Another Sign That The Quants Are Taking Over The Investment Industry

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More Money Flowing Into Smart Beta Is Just Another Sign That Quants Are Taking Over (The Economist)

Smart beta funds, which do not use market cap-weighted approach, seem to be attracting more money. They got $15 billion in Q1 2013, up 45% year-over-year. The Economist points out that there are a number of smart-beta approaches.

“The simplest is to give each market constituent equal weight. If there are 100 stocks, then each would have a weighting of 1%. A second approach, dubbed “fundamental indexing”, is to weight each company by its financial characteristics—sales, dividends, assets or cash-flow. A third is to weight the index in terms of the volatility of the stocks, with the least volatile being favoured. A fourth is to use the “momentum effect” to buy stocks that have recently risen in price. That’s just for starters.”

While the strategy has its own criticisms, The Economist argues that it is “another sign that the Quants are taking over.”

A New Study Tells Maryland’s Pension Fund To Switch To Indexing (Maryland Public Policy Institute)

A report from the Maryland Public Policy Institute is recommending that administrators of state pension systems consider indexing them. The report by Jeff Hooke and John Walters compared the investment fees and investment performance of Maryland’s state pension fund to those of other state pension funds. Their study found that the 10 states with the highest wall street fee ratio over the last five fiscal years had a lower annualized five year return than the bottom 10 states. They also found that an index portfolio mimicking state pensions asset allocation had an annualized return of 2.19%, against 1.5% which was the actual median performance of 35 state pension funds.

“State pension systems represent the retirement security of millions of public employees across the nation. Confidence in the strength of that safety net is beginning to erode. In these tumultuous economic times, the administrators of the state’s pension systems would be wise to consider indexing the systems’ portfolios to ensure average investment returns and to cut unnecessary fees. this would be a safer, more responsible use of system resources than paying Wall Street management firms billions of dollars each year to deliver sub-par results on public securities and risky alternative investments. taxpayers and public sector employees suffer the results of subpar performance.”

Investors Jumped Back Into Stock In June (TD Ameritrade)

TD Ameritrade’s proprietary Investor Movement Index showed that retail investors increased their exposure to stocks in June. The IMX climbed 2.6% to a reading of 5.15 after falling in the months of April and May.

tdameritrade investor sentiment

Two Things Firms Can Do To Attract Female Advisors (The Wall Street Journal)

As wealth managers try to woo more female investors, Catherine Valega of Green Bridge Wealth Management believes need to woo female advisors too. In a new WSJ column she writes that firms can do two things to attract more female advisors. 

1. “They should find ways to get women together. Host events where female advisers are able to meet other female advisers at all levels of the industry. It’s the easiest thing to do. …At top conferences there is sometimes a female adviser dinner, but we need to do that at every level of the experience chain so more women have a chance to receive mentoring.” 2. “Firms try to attract women using the same model they use when attracting a man.” Valega writes that this is a mistake as women have a different work-life balance, and firms need to rethink how they approach female advisors.

The Brand New ‘Pain Trade’ (JonesTrading)

A pain trade refers to an asset that cause the most pain to the most amount of people. And Mike O’Rourke of JonesTrading writes that being long bonds is the new pain trade.

“Much of the pain trade talk over the past two years has been the move higher in equities.  These days, there is a new pain trade–being long bonds. There is a major tidal shift occurring here.  Following 5 years of the Federal Reserve, Commercial Banks and investors piling into bonds the momentum is finally reversing.    

“Normally, we would take the view that investors should not be scared of a 10 year Treasury yield below 3%. The problem is that the behaviour of the buyers of these instruments over the past few years has hardly been normal.”

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