Wealth Management

(New York)

As anyone working in wealth management will know, there has been an explosion of products in the so-called “smart beta” space. Smart beta products seek to use the passive management approach of index-tracking, but use specifically designed indexes based on different parameters to enhance returns. FINRA, Wall Street’s self-regulator, has been reviewing the products and has put out a warning to investors to be very mindful of the products they are choosing. The warning, however, was rather generic, a fact which Dave Nadig, director of ETFs at FactSet, commented on by saying “Because there’s no definition of what the heck smart beta even is, it’s hard to issue a warning”. According to FactSet, close to half of all exchange-traded products are classified as “smart beta”, or a total of 840 in the United States.


FINSUM: Smart beta is exploding in the US, with Goldman Sachs being the latest high-profile addition to the trend. The approach does seem to offer some interesting possibilities, but a thorough investigation of holdings and strategy seems absolutely vital.

Source: Wall Street Journal

(Houston)

This Bloomberg piece starts off by pointing of the oddity of equity investors taking refuge in oil stocks because of fears elsewhere. However, it quickly becomes clear why they are: high dividends that dwarf current returns nearly everywhere else. Royal Dutch Shell is currently paying a dividend of 6.7% and BP is paying 6.8%. That is far higher than the less than 1% you can earn on German ten-year bunds, so it is no wonder investors are fleeing into them. The stocks also offer low prices at present, as oil shares have been hammered by the rout in oil prices. However, as one strategist comments, “When you see an abnormally high yield relative to the market, that can either be fantastic value or it can be a value trap”. With the oil market looking to continue being heavily oversupplied, these dividends may prove the latter situation.


FINSUM: If you think oil will continue to muddle around where it is before possibly rising, then these stocks might be a good buy, as one can earn good dividend income while not seeing capital depreciation. However, they could prove a false economy if share prices tumble.

 Source: Bloomberg

(New York)

Last year Calpers, the largest public pension fund in the US, cuts its investments in hedge funds. This act was followed by several more announcements of large pension fund managers cutting their investments in the space. Many, including this publication, thought the hedge fund sector might take a hit because of the leadership of Calpers and others. However, that has proven untrue. This article highlights how total pension fund investment in hedge funds grew 4% last year despite total returns of only 3.3%, below the MSCI’s 5.5%. Experts in the space say the result is not a surprise, as “liquid alternatives” are seen as having an important diversification role for large investors. According to Preqin, the ten biggest investors in hedge funds increased their exposure to the sector by nearly 10%, or $183 bn, in the twelve months ending in June 2015.


FINSUM: Performance has been poor for some time. However, given volatility in bonds, and worries over a bubble in equities, one can derive a logic of using hedge funds as a diversifying tool. Their high costs of ownership by undermine this though.

Source: Financial Times

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