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02/10/2011

Recent Research: Highlights from February 2011


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Policy Portfolios and Rebalancing Behavior.” The Journal of Portfolio Management (Winter 2011). Martin L. Leibowitz and Anthony Bova.

An institutional fund typically has a multi-asset allocation—the policy portfolio—that is maintained over time. When allocations shift, the fund rebalances back to the policy portfolio. The discipline of the policy portfolio has many benefits: simplicity, convenient benchmarking, and a minimum of organizational frictions. Its very routine nature can lead, however, to an overemphasis on relative returns and an insensitivity to fundamental changes in fund status and market structure. In 2003, the late Peter Bernstein questioned whether rigid adherence to the policy portfolio made sense, given frequent market dislocations and high levels of volatility. In this article, Liebowitz and Bova attempt to shed further light on the Bernstein question by analyzing the risk tolerance and return assumptions of a basic two-asset (equity and cash) fund. One key finding is that policy portfolio rebalancing implicitly assumes that the risk tolerance and return premiums remain fixed over time. But few funds have the sponsorship, liquidity, or organizational conviction to keep such a constant risk tolerance in the face of severely adverse markets. One argument for the policy portfolio rebalancing is that assets become “cheaper” after a decline, but this is inconsistent with a constant return premium. Moreover, “cheaper” assets should actually call for rebalancing beyond the original policy portfolio to a more aggressive allocation. One idea for a more pro-active, market-sensitive process is to develop pre-planned contingency actions for various market scenarios.

 

Quandaries Facing Securitizers in the Wake of the SEC’s Proposed Amendments to Regulation AB.” The Journal of Structured Finance (Winter 2011). Ann M. Kenyon.

The SEC announced its proposed Reg AB amendments (the “RegAB II”) dealing with the offering process, disclosure, and ongoing reporting of asset-backed securitizations on April 7, 2010. Since the comment period expired in August, the SEC has been evaluating comments it has received on its proposal, as well as working with other agencies, as required by the Dodd-Frank legislation, on various measures common to other agency proposals. Securitization participants should be on heightened awareness of the continuing development in the interagency rulemaking process. As currently written, the SEC’s proposed rules are designed to facilitate both investor and general public confidence in structured finance. This article considers the possibility of other consequences, including:

  • Will the proposals have an effect on the length of time it takes to bring a deal to market?
  • What is the effect, if any, of the proposed 5% risk retention requirement with respect to consolidation?
  • What might be the effect of RegAB II on the private placement market?
  • What are some of the considerations with respect to the proposed waterfall programming?

 

Younger Generations’ Investing Behaviors in Mutual Funds: Does Gender Matter?The Journal of Wealth Management (Spring 2011). Alex Wang.

This study aims to understand younger generations’ investing behaviors in mutual funds in order to help wealth advisors understand how better to work with younger generations. Using survey data, this study reveals that knowledge, experience, and income are important factors that influence younger generations’ investing behaviors in mutual funds. Moreover,gender emerges as the most important factor that differentiates younger generations’ investing behaviors in mutual funds. The findings point out challenges for younger women’s wealth management, as they tend to exhibit fewer investing behaviors in mutual funds than their counterparts do. Consistent with previous research on wealth management among older generations, gender differences have significant implications for wealth advisors. As a result, wealth advisors should help younger women enhance their wealth management and financial future by facilitating their acquisition of necessary financial knowledge and experiences and their involvement with their wealth management. Wealth advisors are also urged to consider helping their clients manage their wealth by being aware of gender-predicted differences in client situations.


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