Harvard Management’s Mendillo grapples with challenging environment

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Even Jane Mendillo admits she had awful timing in becoming president and CEO of Harvard Management Company (HMC) on July 1, 2008. As she said in her presentation on “Endowment Management in a Changing World” to the Boston Security Analysts Society on March 25, she assumed her post
* Two days before commodity prices peaked
* Six weeks before the beginning of a massive rescue of financial institutions
* Just before six to nine months of the most challenging markets that most investment professionals have seen
Nonetheless, Mendillo showed a cheerful face to the friendly audience containing many fellow CFA charterholders.

Mendillo is cautious about investments because “At this point, uncertainty is a big factor in markets and economies. The short-mid term may be challenging,” she said. It could take many years, she acknowledged, for the size of the Harvard endowment to return to its $37 billion level of June 30, 2008. Still, she noted, the endowment has posted excellent gains since its beginnings, including its growth from only $19 billion five years earlier.

Mendillo’s caution is reflected in the endowment’s actions. “We’re not rushing for the exits. Nor are we rushing to get back into the markets,” she said. Mendillo took pains to correct what she called misperceptions that HMC has sold private equity holdings for “pennies on the dollar.” The firm has made some transactions in secondary markets, but hasn’t taken major chunks out of its private equity holdings, she said.

HMC is taking a more conservative tack under Mendillo. It has cut back its -5% cash weighting to -3% for the first time in decades. Moreover, the portfolio is “seriously in cash,” she said, because she wanted to create more flexibility in the portfolio and make room for new investments.

Where is HMC heading? Mendillo gave some clues, saying
* We continue to be cautious about deploying cash.”
* “If we don’t think we have an edge in a market, we stay out or we index.”
* External management is significantly more expensive than internal management, so if external management doesn’t pay off, HMC will hire a team that can deliver
* The failure of the illiquid portion of the portfolio to be self-funding has “impacted our appetite for further illiquid assets”
* She expects to see very attractive opportunities in real estate, but they may lie a couple years ahead.
* She is very excited about what the firm’s natural resources team has uncovered.

MFS Investment Management is using LinkedIn to circulate commentary

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MFS Investment Management has set up a LinkedIn group called MFS Investment Commentary. 

Its purpose? According to the group profile, it is “A group for financial advisors and investment industry professionals interested in getting updates on MFS’s outlook on financial markets around the world. James Swanson’s Chief Investment Strategist corner, the Week in Review, and the month Global Perspective are featured here. U.S. investment products offered through MFS Fund Distributors, Inc.”

At a quick glance, it looks as if many of the group members are MFS employees. But perhaps they haven’t publicized it yet among the professionals whom they’re targeting.

Have you noticed any other fund or investment management companies setting up LinkedIn groups? What about other uses of social networking?

Related post: Eaton Vance, Evergreen, and FRC on “Communication Strategies for Good Times and Bad”


A financial advisor’s "Cure for Money Madness"

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People are too obsessed with money and need to get over their irrational beliefs about it, so they can focus on living their lives. That seemed to be the main point of Spencer Sherman’s March 19 talk to the Wharton Club of Boston. Sherman is the author of The Cure for Money Madness.

Sometimes it takes a life-threatening experience to make your aware of your money madness. Take the case of Sherman’s friend Billy, who went swimming by himself off a Hawaiian beach. He panicked when he got caught in a riptide. Instead of swimming parallel to the shore, as experts recommend, he headed straight for the beach. Billy thought his life was over. His last thought before he was rescued? “At least I don’t have to worry about my finances any more.” Finally, Billy put his money into perspective.

Your irrational feelings about money, which are rooted in your childhood, spur you to make mistakes, said Sherman. For example, you may feel that your self-worth depends on your net worth. So you may “buy high and sell low” instead of the more desirable “buy low, sell high.” 

Sherman mentioned some techniques for developing a more rational approach. For starters, think about how you’d advise a friend who’s in your situation because it’s easier to be rational about someone else’s money. Would you advise her or him to buy this stock, build this addition to the house, or take this job? Sherman’s book has a section devoted to exercises and he offers presentations and free conference calls on money madness. 

One of Sherman’s suggestions surprised me. He’d like us to ask ourselves “How can we make our current financial situation the goal?” I’m so accustomed to financial advisors focused on growing their clients’ wealth instead of finding satisfaction now. Ironically, he said, when we stop striving for more, we see the possibilities in what we’ve got. The idea of making the most of what we’ve got seems very appropriate today. 

