NewsLetter October 2020

ONE CAN ONLY HOPE

“SEC share-class crackdown could spell the end for 12b-1 fees”

“The SEC enforcement cases have not said it’s inappropriate for investment advisers to pay 12b-1 fees to brokers. The problem is that the advisers are violating their fiduciary duty by not telling their clients about the conflict of interest created by the 12b-1 fee revenue…

The SEC is essentially saying 12b-1 fees are a thing of the past,” said Addleman, former director of the SEC’s Atlanta office. “There is no amount of disclosure that allows you to keep the fees.”

https://www.investmentnews.com/sec-crackdown-12b-1-196233

UH-OH: INVESTORS PREDICT ‘DOW 50,000’ – IN JUST FIVE YEARS
The average U.S. investor must be even higher than the stock market.

What else can explain the results of a new survey, which found that, among a sample of 1,500 people here in the U.S. who manage their portfolios, the average person expected the stock market to generate sky-high returns of 15.4% a year over the next five years?

After accounting for dividends, that would mean stock prices would nearly double by 2025… Yikes…

If that happens, can we all achieve “Financial Independence” and “Retire Early” to the beach? Just in time for the robots, artificial intelligence, and self-driving cars to do all the work…Oh, and this forecast was the average in the survey. Heaven knows what the optimists expect…

The poll was conducted by global money-management firm Schroders, which surveyed 23,450 private investors in 32 countries around the world. About 10% were already retired, and the other 90% were presumably saving for retirement. Those in the U.S., by the way, came out as, by far, the most optimistic—or possibly deluded—in the world. The Japanese are expecting returns to be less than half as much as folks here.

https://www.marketwatch.com/story/uh-oh-investors-predict-dow-50000-in-just-five-years-2020-08-17

FIDELITY TO LAUNCH BITCOIN FUND FOR WEALTHY INVESTORS
Hope they stay wealthy.

https://www.financial-planning.com/articles/fidelity-investments-files-with-sec-to-launch-bitcoin-fund-for-wealthy-investors

WE’VE COME A LONG WAY
From an article in Texas Tech Today

THEN, MAYBE NOT

COOL

Rope skipping!

https://youtu.be/th9doc-A9B4

HOT

https://pepperhead.com/top-10-worlds-hottest-peppers/

SAME OLD, SAME OLD

I know I’m probably beating a dead horse, but it can’t be that dead with all of the active managers still raking in money.

S&P Dow Jones Indices SPIVA Mid-Year Report

“Despite divergent results over the one-year horizon, both growth and value funds underperformed their benchmarks over the past decade. Large-cap (growth 82%, value 86%), mid-cap (60%, 81%), and small-cap (57%, 90%) all delivered painful results.”

https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-mid-year-2020.pdf?force_download=true

DO YOUR RESEARCH

For example, don’t just rely on headlines. This is true for professionals, as well as for retail investors. Below is a marketing piece I received from a fund company.

“Today’s chart provides a glimpse into why it may make sense to equal weight LCG today…Renaissance LCG SMA has been an equally weighted portfolio since inception in 1991.”

Nice marketing piece, but a closer look at the actual fund performance wasn’t as impressive.

Morningstar Risk Adjusted Measure (Sharpe Ratio*)

The Sharpe ratio measures a fund's risk-adjusted returns. The higher a fund's Sharpe ratio, the better a fund's returns have been relative to the volatility it has experienced.

STILL WAITING

Jim Cramer says the market rally could end July 27 (CNBC 7/27/2020).

As of 10/2, it’s up 2.7% since 7/31.

https://www.cnbc.com/video/2020/07/22/jim-cramer-says-the-market-rally-could-end-july-27.html

GOOD OLD DAYS

THE ANSWER IS NO!!!

A headline in InvestmentNews highlighted the popular issue of “free” trading.

Robinhood can benefit young investors — but is it worth the risks?

I found some of the comments in the article scary.

“To be fair, free trading apps do remove the barrier of entry for young investors to take their finances into their own hands…” The only barrier is one preventing naive investors from churning themselves to death.

“Over the years I have been trying to get my clients excited about investing without success,” he said. “Seeing their recent interest is encouraging. Yes, some will lose money and others will make money — but the lessons learned during this pandemic will be invaluable.” Right, losing money they can’t afford to lose will definitely be a lesson learned.

