Michael Edesess questions the notion of a “rebalancing bonus,” wondering if it’s a ghost in money management’s machine. The concept, he recaps, was formalized in Bill Bernstein’s influential 1996 study—“The Rebalancing Bonus: Theory and Practice”, which found that “the actual return of a rebalanced portfolio usually exceeds the expected return calculated from the weighted sum of the component expected returns.” Edesess points out, apparently with Bernstein’s support, that the 1996 analysis is slightly misleading in the sense that the underlying assumptions aren’t as practical as they could or should be. Although Edesess’s number crunching is yet another reminder that you can’t count on rebalancing to boost return, that’s still not an argument for shunning rebalancing as a risk-management tool.
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Small- and micro-cap stocks have had a good run lately, but the bullish momentum is now fading. In the long run, finance theory tells us that these corners of the equity market will generate a risk premium over and above the broad stock-market benchmarks. In the short run, however, gravity can and does intrude on the party if performance gets ahead of itself.
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Thanks to yesterday’s annual meeting for Berkshire Hathaway, it’s the high season once again for admiring Warren Buffett’s stellar investing record. The praise is certainly justified. The company’s stock has risen by roughly 20% a year over nearly five decades, convincingly outperforming the US stock market by a wide margin. As The Economist notes, “someone who invested $1000 at the outset would now have more than $10m, compared to around $100,000 if they had invested the same amount of money in the S&P 500.”
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● The Reckoning: Financial Accountability and the Rise and Fall of Nations
By Jacob Soll
Review by James Grant via The Wall Street Journal
It’s shirtsleeves to shirtsleeves for great empires, prosperous city-states and the member companies of the Dow Jones Industrial Average. Debt or sin or war or the tax man finally lays them low. Now comes Jacob Soll with a new theory of the decline and fall of earthly institutions. He fingers the accountants.
According to the author of “The Reckoning,” successful societies—while they last—are those that properly cast their figures. They confront their liabilities as well as their assets. In their enterprise and politics, accountability is the watchword—until one misfortune or another sets the red ink to overflowing.
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The private sector created a surprisingly high number of jobs last month, the Labor Department reports. Private payrolls increased 273,000, or well above the consensus forecast of 213,000 (according to Econoday.com) and substantially higher than March’s revised 202,000 advance. It’s good news, of course, but today’s upbeat release is primarily a clue for thinking that the labor market is again growing at the trend rate that prevailed before the harsh winter took a toll.
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The New York Times reminds us not to take today’s jobs report too seriously. Why? The standard glitch will likely infect the data: statistical noise. “Even when the economy is moving in a clear direction, the noise in month-to-month changes can be big enough to obscure any trend,” Neil Irwin and Kevin Quealy write on the paper’s Upshot blog. To drive home the point, the article includes a simulation of how short-term fluctuations could play havoc with our ability to interpret the data point du jour. What the article didn’t mention is that this caveat applies to every economic indicator.
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Private nonfarm payrolls in the US are projected to increase 210,000 (seasonally adjusted) in tomorrow’s April update from the Labor Department, according to The Capital Spectator’s median econometric point forecast. The expected monthly rise is moderately above the previously reported increase of 192,000 for March.
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April was kind to the major asset classes, at least in relative terms. All corners posted gains. The big winner: US REITs, which topped the list with a strong 3.3% total return, based on the MSCI US REIT Index. In fact, US REITs have been firing on all cylinders lately—so far this year, the asset class is comfortably in the performance lead with a hefty 13.7% advance in 2014 through the end of April. In close pursuit: commodities, which have rebounded sharply this year, gaining nearly 10% via the broadly defined DJ-UBS Commodity Index. In other words, portfolio strategies with low-to-zero weights in US REITs and commodities have endured substantial opportunity costs in recent months.
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The pace of jobs creation in April improved for the third month in a row, according to the ADP Employment Report. “The 220,000 US private sector jobs added in April is well above the twelve-month average,” noted ADP’s president and chief executive officer. “Job growth appears to be trending up and hopefully this will continue,” said Carlos Rodriguez.
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What’s your return expectation for your investment portfolio? That’s a tough question to answer because there are many ways to estimate future performance. Meanwhile, let’s not forget that every forecast is probably wrong in some degree and so it’s a good idea to crunch the numbers from multiple angles. As a first step with modeling multi-asset-class strategies, I like to begin with what’s known as equilibrium risk premiums.
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