Sunday, January 17, 2010
Tuesday, November 24, 2009
Saturday, November 07, 2009
XBRL covers 60% of global market cap
While this is an encouragingly large share, it is still some ways away from the 90+% that I reckon to be necessary to encourage global investors to migrate the information infrastructure of their analytical processes to XBRL. Bringing the EU's market cap on board would bring us substantially closer to that important threshold.
Thursday, October 08, 2009
UNCTAD on fair value
Monday, September 28, 2009
Clones doing well
Separately, EDHEC finds the performance of cloning methodologies to be systematically inferior to the real thing. However, this study performs a proprietary cloning methodology. The significance of its finding is thus limited to the quality of those strategies. While being performed over a longer time period, we think that the above mentioned assessment of commercially available products is more practically relevant to investors.
Friday, September 25, 2009
Are you prepared to be compared?
Saturday, August 29, 2009
No return on closing DB plans
Sunday, July 26, 2009
BIS on the crisis and remedies
"And, in the future, a financial firm that is too big or too interconnected to fail must be too big to exist."
Wednesday, July 15, 2009
Victims IV: The real crisis
Monday, June 15, 2009
Impact of accounting and prudential regulation on pensions
"A long-term view involves short-term risk, whereas a short-sighted strategy involves increased risk over the long term."
- There seem to be a few at least implicit factual inaccuracies in the parts describing the regulatory environment. The most glaring of which may be the assumption that the EU pensions directive is applicable in Switzerland - it is not.
- Accounting standards seem to be understood to effectively determine investment action. While it is not unheard of that managements structure transactions in such ways as to optimise their reporting, this clearly goes one step too far. We are well aware of the interdependence between perception (qua accounting standards) and (economic) reality, but at least in an academic report, the latter needs to retain some vestige of predominance over the former. Remember: pension funds' long-term time horizon, as accounting standards can and do change.
Tuesday, May 19, 2009
Behavioural finance is a fashionable topic, of course, and an interesting one at the same time. It is useful to be aware, if that's possible at all, of the cognitive limitations of our decision making processes. Yet, I still have to see a useful active behavioural tool for investing - much of those uses seem to be limited to technical analysis.
This video reminded me of a similar presentation by Richard Thaler at this year's CFA Institute annual conference in Orlando. The biggest surprise in that presentation was that XBRL featured prominently in it as an important tool for improving financial decision making.
P.S. This podcast interview�with Ariely gave me some food for thought. There is probably a fruitful tension between the rational expectations axiom and what Ariely calls predictably irrational. It can be a rational to expect collective irrationality.�
Thursday, May 14, 2009
On 2nd derivatives, green shoots and inflection points
We don't do investment advice on this blog. But all the hopeful talk about green shoots has also provoked this nice�Buiter comment. To turn bullish on the news of an inflection point after what may easily have been the world's sharpest inventory rundown in human history requires a foolhardy degree of optimism, given that the economic growth trajectory is no sinus curve - another inflection point may easily occur before we're actually coming across a turning point.�
Friday, May 08, 2009
Moving GIPS to the 21st century
MOVING GIPS TO THE 21ST CENTURYContextCFA Institute's�GIPS�are similar to Accounting Standards in that they prescribe in some detail the concepts, requirements and procedures for reporting performance of asset managers' investment vehicles. The purpose of GIPS is to make asset managers' reported performance numbers consistent and comparable across several providers and facilitate manager selection by investors on the basis of the manager's track record. According to the CBRM, financial reporting is made for investors. The same applies to GIPS reporting. Therefore, the same compelling logic that has driven the SEC to mandate the�XBRL�format for business reporting of all listed entities and mutual funds in the US should apply in the case of (voluntary) GIPS reporting, at least in so far as the premises for XBRL reporting of GIPS numbers should be prepared.In the course of the GIPS 2010 project, it is essential to lay the groundworks for bringing GIPS online, i.e. making GIPS reports even more quickly available and comparable with XBRL.What is necessary?As with financial reporting, the key requirement to enable GIPS reporting using XBRL is a�taxonomy. The GIPS taxonomy, like FASB's US GAAP taxonomy or the IASB's IFRS taxonomy, contains all the concepts and relationships of GIPS without impeding the