Advisor Perspectives

Advisor Perspectives
Insights into the world of high- and ultra-high net worth investing

November 3, 2008- Vol 2, Issue 45

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The housing market was the epicenter of the financial crisis and, until a bottom is reached, the economy cannot recover. A panel of experts, including Nouriel Roubini and Chris Whalen, look at when this will occur and the implications for the economy and the capital markets.

Target Date funds are one of the fastest growing segments of the mutual fund industry. Our sponsor American Century Investments®' white paper explains their approach to asset allocation for LIVESTRONGTM Portfolios from American Century Investments and highlights how this approach is both realistic and responsible given market volatility and the need to manage risk as the target date of retirement approaches.

Fund manager George Soros discusses his theory of reflexivity and how it applies to the credit crisis. He says the authorities "have lost control" of the financial markets and offers his predictions - including the failure of one-half to two-thirds of all hedge funds.

Andre Perold says static asset allocations - like the traditional 60/40 portfolio - may be outdated. He discusses a new concept, stable-risk portfolios, which can offer lower volatility and higher returns.

Executives from the major ratings agencies were called to testify in front of a Congressional committee two weeks ago. We look at the regulatory history of the ratings industry, and show that regulators have known about the problems in the industry for a long time - yet did nothing to address them.

More articles below.

We welcome a new sponsor, Clients Interactive, who offers a customizable newsletter service for advisors. Their ad is below.

We have three guest contributions:

Scott Welch of Fortigent provides a comprehensive analysis of common investor reactions to market volatility and how advisors can respond to them. Welch provides extensive evidence to support the benefits of a long-term perspective and broad diversification.

Dan di Bartolomeo of Northfield Information Services reviews the causes of the credit crisis and the overall implications for the economy and the markets. He looks at the immediate issues - like the ratings agencies and inconsistency in the regulatory environment - and longer term issues, such as entitlement spending.

Ron Surz looks at the decimation of the finance sector. In the last year, $1 trillion of market capitalization has been lost in this sector, and Surz shows the impact this will have when fund performance is benchmarked against indices.

Lastly, we highlight some recent Advisor Market Commentaries.

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Where is the Bottom in the Housing Market?

Housing remains a critical variable in projecting the duration and severity of the recession. On October 30, a panel of experts addressed the question of whether the housing market is near its bottom. At the same time, the panelists addressed the broader economic picture and its implications for investors.

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Target-Date Portfolios and Retirement Financial Security

Today, there's a growing chorus of academics and retirement planning experts insisting that Americans aren't saving enough for retirement in the new world of DC plans. In response to this problem, several prominent asset management companies have launched target-date products with very high equity allocations throughout the investment horizon of the portfolios, even in the years just before and after retirement. In our view, an overly aggressive equity allocation is a poor strategy for retirement planning success. This piece focuses on our investment thinking behind LIVESTRONG™ Portfolios. We take a different approach, designed to maximize the likelihood of a secure retirement for our investors without unnecessary risk-taking associated with high equity exposure.

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George Soros - "The Authorities have Lost Control"

George Soros uses his theory of "reflexivity" to explain how the housing bubble was a "detonator" that set off the bursting of a super-bubble, the consequences of which are the credit crisis. He offers a three-part plan to remedy the crisis, but says that right now the authorities have lost control.

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Stable Risk Portfolios: A Timely Alternative to Static Asset Allocations?

Static asset allocations make sense if expected returns, risks, and correlations for asset classes are constant. But these all change over time. Andre Perold shows how time-varying risk for portfolios can be seen in measures of stock market volatility and shifts in stock-bond correlations that run the gamut from positive to negative, and how it can be addressed through the new concept of stable-risk portfolios.

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Rating the Regulators

The ratings agencies have been the target of much criticism for their failures leading up to the credit crisis, and rightly so. We look at the role of the regulators, and their failure over many years to address the core problems in the ratings industry, even though they were well aware these problems existed.

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Talking Investors Down Off The Ledge

Scott Welch of Fortigent argues there is no single root cause to current market turmoil. The old saying is that "Victory has a thousand fathers but defeat is an orphan." He summarizes the myriad culprits to the current situation not to point fingers but merely to highlight that this is a very complex situation and it will take complex solutions - and time - to work through it. Be very wary of anyone offering simple or one-off answers.

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