Investment Industry Update: 3rd Quarter 2014

During the third quarter, two significant news items in the investment industry occurred within a week of each other.  Neither directly affects most of our clients’ portfolios, but both serve to reinforce our chosen investment philosophy.

The first development was the announcement by the California Public Employees’ Retirement System, or CalPERS, that the enormous and influential pension fund is abandoning its allocation to hedge funds.  In the announcement, CalPERS cited the complexity and cost of hedge funds among the primary reasons for the change.  Although it did not mention performance as a reason, any review of the CalPERS’ hedge fund performance leaves little doubt that it has disappointed.  We have long argued that most of these private funds are not worth the costs and risks for our clients, and we have thus avoided them.  As the name implies, private funds are just that-private.  They often employ secretive strategies that are difficult to understand, can take significant risk through concentrated positions, leverage and other means, and carry fees that average 2% annually + 20% of any profits generated.  While we do believe there is value in owning certain investments that have the potential to be less correlated to stocks and/or bonds, we prefer to access them via liquid, transparent funds with more reasonable fees.

The other significant news item was the sudden departure of Bill Gross from PIMCO, the world’s largest bond management firm.  The reason for his leaving is being hotly debated in the industry, but the real issue in our minds is that now investment committees all over the country must decide whether to stay with PIMCO’s actively managed funds, or follow the Bond King to his new company.  Either decision has risks, and potentially generates an unnecessary tax bill for clients.  We prefer our philosophy of allocating most of our core bond and stock allocations to index funds and ETFs.  These funds’ work because of the construction of the portfolio, not owing to the genius of one person, who could retire, leave or be fired at any time.  Rather than trying to ID the next “guru”, which are few and far between, most of our investment committee time is spent analyzing the valuations of asset classes.  We believe that’s a much better predictor of future returns.  See this study by Vanguard if you want to learn more.

Other articles that appeared in the 3rd Quarter issue of Your Family CFO Report include Economic Overview and Asset Class Summary. Please call us anytime with questions at 404-874-6244 and feel free to pass our message along to friends.

All references in this publication referring to our average allocation or “typical portfolios” reflect those of the fully discretionary accounts of clients with moderate risk profiles. Actual client portfolios are tailored to individual client circumstances and asset allocations may vary.  Any reference to returns reflect the performance of asset classes, are for illustration purposes only, and do not reflect the returns of any specific investment of Smith & Howard Wealth Management. No representation is made that any investment decisions discussed herein have been profitable in the past or will be in the future. Past performance is no guarantee of future results. A list of all recommended investments is available upon request.