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Walter White will succeed Gary C. Bhojwani as president and CEO of Allianz Life Insurance Co. of North America, effective January 1, 2012. Bhojwani will remain in Minneapolis as chairman of Allianz Life, with responsibility for the U.S. insurance operations of Allianz on the board of management of Allianz SE, Munich.

White (pictured at left)  joined Allianz Life in 2009 as chief administrative officer responsible for compliance, information technology, operations, and suitability. A new CAO for Allianz Life will be named.

Prior to joining Allianz Life, White was president of Woodbury Financial Services (Hartford Life’s independent broker/dealer). He led the formation of Woodbury Financial after Hartford Life purchased Fortis Financial Group in 2001.

At Fortis, White held senior leadership positions in operations, finance, marketing, and sales. Before joining Fortis, White was also president of MONY Brokerage, the MONY Group’s life insurance brokerage subsidiary.

White holds a Bachelor of Arts degree from Yale University and an MBA from The Wharton School at the University of Pennsylvania. He holds a Chartered Life Underwriter (CLU) designation.

Euro-crisis triggers “review with negative implications” for AXA

The financial strength rating (A+, Superior) and issuer credit ratings (aa-) of AXA Equitable Life Insurance Co. have been placed under review with negative implications by A.M. Best Co. The ratings agency also instituted a similar review of the ICR (a-) of AXA Financial and the debt ratings of AXA Financial and AXA Equitable.

The actions stem from exposure of the companies’ French parent, AXA S.A., to the ongoing eurozone financial crisis, which A.M. Best described as “the continued deterioration of the sovereign creditworthiness of several eurozone countries and the negative economic outlook for the region.”   

The review will remain in effect while A.M. Best examines the organization’s exposure to a prolonged adverse economic environment within the eurozone and the potential impact on its U.S. life insurance operations.

“Downward rating pressure may occur if there were a worsening of the AXA Group or AXA Financial life insurance subsidiaries’ risk-adjusted capitalization tied to investment losses, a deterioration of the operating environment in key territories of the parent or a perceived lessening of support for the U.S. insurance operations,” A.M. Best said in a release.

Besides AXA Equitable Life, the review affects MONY Life Insurance Co. and MONY Life Insurance Co. of America. In addition, the A (Excellent) and “a+” issuer credit ratings of AXA Equitable Life and Annuity Co. and U.S. Financial Life Insurance Co. are under review with negative implications. The “a” debt ratings on $350 million in 7% senior unsecured debentures, due 2028, issued by AXA Financial Inc. and $200 million on 7.7% surplus notes, due 2015, issued by AXA Equitable Life Insurance Co. were also under review with negative implications.

Prudential to sponsor National Retirement Risk Index

Prudential Financial will be the exclusive sponsor of the Center for Retirement Research (CRR) at Boston College’s National Retirement Risk Index, Prudential said in a release.  

The Index measures the percentage of working-age Americans at risk of failing to maintain their standard of living in retirement.  As its sponsor, Prudential will underwrite a number of studies conducted by the CRR related to the Index.

The National Retirement Risk Index reflects the changing retirement landscape.  According to the Index, the percentage of households at risk of not being able to maintain their standard of living in retirement rose to 51% in 2009 from 30% in 1989. The next update of the Index is scheduled for the spring of 2012.

“Retirement needs are increasing due to longer life spans and rising health care costs, while retirement resources are shrinking due to declining Social Security replacement rates and insufficient savings in 401(k)s,” said Alicia Munnell, director of the Center for Retirement Research.   

MassMutual launches new retirement plan investment option 

MassMutual’s Retirement Services Division has launched MassMutual Barings Dynamic Allocation Fund, with management by MassMutual-affiliate Baring International Investment Limited. The fund is offered to MassMutual’s plan sponsor clients and their advisors.

The new Fund relies on Barings’ dynamic multi-asset strategy, which has been in operation since 2002, to combine investment types from across the risk/return spectrum. The portfolio includes stock and bond investments from developed and emerging economies as well as real estate, commodities, and other investment vehicles.

Barings portfolio managers have discretion to increase exposure to investments with growth potential when they anticipate growth markets and hold more defensive alternatives when they anticipate weaker markets.

Barclays Wealth hires five to serve HNW clients in New York

Barclays Wealth has appointed five Investment Representatives to its New York office, bringing the total number of new advisors hired in the Americas this year to 50.

Jack Broderick and Bill Belleville, CFA, join as managing directors from Credit Suisse Private Banking. Broderick and Belleville have more than 40 years of combined experience in wealth management, trading and solutions development for high net worth individuals and family offices.  

Broderick spent 15 years at Credit Suisse, initially running the Monetization Services Group, an equities trading desk. In 2000, he moved to London to develop a similar platform for European clients. He returned to New York three years later as a relationship manager in Private Banking. Prior to Credit Suisse, Broderick managed the Execution Services Desk at Lehman Brothers for seven years. He holds a B.A. in mathematics and economics from Bucknell and an M.B.A. from Fordham.

Belleville, CFA, joined Credit Suisse Private Banking in 2001 to design customized solutions for high net worth clients. Prior to Credit Suisse, he specialized in fixed-income derivatives and structured products in roles at Merrill Lynch, Cantor Fitzgerald Securities, and First Continental Trading. A CFA charterholder, Belleville holds a B.S. in economics from Cornell, an M.B.A. from the Wharton School, and an M.A. in International Studies from the School of Arts and Sciences at University of Pennsylvania.  He sits on the Board of Trustees of The Albany Academy.

