In Securing Replacement Income with Goal-Based Retirement Investing Strategies, from the Spring 2020 issue of The Journal of Retirement, authors Lionel Martellini, Vincent Milhau (both of EDHEC-Risk Institute in Nice, France) and John Mulvey (of Princeton University) address how to provide investors with their minimum required retirement income while offering the flexibility to invest for growth (and potentially higher retirement income). Annuities and target-date funds offer either guaranteed income or flexibility, but not both at the same time. Martellini, Milhau, and Mulvey recommend a goal-based investing (GBI) strategy that consists of building blocks designed to realize different goals. The first building block is a retirement goal-hedging portfolio (GHP) consisting of bonds whose principal and interest payments can generate sufficient income for the first 20 years of retirement. After that, a deferred annuity can cover retirees’ income needs for the rest of their lives. The second building block is a performance-seeking portfolio (PSP) of long-term growth investments that offer the chance for upside and higher income after retirement. Financial advisors can be of great help to clients who adopt this strategy—constructing and managing GHPs and PSPs and recommending specific deferred annuities. TOPICS: Retirement, pension funds, wealth management
{"title":"Practical Applications of Securing Replacement Income with Goal-Based Retirement Investing Strategies","authors":"L. Martellini, Milhau Milhau, J. Mulvey","doi":"10.3905/pa.8.2.412","DOIUrl":"https://doi.org/10.3905/pa.8.2.412","url":null,"abstract":"In Securing Replacement Income with Goal-Based Retirement Investing Strategies, from the Spring 2020 issue of The Journal of Retirement, authors Lionel Martellini, Vincent Milhau (both of EDHEC-Risk Institute in Nice, France) and John Mulvey (of Princeton University) address how to provide investors with their minimum required retirement income while offering the flexibility to invest for growth (and potentially higher retirement income). Annuities and target-date funds offer either guaranteed income or flexibility, but not both at the same time. Martellini, Milhau, and Mulvey recommend a goal-based investing (GBI) strategy that consists of building blocks designed to realize different goals. The first building block is a retirement goal-hedging portfolio (GHP) consisting of bonds whose principal and interest payments can generate sufficient income for the first 20 years of retirement. After that, a deferred annuity can cover retirees’ income needs for the rest of their lives. The second building block is a performance-seeking portfolio (PSP) of long-term growth investments that offer the chance for upside and higher income after retirement. Financial advisors can be of great help to clients who adopt this strategy—constructing and managing GHPs and PSPs and recommending specific deferred annuities. TOPICS: Retirement, pension funds, wealth management","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115998859","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Roger Aliaga-Dı́az, Giulio Renzi-Ricci, Ankul Daga, H. Ahluwalia
In Portfolio Optimization with Active, Passive, and Factors: Removing the Ad Hoc Step, from the March 2020 issue of The Journal of Portfolio Management, Roger Aliaga-Diaz, Giulio Renzi-Ricci, Ankul Daga, and Harshdeep Ahluwalia, all with The Vanguard Group, discuss a more streamlined way to optimize portfolios. They present a quantitative asset-allocation framework that incorporates active, passive, and factor strategies—and propose a utility optimization model that concurrently allocates assets among investments in these three dimensions. Their approach condenses portfolio optimization into one step that integrates investors’ risk tolerance into asset allocation. The model incorporates investor risk preferences shaped by the uncertainties inherent with active, passive, and factor investment returns. By clarifying investors’ decision-making, this approach steers them away from ad hoc portfolio allocations and permits them to customize their portfolios more deliberately. The authors highlight practical applications, including how the approach can be used to substitute lower-cost factor strategies for higher-cost active strategies and to create factor-tilted portfolios aligned with investors’ varying risk thresholds. TOPICS: Analysis of individual factors/risk premia, factor-based models, portfolio theory, portfolio construction
