Recent Research: Highlights from November 2010
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“Is Patience a Virtue? The Unsentimental Case for the Long View in Evaluating Returns.” The Journal of Portfolio Management (Fall 2010). David L Donoho, Robert A Crenian, and Matthew H Scanlan.
In this article, Donoho, Crenian, and Scanlan report the results of their study into the cost of institutional investor impatience. Using Monte Carlo simulation techniques, the authors construct an idealized world with a universe of investment managers of precisely quantified skill, with skill levels varying among the managers. Although many institutions base manager hiring decisions heavily on the manager’s performance in the most recent months or years, the authors’ simulations show that institutions that rely on longer performance horizons of 5–10 years are more likely to find and stick with the better managers. This happens because on shorter time scales, the relatively few highly skilled managers are often temporarily outperformed by one of the many lesser-skilled managers, specifically, unskilled managers who have recently happened to simply be lucky. Hence, if a plan that previously was long-term oriented starts to hire managers based on short-term results, it will often find that the newly chosen manager underperforms both his own previous performance and also the manager previously managing the plan’s funds. It can, however, truly take patience to keep a skilled manager in a fund portfolio. In the authors’ simulations, skilled managers have deeper, longer, and more frequent drawdowns than many investors would expect.
To watch a video of Scanlan discussing his views on portfolio manager selection, click here.
“Not All Advisors Are the Same: How Can You Tell the Difference?” The Journal of Wealth Management (Winter 2010). Maria Elena Lagomasino.
Over the last dozen years in wealth management I have seen much change in the industry. In particular, I have seen a blurring of the lines that once existed between firms selling products and those advising. When the law separating banks and brokers was repealed in 1999, banks and brokers were allowed to merge—and they did. A “sales culture” swept through the industry and relationships with trusted wealth managers changed. Relationships became one between customers and salespeople rather than fiduciary relationships based on trust and loyalty to the client. Many clients are unaware of this change—and it costs them dearly.
“Lurking around the Corner: The Unknowns in Dodd-Frank.” The Journal of Structured Finance (Fall 2010). Joel S Telpner.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the most comprehensive regulatory reform undertaken of the U.S. financial services industry and financial markets since the Great Depression. Much has already been written about this Act. However, given its enormous complexity and sheer size, many questions still remain. The Act is littered with ambiguities. In addition, significant provisions of Dodd-Frank delegate to regulatory bodies such as the SEC and CFTC the responsibility to issue implementing rules and regulations. This article focuses on the provisions of Dodd-Frank that impact the world of structured finance including the regulation of derivatives markets, swap dealers and major swap participants; the new clearing requirements; the changes to the securitization market; and the limitations being imposed on the derivatives activities of depository institutions. The article outlines what we already know about these provisions of Dodd-Frank. More importantly, the article discusses what we still don’t know and what still remains ambiguous under the Act and outlines the rules and regulations that must still be issued under the Act to address these unknowns and the ambiguities.