Recent Research: Highlights from November 2014
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"Let’s Save Retirement: Repairing America’s Broken System of Funding Workers’ Retirement"
The Journal of Retirement
Russell L. Olson and Douglas W. Phillip
Far too few American workers can look forward to financial independence as they age. Many will be obliged to extend their working lives, some into their seventies. A patchwork of defined contribution (DC) retirement plans now serve as the primary retirement saving vehicle in the private sector, but they are complex, costly, and challenging for employers and employees to manage. This article presents a comprehensive set of recommendations for a unified private DC pension system to cover all working Americans, with a single set of rules and without cost to the government. A key part is the creation of broadly diversified trusteed retirement funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities. Employee contributions will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF or the employer already sponsors a defined benefit (DB) pension plan. TRFs will relieve employers from fiduciary responsibility for all future DC contributions. To protect retirees from inflation, longevity, and asset price volatility risk, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A new government agency, the Federal Longevity Insurance Administration, will enable private insurance companies to provide low-cost annuities.
"Es-cape-ing from Overvalued Sectors: Sector Selection Based on the Cyclically Adjusted Price-Earnings (CAPE) Ratio"
The Journal of Portfolio Management (Fall 2014)
Oliver Bunn, Arne Staal, Ji Zhuang, Anthony Lazanas, Cenk Ural, and Robert Shiller
This article explores the effectiveness of the cyclically adjusted price-earnings (CAPE) ratio to detect over- or undervaluation of sectors within the U.S. economy. The authors modify the original notion of the ratio from several empirical studies by John Campbell and Robert Shiller, not only to ensure uniform corporate payout policies, but also to allow comparisons across the sectors’ potentially differing accounting standards and varying growth expectations. Considering sector-level CAPE information back to the early 1980s, the authors translate the CAPE-based valuation signals into a sector rotation strategy, whose long-term value nature is complemented by a supplemental momentum adjustment, in order to eliminate value traps. The performance enhancement associated with the CAPE-based sector rotation extends to European sectors as an out-of-sample test.
"The Family Office Landscape: Today’s Trends and Five Predictions for the Family Office of Tomorrow"
The Journal of Wealth Management (Fall 2014)
Kirby Rosplock and Barbara R. Hauser
The family office landscape is evolving and in this article, Hauser and Rosplock discuss critical trends impacting the family office and wealth management space, as well as offer five predictions for its future.
"Alternative Structures for Investment in Credit and Operations in MBS Securitization"
The Journal of Structured Finance (Fall 2014)
Manoj K. Singh
This article examines the role of Fannie Mae and Freddie Mac (the GSEs) across a wide range of activities related to securitization as a vehicle for housing finance, with focus on a few key aspects that are undergoing a transition. The two main categories of GSE participation are their role as investors and their role in securitization operations. As the GSEs experiment with attracting private capital via structured products and insurance-based models to invest in mortgage credit risk, the author proposes two alternative models using the respective channels. The objective is to show a path to attract a wide base of investors at the “front end” so that risk taking by other players happens simultaneously with GSE securitization and shifts some operational burden of securitization from the GSEs to the private sector. The author explores the economics of recent risk transfer transactions in light of the guarantee fees charged by the GSEs for their overall role in securitization and offer insights about further participation of private entities in other operational roles. One such role is the post-securitization credit risk management that the GSEs perform. Going forward, risk-sharing arrangements with the private sector leave the investors facing credit risk, in addition to mortgage-backed security holders, dependent on the efficiency of such service provided by the GSEs in a principal/agent framework.