Wealth Management

(New York)

In an article that will surprise precisely none of our readers, the Financial Times has put out a piece explaining that 99% of all active US managers underperform. Nearly every US, global, and EM fund failed to beat their benchmark since 2006. The stats come from S&P Dow Jones, and will put even more pressure on active managers to justify their worth and existence. The director of research at S&P Dow Jones summarized the results in a single word: “startling”. “The S&P figures have become a massive boon for the ETF industry, which has been able to use them to show the benefit of passive investing”, said one commentator from Citigroup.


FINSUM: With stats this bad, the passive management business does even need to do any marketing. We still think active management has some merits, but part of the issue is that no one has stepped up to become a voice for the industry.

Source: Financial Times

(New York)

This article is an interesting one for advisers to read for clients. The piece looks at new statistics which show there is in fact a strong increase in happiness and sense of well-being as you move up the wealth ladder. While this contrasts with the motto “money can’t buy happiness”, the data probably surprises few. However, the most interesting part of the study is that the researchers found that certain types of wealth have a much larger impact on happiness than others. For instance, increases in financial wealth—such as stocks, bonds, or cash, had a very high effect, while increasing in property wealth and pension wealth had no effect on happiness.


FINSUM: This is a great article as it shows which asset classes bring the most happiness alongside the net gain in wealth. Could be an important aspect to consider.

Source: Financial Times

(New York)

There are risks hidden in your ETFs that you are not aware of—and we are not talking about a lack of liquidity of underlying assets. This piece looks at some of those risks and chronicles some people trying to create better ETFs that overcome the common issues. One big problem, for instance, is that most equity ETFs inevitably give investors more and more exposure to bubble-like valuations. The reason why is that with an ETF, your holdings always increase based on which stocks in the index did best, so you always end up owning a disproportionate share of the stocks that have risen recently. This means that as valuations jump, investors are increasingly exposed to big falls in value. Because of this, some suggest tracking shares on a different basis, such as book value. If you had done this from 1964-2012, your overall return would have been a little more than double what it would have been tracking shares based on market capitalization.


FINSUM: This article points out some of the important structural risks that ETF investors are exposed to. With the huge new push into passive looming because of the fiduciary rule, these kinds of risks are getting ever more critical to pay attention to.

Source: Wall Street Journal

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