Posts filed under “Markets”
Morgan Stanley’s Stephen Roach takes a look at what may be the most important appointment President Bush makes — and he does not come away very confident about it:
"And that, I’m afraid, brings me to the most controversial point of all — the selection process, itself. With the consent of the US Senate, the choice of selecting a new Fed chairman falls to the President. Generalizing on the basis of George W. Bush’s most recent senior appointments, I suspect the President will look for three key traits in a new Fed chairman — familiarity, loyalty, and a pro-growth bias. This is not meant to be critical. It is a carefully determined observation based on the President’s record. In the case of a Fed Chairman, those criteria imply that President Bush will probably not select the next Paul Volcker — a tough, independent policy maker who might be predisposed toward “tight money.” While this is inconsistent with the President’s statement on this matter at a recent press conference, in the end, I still believe George W. Bush will opt for a trusted team player who shares the goals and objectives of his political agenda.
This could well pose a serious problem for US financial markets. With America’s external financing critically dependent on the foreign confidence factor, any doubts over central bank independence will not go over well. That’s especially the case for a US economy beset with record imbalances, a potential inflation scare, and bubble-like conditions in asset markets. Foreign investors have been extraordinarily generous in the terms they have offered for funding America’s external deficit. In part, that generosity may reflect the “Greenspan factor” — the confidence that investors have in Alan Greenspan’s adroit management of periodic international financial crises. With the Greenspan factor about to be taken out of the confidence equation, any fears of an “easy money” Fed could well prompt foreign investors to exact concessions in those financing terms in the form of a weaker dollar and higher real interest rates."
Or, to rephrase Mr. Roach’s concerns, consider this:
UPDATE: October 10, 2005 8:06am
Stephen Roach (from Zurich)
Morgan Stanley, Oct 07, 2005
Among individual investors, David Swensen isn’t a household name. But he is an icon in the world of big institutional money managers such as endowments and pension funds.
Mr. Swensen’s fame comes from his oversight of Yale University’s $15 billion endowment fund, which, since he was hired 20 years ago, has returned an average of 16% a year, far outpacing the market and other funds run for universities. Before arriving, Mr. Swensen had never overseen an institutional portfolio, and he brought to the job an unconventional approach for dividing up the portfolio among different asset classes. He is now Yale’s chief investment officer.
Five years ago, Mr. Swensen set out to write a book that would bring the lessons he learned to individual investors. Instead, he says he found that the option most accessible to individuals — mutual funds — often makes it impossible to beat the market. And even when they do find good managers, individuals end up shooting themselves in the foot, he says.
So while Yale relies on actively managed portfolios, Mr. Swensen says individuals should just stick to index funds, especially those run by not-for-profit companies. He also likes exchange-traded funds, which trade on exchanges like stocks, but says "buyer beware."
Excerpts from an interview with Mr. Swensen follow:
WSJ: You had hoped to give small investors a road map for beating the market based on Yale’s approach to investing. What happened?
Mr. Swensen: I found when I started down that path that individuals just don’t have the same set of investment opportunities available to them that we do here at Yale. In fact, the evidence showed me that the mutual-fund industry has completely failed to provide reasonable active-management returns to individuals.
WSJ: To say that it completely failed — that’s a pretty harsh statement to make.
Mr. Swensen: I think the evidence is there. The crux of the failure is with the for-profit management of funds for individuals. Mutual-fund managers have a fiduciary responsibility to investors. Obviously, if they are operating in a for-profit mode, they have a profit motive. When you put the profit motive up against fiduciary responsibility, that fiduciary responsibility loses and profits win.
continued below . . .
Yale Manager Blasts Industry
THE WALL STREET JOURNAL, September 6, 2005