.