{"title":"Practical Applications of Portfolio Optimization with Active, Passive, and Factors: Removing the Ad Hoc Step","authors":"Roger Aliaga-Dı́az, Giulio Renzi-Ricci, Ankul Daga, H. Ahluwalia","doi":"10.3905/pa.8.2.410","DOIUrl":"https://doi.org/10.3905/pa.8.2.410","url":null,"abstract":"In Portfolio Optimization with Active, Passive, and Factors: Removing the Ad Hoc Step, from the March 2020 issue of The Journal of Portfolio Management, Roger Aliaga-Diaz, Giulio Renzi-Ricci, Ankul Daga, and Harshdeep Ahluwalia, all with The Vanguard Group, discuss a more streamlined way to optimize portfolios. They present a quantitative asset-allocation framework that incorporates active, passive, and factor strategies—and propose a utility optimization model that concurrently allocates assets among investments in these three dimensions. Their approach condenses portfolio optimization into one step that integrates investors’ risk tolerance into asset allocation. The model incorporates investor risk preferences shaped by the uncertainties inherent with active, passive, and factor investment returns. By clarifying investors’ decision-making, this approach steers them away from ad hoc portfolio allocations and permits them to customize their portfolios more deliberately. The authors highlight practical applications, including how the approach can be used to substitute lower-cost factor strategies for higher-cost active strategies and to create factor-tilted portfolios aligned with investors’ varying risk thresholds. TOPICS: Analysis of individual factors/risk premia, factor-based models, portfolio theory, portfolio construction","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121837682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees, from the Summer 2020 issue of The Journal of Retirement, authors William Reichenstein (of Social Security Solutions, Inc. and Retiree, Inc.) and William Meyer (also of Retiree, Inc.) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the tax torpedo. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. TOPICS: Wealth management, retirement, social security
{"title":"Practical Applications of Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees","authors":"William R Reichenstein, W. Meyer","doi":"10.3905/pa.8.2.415","DOIUrl":"https://doi.org/10.3905/pa.8.2.415","url":null,"abstract":"Practical Applications Summary In Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees, from the Summer 2020 issue of The Journal of Retirement, authors William Reichenstein (of Social Security Solutions, Inc. and Retiree, Inc.) and William Meyer (also of Retiree, Inc.) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the tax torpedo. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. TOPICS: Wealth management, retirement, social security","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122091906","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In Fundamental Factors That Improve Your Investments: A Practical Guide, from the October 2019 issue of The Journal of Investing, authors Pim Lausberg (of APG Asset Management), Alfred Slager (of TIAS School for Business and Society), and Philip Stork (of VU University Amsterdam) explore the influence of fundamental factors—rather than style factors—on portfolio returns. The authors present an intuitive framework for measuring and steering fundamental factors in a portfolio and provide examples showing how to identify factor concentration risks and tilt portfolios to desired exposures. They also offer suggestions on how investors can embed the factor-based approach in their existing investment process. TOPICS: Analysis of individual factors/risk premia, portfolio construction, performance measurement
{"title":"Practical Applications of Fundamental Factors That Improve Your Investments: A Practical Guide","authors":"Pim Lausberg, Alfred Slager, Philip A. Stork","doi":"10.3905/pa.8.2.408","DOIUrl":"https://doi.org/10.3905/pa.8.2.408","url":null,"abstract":"Practical Applications Summary In Fundamental Factors That Improve Your Investments: A Practical Guide, from the October 2019 issue of The Journal of Investing, authors Pim Lausberg (of APG Asset Management), Alfred Slager (of TIAS School for Business and Society), and Philip Stork (of VU University Amsterdam) explore the influence of fundamental factors—rather than style factors—on portfolio returns. The authors present an intuitive framework for measuring and steering fundamental factors in a portfolio and provide examples showing how to identify