I liked Sherman’s exercise for adjusting to less wealth.
1. Together with your spouse or significant other, write down your spending intentions for 2009.
2. Figure out how to create a great life within the limitations of those spending intentions.
3. Cut your 2009 spending intentions by 25% or even 50%. Get creative about working within those limits. For example, instead of eating out, you could organize potluck dinners and spend more time with family and friends.

If you’re intrigued by Sherman’s approach, check out his website or one of his YouTube videos.


How can I come up with ideas for a weekly newspaper column on personal finance?

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That’s the question a newly independent advisor asked me.

Before I offer some ideas, I’m going to challenge the idea that a newspaper column must be weekly. As newspapers decline, this advisor would be lucky to get into print once a month. But let’s assume the paper DOES need a weekly column. How about offering to rotate authorship with three advisors who have different niches?  You’ll reduce your burden and increase the range of topics covered by the column. That sounds like a win-win situation to me. If you know of anyone who’s tried column-sharing, please leave a comment below. 

Once you’ve landed your column, here are some sources for ideas.
1. Questions your clients ask you
2. LinkedIn and other social networking sites–See what questions appear on relevant LinkedIn’s groups. Pose a question in a social networking forum. For example, “What’s your most pressing personal finance question?” or “What questions do you have about managing your 401(k)?”
3. Professional publications–Have you read an interesting article in Financial Planning, Advisor Perspectives. Financial Analysts Journal or some other trade publication? Talk about the topic in plain terms that regular folks can understand.
4. Newspapers, TV, and other media–It’s especially good to pick a controversial topic.
5. Personal finance blogs–There are lots of good blogs out there. For a list of financial and economic blogs read by financial advisors, check out the list on page 3 of my article, “Investment Strategy Blogs Slow to Influence Financial Advisors.” For a more recent list, see “RIA blogs recommended by my Twitter friends.”

Can you suggest more sources? Please leave a comment.

Note: This post was updated on May 18, 2015 to remove a broken link and to add more recent information.

Madoff whistleblower Harry Markopolos speaks

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You can see Harry Markopolos speak in the video excerpts that make up part of “One-On-One With Harry Markopolos: Validated, But Not Satisfied” on WBUR’s website.

According to an editor’s note, “More interview excerpts will be posted March 30 in conjunction with a special profile of Markopolos slated to air on Morning Edition.”

Also, you can view the “60 Minutes” interview with Harry, including some clips from the BSAS Market Outlook dinner.

Fixed income attribution falls short

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Attribution analysis can help investment managers keep their clients, even in down-markets, said David Spaulding, president of The Spaulding Group, Inc. in his presentation on “Fixed Income Attribution: An Introduction” to the Boston Security Analysts Society (BSAS) on March 5. But good attribution analysis has been hard for fixed income managers to find. While equity managers have long enjoyed good models and software, the fixed income world is only catching up now, according to Spaulding. The Campisi model for fixed income attribution offers a solution. 

Explanation of underperformance can save the day
Some managers underperform their benchmarks, but keep their clients because of attribution. How’s that? Attribution helps them to explain what’s working–and what’s not. With that information, managers can reassure clients with their strategies for fixing things. This is a technique I talked about in “How can you report underperformance in your client letters?“ 

Equity-based models don’t cut it
But many fixed income managers create their performance attribution with the equivalent of one hand tied behind their back, based on what I learned from Spaulding. They’re using attribution models developed for equities, which look only at security selection and sector allocation. That’s a poor match for fixed income, where decisions about duration, sectors, and risk levels (ratings) are most important and security selection typically doesn’t count for much.

“If you’re not looking at duration, you don’t have fixed income attribution,” said Spaulding. That’s because the duration decision typically has the greatest impact on fixed income performance. 

Campisi model fixes problems 
The Campisi model, developed by Stephen Campisi, CFA, may help. It is an attribution model with the potential to  play the role for fixed income that two Brinson models play for equities, said Spaulding. The model views bond returns as coming from income in addition to price change. Spaulding ran through the steps in applying the model, including gathering the data, calculating the contribution effect for the benchmark and the portfolio, and calculating the attribution effect.

The BSAS audience seemed receptive to the Campisi model. But some expressed concern about handling derivatives in a fixed income portfolio. Spaulding said that assets that aren’t in a portfolio’s benchmark should be isolated and only their contribution should be discussed. However, I got the sense that managers who invest heavily in derivatives aren’t satisfied with that solution.