reporting entity's flexibility in disclosing additional items by using its built-in extensibility. Taxonomies are usually created and maintained by cross-sectional working groups of stakeholders under the umbrella of an XBRL jurisdiction. The extent of the effort to build a taxonomy depends on the standard it is intended to represent. In the case of GIPS, it seems natural that CFA Institute takes on the responsibility for creating and maintaining the standard GIPS taxonomy.What can be achieved?The availability of a GIPS taxonomy is a necessary, but not a sufficient condition for establishing XBRL GIPS reporting. Preparers and users have to follow suit and establish practice. However, if the example of accounting standards is any indication, it is crucial that the Standard Setter (CFA Institute) endorses XBRL by creating a taxonomy for its standard and thus providing the infrastructure on which usage can be built.�As�multiple case studies�show, deploying XBRL in the reporting value chain of GIPS will result in smarter, cheaper and faster GIPS reports: They are smarter because the validation procedures built into XBRL taxonomies from the start massively reduces errors in reports, thus also reducing the cost of preparing and verifying them. They are faster because they can be made available online immediately and can be compared automatically without re-keying any information.Given XBRL's widespread and quickly expanding application in financial reporting, competing IT tools at all stages of the reporting process are already available and are improved continuously. These tools are usually agnostic of the taxonomy they are applied to, thus they are usable on GIPS reporting. It is easily imaginable that the�SEC's Mutual Fund Viewer�could be applied to GIPS reports, provided that they collected in a single location online. Perhaps there is another role for the CFA Institute in this? The ongoing parallel development of IT tools handling XBRL formated financial reporting constitutes a very important synergy that GIPS can take advantage of effortlessly."Resistance is futile ..."And yet, the Borg are�effect-fully�resisted in Star Trek. Clearly, GIPS is a well established global standard�that works. It is therefore not immediately obvious to practitioners in the field why the plumbing of the process should be changed. Incidentally, there is no recognisable�need�to move to XBRL at the present.�Yet, the transformation of the financial reporting process to XBRL has met and is in the process of overcoming the same resistance globally. The potential gains in transparency and process efficiency are too large to dismiss.�Finally, there is another factor that makes the case for adopting XBRL in GIPS even more compelling: GIPS is not mandated anywhere (to my knowledge) and thus fully dependent on voluntary adoption as well as market demand. The availability of a GIPS taxonomy and CFA Institute's encouragement of the usage of XBRL in GIPS reporting would send a clear signal about how GIPS is being future proofed and made increasingly transparent and user-friendly.
Tuesday, May 05, 2009
XBRL - A Guide for Investors
Also on the XBRL channel: Yesterday, L'Agefi published an article I've written. But when you follow the link, you'll see that it is written in excellent French, which cannot be me. Thanks for the contact and the translation goes to Marc Barbezat, member of XBRL CH!
Thursday, April 23, 2009
Investing in infrastructure
Saturday, March 28, 2009
The tyranny of the present
Friday, March 06, 2009
As an institutional investor, we are always interested in informative long-term charts. This one fits the bill, even though it is probably meant to shock today's investor with its implicit statement that there was no money to be made in 43 years of investment in the Dow.
However, some qualifications need to be made. The obvious one is that the chart is just a price chart corrected for inflation, but without taking into account the dividend yield, which is probably about 5% p.a. by now. Getting that kind of return on top of real, inflation-adjusted capital preservation on a long-term basis is no mean feat indeed!
Wednesday, January 14, 2009
Sunday, January 11, 2009
Victims (III): Prudent Person in Switzerland?
Sunday, December 28, 2008
Wikinomics in finance?
Saturday, December 27, 2008
Monday, December 08, 2008
Death and taxes ...
Tuesday, December 02, 2008
Tuesday, October 28, 2008
Innovative ways of financing retirement
Wednesday, October 22, 2008
XBRL for Investment Professionals
Deconstructing financial mythology
- Bank lending to non?nancial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commercial paper issuance by non-financial corporations has declined sharply and�rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers.
P.S. And here's follow-up ... I'm sure there's more to come.
Sunday, October 19, 2008
Truth or dare?
Thursday, August 28, 2008
Evaluating short extension funds (130/30)
Tuesday, August 26, 2008
Tuesday, August 12, 2008
Challenges in Quantitative Management
Tuesday, July 15, 2008
A Plunge Protection Team?