factor concentration risks and tilt portfolios to desired exposures. They also offer suggestions on how investors can embed the factor-based approach in their existing investment process. TOPICS: Analysis of individual factors/risk premia, portfolio construction, performance measurement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131054533","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In The Value of Allocating to Annuities, from the Summer 2020 issue of The Journal of Retirement, author David Blanchett of Morningstar Investment Management explores the costs and benefits of including annuities in the mix of products financial advisors recommend to clients. Annuities have long been unpopular among investors and advisors, who perceive them as complex, expensive, and inflexible. But annuities provide one benefit other products cannot: guaranteed lifetime income. Blanchett says it is unwise to ignore this benefit, and investors and advisors should consider the relative cost of an annuity-inclusive vs. an investment-only strategy. Blanchett demonstrates that if advisors construct product mixes with moderate fees across annuities and investments, allocating an average of 30% to annuities generates an average alpha-equivalent benefit (that is, an additional return) of 0.73% relative to investment-only portfolios. Therefore, Blanchett says, advisors should educate themselves about annuities, to better identify the right annuity products and the clients for whom they make sense. TOPICS: Wealth management, retirement
晨星投资管理公司(Morningstar Investment Management)的作者大卫·布兰切特(David Blanchett)在《配置年金的价值》(The Value of allocation to年金)一书中探讨了将年金纳入理财顾问向客户推荐的产品组合中的成本和收益。长期以来，年金一直不受投资者和顾问的欢迎，他们认为年金复杂、昂贵、缺乏灵活性。但年金提供了其他产品无法提供的一个好处:终身收入保障。布兰切特说，忽视这种好处是不明智的，投资者和顾问应该考虑包括年金在内的投资策略与只投资策略的相对成本。布兰切特证明，如果投资顾问在年金和投资组合中构建费用适中的产品组合，那么平均分配30%给年金，相对于只投资的投资组合，平均α当量收益(即额外回报)为0.73%。因此，布兰切特表示，理财顾问应该对自己进行有关年金的教育，以便更好地识别正确的年金产品，以及这些产品对哪些客户有意义。主题:财富管理、退休
{"title":"Practical Applications of The Value of Allocating to Annuities","authors":"David Blanchett","doi":"10.3905/pa.8.2.414","DOIUrl":"https://doi.org/10.3905/pa.8.2.414","url":null,"abstract":"Practical Applications Summary In The Value of Allocating to Annuities, from the Summer 2020 issue of The Journal of Retirement, author David Blanchett of Morningstar Investment Management explores the costs and benefits of including annuities in the mix of products financial advisors recommend to clients. Annuities have long been unpopular among investors and advisors, who perceive them as complex, expensive, and inflexible. But annuities provide one benefit other products cannot: guaranteed lifetime income. Blanchett says it is unwise to ignore this benefit, and investors and advisors should consider the relative cost of an annuity-inclusive vs. an investment-only strategy. Blanchett demonstrates that if advisors construct product mixes with moderate fees across annuities and investments, allocating an average of 30% to annuities generates an average alpha-equivalent benefit (that is, an additional return) of 0.73% relative to investment-only portfolios. Therefore, Blanchett says, advisors should educate themselves about annuities, to better identify the right annuity products and the clients for whom they make sense. TOPICS: Wealth management, retirement","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123748997","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jonathan Handy, Jonathan T. Ricketts, Thomas I. Smythe
Practical Applications Summary In Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice? in the Spring 2020 edition of The Journal of Index Investing, Jonathan Handy of Western Kentucky University, Jonathan Ricketts of Furman University, and Thomas Smythe of Florida Gulf Coast University review the empirical and academic literature on multiclass mutual funds and draw conclusions about the suitability of such funds for investors. The authors trace the history of these investment products and examine the considerable body of evidence that multiclass funds have governance issues and incur substantial, if not excessive, expenses. Although the multiclass framework may broaden investor options, it also inherently leads to agency problems. Fund advisors often face conflicts of interest between themselves and their clients. They may be motivated to recommend a class of mutual fund shares that is inappropriate for a client but may be the most profitable for the advisor to sell. Moreover, investors are confused by the categorization schemes of multiclass funds and their associated fees. Advisors and fund managers themselves are often not fully conversant with the characteristics of the multiclass funds they are touting. The systemic weaknesses of the multiclass-fund framework should prompt reconsideration or even eschewal of these products by investors and advisors alike. TOPICS: Financial crises and financial market history, mutual fund performance
