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Recent Research: Highlights from August 2011

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Risk-Based Asset Allocation: A New Answer to an Old Question? The Journal of Portfolio Management (Summer 2011). Wai Lee.

In recent years, we have witnessed an alarmingly large and growing amount of literature on portfolio construction approaches focused on risks and diversification rather than on estimating expected returns. Numerous simulations applied to different universes have been documented in support of these approaches based on their apparent outperformance versus passive market capitalization–weighted or static fixed-weight portfolios. Many studies attribute the better performance of these risk-based asset allocation approaches to superior diversification. Given the absence of clearly defined investment objective functions behind these approaches as well as the metrics used by these studies to evaluate ex post performance, Lee puts these approaches into the same context of mean-variance efficiency in an attempt to understand their theoretical underpinnings. In doing so, he hopes to shed some light on what these approaches attempt to achieve and on the characteristics of the investment universe, if indeed these approaches are meant to approximate mean-variance efficiency. Rather than adding to the already large collection of simulation results, Lee uses some simple examples to compare and contrast the portfolio and risk characteristics of these approaches. He also reiterates that any portfolio which deviates from the market capitalization–weighted portfolio is an active portfolio. He concludes that there is no theory to predict, ex ante, that any of these risk-based approaches should outperform.

Differences and Similarities in Family Governance and Educational Needs across Geographies. The Journal of Wealth Management (Fall 2011). Lisa Gray.

Families across the globe increasingly realize the importance of organizing themselves to better manage all aspects of their wealth. In light of the 2008 crisis, this need has become particularly relevant. However, the way families organize themselves in one country may not be an appropriate fit for families in other countries. Since the family office has the longest developmental history in America, many countries look to the American prototype for family governance and family office creation. The generational histories of various cultures show the foundational differences in governance and educational needs across geographies and, consequentially, across cultures. Although the American approach to family governance and family office creation may serve as a good place to start, the American approach may not fit each global family’s particular needs. This article attempts to provide an overview of these multicultural generational backdrops, illuminate the need for more-customized education about governance, and facilitate a more-tailored governance creation process that fits the different needs of families based on their geographical and cultural heritage.

Developments in Asset-Backed Securitization since Dodd–Frank: An Assessment of the Regulatory Landscape. The Journal of Structured Finance (Summer 2011). Donald N. Lamson and Gregg L. Rozansky.

Enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act in July 2010 heralded fundamental change for the U.S. financial regulatory system, including the asset-backed securitization industry and credit rating agencies. Congress left it to the regulatory agencies to finalize Dodd-Frank’s requirements through administrative rulemakings, but they are experiencing difficulty meeting the Act’s ambitious deadlines. As far as ABS industry participants are concerned, the Securities and Exchange Commission will issue most of the relevant rulemakings. The problem is particularly acute for the SEC, which is responsible for adopting more than 100 rulemakings and conducting more than 20 studies. There is a tension inherent in the rulemaking process: The SEC must adopt rules within tight timeframes to provide certainty as to how the industry may conduct its business but not at the risk of unintended and unanticipated consequences that can result from haste. With the one-year anniversary of Dodd–Frank approaching, this article takes stock of where we are in the rulemaking process, reviewing what has been finalized, what remains outstanding, what has slipped behind, and areas of controversy for the ABS industry.

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