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CRS — Social Security: Trust Fund Investment Practices (August 20, 2014)

August 27, 2014 Comments off

Social Security: Trust Fund Investment Practices (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

The Social Security Act has always required surplus Social Security revenues (revenues in excess of program expenditures) to be invested in U.S. government securities (or U.S. government-backed securities). In recent years, attention has been focused on alternative investment practices in an effort to increase the interest earnings of the trust funds, among other goals. This report describes Social Security trust fund investment practices under current law.

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Global Investor Confidence in US Soars for Third Straight Year, According to 2014 Global Venture Capital Confidence Survey

August 14, 2014 Comments off

Global Investor Confidence in US Soars for Third Straight Year, According to 2014 Global Venture Capital Confidence Survey
Source: Deloitte

Global investor confidence in the United States significantly increased for the third year in a row, driven by a combination of favorable capital markets, abundant investment opportunities in innovative companies and a strong investor climate, according to the 2014 Global Venture Capital Confidence Survey from Deloitte and the National Venture Capital Association. Moreover, global investor confidence also increased in the United Kingdom, Israel and Canada, but continued to decline in Brazil, China and India, according to the survey.

Survey: lawyers ready to join in major push to spot and report financial fraud targeting older Americans

August 12, 2014 Comments off

Survey: lawyers ready to join in major push to spot and report financial fraud targeting older Americans (PDF)
Source: Investor Protection Trust (IPT), the Investor Protection Institute (IPI), and the American Bar Association (ABA)

Nine out of 10 practicing attorneys surveyed by the Investor Protection Trust (IPT), the Investor Protection Institute (IPI), and the American Bar Association (ABA) are willing to take part in a new campaign to address the estimated 20 percent of older America ns who have been the victims of investment fraud and financial exploitation.

In releasing the survey findings, the three groups announced that they are launching the Elder Investment Fraud and Financial Exploitation (EIFFE) Prevention Program Legal. The EIFFE Prevention Program Legal will develop, test, and implement a model national continuing legal education (CLE) program to teach lawyers to: (1) recognize clients’ possible vulnerability to EIFFE due to mild cognitive impairment (MCI); (2) identify EIFFE in their clients; and (3) report suspected instances of EIFFE to appropriate authorities. In June 2010, the Investor Protection Trust released a national survey showing that one out five older Americans are victims of financial swindles.

+ Survey Results (PDF)

A Real Fix for Credit Ratings

August 8, 2014 Comments off

A Real Fix for Credit Ratings
Source: Brookings Institution

The failure of credit ratings agencies to do their job – warn investors of the true risks entailed by the subprime mortgage securities they rated – was at the heart of the financial crisis. Policy makers since have wrestled with how to “fix” the ratings process going forward. Although the Securities and Exchange Commission has required the agencies to disclose more of their methodology, the ratings process is still less than transparent. The issuer-pay rating agency business model has been criticized as a central cause and new agencies designated by the SEC after 2008 moved away from this model, though they have since moved back. Various additional ideas to fix the system have been put forward but none has been adopted: randomizing the choice of ratings agency, or replacing private ratings with those of a public agency, such as the Securities and Exchange Commission.

Faulting the issuer-pay model for the Crisis, which has been in continuous use for more than 40 years cannot explain the sudden explosion and subsequent collapse of the securitization market, which occurred over a much shorter period. We offer a different approach here: by showing how the absence of a single, numerical, public structured credit scale to serve as a yardstick of structured credit quality in the U.S. debt capital markets provides a more plausible explanation for the problems in structured finance in particular. Transparent, numerical benchmarks of credit risk relating to structured credits should not only fix structured finance going forward, and ideally help resuscitate the market but in a more sensible fashion. In addition, we will argue that such benchmarks also are a necessary component to a prudent system of capital regulation and for accurately informing investors of true credit risk, just as speed limits are a necessary component of vehicular traffic regulation.

