Archives for investing



The Problem of Dominated Funds

This is the second in a series of posts about the problem of excess fees charged to defined contribution retirement plans.

Retirement regulations have largely been successful in giving worker/participant defined contribution plans the opportunity to diversify.  Most plans nowadays give participants a sufficient variety of investment options that it is possible to allocate investments so as to diversify away most idiosyncratic risks.

However, the 1974 Employment Retirement Income Security Act’s (ERISA) emphasis on diversification has diverted attention from the problem of excess costs.  Courts evaluating whether plan fiduciaries have acted prudently have tended to just ask whether the plan offered a sufficient number of reasonably-priced investment opportunities.  For example, in Hecker vs. Deer & Co. (7th Cir. 2009), the 7th Circuit found it was “untenable to suggest that all of the more than 2500 publicly available investment options had excessive expense ratios.” Read More »



Exploitation-Neutral Consumption

Watching The Wolf of Wall Street was a guilty pleasure for me.  It wasn’t that the movie valorizes Jordan Belfort’s crimes, which defrauded victims of more than a hundred million dollars, but I felt uneasy about being entertained by a work of art indirectly derived from the pain of others – especially since it wasn’t clear that the injured parties were participating in the movie’s profits.

The movie literally and figuratively kept the victims of Belfort’s fraud outside the frame. In only a few scenes do we hear even the disembodied voices of the defrauded investors.  But imagine what it would be like to watch the movie in the presence of one of Belfort’s 1,500 real-life victims, whose ranks included architects, engineers, insurance agents, real estate appraisers, and other middle-class professionals.

The movie repeats Belfort’s claim that his firm only targeted the super-rich. The idea is that we needn’t worry so much about who was hurt by these crimes, because these investors were so wealthy that they wouldn’t be as impacted by the loss of a few dollars. But some of his victims’ families tell a very different story: “My father lost practically a quarter-million dollars,” said one man, whose father, an engineer, was cold-called at home by a Stratton broker. His father suffered a stroke under the stress of his losses. As another investor puts it: “I’m not a rich guy, and I’ve been paying for it ever since.” Read More »



“Just How Useless Is the Asset-Management Industry?”

An interesting article on the Harvard Business Review blog, by Justin Fox, on a topic that most investors already have a strong feeling (or should I say “bias”?) about. It may not, therefore, change anyone’s mind — but the fascinating lead shows the active-management roots of passive-management legend Jack Bogle:

Writing under a pseudonym in the Financial Analysts Journal in 1960, mutual fund executive Jack Bogle made “The Case for Mutual Fund Management.” Bogle took the track records of four leading mutual funds going back to 1930 and compared them to the performance of the Dow Jones Industrials. Not only had the four beaten the Dow, handily, but during the period from 1950 through 1956, for which the brokerage Arthur Wiesenberger & Co. (the Lipper/Morningstar of its day) had calculated mutual fund volatility, all but one of them had fluctuated less than the Dow.

“[M]utual funds in general have met the test of time, and performed in keeping with their stated policies and goals,” Bogle concluded.

Read More »



Investing in a Warmer Future

Bloomberg Businessweek explores how firms are adapting to a future climate:

Investing in climate change used to mean putting money into efforts to stop global warming. Morgan Stanley, Goldman Sachs, and other firms took stakes in wind farms and tidal-energy projects, and set up carbon-trading desks. The appeal of cleantech has dimmed as efforts to curb greenhouse gas emissions have faltered: Venture capital and private equity investments fell 34 percent last year, to $5.8 billion, according to Bloomberg New Energy Finance.

Now some investors are taking another approach. Working under the assumption that climate change is inevitable, they’re investing in businesses that will profit as the planet gets hotter. (The World Bank says the earth could warm by 4C by the end of the century.) Their strategies include buying water treatment companies, brokering deals for Australian farmland, and backing a startup that has engineered a mosquito to fight dengue, a disease that’s spreading as the mercury climbs.