Barclays Wealth also hired Michael Gordon, Scott Madison and Jonathan Sopher as advisors in New York. Gordon and Madison join as Directors from Credit Suisse Private Banking, where for the past three years they specialized in serving high net worth clients.  Previously, Gordon worked for six years in the Private Client Group of Jefferies & Co. He holds a B.S. in Business and an M.B.A from the University of Chicago. 

Prior to Credit Suisse, Mr. Madison worked in the Markets Coverage Group in Goldman Sachs’s Private Bank and in Jefferies’s Private Client Group. He holds a B.S. in Accounting from Indiana University. 

Jonathan Sopher joins as a Director and brings 17 years of wealth management experience to his new role at Barclays Wealth. Previous roles included serving as a financial advisor at Jefferies & Co., Wachovia Securities and Prudential Securities. He holds a B.A. in Business Communications from California State Northridge. 

The five new New York-based Investment Representatives report to Mark Stevenson, regional manager for New York.

New kit to help plan sponsors comply with fee disclosure regs

To help plan sponsors comply with Department of Labor rules for fee disclosure in 2012, 401k Pro Advisor, a division of Wealth & Pension Services Group, Inc., is providing needed fiduciary reviews and cost analysis to assist 401k plans in evaluating the new information.

Under the new rules, known as 408(b) and 404(a), retirement plans will receive fee disclosures from their service providers that are intended to allow plan sponsors to tell whether vendor fees are reasonable and to reveal hidden compensation and conflicts of interest.   

Compensation is defined to include “both direct and indirect and applies to the service provider, its affiliates or subcontractors.” Service providers must disclose if they are acting in the capacity of a fiduciary to the plan. In many instances, this will be a “no,” which will be a surprise to many plan sponsors.

“As a fiduciary, the plan sponsor is duty-bound to understand, review and monitor this newly disclosed information,” says William Kring, chief investment officer of Wealth & Pension Services Group, Inc. and founder of 401k ProAdvisor.

Plan sponsors may find it difficult to evaluate this new information against a standard of “reasonableness” as required by ERISA, according to Kring. Also, participants will raise alarms as they realize they pay for most plan expenses. A recent survey by AARP showed that 74% of participants do not know they pay for plan expenses. 

ERISA requires that plan sponsors hire prudent experts to help them with determinations of reasonableness. 401k ProAdvisor’s 408b2 Rules Kit and consulting services “will take the burden off plan sponsors to evaluate the disclosure information that will be forthcoming,” the company said in a release.

“Further, 401k ProAdvisor will identify fiduciary breaches, conflicts, cost control issues, and highlight areas that need additional fiduciary follow-up. If necessary, 401k Pro Advisor can negotiate fees across service providers to meet the test of reasonable compensation,” the release said.

Despite signs of progress over the last few months—the economy grew at an annualized rate of 2% in July and September—the U.S. recovery remains vulnerable, according to a report released by TD Economics, an affiliate of TD Bank.

Although TD Economics projects 3.2% growth in the closing months of 2011—“economy’s best quarterly performance since mid-2010”—it expects growth of only about 1.9% during 2012 and 2.3% in 2013. The unemployment rate is expected to remain elevated at 8.8% by the end of next year, and 8.4% by 2013. 

The main headwinds, according to the report, are “financial market volatility, Europe’s dual banking and fiscal crises, and a highly polarized U.S. Congress,” as well as “overzealous fiscal restraint in Washington.”

A “disconnect” exists between positive economic performance and persistent economic pessimism among businesses and households, which seems to discount modest improvements in commercial bank lending, employment, credit quality, and credit delinquency rates since the financial crisis.  

TD Economics forecasts the eurozone economy to contract 1.2% in 2012. “Though the U.S. banking system has relatively small exposure to the debt of the most troubled periphery nations, a failure on the part of European policymakers to contain the crisis could lead to financial contagion migrating West,” the report said. “The eurozone’s governing structure was not built to take on the kind of extraordinary decisions at the kind of extraordinary pace the situation requires.”  

The failure of the Congressional “supercommittee” to reach consensus on deficit reduction may lead to steep spending cuts by 2013, and “partisan jockeying” on the payroll tax cut and emergency unemployment benefits could reduce economic growth by 0.7% next year, the report added. 234 – tasked with drawing up plans to bring the country’s deficit trajectory under control – failed to reach a consensus. As a result, steep spending cuts are slated to come into place by 2013. Partisan jockeying has left Congress at an impasse over whether to extend this year’s payroll tax cut and emergency unemployment benefits into 2012. Failure to do so could result in as much as a 0.7 percentage point drag on economic growth next year.

© 2011 RIJ Publishing LLC. All rights reserved.

Annual returns from a 50/50 equity/bond portfolio are likely to average between 4.5% and 6.5% in nominal terms and 3.5% to 4.5% in real terms over the next decade or so, according to forecasts in a November research brief from Vanguard.

Such returns would be below the historical average since 1926, (8.2% nominal, 5.1% real), but higher than in the past ten years in either the US or Japan. The estimate was based on Vanguard’s proprietary Capital Markets Model, as of September 30, 2011.

The fact that 10-year Treasury rates are only about 2% indicates the market’s belief that the U.S. economy will grow slowly over the next decade, Vanguard pointed out. Even if growth picks up and interest rates rise, bond prices will fall, hurting the returns of bondholders.

