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Recent Research: Highlights from February 2014

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"Contribution of Pension and Retirement Savings to Retirement Income Security: More Than Meets the Eye"
The Journal of Retirement (Winter 2014)
Billie Jean Miller and Sylvester J. Schieber

Recently, much concern has been expressed about the U.S. retirement system. Social Security is underfunded, while supplemental plans reportedly provide benefits half only that of Social Security and have gained little ground over the last 40 years. The shift to defined contribution plans is often seen as problematic. Some analysts suggest scrapping tax preferences for retirement plans and expanding Social Security. Much evidence that supplemental plans are coming up short on enhancing retirement security comes from the Current Population Survey (CPS). The analysis here shows that most income from retirement plans is not captured by the CPS or the Social Security reports developed using it. Ignoring retirees’ growing private retirement savings and income distorts the role played by private pensions, resulting in inaccurate assessments of retirees’ economic status. This error may bias policymakers’ judgment as to the right policies for an aging population and underfunded pensions.

"Can Alpha Be Captured by Risk Premia?"
The Journal of Portfolio Management (Winter 2014)
Jennifer Bender, P. Brett Hammond, and William Mok

This article explores the roles of risk premia strategies in institutional equity portfolios, not only as potential replacements for existing passive beta investments, but for certain active mandates as well. The authors quantify the degree to which active equity manager returns (alpha) can be captured by using long-only factor portfolios, as reflected by the MSCI Risk Premia indices. Using 10 years of historical data from January 2002 to March 2012, the authors find that risk premia can account for a substantial portion of alpha: as much as 80%. They also propose a portfolio construction framework for incorporating active managers who deliver the highest alpha, once risk premia are accounted for.

"Managing Art Wealth: Creating a Single Family Office that Preserves and Protects the Family Art Collection"
The Journal of Wealth Management (Spring 2014)
Alessia Zorloni and Randall Willette

Investing in art, once the preserve of a wealthy elite in Europe and North America, is now global. This expansion of the art market, made possible by the broader dissemination of concentrated wealth and by the globalization of art, has fuelled the tendency to view art as an asset class comparable to stocks or real estate. Only recently, however, has art been viewed through the lens of modern portfolio theory and considered a potential alternative investment as part of a portfolio of assets. Based on this evidence, this study examines the role of art in the overall wealth-management strategy of a single family office and the issues faced by wealthy families in managing a private art collection. Finally the paper offers general recommendations on what constitutes sound art governance in order to preserve and protect a family collection.

"Proposed Risk Retention Rules Trouble Abcp Market"
The Journal of Structured Finance (Winter 2014)
James J. Croke and Peter C. Manbeck

As required by the Dodd-Frank Act, the Federal Reserve Board, the Securities and Exchange Commission and other federal regulators are moving forward with plans to require risk retention in most securitizations and are likely to approve final risk retention rules in early 2014. Although in developing the rules the regulators have endeavored to take into account the unique features of different securitization markets, the retention rules that those regulators have proposed for asset-backed commercial paper (ABCP) conduits fail to recognize the substantial differences that exist between ABCP programs and other securitization structures. The proposed rules would impose operating restrictions and disclosure obligations on ABCP conduits and their sponsors that could have a significant adverse impact on the ABCP market. In particular, those rules would require conduit sponsors to retain horizontal or vertical credit risk in their conduits or to comply with a narrow safe harbor that would (among other issues) limit the categories of assets that the conduits could finance. This article describes the risk retention rules that the regulators have proposed for ABCP conduits and discusses the compliance options available to conduit sponsors and the practical difficulties that each option would create.

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