{"title":"Practical Applications of Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice?","authors":"Jonathan Handy, Jonathan T. Ricketts, Thomas I. Smythe","doi":"10.3905/pa.8.3.407","DOIUrl":"https://doi.org/10.3905/pa.8.3.407","url":null,"abstract":"Practical Applications Summary In Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice? in the Spring 2020 edition of The Journal of Index Investing, Jonathan Handy of Western Kentucky University, Jonathan Ricketts of Furman University, and Thomas Smythe of Florida Gulf Coast University review the empirical and academic literature on multiclass mutual funds and draw conclusions about the suitability of such funds for investors. The authors trace the history of these investment products and examine the considerable body of evidence that multiclass funds have governance issues and incur substantial, if not excessive, expenses. Although the multiclass framework may broaden investor options, it also inherently leads to agency problems. Fund advisors often face conflicts of interest between themselves and their clients. They may be motivated to recommend a class of mutual fund shares that is inappropriate for a client but may be the most profitable for the advisor to sell. Moreover, investors are confused by the categorization schemes of multiclass funds and their associated fees. Advisors and fund managers themselves are often not fully conversant with the characteristics of the multiclass funds they are touting. The systemic weaknesses of the multiclass-fund framework should prompt reconsideration or even eschewal of these products by investors and advisors alike. TOPICS: Financial crises and financial market history, mutual fund performance","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129757615","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jonathan Handy, Jonathan T. Ricketts, Thomas I. Smythe
Practical Applications Summary In Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice? in the Spring 2020 edition of The Journal of Index Investing, Jonathan Handy of Western Kentucky University, Jonathan Ricketts of Furman University, and Thomas Smythe of Florida Gulf Coast University review the empirical and academic literature on multiclass mutual funds and draw conclusions about the suitability of such funds for investors. The authors trace the history of these investment products and examine the considerable body of evidence that multiclass funds have governance issues and incur substantial, if not excessive, expenses. Although the multiclass framework may broaden investor options, it also inherently leads to agency problems. Fund advisors often face conflicts of interest between themselves and their clients. They may be motivated to recommend a class of mutual fund shares that is inappropriate for a client but may be the most profitable for the advisor to sell. Moreover, investors are confused by the categorization schemes of multiclass funds and their associated fees. Advisors and fund managers themselves are often not fully conversant with the characteristics of the multiclass funds they are touting. The systemic weaknesses of the multiclass-fund framework should prompt reconsideration or even eschewal of these products by investors and advisors alike. TOPICS: Financial crises and financial market history, mutual fund performance
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Practical Applications Summary In CLOs, Private Equity, Pensions, and Systemic Risk, from the Spring 2020 issue of The Journal of Structured Finance, Rod Dubitsky, founder of the People’s Economist, examines rating agency models for analyzing collateralized loan obligations (CLOs) and concludes that they are deeply flawed in that they rely on historical data that does not describe the current situation and on assumptions about correlation (diversification) that do not hold true in practice. Dubitsky presents evidence that default likelihoods are higher and expected recoveries are lower than the rating agencies assume in their models. He also highlights problematic practices in the CLO market, including