“But the future need not be dark, either,” Vanguard’s economics say. “Indeed, the present levels of interest rates and stock market valuations are arguably closer to the levels of the 1950s and 1960s, environments that over time produced respectable balanced portfolio returns.

“… We believe that realistically recalibrating one’s return expectations for a balanced portfolio is more prudent than making a drastic shift in allocation in an attempt either to defend against elevated market volatility or to pursue higher returns under the allure of higher yields, higher economic growth, or alternative investments,” they wrote.

“Investors who are unwilling or unable to lower their targeted rates of return or spending requirements may need to increase their savings rates—an approach that Vanguard research has shown can be quite effective in raising the odds of investment success.

“An alternative approach, for investors who feel locked to their return or spending targets, would be to adopt a somewhat more aggressive strategic asset allocation by increasing their holdings of equities. Of course, a direct result of this approach would be for the investor to bear higher portfolio volatility and greater downside risk.

To forecast U.S. bond market returns, Vanguard used the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975, and the Barclays Capital U.S. Aggregate Bond Index thereafter.

For U.S. stock market returns, Vanguard used the S&P 90 from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, to 1974; the Dow Jones Wilshire 5000 Index from 1975 to April 22, 2005; and the MSCI US Broad Market Index thereafter. For international stock market returns, Vanguard used the MSCI EAFE Index from 1970 through 1988, and a blend of 75% MSCI EAFE Index and 25% MSCI Emerging Markets Index thereafter.

© 2011 RIJ Publishing LLC. All rights reserved.

Securian Financial Group names new president

Christopher M. Hilger has been appointed the 16th president of the 131-year-old Securian Financial Group, Inc., the company reported this week. Formerly executive vice president, Hilger succeeds Randy F. Wallake, who is retiring. The change is effective on January 1, 2012, according to chairman and CEO Robert L. Senkler.

Hilger, 47, will report to Senkler with accountability for all of Securian’s insurance businesses and its Information Services technology division. Hilger also serves as CEO of Allied Solutions, LLC a Securian subsidiary headquartered in Indianapolis, Ind., that distributes insurance products and services to financial institutions.

A 25-year veteran of the insurance industry, Hilger joined Securian in 2004 when the company purchased Allied Solutions, a distributor in the financial institution market. In 2007, he was named senior vice president of Securian’s Financial Institution Group and in 2010 was promoted to executive vice president with the added accountability for the company’s Group Insurance business.

Wallake, 63, also an insurance industry veteran, joined Securian in 1987 as vice president of pension sales and subsequently assumed responsibility for the company’s retirement business. In 2001, he was promoted to executive vice president, adding responsibility for the company’s individual insurance business and, two years later, its broker-dealer and trust operations. As president and vice chairman, he directed all of the company’s insurance businesses.  

Barclays Wealth appoints Joseph Danowsky as Americas Head of Solutions

Barclays Wealth, the leading global wealth manager by assets under management,  has hired Joseph Danowsky as a Managing Director and Head of Solutions for the Americas.

In this new role, Mr. Danowsky is responsible for delivering solutions on stock-related holdings to high net worth individuals as well as corporations, venture capital, and private equity funds. He reports to Paul Morton, Head of Capital Markets, Operating Platforms and Business Strategy for Barclays Wealth in the Americas.

Based in New York, Mr. Danowsky’s responsibilities at Barclays Wealth include: helping individuals manage restricted/concentrated stock positions through Rule 144 sales, 10b5-1 sales plans, and hedging and monetization strategies; providing companies with executive services such as stock option administration and corporate stock buy-backs; and assisting venture capital and private equity funds with restricted stock sales, share distributions, and hedging and monetization transactions.

Danowsky is also responsible for expanding the firm’s suite of client solutions to include specialized products such as managed option overlay programs and exchange funds. In his role, he will work closely with investment professionals across Barclays Wealth to deliver the full breadth of the firm’s investment services.

Danowsky joins Barclays Wealth from J.P. Morgan Securities, where he worked in a similar role for the past three years. Previously, he worked at Bear Stearns for more than two decades. Starting in 2001, Danowsky helped develop the firm’s Advisory Services/Wealth Management group, where he held the position of Senior Managing Director. Prior to that, Danowsky worked in the firm’s legal department managing a team that focused on derivatives transactions, insider and restricted stock issues, complex trading strategies, and prime broker arrangements.

Mr. Danowsky holds a J.D. from Harvard Law School and a B.A. in economics from the University of Pennsylvania, where he graduated summa cum laude and Phi Beta Kappa.

MassMutual has launched a new Pension Funding Scorecard to help defined benefit plan sponsors and retirement plan advisors evaluate portfolio performance and deal more effectively with the impact of market volatility on the funded status of their pension plans.

The Scorecard provides a quarter-by-quarter performance comparison for a liability-driven investing (LDI) portfolio vs. a traditional 60% equity/40% fixed income portfolio against the MassMutual Pension Liability Index (MMPLI). The MMPLI is based on aggregating data from defined benefit plans on MassMutual’s Retirement Services platform.

The tool also provides historical returns to help retirement plan advisors, plan administrators and chief financial officers make informed decisions about pension funding approaches.

LDI has achieved increasing attention for its ability to help mitigate the volatility and unpredictability of pension plan funding status. According to its proponents, LDI can enable better cash flow management and better alignment of asset and liability returns over time, while streamlining plan administration. In addition, LDI can often help reduce concerns associated with downturns in the equity markets, an issue that has spurred heightened interest in LDI among CFOs and pension committees.