Tuesday, July 01, 2008
CEIOPS State of Pensions Report
Thursday, June 19, 2008
XBRL for Investment Professionals
Saturday, May 17, 2008
nomos vs. thesis
Monday, May 12, 2008
Answering our own question is managed futures is an asset class? It is anything, but ... If anything, it is the "anti-asset class". It is an observable materialization of behavioral finance, where risk, return, leverage and skill operate un-tethered from the anchor of an accurate representation of beta. In other words, it defies rational expectations equilibrium, the efficient market hypothesis and allied models?the CAPM, arbitrage pricing theory or otherwise?to single-handedly isolate a persistent source of return without that source eventually slipping away. (...)�Unbeknownst to modern finance, the commodity futures markets may be the shoals against which rational expectations equilibrium, the "de facto ruling paradigm of financial economics," is eventually shipwrecked.
In view of this and particularly this, it may perhaps be time to indeed revisit one's CF long exposure, which has been entered into on the possibly naive assumption that the futures markets are tightly monitored net zero sum games that have no impact on the spot markets.�
Sunday, May 11, 2008
Analysis of competing hypotheses
Wednesday, March 26, 2008
Counterparty risk in credit markets
Monday, March 24, 2008
The (Mis)Behaviour of Markets
Wednesday, January 30, 2008
Wednesday, January 02, 2008
The future of public pensions
Sunday, December 09, 2007
EDHEC alternative investments days
CDI vs. LDI?
Tuesday, October 23, 2007
Impact of funding risk
An excellent article in the current issue of the Financial Analysts Journal goes an important step further: The author estimates the correlation between pension fund deficits and associated credit spreads. The results are statistically significant and show interesting characteristics: The sensitivity of spreads to unfunded pension liabilities is about five times larger for junk bonds than for investment grade bonds. Also, the sensitivity to pension liabilities is much larger than to ordinary long term debt - double for investment grade, triple for junk. The model was also run for samples from the UK and Japan, but those results only confirmed a generic sensitivity.
This is where the relevance of pensions for corporate finance becomes evident. We expect that the relevance will increase thanks to better, more relevant accounting information and increasing market attention.
Tuesday, October 16, 2007
In related news, the World Bank has identified impact and source vulnerabilities of the world's countries in order to delineate country stakes in upcoming climate negotiations. Countries with high source vulnerability face above average negative consequences of climate change measures, while countries with high impact vulnerability are expected to suffer most from the consequences of climate change. As shown on the map, the two types of vulnerabilities are far from congruent, which means that negotiations will be very difficult.
Friday, October 12, 2007
CFA Institute podcasts
Saturday, September 22, 2007
Global Graying Report
Sunday, September 16, 2007
Valuation of Swiss IORPs
Now, this is not exactly news as IAS 19 is hardly known to reflect economic reality thanks to its built-in shortcomings. But the instances listed do not even appear to be related to IAS 19 features to start with, but rather to what needs to be considered as accounting artefacts in the light of (legal) reality. One wonders how such numbers can be presented as true and fair?
Tuesday, September 11, 2007
Sovereign wealth funds
Saturday, July 28, 2007
Global upward trend in profit share
Tuesday, July 10, 2007
Lifetime financial advice
The largest asset that most human beings have, at least when they are young, is their human capital? that is, the present value of their expected future labor income. Human capital interacts with traditional investments, such as stocks, bonds, and real estate, through the correlation structure. But human capital interacts in even more interesting and profitable ways with life insurance and annuities because these assets have payoffs linked to the holder?s longevity. The authors of Lifetime Financial Advice present a framework for understanding and managing all of these assets holistically.
This complex issue is approached in a systematic, model based fashion from the perspective of the individual investor. It may not, therefore, hold as much interest to the traditional institutional investor managing retirement monies collectively. Private wealth & insurance product managers should be able to find plenty of food for thought, though. But not only them: this short monograph should be essential reading for everyone
Friday, June 15, 2007
Pensions directive to be revised 2008
Monday, May 21, 2007
Incentives for DB plans
We agree with both parts of the analysis, namely that DB plans are preferable to DC, and that there is currently a lack of incentives for DB plans. We strongly disagree however with Mr Dodge's opposition to fair value accounting. He claims, essentially, that we are not interested in today's values, but in expected values far into the future. We think that analysts of pensions are very much interested in today's values. For one, every expected future value can be discounted to a current present value (assuming that the term structure holds). Thus, Mr Dodge's distinction would essentially become moot.