weakened bond covenants and other terms, conflicts of interest in the management of CLO underlying portfolios, and a rising concentration of underlying leveraged loans in the lowest rating categories. Additionally, Dubitsky examines the relationships among 1) CLOs, 2) private equity–sponsored companies that borrow via leveraged loans that are then packaged into CLOs, and 3) pension plans that invest in private equity (PE) funds and CLOs. He argues that a contraction of available CLO-funded credit to leveraged-loan borrowers could cause many to fail, resulting in both increased unemployment and losses to PE funds and their pension plan investors. He concludes that the potential contraction of CLO funding for leveraged loans creates significant systemic risk. TOPICS: CLOs, CDOs, and other structured credit; financial crises and financial market history
《人民经济学人》(People’s Economist)创始人罗德•杜比茨基(Rod Dubitsky)在《结构金融杂志》(the Journal of Structured Finance) 2020年春季号的《clo、私募股权、养老金和系统性风险》一书中，研究了评级机构用于分析抵押贷款债券(clo)的模型，并得出结论认为，这些模型存在严重缺陷，因为它们依赖于无法描述当前形势的历史数据，以及在实践中不成立的相关性(多样化)假设。杜比茨基提出的证据表明，违约的可能性更高，预期的收回比评级机构在其模型中假设的要低。他还强调了CLO市场中存在问题的做法，包括债券契约和其他条款的弱化、CLO基础投资组合管理中的利益冲突，以及基础杠杆贷款越来越集中于评级最低的类别。此外，杜比茨基还研究了以下三者之间的关系:1)clo; 2)私募股权赞助的公司通过杠杆贷款借款，然后打包成clo; 3)投资私募股权(PE)基金和clo的养老金计划。他认为，对杠杆贷款借款人可用的clo融资信贷的收缩可能会导致许多人破产，从而导致失业率上升，并给私募股权基金及其养老金计划投资者带来损失。他的结论是，杠杆贷款的CLO融资可能出现收缩，会造成重大的系统性风险。主题:clo、cdo和其他结构性信贷;金融危机和金融市场的历史
{"title":"Practical Applications of CLOs, Private Equity, Pensions, and Systemic Risk","authors":"Rod Dubitsky","doi":"10.3905/pa.8.3.406","DOIUrl":"https://doi.org/10.3905/pa.8.3.406","url":null,"abstract":"Practical Applications Summary In CLOs, Private Equity, Pensions, and Systemic Risk, from the Spring 2020 issue of The Journal of Structured Finance, Rod Dubitsky, founder of the People’s Economist, examines rating agency models for analyzing collateralized loan obligations (CLOs) and concludes that they are deeply flawed in that they rely on historical data that does not describe the current situation and on assumptions about correlation (diversification) that do not hold true in practice. Dubitsky presents evidence that default likelihoods are higher and expected recoveries are lower than the rating agencies assume in their models. He also highlights problematic practices in the CLO market, including weakened bond covenants and other terms, conflicts of interest in the management of CLO underlying portfolios, and a rising concentration of underlying leveraged loans in the lowest rating categories. Additionally, Dubitsky examines the relationships among 1) CLOs, 2) private equity–sponsored companies that borrow via leveraged loans that are then packaged into CLOs, and 3) pension plans that invest in private equity (PE) funds and CLOs. He argues that a contraction of available CLO-funded credit to leveraged-loan borrowers could cause many to fail, resulting in both increased unemployment and losses to PE funds and their pension plan investors. He concludes that the potential contraction of CLO funding for leveraged loans creates significant systemic risk. TOPICS: CLOs, CDOs, and other structured credit; financial crises and financial market history","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125660016","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In CLOs, Private Equity, Pensions, and Systemic Risk, from the Spring 2020 issue of The Journal of Structured Finance, Rod Dubitsky, founder of the People’s Economist, examines rating agency models for analyzing collateralized loan obligations (CLOs) and concludes that they are deeply flawed in that they rely on historical data that does not describe the current situation and on assumptions about correlation (diversification) that do not hold true in practice. Dubitsky presents evidence that default likelihoods are higher and expected recoveries are lower than the rating agencies assume in their models. He also highlights problematic practices in the CLO market, including weakened bond covenants and other terms, conflicts of interest in the management of CLO underlying portfolios, and a rising concentration of underlying leveraged loans in the lowest rating categories. Additionally, Dubitsky examines the relationships among 1) CLOs, 2) private equity–sponsored companies that borrow via leveraged loans that are then packaged into CLOs, and 3) pension plans that invest in private equity (PE) funds and CLOs. He argues that a contraction of available CLO-funded credit to leveraged-loan borrowers could cause many to fail, resulting in both increased unemployment and losses to PE funds and their pension plan investors. He concludes that the potential contraction of CLO funding for leveraged loans creates significant systemic risk. TOPICS: CLOs, CDOs, and other structured credit; financial crises and financial market history