It looks as if challenges still remain until fixed income attribution achieves the usefulness of its equity counterpart.

If you’d like a copy of Spaulding’s PowerPoint presentation, e-mail your request to The Spaulding Group.

Funds using alternative investment strategies gain steam

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Alternative investments that are less correlated to major market indexes are gathering momentum in the advisor community. Two trends are fueling the movement. First, the sharp market declines since September 2008 have boosted the attraction of strategies that don’t dive along with stock market. “This year, people are looking to dial down risk in their portfolios,” says Bill Harding, director of research at Morningstar Investment Services in Chicago. Second, these strategies are increasingly available to those who don’t qualify as accredited investors (with investable assets of $1 million or more).

Continue reading “Against the Grain,” my article in the March 2009 issue of Financial Planning magazine (free registration may be required for access).

Also, here’s some information that didn’t make it into the article. It’s the list of funds used by the advisors whom I interviewed.

Absolute Opportunities
Absolute Strategies
Arbitrage
Diamond Hill Long-Short
Direxion Commodity Trends
Gateway
Highbridge Statistical Market Neutral
Hussman Strategic Growth
Merger
Nakoma Absolute Return
PIMCO CommodityRealReturn Strategy
Robeco Boston Partners Long/Short Equity
Rydex Managed Futures Strategy

"James Grant: A Positive Lesson from the Great Depression"

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Great price tags on a number of investments are the silver lining of the current recession, according to James Grant, founder of Grant’s Interest Rate Observer. 

Grant shared his “Thoughts on the Financial Markets and the Current State of the Economy” with the Boston Security Analysts Society on February 11. He spoke at length about the virtues of value investing, as exemplified by the Depression era strategies of Floyd Odlum of Atlas Corporation. Today’s investors can learn from Odlum’s strategy of underpaying for assets, Grant said.

Continue reading “James Grant: A Positive Lesson from the Great Depression,” my article in Advisor Perspectives.

"Institutional investing" isn’t as great as you think

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That’s what Van Kampen Investments discovered when it researched how to name a new retirement income product.

“Institutional” means expertise to financial services professionals, but it makes individuals think of hospitals and prisons, said Andrew Scherer, managing director, Van Kampen Investments, in his comments to the Managing Retirement Income conference on Feb. 10.

Van Kampen named its new product “Retirement Strategy Funds” and adopted the tag line “helping you build a better plan” under the influence of research showing that
1. “‘Retirement’ resonated better than ‘Freedom,’ ‘Target,’ ‘Lifetime’ and others.”
2. “‘Strategic’ tested better than ‘automatic,’ ‘institutional,’ or ‘customized.'”
3. “Positive messaging resonates, fear-based does not.”

Can you think of other words that mean different things to you and your clients? Would you agree that “risk” is one of those words? Please leave a comment.

Related posts:
* Highlights from the Managing Retirement Income Conference
* Notable quotes from the Managing Retirement Income Conference


Notable quotes from the Managing Retirement Income Conference

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Speakers expressed some interesting opinions at the Managing Retirement Income Conference on Feb. 10. Their comments are paraphrased below.

  • It’ll take at least two years at 5% equity returns for people to make back what their 401(k) plans lost in the 2008  stock market decline.–Jack L. VanDerhei, Employee Benefit Research Institute
  • Retirement will turn out to have been a twentieth century retirement phenomenon. Fewer people can afford our concept of retirement because of longer lives and all three legs of the retirement stool getting shorter.–Larry Cohen, SRI Consulting
  • Only one in six LIMRA survey respondents have taken action–mostly reallocating balances–related to the economic crisis. Respondents are planning to reduce debt, delay making investments, and reduce plan contributions.–Bob Kerzner, LIMRA International
  • A tremendous demand for financial advice is coming, but people lack confidence in financial advisors.–Bill Dwyer, LPL Financial Services
  • Top earners might be willing to give up receiving Social Security payments, which they don’t need, in return for not paying more for Social Security–John Murphy, Oppenheimer Funds
  • It’s a myth that income annuities reduce liquidity and your children’s inheritance. Used properly, they can allow your assets to grow. –Steve Deschenes, MassMutual
  • There are three categories of managed payout funds: perpetual horizon endowment, horizon targeted self-annuitizing, and dollar payout targeting.–Richard Fulmer, Russell Investments

Related post: “Highlights from the Managing Retirement Income Conference”