“…[at] a firm specializing in working with couples in their 30s and 40s, plenty of her clients use Robinhood and Stash for free trades and fractional share purchases…[it] encourages her clients to see their accounts with Robinhood or Stash as their ‘fun money,’ she said. “If it all goes to zero, they can still accomplish their big goals. If it does well, then it will get them to their goals faster.” Wow, this advisor must have a very different clientele than I’m familiar with, if they have enough “fun money” to play around trading stock.

I agree with Christine Benz of Morningstar, although I believe she is excessively polite. Rather than “not a great way,” I think it’s an insane way.

https://www.investmentnews.com/robinhood-young-investors-risks-196509

FROM PETER

BAH HUMBUG

From a recent InvestrmentNews article

Advisers question the value of bonds in client portfolios.

The traditional portfolio ballast layers on risk without providing much reward.

“It’s naïveté to focus on poor bond returns and not their place in a balanced portfolio,” said Harold Evensky, chairman and co-founder of Evensky & Katz/Foldes Financial Wealth Management.

Evensky added that the anti-bond trend is likely temporary, “until the next major market correction, when they realize that stock returns don’t always go up, and in those cases, it’s nice to have some [ability] to buy stock at bargain prices.”

https://www.investmentnews.com/advisers-questioning-value-bonds-client-portfolios-196238

DEJA VIEU ALL OVER AGAIN

Stock investors are the most bullish they've been in 15 years, one measure shows.

Sure hope they’re right, but I wouldn’t bet the farm.

https://markets.businessinsider.com/news/stocks/stock-market-outlook-investors-most-bullish-years-short-interest-2020-8-1029525803#

WHY AM I NOT SURPRISED?

Do 401(k) Advisors Add Value- Morningstar

While the differences associated with 401(k) plans that had an advisor varied by test, the overall analysis strongly suggests that smaller 401(k) plans – defined as those with assets from $1 million to $50 million – that have an advisor are doing better than those without.

https://www.morningstar.com/lp/value-of-advisors

NEGLECTED TO NOTE

That the 50% annual return figure noted below was before fees for the period from 1985 to 1994. More recently, he has been manager of Gotham Large Value Fund (GVALX). Below is the fund’s performance since inception, as compared to the iShares Russell 3000 Index (IWV).

https://www.businessinsider.com/joel-greenblatt-book-interview-common-sense-education-immigration-social-security-2020-8

WISE WORDS FROM MORNINGSTAR

Here's Why You Should Rebalance (Again)

Rebalancing during a bear market can feel painful, but it pays off in the long run.

The Exhibit below shows the max drawdown during both periods and how long it took the portfolio to recover its losses, as compared with the same portfolio rebalanced annually at the end of each year, arguably the simplest rebalancing strategy. It also includes the current drawdown through March 20.

The market had recovered by early August.

https://www.morningstar.com/articles/974578/heres-why-you-should-rebalance-again

FOX GUARDING THE HEN HOUSE

“Earlier this summer, the Department of Labor proposed a new restructuring of its fiduciary advice rules that would, for the first time, allow ERISA fiduciaries of retirement plans to receive commission-based compensation, 12b-1 fees, and other conflicted revenue-sharing payments, as long as the plan fiduciaries have otherwise acted in the best interests of the plan participants.”

This give oxymoron new meaning.

https://www.investmentnews.com/dol-advice-proposal-criticized-by-both-sides-at-hearing-196727.

MORE GURUS BITE THE DUST

“Of more than 700 U.S.-listed smart-beta ETFs, about 60% have undershot their indexes since the start of this year, according to data compiled by Bloomberg.

It’s every quant’s nightmare: Trades that look good on paper break down in the real world. And in the $1 trillion business of smart-beta investing, it’s happening on an industrial scale.

According to a new study, hundreds of strategies that showed significant outperformance in backtesting are failing to live up to their hype once they are packaged up and sold as ETFs.”

Hindsight is 20/20. Investing based on hindsight can be expensive.

https://www.financial-planning.com/articles/quant-investing-fears-ring-true-in-1-trillion-world-of-smart-beta

WHAT A DIFFERENCE A YEAR MAKES

My associate, Danqin, did some research to see what major firms were projecting for long-term nominal market returns in 2018 and 2019. Not too surprisingly, predicting the future is a slippery slope.