More importantly however, it is not at all clear at which specific point "far into the future" the expected value would need to be formed - surely that cannot be discretionary? How about changes to those expected future values, based on variations of underlying assumptions? Finally, the volatility introduced to sponsors' balance sheets is not artificial, it's an economic fact. Cognition of that fact is a prerequisite of sponsors' ability to manage the inherent economic risk of their DB plans and, therefore, an enabler of an effective defined-benefit pension system.
Sunday, May 20, 2007
Corporate Finance meets pension management
"Pensions are being transformed from off-balance sheet operations with results smoothed over many years, to large consolidated business units with high potential short-term volatility, bringing them to center-stage for executive managers."
Earlier in the year, JP Morgan has come up with a white paper that is very much in line with our thinking: Corporate Finance meets Pension Management: A new era for pension leaders. The paper is obviously targeted to the US market struggling with implementing the Pension Protection Act of 2006 and US GAAP SFAS 158, but as accounting (and regulation) follows economics in Europe, too, Europeans are well advised to consider this a sneak peek preview of their own not too distant future.
JP Morgan established a set of three strategic pension metrics, namely shareholder equity at risk, corporate cash flow at risk and earnings at risk. These metrics measure the impact of pensions on the respective variable of the sponsoring corporation. Putting the metrics into action will lead to important changes in the pension plans' risk exposure: JPM expects a shift from the currently too high equity exposure into an allocation of 25%-35% in non-traditional assets. As the paper originates from JPM's asset management arm, I have a feeling that the wish may have been father to the thought ...
Friday, May 18, 2007
"Prudent investor" for Switzerland?
Unfortunately, detailed results of the survey appear not to be available online.
Friday, May 11, 2007
Tuesday, May 08, 2007
Institutional hedge funds?
In my view, hedge funds are perfectly appropriate for private wealth because of individual investors' known disproportionate avoidance of loss. In the case of institutional investors whose equity is subject to volatility of assets and liabilities, absolute return strategies may be net inefficient at best, or they may even create additional asset/liability mismatch and thus be entirely counter-productive if considered from a comprehensive balance sheet risk management perspective.
That being said, the traditional distinction between hedge funds as providers of absolute return strategies on the one hand or alpha engines on the other becomes increasingly blurred. It is therefore advisable to keep a close watch on the industry, especially given the recent competitive pressure on excessive and asymmetrical fees exerted by institutional investors (epn story).
Monday, May 07, 2007
Commission addresses differential taxation of investment income
Tuesday, April 17, 2007
Mitigating cost of ageing
Sunday, April 15, 2007
Institutional Life Markets Association
Saturday, April 14, 2007
CFA Magazine finds
Friday, April 13, 2007
Draft Swiss pension law
At the same time, ASIP has published the executive summary of a research paper examining the alleged over-capitalisation of the Swiss second pillar with a view to reducing the full coverage requirement. Some of the arguments proffered are truly surprising: foreign investments are used as evidence of an over-abundance of capital. Unsurprisingly, the authors conclude that there is no indication for too much saving and that it is reasonable to maintain the full coverage requirement.
Wednesday, April 11, 2007
2007 asset allocation survey
Monday, April 09, 2007
Financial investments in commodities
The latter question is answered quite in the affirmative, while the former is more difficult to address. The BIS notes a significant divergence of long-dated futures prices (in crude oil and copper) from estimates of current marginal production costs since 2003. In efficient markets, expected marginal costs should act as anchors for long-dated futures prices. However, the research offers several fundamental reasons for such divergences, hence they are not necessarily a consequence of portfolio investments.
Wednesday, April 04, 2007
Annuities: a private solution to longevity risk
Wednesday, March 28, 2007
Tuesday, March 27, 2007
Regulatory risk in Poland
Tuesday, March 13, 2007
Global institutional investors
Two side notes on Swiss pension funds: Available information about their assets & allocation is two years older than other countries', and their equity exposure is considerably below average.