The annual Morningstar Ibbotson Conference will take place Feb. 23-24 at the Westin Diplomat Resort & Spa in Hollywood, Fla. The conference, Morningstar’s main event for institutions, will feature speakers from academic institutions and the financial services industry who will discuss new research and techniques in asset allocation, investment research, and portfolio construction.

Thomas Sargent, winner of the 2011 Nobel Prize in Economic Sciences and professor of economics and business at New York University, will deliver the keynote address and discuss the role of government policy and regulation in the midst of today’s economic crisis.

General session speakers include:

• Liz Ann Sonders, chief investment strategist for Charles Schwab & Co., Inc., who will address the state of the markets and the forces that shape the economic landscape;
• Charles Nelson, president of Great-West Retirement Services, who will discuss the opportunities and challenges in the retirement industry as defined contribution plans become the primary source for retirement security;
• Meir Statman, Ph.D., Glenn Klimek professor of finance at Santa Clara University, who will address investor desires and behavioral finance;
• William A. Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago, who will provide his economic outlook for 2012; and
• Roger Ibbotson, Ph.D., founder of Ibbotson Associates, professor of finance at Yale School of Management, and partner at Zebra Capital Management, who will examine the quarter-century controversy over the importance of asset allocation.

Topics of breakout sessions will include dynamic asset allocation, new techniques for mutual fund selection, target-date fund glide path stability, credit and liquidity risks of stable value products, asset-class- versus risk-factor-based asset allocation; and incorporating non-normal return assumptions into fund of funds optimization. In addition, John Rekenthaler, vice president of research for Morningstar will present an overview of the methodology behind the new Morningstar Analyst Rating for funds.

In addition to the conference, Morningstar will host an institutional software symposium focused on asset allocation for Morningstar Direct and Morningstar EnCorr clients on Wednesday, Feb. 22. Clients will receive training from product experts, trade ideas with peers, and explore Morningstar methodologies.

Envestnet, Inc., a provider of wealth management software and services to financial advisors, has acquired FundQuest Inc., BNP Paribas’ U.S. provider of fee-based managed services and solutions. The Boston-based firm managed about $15 billion as of June 30, 2011.

FundQuest, Inc. has provided managed account programs, overlay portfolio management, mutual funds, institutional asset management and investment consulting to RIAs, independent advisors, broker-dealers, banks and trust organizations since 1993.

Timothy Clift, formerly chief investment officer and chairman of the investment committee at FundQuest, Inc., will join Envestnet|PMC as chief investment strategist, responsible for the development of investment strategies for client portfolios as well as the development of manager and fund strategist selection methods.  

Clift joined FundQuest in 1994 and was responsible for its investment management programs for separately managed accounts, mutual funds, alternative investments, exchange-traded funds and annuities.  

Before joining FundQuest, Clift worked for Donaldson, Lufkin & Jenrette, where he was responsible for asset management, research and sales.  

A new report from the Urban Institute claims that if the Social Security reforms recommended by the National Commission on Fiscal Responsibility and Reform a year ago were adopted, the Social Security benefits received by adults would decline relative to benefits currently scheduled.

In 2070, when all of the proposed provisions would be fully phased in, average benefits would be 14% lower for those in the middle of the earnings distribution, the Urban Institute report said.

While the proposal largely preserves scheduled benefits for those in the bottom earnings quintile, they would experience a projected 3% benefit reduction primarily because of the proposed COLA changes—despite the inclusion of several benefit enhancements for recipients with low lifetime earnings.

For those in top earnings quintile, projected benefits would fall by about a quarter. As a result, their projected first-year replacement rates from Social Security will decline markedly for future generations, along with their return from the payroll taxes they pay over their lifetimes. These declining returns could erode political support for OASDI.

The proposal generally leaves beneficiaries in the bottom four lifetime earnings quintiles with higher benefits than they would receive under a payable baseline (under which Social Security is not changed at all in the near term and beneficiaries faced across-the-board benefit reductions once the Trust Funds are exhausted).

Compared to a feasible baseline (under which action is similarly deferred until Trust Fund exhaustion, but at that point restores balance though an even division between benefit reductions and payroll tax increases), relatively fewer beneficiaries have higher benefits, but the lower two quintiles still do comparably well.

 The National Commission on Fiscal Responsibility and Reform (NCFRR), led by Erskine Bowles and Alan Simpson, released a set of recommendations in December 2010 to help place the Social Security program on a sounder long-run financial footing. These recommendations included the following provisions that reduce the long-run fiscal imbalance through increased payroll tax contributions or reduced benefits:

• Increase the earnings subject to the Social Security payroll tax;

• Modify the benefit formula to slow the growth of future benefits;

• When calculating the cost-of-living adjustment (COLA), replace the current version of the consumer price index (CPI), the CPI for urban wage earners and clerical workers, or CPI-W, with the chained consumer price index (C-CPI-U, also known as the superlative CPI);

• Index the Early Eligibility Age (EEA) and the Full Retirement Age (FRA) to life expectancy to maintain a roughly constant ratio of retirement years to work years; and

• Cover newly hired state and local workers under Old-Age, Survivors, and Disability Insurance (OASDI).

