I am just back from another conference of Registered Investment Advisors (RIA), sponsored by Institutional Investor magazine. These conferences occur two to three times a year, and I have attended for a few years now. In exchange for moderating a panel or speaking on a topic, I get valuable time networking with larger peer firms from around the nation. This has been tremendously helpful for us to stay current of pertinent topics, but also to share and absorb the collective wisdom of our peers.
This conference had some of the same themes of others, and a few new ones. A few takeaways:
- Liquid Alts: Advisors are mostly fatigued by the process of chasing return through so-called ‘liquid alternative’ products which aim to deliver returns between stocks and bonds, uncorrelated to both markets all for an efficient fee and with transparency and liquidity. It would take a blessed marksman to shoot down all of those ducks, and indeed, most offerings have fallen short on most, and in some sad cases all, of those criteria. There is a circular irony in paying extra money for a complicated process that ultimately delivers something between the return of stocks and bonds when one can almost customize that return path just by blending….stocks and bonds.
- Cyber security: This topic that came up a few times, and I sat on a panel on this topic. I agreed to have a security expert assess our firm’s setup for the conference attendees. As one might expect, the single biggest risk that we, and most people, face in terms of a cyber breach is the simple act of clicking on a malicious link or attachment. We encrypt our emails, keep a dedicated router in our offices and work with industry leading partners who diligently protect our data. We also aim to keep a high level of service but remove ourselves as potential weak links in the chain as well. Recently we opted to no longer move money for clients, deciding instead to simply facilitate this activity between client and custodian. This is a road other advisors have traveled or are considering. The expert on my panel, whose firm works with large hedge funds, RIAs, banks, and the like, said that they were able to snare 80% of a large asset management firm in a (fake) virus email simply by asking folks to “click here to receive a free cookie”. That’s right, nearly everyone was willing to risk firm wide infection for a cookie. We do our part; stay vigilant – keep your passwords safe and when in doubt, DON’T CLICK.
- What the heck, interest rates?: I was literally a much younger man when my peers first started to agonize over interest rates: their current level, expectations of the future path and the destruction that is or has been or will be wrought by this tragedy. The path of U.S. interest rates has continued to confound investors for more than half a decade. The simple aggregate bond index (think S&P 500 for bonds) continues to be very, very hard for most investors to beat. Why? Simply, by assessing the level of rates, then pulling out their crystal balls, many investors assure themselves they can divine the true and correct path of rates. They are wrong. Interest rates may rise someday, but I may be well ensconced in a field of daisies by then. We do know that we have the most intense focus on the future path of rates in the history of the developed world. Any movements are likely to be communicated, anticipated and ultimately, ease in like a tire with a slow leak. The steady upward path of rates will be offset by a nifty feature called “roll down yield”. If your manager is worried about rates but can’t explain roll down yield, buy some sneakers and run. It simply states that as rates rise, maturing bonds are re-invested at the new higher rates, and their now higher coupon payments flow into the portfolio. Steadily upward rates, steadily increasing income stream into your portfolio. If rates fall, the opposite happens, but is offset by a price increase. The worst calendar year return in U.S. investment grade bonds is -4% in 1994. 2013 was in the top 3 at -2%. When we put our portfolio management pants on there are many dragons to slay and fears to realize, but rates just don’t bother us.
- Brace yourselves for lower returns. This is a fairly real thing to consider. The current stock market is near its all-time highs. Bond prices are quite high, and rates are low, so while losses might be small, future returns are likely to be fairly low. Inflation is low. GDP growth is somewhat muted (thought the U.S. continues to outpace every other developed nation on Earth…). There is a ‘debt to income’ overhang, globally. And we mostly have more retirees than we have workers. All of these things feed into the ticker tape machine of return expectations and suggest that future returns to investors of today may be less than they have been in the past. The old expectation that bonds returned 4% and stocks returned 9%, and so a 60/40 portfolio should return 7% is probably due for review. We share this view, though it is devilishly hard to pin down. The primary question, how much lower? is almost impossible to answer without much guesswork. But to be safe, we assume a bit lower, we assume double digit losses in the early years of our clients’ retirement years and just for safety we tend to throw in a high (4.1%) inflation rate to most of our financial plans.
The next conference is in late June, and I am scheduled to lead a discussion on best practices in reporting. We will report back then on any new takeaways.