LOOKS LIKE I’M NOT THE ONLY ONE CONCERNED

State Regulators Question SEC's Private Markets Decision During Annual Conference

Incoming NASAA President Lisa Hopkins said the expansion of private markets without proper regulation and transparency is a “potential breeding ground for fraud,“ during the organization's virtual annual conference.

https://www.wealthmanagement.com/regulation-compliance/state-regulators-question-secs-private-markets-decision-during-annual?NL=WM-27&Issue=WM-27_20200905_WM-

27_685&sfvc4enews=42&cl=article_9_b&utm_rid=CPG09000006048947&utm_campaign=2881 6&utm_medium=email&elq2=e26ecdfad1c845dd9329eb41a06330d2&oly_enc_id=1239F98506 12E8V

SEIZE THE MOMENT

Remember all those women on the Titanic who waved off the dessert cart. —Erma Bombeck

DEJA VU ALL OVER AGAIN

Merrill’s army of newbies to resume cold-calling

When I started in this business almost 40 years ago, it was as a stock broker with Bache (now Prudential). After a few weeks of training, I was given a desk and my manager pointed at my phone and said, “Start calling!” After a dozen hang-ups and nasty comments, I was considering a new career. Luckily, about then, I saw an ad for a new designation known as the Certified Financial Planner (CFP) and my new career was born. Today there are nearly 90,000 CFP’s in the U.S. and 190,000 worldwide. In 1984, my number was 6,935.

https://www.investmentnews.com/merrills-army-newbies-resume-cold-calling-197647?NLID=IN-

Daily-Pulse&NL_issueDate=2020101&utm_source=IN-Daily-Pulse-

2020101&utm_medium=email&utm_campaign=investmentnews&utm_visit=177505

SIGNS THAT HUMANITY IS REGRESSING

From my little brother

US SEC UPGRADES “ACCREDITED INVESTORS,“ PUTS FINANCIAL KNOWLEDGE FIRST

The SEC amending its definition of accredited investors could have significant implications for regulated crypto token sales.

“As part of the SEC amending its definition of an accredited investor, the commission will no longer view wealth as the sole basis for determining whether an individual or corporate entity is eligible to participate in a private equity sale...The new definition includes consideration of ‘financial sophistication’ in determining whether individuals or institutions are qualified investors.”

Couldn’t agree more that wealth is not a good standard for investment knowledge, but I’d love to know how the SEC will determine an investors “sophistication” regarding crypto token sales. I believe most professional advisors (me included) are unqualified to do the appropriate due diligence on such investments.

https://cointelegraph.com/news/us-sec-upgrades-accredited-investors-puts-financial-knowledge-first

THINK ABOUT IT

LOTS OF GURUS

Predicting future returns. Below is an example from Vanguard.

“Our 10-year annualized nominal return projections are as follows. Please note that the figures are based on a 1-point range around the 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.”

Sobering numbers indeed. Interesting to note the wide ranges and the difference between growth and value and the low inflation expectation.

MORE GREAT PICTURES

Also from Peter

LITTLE COMPANIES, BIG CHOPS

An interesting article about Wasatch Micro Cap fund. It provides food for thought on how much weight to apply to short-term performance. While the fund has blown the socks off its index competitor IJT (iShares S&P Small Cap Growth) for about 7 months (when I read the article), the prior 8 years and 3 months was a dead heat. While great short-term performance is always exciting, it all too often will precede significant later under performance. Only time will tell.

https://www.fa-mag.com/news/little-companies--big-chops-57126.html

BRAIN TEST ANSWERS

#1 Answer: ”Bread.” If you said “toast,” just give up now and go do something else and try not to hurt yourself.

#2 Answer: Cows drink water. If you said “milk,” don't attempt the next question. Your brain is already over-stressed and may even overheat. Content yourself with reading more appropriate literature, such as Women's Weekly or Auto World. However, if you did say “water,” proceed to Question #3.

#3 Answer: Greenhouses are made from glass. If you said “green bricks,” why are you still reading this??? PLEASE, go lie down! But, if you said “glass,” go on to Question #4.

#4 Answer: Oh, for crying out loud. Don't you remember your own age?!?! It was YOU driving the bus!

If it’s any consolation, 95% of people fail most of the questions!

Hope you enjoyed this issue, and I look forward to “seeing” you again.

Harold Evensky
Founder
Evensky & Katz / Foldes Financial Wealth Management

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Evensky & Katz / Foldes Financial Wealth Management (“EK-FF”), or any non-investment-related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual s ituation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from EK-FF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. EK-FF is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of EK-FF’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are an EK-FF client, please remember to contact EK-FF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. EK-FF shall continue to rely on the accuracy of information that you have provided.

© Evensky & Katz/ Foldes Financial Wealth Management

© Evensky & Katz / Foldes Financial Wealth Management

Read more commentaries by Evensky & Katz / Foldes Financial Wealth Management