Additional provisions aim to shore up benefit adequacy and, in some cases, mitigate effects of the prior provisions. These adjustments include the following:

• A minimum benefit for full-career low-wage workers;

• A benefit enhancement for the long-lived and longtime disabled;

• A hardship exemption from increases in the EEA and FRA for individuals with low lifetime earnings and relatively long careers; and

• An option for beneficiaries subject to increases in EEA and FRA (because the hardship exemption does not apply to them) to start receiving up to one-half of the benefit for which they would be eligible at age 62.

This report presents distributional estimates of the effects of the commission’s proposal on future Social Security beneficiaries. All projections rely on the Urban Institute’s Dynamic Simulation of Income Model (DYNASIM), a model of the retirement resources of the U.S. population based on the 1990–1993 panels of the Survey of Income and Program Participation (SIPP).

Our distributional analysis reveals that the projected effects of NCFRR’s proposal are particularly deep relative to current law scheduled for those reaching retirement age several decades from now, when reductions are phased in. In addition, projected benefit reductions are closely related to lifetime earnings, with those at the bottom of the lifetime earnings distribution largely shielded and those at the top experiencing significant reductions.

© 2011 RIJ Publishing LLC. All rights reserved.

The great debate goes on… and on and on.  “Active management wins!” “No—passive management wins!” The market behavior of the past two decades could support either argument. Or perhaps we need to redefine our terms. 3D Asset Management of East Hartford, Conn., for instance, has created a hybrid strategy that poses an interesting twist on the definitions of both passive and active. (More about 3D in a moment.)

Once upon a time, active equity investing meant trading stocks and passive investing meant buying and holding stocks. Starting in the 1990’s, when S&P 500 Index funds returned 17% or more a year, active and passive management came to mean trading or holding an entire asset class or index. An investment of $100,000 in the S&P 500 Index on January 1, 1990 would have grown to nearly $500,000 by December 31, 1999. Financial publications touted S&P 500 index funds as the only investment anyone could ever need.

Unfortunately, this type of passive strategy failed during the following decade, producing a 1% annual compounded loss. An investment of $100,000 in the S&P 500 Index on January 1, 2000 would have been worth just $90,000 at the end of the decade. Retirees who were drawing income from that type of account were devastated. By early 2010, passive strategies were being called “old school” methods that were obsolete in the “New Normal.”  

Did this poor performance invalidate passive equity investing? Not at all. We have been so focused on the rise and fall of the S&P 500 that we have forgotten the true definition of passive investing. A true passive strategy, history shows, was never meant to be limited to the S&P 500 or to any other single asset class.

The roots of today’s investing strategies can be traced to Harry Markowitz’ work. Prior to his   development of Modern Portfolio Theory in the 1950s, successful investment strategies were attributed to the ability to select and hold a handful of the “right” individual stocks. Markowitz’ “Theory of Portfolio Choice” showed that diversification could reduce risk without sacrificing yield and that investors could construct optimal portfolios that maximized return for given levels of risk. This work led to a Nobel Prize in economics for Markowitz, William Sharpe and Merton Miller in 1990.  

Twenty years later, at the University of Chicago, Eugene Fama and Kenneth French redefined passive investing. In the mid-1970s, Fama’s “Market Efficiency” white paper argued that, because equity markets were priced efficiently and because of the drag of active management fees, picking a few companies out of an asset class would offer no better returns than buying the whole asset class.

Fama/ French modeling recommends taking positions in all equity asset classes worldwide and weighting them according to each investor’s appetite for risk. Instead of holding just a few investments, passive portfolios of this type might hold shares in 8,000 to 10,000 companies. (The two men had the benefit of the Center for Research in Security Prices (CRSP) at the University of Chicago’s Graduate School of Business (now the Booth School). Created in 1960, CRSP remains one of the world’s largest database of historical investment returns.

Such portfolios could control costs and volatility while outperforming actively managed portfolios with similar risk exposure, Fama and French demonstrated. Sure enough, during the so-called “lost decade” of 2000 to 2009, diversified portfolios that followed their model delivered compound annual returns of 6% to 8% (with 8% coming from all-equity passive portfolios) Of the stock pickers and asset class “rotators” who called passive management a lost cause, few outperformed the Fama/French strategy. 

Does that mean that active management is dead? No, it simply needs to be redefined. 3D Asset Management follows the Fama/French mathematical weightings and uses exchange traded funds instead of index funds because they cost even less. But Wayne Connors, the 3D Asset Management principal who sets the firm’s allocations, also uses “active overlay”—a hybrid of active and passive strategies that involves actively managing the weights of asset classes in a diversified portfolio.  

Based on studies of investment behavior, 3D has observed that the movement of institutional money in and out of equities has short-term (over a period of 18 to 24 months) impact on the returns of certain asset classes and consequently adds to the volatility of a traditional passive portfolio. The firm subsequently demonstrated that yield can be increased and volatility reduced by tracking this behavior and adjusting the “weighting” of the indexes periodically—while remaining fully invested in all of them and adhering to the Fama/French model.    

For advisors who design income strategies for retired clients—whether you use a systematic withdrawal plan or a time-segmentation (bucket) strategy—this hybrid strategy is worth considering.  As the originator of the time-segmented Income for Life Model (IFLM) strategy now marketed by Wealth2K, I recommend this hybrid approach to my retired clients for the long-term segments of the model.