Practical Considerations for Factor-Based Asset Allocation

August 5, 2014 Comments off

Practical Considerations for Factor-Based Asset Allocation (PDF)
Source: McGraw-Hill Financial

Much has been written about the shortcomings of the traditional approach to asset allocation. Traditional asset allocation policies can typically be characterized by relatively static asset allocation and by diversification across asset class building blocks. As asset class returns are largely driven by common risk factors such as growth and inflation, traditional balanced portfolios can be poorly diversified, with a pro-cyclical growth bias that may lead to significant drawdowns and losses in the event of market turmoil. Against this backdrop, there has been an emerging shift, especially among institutional investors, toward more dynamic asset allocation, hinged on diversification across risk factors.

This being said, most investment portfolios are still constructed on the basis of direct asset class exposure and, as yet, it may not be feasible for investors to apply a factor-based asset allocation framework to implement their policy-level decisions. For this reason, more practical solutions are needed in order to allow investors to potentially incorporate risk factors in the portfolio construction process while accommodating their constraints and existing investment processes.

Exactly how risk factors should be included in the portfolio construction process is still a nascent area of research and is fiercely debated among practitioners. While there are numerous research papers that explore this topic, they tend to be theoretical, and it is for this reason that this paper has a stronger focus on the practical aspects of implementation. Rather than provide definitive answers here, we aim to share our reflections on this topic, following feedback from practitioners and discussions that took place in client roundtable events S&P Dow Jones Indices organized to promote dialogue with industry experts.

In this paper, we review three approaches of risk-factor-based portfolio construction and, using stylized case studies, discuss the investment rationale of the approach and remark on the issues that should be given consideration. First, this paper analyzes the use of risk parity on the asset class level as an approach to potentially reduce the concentration of equity risks in a traditional, balanced portfolio. Next, we examine how returns may potentially be enhanced or how risk may potentially be reduced by adopting alternate beta strategies—that is, strategies designed to capture both beta exposure from individual asset classes and systematic factors (such as value). Following that, we assess the feasibility of using risk premia portfolios, which involves taking long-short positions, to target systematic factors—a strategy used by some investors as a low-cost alternative to other absolute return strategies. Finally, we summarize our reflections on the trends in this area.

PwC and IRRC Institute Release New Cybersecurity Report; Offers Investors Strategies to Evaluate Risk Amid Opaque Corporate Disclosures

August 4, 2014 Comments off

PwC and IRRC Institute Release New Cybersecurity Report; Offers Investors Strategies to Evaluate Risk Amid Opaque Corporate Disclosures
Source: PricewaterhouseCoopers

A new report from PwC US and the Investor Responsibility Research Center Institute (IRRCi) indicates that while companies must disclose significant cyber risks, those disclosures rarely provide differentiated or actionable information. The report examines key cybersecurity threats to corporations and provides information to investors struggling to evaluate investment risk, business mitigation strategies and the quality of corporate board oversight.

The report suggests that investors focus on corporate preparedness for cyber attacks, engage with highly-likely targets to better understand corporate preparedness, and demand better and more actionable disclosures (though not at a level that would provide a cyber-attacker a roadmap to make those attacks).

The study suggests investors ask the following key questions:

  • Does the company have a Security & Privacy executive who reports to a senior level position within the company?
  • Does the company have a documented cybersecurity strategy that is regularly reviewed and updated?
  • Does the company perform periodic risk assessments and technical audits of its security posture?
  • Can senior business executives explain the challenges of cybersecurity and how their company is responding?
  • What is the organization doing to address security at its business partners?
  • Has the company addressed its sector-based vulnerability to cyber attack?
  • Does the organization have a response plan for a cyber incident?

The study also outlines common motivations for cyber-attacks, by industry sector, based on PwC experience…

How America Saves 2014

July 31, 2014 Comments off

How America Saves 2014
Source: Vanguard

How America Saves 2014 is here! This comprehensive report analyzes the saving, investing, and account activity trends in defined contribution (DC) plans at Vanguard. The report offers useful insights into current issues affecting DC plans, including employer contribution trends, automatic plan features, use of target-date funds, and use of advice services.

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