Last week’s top conversations were started by Larry Swedroe, Wade Pfau and Adam Butler. They generated thoughtful discussions on: the myth of private equity and venture capital outperformance; Dimensional Fund Advisors’ targetdate retirement income funds; and exposing the “active risks” of passive portfolios.
Larry Swedroe’s Exposed: The Myth of Private Equity and Venture Capital Outperformance received five comments about the risks of investing in complex alternative asset classes. Advisors agreed that in the private equity (PE) and venture capital (VC) space “outperformance has been elusive, unless you are able to invest with managers generating top-quartile and top-decile type returns,” but those managers are usually closed to new investors. Some advisors added that PE and VC investments need to be made in the early stages of a market cycle, and that investors should stay away because “institutions and individuals are both historically very bad at timing their investments in the market.” In response, others suggested that market timing might not even matter because in the early stages of the market cycle, equity valuations tend to be low as well. Members concluded that advisors should use small-value stocks and small-cap index ETFs to gain exposure to potentially higher returns because they offer better liquidity, diversification and transparency than PE and VC.
Wade Pfau’s Meeting Retirement Goals with Dimensional’s Target-Date Retirement Income Funds received 16 comments about strategies that can be used to protect clients from inflation, interest rate and longevity risk in retirement. Advisors agreed that the DFA Target-Date Retirement Income Funds are “most suitable and cost-effective for 401(k) plan participants,” and they proposed different strategies that advisors can use in place of these funds. Many advisors advocated for the use of TIPS ladders to protect against inflation and interest rate risks, and some suggested that they should be used with SPIAs to increase guaranteed lifetime income. However, others argued that a strategy using CDs and DIAs would be a superior alternative that also allows advisors to avoid expenses associated with mutual funds. They reasoned that, “while they are not inflation protected, CDs typically provide much higher yields than Treasuries, making the inflation insurance ‘expensive.’” While some agreed with this reasoning, others had reservations about the way DIAs combine with the rest of a portfolio. In the end, members concluded that choosing the most appropriate approach depends on how advisors and clients perceive risks.
Adam Butler answered a dozen member questions following his recent APViewpoint webinar, Exposing the “Active Risks” of Passive Portfolios, the first presentation of a four-part series. In this webinar, Butler covered the role of asset allocation versus security selection in achieving clients’ long-term objectives, and introduced what he said was the only portfolio that makes no active bets — the ReSolve Global Market Portfolio (GMP). The subsequent Q&A conversation received 12 comments about the strategy of the GMP, a portfolio based on the belief that markets are both micro and macro-efficient. Butler explained that the GMP is only rebalanced every few years, and that “the portfolio is perfectly balanced so that an investor is agnostic about what economic environments the future holds.” He discussed specific ways in which the portfolio achieves this, such as its inclusion of REITs as a separate asset class to provide diversification properties beyond those in global stock market indexes. He also provided clarification about the costs associated with the GMP, explaining that there are relatively low underlying costs because it exclusively uses ETFs, and that the primary source of tax exposure are dividends and interest. If you missed the live webinar, you can view an on-demand replay on the APViewpoint events page here.
APViewpoint will be hosting its next CE eligible webinar, New Research: The Art and Science of Portfolio Optimization, on Thursday, July 14, at 4:15 PM ET. In this presentation, ReSolve Asset Management CEO Adam Butler will explore a variety of methods for constructing portfolios based on specific market assumptions. He will discuss discuss the relationship between risk and excess return, and will review different ways to optimize diversification.
Marianne Brunet is a financial markets analyst with Advisor Perspectives.