Piet Dircke of the Dutch engineering and flood-prevention firm Arcadis says he was besieged with calls after Hurricane Sandy: “The climate is changing. Sea level is rising. That’s quite obvious. At the same time, the cities that are close to the waterline continue to grow and have more money and need for protection. It’s almost a natural growth market.”



Investing in Human Capital, One Person at a Time

Last week, we got an email from Freakonomics reader Paul Gu, a Thiel 20under20 fellow and founding team member of Upstart, a startup from former Googler Dave Girouard aimed at matching promising young students with financial backers. Here’s how it works:

Upstart aims to help you with the most important part of pursuing your dreams — taking the first step. It may be as simple as applying for an internship, relocating to another city, or spending a few months in a garage working on your idea. Your Upstart backers will provide you with a modest amount of capital, combined with the support and guidance you’ll need. In return, you share a small portion of your income for 10 years. By matching you with the right backers and by providing just a slice of economic freedom – where repayment is based on your future success — we help you get started on the right path.

In addition to being an Upstart employee, Gu is also a participant.  We were curious about why someone with such high potential future earnings was willing to give away a percentage of his hypothetical millions … here’s how he explained his decision:

For me, becoming an upstart is good economics. I’m stepping away from the hedge fund path to build a startup. That’s a much higher risk, higher volatility path, and most of the income potential is concentrated years into the future. Taking an Upstart investment makes it possible for me to access the educational and long-term benefits of working on a startup I’m passionate about without the loss of financial security or flexibility to make efficient consumption choices today (e.g. choosing housing with a shorter commute). Since Upstart determines each upstart’s funding rate offer based on his or her academic and career achievements, it makes economic sense for individuals all along the talent distribution.

Read More »



My Target-Date Fund Is Bigger Than Yours

We’ve banged the drum quite a bit on the need for greater financial literacy. If you care about such things, you might want to take a look at a new working paper by Pierluigi Balduzzi and Jonathan Reuter called “Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006″ (abstract; PDF).

That isn’t the sexiest title ever, and if you don’t care at all about personal finance or investing then you probably shouldn’t go near it. But if you care even a little bit, the paper has some interesting lessons even beyond the fairly narrow focus of Target-Date Funds. A Target-Date Fund is, in a nutshell, a mutual fund whose asset allocation automatically shifts over time as the target date approaches. Read More »



Finally, an Investment Worth Making

From the Pittsburgh Post-Gazette:

In the decade since the stadium opened, the personal seat licenses or PSLs fans bought for the right to purchase season tickets have soared in value, offering a far better return on investment than the slumping stock market or even the price of a barrel of oil.

Take, for instance, a fan who bought a license for a seat in an upper level of Heinz Field for $250 in 2001. It now is selling for an average of $4,306, an increase of 1,622.4 percent, based on 2011 sales at STR Marketplace, a website authorized by the Steelers to allow fans to buy and sell seat licenses.

A seat license that went for $500 in an end zone now is selling for an average of $7,486, an increase of 1,397.2 percent. And one that sold in a lower midfield section for $2,700 when the stadium opened now is going for an average of $17,131, a jump of nearly 534.5 percent.

Taken together, the 49,278 seat licenses sold by the Steelers for an average of $1,172 since Heinz Field opened now are selling for $9,802, on average, or an increase of 736.3 percent, based on the sales data.

Read More »



It’s Good to Have Friends in Texas

The University of Texas System regents have chosen to invest $10 million in a start-up company that provides web-based advising services to university students. Perhaps a good idea, although unlike nearly all other investments of the System’s endowment, this one was made by fiat of the Board of Regents with no consultation of its investment advisors. Interestingly, the start-up is run by a man who was on Gov. Rick Perry’s re-election finance committee and by another whose father was a previous chancellor of the System (with the former chancellor being part-owner of the company).

This is one of the best examples I’ve ever seen of successful rent-seeking in the public sector (although laypeople might use a less felicitous term than rent-seeking). This blog needs a contest for the most outrageous example of this behavior, and this is my entry into that contest. So, dear readers, please share your examples in the comments section.

[HT to AC]