《人民经济学人》(People’s Economist)创始人罗德•杜比茨基(Rod Dubitsky)在《结构金融杂志》(the Journal of Structured Finance) 2020年春季号的《clo、私募股权、养老金和系统性风险》一书中，研究了评级机构用于分析抵押贷款债券(clo)的模型，并得出结论认为，这些模型存在严重缺陷，因为它们依赖于无法描述当前形势的历史数据，以及在实践中不成立的相关性(多样化)假设。杜比茨基提出的证据表明，违约的可能性更高，预期的收回比评级机构在其模型中假设的要低。他还强调了CLO市场中存在问题的做法，包括债券契约和其他条款的弱化、CLO基础投资组合管理中的利益冲突，以及基础杠杆贷款越来越集中于评级最低的类别。此外，杜比茨基还研究了以下三者之间的关系:1)clo; 2)私募股权赞助的公司通过杠杆贷款借款，然后打包成clo; 3)投资私募股权(PE)基金和clo的养老金计划。他认为，对杠杆贷款借款人可用的clo融资信贷的收缩可能会导致许多人破产，从而导致失业率上升，并给私募股权基金及其养老金计划投资者带来损失。他的结论是，杠杆贷款的CLO融资可能出现收缩，会造成重大的系统性风险。主题:clo、cdo和其他结构性信贷;金融危机和金融市场的历史
{"title":"Practical Applications of CLOs, Private Equity, Pensions, and Systemic Risk","authors":"Rod Dubitsky","doi":"10.3905/pa.8.2.406","DOIUrl":"https://doi.org/10.3905/pa.8.2.406","url":null,"abstract":"Practical Applications Summary In CLOs, Private Equity, Pensions, and Systemic Risk, from the Spring 2020 issue of The Journal of Structured Finance, Rod Dubitsky, founder of the People’s Economist, examines rating agency models for analyzing collateralized loan obligations (CLOs) and concludes that they are deeply flawed in that they rely on historical data that does not describe the current situation and on assumptions about correlation (diversification) that do not hold true in practice. Dubitsky presents evidence that default likelihoods are higher and expected recoveries are lower than the rating agencies assume in their models. He also highlights problematic practices in the CLO market, including weakened bond covenants and other terms, conflicts of interest in the management of CLO underlying portfolios, and a rising concentration of underlying leveraged loans in the lowest rating categories. Additionally, Dubitsky examines the relationships among 1) CLOs, 2) private equity–sponsored companies that borrow via leveraged loans that are then packaged into CLOs, and 3) pension plans that invest in private equity (PE) funds and CLOs. He argues that a contraction of available CLO-funded credit to leveraged-loan borrowers could cause many to fail, resulting in both increased unemployment and losses to PE funds and their pension plan investors. He concludes that the potential contraction of CLO funding for leveraged loans creates significant systemic risk. TOPICS: CLOs, CDOs, and other structured credit; financial crises and financial market history","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132402007","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Practical Applications Summary In The Pragmatics of Private Markets Investing from the 2020 Fund Manager Selection special issue of The Journal of Portfolio Management, Karl Polen, chief investment officer of the Arizona State Retirement System, provides insights on private market investing from the vantage of nearly 40 years in the industry. Polen approaches private market investing from the perspective of investing in a business, and therefore he puts the emphasis on the private equity firm’s business strategy, company culture, and employees. Ultimately, private equity firms must also have fee structures that align with investor interests. TOPIC: Manager selection
{"title":"Practical Applications of The Pragmatics of Private Markets Investing","authors":"K. Polen","doi":"10.3905/pa.8.2.405","DOIUrl":"https://doi.org/10.3905/pa.8.2.405","url":null,"abstract":"Practical Applications Summary In The Pragmatics of Private Markets Investing from the 2020 Fund Manager Selection special issue of The Journal of Portfolio Management, Karl Polen, chief investment officer of the Arizona State Retirement System, provides insights on private market investing from the vantage of nearly 40 years in the industry. Polen approaches private market investing from the perspective of investing in a business, and therefore he puts the emphasis on the private equity firm’s business strategy, company culture, and employees. Ultimately, private equity firms must also have fee structures that align with investor interests. TOPIC: Manager selection","PeriodicalId":179835,"journal":{"name":"Practical Application","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129189608","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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