The volatility of the last few years has led the public to believe that all investment theory is obsolete and that only two options remain: to manage money very actively or to buy indexed annuities with income riders and shift all market risk to an insurer. Too many advisors have allowed themselves to get swept along by this same wave of emotion, when it’s our job to stay on the intellectual side of advice. If Markowitz, Fama and French are right, there is no rationale to “shift” long-term market risk. The lost opportunity-cost is too great.  Even in the worst of times, passive diversified portfolio design serves our clients well.

Phil Lubinski, CFP, is owner of the Strategic Distribution Institute, LLC.

Vanguard participants earn an average of 3.76% a year over five years

For the three million or so plan participants in defined contribution plans whose records were kept by Vanguard, the average annual total return over the five-year period ending on December 31, 2010 was 3.76%, net of all investment expenses fees and independent of each participant’s unique contribution or withdrawal pattern. 

The average cumulative return for that period, which included the 2008-2009 crash in equity market prices and corporate bond prices, was 20.27%. From the end of 2007 to the end of 2010, the average Vanguard participant broke even, with virtually no total return gain or loss.

The results were reported in a November 2011 research brief, “Participants during the financial crisis: Total Returns, 2005-2010,” written by Stephen P. Utkus and Shantanu Bapat of the Vanguard Center for Retirement Research.

There was some dispersion around the averages. The youngest participants (<25) had the highest five-year annualized returns (4.18%) of any age group; those with the highest account balances (>$250,000) had the highest returns of any account size group by a small margin (3.97%). Those with household incomes between $30,000 and $50,000 had the highest returns of the income segments (3.84%) and men gain slightly more than women (3.84% versus 3.60%).     

But those with the highest average annualized five-year returns (4.65%) were the over-65-year-olds who had all their money in a single target date fund. They also had the lowest average equity exposure, at 40%.

Not surprisingly, participants who used single target date funds (3.90%) and people who used Vanguard’s managed account service (3.66%) experienced tightly clustered returns—there was little variation in a random sample of 1,000 participants.

For the self-directed participants in the sample, the performance was scattershot, with annual five-year returns ranging from highs of almost 15% for a handful of people to lows as deep as minus 7.5% for a few. Some of the deviation was attributed to holdings of company stock.

“Some participants’ more extreme portfolio construction strategies resulted in exceptionally positive results over the period and some resulted in very poor results,” the authors commented.

“For many others, investment results were scattered, seemingly unpredictably, across the risk-return space. For plan fiduciaries, an important question to weigh is whether such dispersion of outcomes reasonably reflects individual participants’ desires for portfolio customization—or their lack of skill at portfolio construction.”

MetLife issues earnings forecast for 2012

MetLife, Inc., company expects 2012 operating earnings to be between $5.1 billion and $5.6 billion ($4.80 to $5.20 per share), up 7% over 2011 adjusted results, the largest U.S. life insurer and leading variable annuity issuer said in a release this week. The adjustments reflect several one-time items in 2011 and the estimated impact of an industry-wide change in accounting methodology.

MetLife’s stock price peaked at about $63 in October 2007, fell below $14 in early 2009 and closed at about $32 this week. Its one-year return is a loss of more than 18%, according to Bloomberg.

Shares of other publicly held insurers, such as Lincoln National Corp., Hartford Financial Services Group, and Genworth Financial Inc., have suffered as much or more. 

A recent report in Bloomberg said:

The current low interest rates have hurt investment income at companies including MetLife, the largest U.S. life insurer. Treasuries have fluctuated over the past three months as European leaders tried to convince investors that nations in the region will be able to pay their debts. The U.S. 10-year yield rose to 2.42% on Oct. 28, after reaching a record low 1.67% on Sept. 23.

The average yield on MetLife’s more than $350 billion in fixed-income holdings sank to 4.8% in the three months ended Sept. 30 from 5.8 percent a year earlier, according to data on the insurer’s website. In addition to its bond portfolio, the life insurer is using funds to finance hard assets such as locomotives, power plants and real estate.

In addition to operating earnings growth in 2012, MetLife projects it will increase premiums, fees & other revenues by 5% over 2011 to between $47.3 billion and $48.6 billion, the company said in a release.

MetLife estimates its full year 2011 operating earnings will grow 32% to between $5.2 billion and $5.3 billion ($4.83 to $4.93 per share) compared with $3.9 billion ($4.43 per share) in 2010.

For 2011, MetLife expects to grow its premiums, fees and other revenues 32%, to be between $46.3 billion and $46.8 billion, compared with $35.2 billion in 2010.

Book value per share at year-end 2011 is expected to be between $56.15 and $57.25, up 28% from $44.18 at year-end 2010.

MetLife expects fourth quarter 2011 operating earnings of between $1.2 billion and $1.3 billion ($1.16 to $1.26 per share), up 7% from $1.2 billion ($1.19 per share) in the fourth quarter of 2010.

Per share calculations for full year and fourth quarter 2011 are based on 1,068.2 million and 1,066.5 million shares outstanding, respectively. Per share calculations for 2012 are based on 1,070.3 million average shares outstanding.

Plan sponsors give Vanguard top marks: Boston Research Group

Retirement plan sponsors ranked Vanguard tops in 2011 for overall satisfaction, value for cost, and investment performance, according to Boston Research Group’s 2011 Plan Sponsor Satisfaction and Loyalty Study. This marked the third consecutive year that Vanguard has achieved the #1 ranking for overall satisfaction; it has been in the top five in that category since 1999.