Monday, March 12, 2007
The chocolate connection
The OFP seems to be a highly attractive entity to provide pan-European pensions with. It operates on zero (income, capital, VAT) tax, it can provide solidarity across several pension plans (which is attractive for efficient capital allocation), it reflects no other restrictions on asset management than the Directive's prudent person principle, it may rely on Belgium's extensive network of double taxation treaties, it takes advantages of Belgium's recent transition to EET, it is not encumbered by a Pensions Protection Fund levy and last, but by no means least, the valuation of its liabilities may be based on a discount rate that incorporates expected returns, thus may go as high as 6%. A word of caution may be in order here, though: It is not clear whether the long term consensus expected return used to derive that attractive discount rate takes into consideration recent literature on the proper calculation of expected rates of return.
Jean-Pierre Steiner of Nestl� Capital Advisers shed some cold water on participants' hopes that pan-European pension plans might fully replace local plans in the near future. In his view, this is an ambitious long-term objective reaching beyond his active lifetime. Nevertheless, he put Nestl�'s considerable weight behind the support of Belgium as the currently most attractive location for pan-European pension funds.
Also of interest was Mr Van Hulle, the EU Commission's representative's comment that he wasn't opposed to supervisory shopping, which is of course tantamount to regulatory shopping - something that tends to be frowned upon elsewhere. Equally interesting to Swiss listeners was Mr Wymeersch's note that Belgian first pillar institutions may be falling under the Directive, which seems to be in direct contradiction to the Directive's scope and is of particular interest to Liechtenstein as well.
Wednesday, February 14, 2007
Financial Analysts on Pensions
Tuesday, January 30, 2007
Monday, December 18, 2006
The hitherto virtually untapped market segment of extreme mortality might prove to be exceptionally interesting for pension funds because of its potentially long duration, its size and its natural hedging capacity for pension funds: a mortality bond's payout is negatively related to longevity, which is one of the principal risk factors affecting pension funds' liabilities. To be an effective hedge, the populations covered need to overlap significantly, though. SwissRe estimates a current market size of USD 5'500 bio, which it expects to grow to USD 7'000 bio by 2010.
A word of caution is in order, though (which is notably absent from the SwissRe paper). Insurance capacity is a highly cyclical asset with short cycles and high variance. Therefore it is likely that broader capital markets will be tapped when capacity is relatively scarce & expensive. Insurers will thus tend to offer relatively less favourable terms in order to take advantage of the broader market's limited sophistication & knowledge of insurance cycles.
Tuesday, December 05, 2006
IAS 19 to enter the risk-return continuum?
Faithful representation of the economic reality of plan liabilities appears to be much better warranted under such a structured approach. Furthermore, corporate sponsors' risk management towards pensions liabilities will be much improved, if not enabled, since the industry has built a lot of experience in structured instruments. Some preparers may be fazed by the approach's additional complexity, but once they realise that it might actually help them to better mitigate risk, they ought to embrace it.
Thursday, November 30, 2006
A Commissioner's philippic
The core focus of the speech was dedicated to the third pillar and forthcoming changes in the regulatory environment as well as existing challenges in the marketplace, such as insufficient availability of annuity products. (More from IPE)
Wednesday, November 22, 2006
Asset management under the Directive [CH]
Tuesday, October 17, 2006
Allianz goes pan-European
Sunday, October 15, 2006
Of latency trading & algo-busters
Monday, October 02, 2006
In my view, there could be two explanations for this: 1) The reforms effectively lowered public saving, but the public has not yet become aware of the need for correspondingly higher private savings. The consequences of this would be dire. 2) The reforms did not have the effect intended to reduce public saving. In any case, this paper's macroeconomic perspective on policymaking is rather refreshing.
Initially mistaking the CeRP for the CEPR, I subsequently checked their (also not RSS equipped!) site and found two not so recent, but even more interesting and fascinating reports focusing on the respective microstructures of two highly relevant markets for European pension funds: the European corporate bond market and the European government bond market. Those markets' structures are analysed with a view to increasing their transparency, liquidity and efficiency, ostensibly by means of EU regulation. A combination of an up-to-date description of market structures and a game theoretical assessment of the impact of regulation on said criteria make for a highly educational read for everyone who is interested in European fixed interest markets.