Boston Research Group (BRG) is a strategic market research and consulting firm that serves a number of industries, including the financial services industry. BRG conducts an independent annual survey of how plan sponsors perceive full-service retirement plan providers, which provide investment management and administrative services such as plan recordkeeping; accounting, legal, compliance, and trustee services; participant education; websites; customer service phone centers; and loan administration.

This year’s findings resulted from BRG’s nationwide survey between April and July 2011 of 1,454 401(k) plan sponsors with $5 million or more in plan assets. BRG establishes quotas for plan sponsor responses for each recordkeeper to achieve statistically reliable samples. Vanguard has been among the top-tier providers, as ranked by client satisfaction and cost, in every BRG survey since 1999.

The BRG findings follow a Cogent Research “Retirement Planscape 2011” survey this summer that rated Vanguard among the best in several categories, including brand impression, loyalty, and plan sponsor support. Conducted in March and April 2011, the survey cited Vanguard as the top defined contribution (DC) investment manager for favorable brand impression among those familiar with the brand.

In assessing attributes that help drive perception of a DC investment manager’s brand, plan sponsors placed Vanguard first in the categories of “competitive fees/fee structure” and “good value for the money.” In addition, Vanguard was second for “noteworthy organizational stability” and “industry-leading product innovation.” The survey studied the impact of brand and loyalty among a representative cross section of 1,994 401(k) plan sponsors.

Pre-retirees and retirees happy, optimistic

Americans’ trademark optimism is intact, at least in regard to retirement, despite the economic turbulence that is reportedly forcing many people to work longer and make do with less. In fact, many retirees found only one downside: They wish they could have done it sooner. That’s according to a new survey from The Hartford and MIT AgeLab.

The October 2011 Age of Opportunity study, which measured the opinions and concerns of Americans both in and approaching retirement, found that most retirees are pleased with their life, and both pre-retirees and retirees have a positive attitude about retirement overall:

• Retirees are more likely to say “I am happier now that I am retired” (77%) than those who have yet to retire are to say “I will be happier after I retire” (64%).
• Other than wishing they could retire earlier (35% of pre-retirees), or could have retired earlier (42% of retirees), many recent and soon-to-be retirees see few negatives about retiring.
• Twenty-six percent of those nearing retirement said they feel “hopeful” about retirement, while 27% of those who have recently retired say they feel “peaceful.”
• Among those who did find something less than positive about the next phase of their lives, dealing with medical or health issues was cited most often (2% for both pre-retirees and retirees).
• Among retirees, the more affluent are twice as likely as others to cite giving up a fulfilling career as a negative to retirement.

The study, conducted by GfK Roper for The Hartford and the MIT AgeLab, surveyed people who are within 10 years of retiring versus those who have retired within the last 10 years, and attempted to answer the question, “Does the reality of retirement match expectations?”

Most pre-retirees and retirees cite health or medical issues as the thing they worry most about impacting their retirement. Health is definitely top of mind. Other health-related findings include:

• If they could change one aspect of retirement, retirees say they would have saved more money or been better prepared financially (32%), but they also wish they’d paid more attention to the importance of health issues (13%).
• When asked how long they would like to live, most said “as long as I am healthy” (80% of pre-retirees, 75% of retirees). In contrast, just 3% of pre-retirees and 4% of retirees said they would prefer to live as long as their money lasts.
• Retirement-age Americans see themselves living a very long time. Many expect to make it into their 90s (29% of pre-retirees, 35% of retirees).
• Although many retirees (48%) and most pre-retirees (63%) say their spouse is the person most likely to care for them if they become chronically ill, few (11% of pre-retirees and 10% of retirees) say their top concern is caring for a spouse or family member impacting their retirement.

When it comes to planning, both pre-retirees and retirees said a milestone birthday (19% of pre-retirees, 14% of retirees) or the realization that they are within 10 years of retiring (15% of pre-retirees, 11% of retirees) were the two most common triggers for serious financial planning.

It also seems that early planning plays off: More affluent retirees – those with $250,000 or more of investable assets – are twice as likely to say they began serious financial planning when they got their first job.

Both retirees and pre-retirees say they would give up some “extras” to help make ends meet in retirement, including moving to a more modest home (14% of retirees and 21% of pre-retirees), driving a less-expensive car (15% and 18%, respectively), or shopping less (17% for both). They were less willing to give up dining out, entertainment and recreational pursuits. Those who are more affluent are even more likely to “trade down” a home or car to preserve other aspects of their lifestyle.

Americans’ independent-mindedness also showed through as the survey found that retirees say they followed their own path, and pre-retirees hope to do the same. When asked what song they’d use to describe the retirement they have, or the one they hope to have, both groups most often chose (I Did It) “My Way.”

From Oct. 3-16, 2011, GfK Roper conducted a total of 1,964 telephone interviews with adults 45 years and older using RDD (random digit dialing). To qualify, respondents must have retired in the past 2-10 years (“retiree”) or plan to retire in the next 2-10 years (“pre-retiree”). These groups were further divided based on their household’s total investable assets, with quotas for under $250,000 and $250,000 or higher.

Securian finds opportunities for advisors among small business owners  

Securian Research has created a research paper to help financial advisors understand and cultivate small business owners as potential clients.

“For many financial advisors small business owners (SBOs) are highly desirable when building an advisory business because of the many financial services they need and use. But SBOs are legendarily difficult to get in front of because they are so busy and not particularly interested in hearing about a service they’re not convinced they need,” Securian said in a release.  

The paper, Small but mighty: Growing opportunities for financial advisors and small business owners, summarizes Securian’s analysis of the financial concerns of small business owners.

The online, statistically valid survey of 435 SBOs across the US shows their top financial concerns include cost control, profitability, building wealth, financial security for their families and rising health care costs.

Ironically, the percentages of SBOs who want outside assistance with these concerns is much larger than the percentage who actually seek and use it.   

There are circumstances under which SBOs consider seeking a financial advisor’s services. All fall in the typical advisor’s “sweet spot,” including business succession planning, personal finance, asset management and employee benefits.   

How does an advisor get on a small business owner’s radar? Recommendations from family members, business acquaintances, and other financial professionals provide the best entrée to an SBO. Clearly, networking with bankers, accountants and attorneys is important.

Securian will use the research to develop a “Small But Mighty” campaign that gives advisors a step-by-step approach to building their small business clientele.

Small business owners surveyed met these requirements:

• Private company ownership, sole or shared
• At least 50 percent responsibility company financial decisions
• At least 50 percent responsibility for household financial decisions
• For-profit company not in marketing, market research or financial planning
• Three to 250 employees
• Minimum of one year as owner.

Nationwide Financial aids in planning for retirement health care expenses

Health care is consistently among the main concerns of retirees and pre-retirees as they consider their post-employment finances. This, along with ongoing uncertainty over the future of Medicare, means that paying for heath care should now be taken into even greater consideration when planning for retirement.

To better assist advisors in helping clients plan for health care-related retirement expenses, Nationwide Financial today launched the Personal Health Care Assessment to help advisors estimate their clients’ health care expenses in retirement.

Today, Medicare provides health coverage to 46 million older or disabled Americans, but there are several common misconceptions about what is covered. In fact, Medicare currently covers only about 51% of the expenses associated with health care services.

Developed by leading physicians and experienced actuaries, The Personal Health Care Assessment program uses proprietary health risk analysis and up-to-date actuarial cost data such as personal health and lifestyle information, health care costs, actuarial data and medical coverage. The data is analyzed by these experts to identify a meaningful, personalized cost estimate that will help clients plan for future medical expenses.

The assessment starts with a questionnaire on the client’s health history, lifestyle and family history of medical conditions. After this, they will receive a report that offers suggestions for decreasing health risks. The report will tell clients about their health profile, health risks, estimated life expectancy based on those risks, and hypothetical out-of-pocket health care costs during their retirement.

The program also utilizes tools that allow for “what-if” scenarios. For example, how will a change in their year of retirement affect a client’s out-of-pocket heath care costs?

© 2011 RIJ Publishing LLC. All rights reserved.

Following the collective stock recommendations made by Motley Fool website readers and posted on the website in a certain way could have yielded substantial returns, according to a paper published this year by the National Bureau of Economic Research.

“A strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over 9 percent per annum over the sample period,” the paper said. 

“These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines, while positive picks on the site produce returns that are statistically indistinguishable from the market.”

Written by Judith A. Chevalier of Yale and Richard J. Zeckhauser and Christopher Avery of Harvard, the paper assesses the predictive power of approximately 2.5 million stock predictions submitted by individual users to the ‘CAPS’ website run by the Motley Fool company.

According to a summary of the paper published by NBER:

The data used in the analysis spans the period between November 2006 and December 2008, a period with significant swings in stock market performance. In the past, using different data sets, researchers have found that individuals perform poorly as stock market investors, except when they concentrate their portfolios on stocks for which they have an informational advantage.

And, while internet trading and message boards have facilitated trading, there is no evidence that those boards predict performance of the stocks. But the CAPS data differ from internet trading or online prediction markets in three ways: First, participants make precise predictions about future price, rather than simple buy/sell/hold recommendations. Second, the website provides a rating of participants by scoring their reputation.

And finally, CAPS synthesizes the history of past picks to produce a rating of each stock – on a 5-star scale.  The authors analyze the informational content of the CAPS picks by tracking the performance of portfolios formed on the basis of positive and negative picks (that is, predictions of increases and decreases in the prices of individual stocks, respectively).

A preliminary look at the relationship between individual picks in the CAPS system and subsequent stock market returns shows some interesting facts. For example, on average CAPS participants — like most stock market analysts — have been relatively bullish, producing a ratio of about five positive picks per negative pick.

Second, the relationship between returns for positive versus negative picks varies very little by market cap. Third, averaging across the whole time period, 5-star stocks outperformed 1-star stocks by 9 percentage points (although removing the height of the financial crisis increases the difference in returns between 5-star and 1-star to 14.6 percentage points). 

Most interestingly, these picks prove to be surprisingly informative about future stock prices. Although the return from investing in the positive-pick portfolio would have been negative over the course of the study period, the Motley Fool participants’ positive picks systematically outperformed the negative picks.

The authors posit that it may not be surprising that social investing websites are more successful at predicting abnormally negative future stock performance than they are at predicting abnormally positive future stock performance, because acting on negative information about the prospects for a stock can be more costly and difficult than acting on positive information about the prospects for a stock.

But the differences in returns between stocks ranked highly and stocks ranked poorly might be attributable to inherent differences in their characteristics, such as differences in risk, in market cap, or in past performance. Controlling for those factors, the authors find that differences in return are mostly due to stock picking.

© 2011 RIJ Publishing LLC. All rights reserved.