Gideon Pell QRE®

Can you increase someones financial knowledge? Yes...BUT what about subjective measures like financial self-efficacy, propensity to plan, even risk tolerance? That's the question Paul Gerrans, Arvid Hoffmann, Dr. Si McNair and I addressed in our NEWLY ACCEPTED paper in the Pacific Basin Finance Journal, which is already available as a pre-proof here: https://lnkd.in/gQ2Wvhwi It was a bit of a rollercoaster getting this one published BUT it's a pretty cool study because Paul had run an experiment putting some students through a financial literacy course (and others not). Then after waving a magic stats wand at it (aka a Latent Transition Analysis with dynamic states) we were able to show different sub-categories of individuals whose financial literacy AND subjective measures evolved in different ways. The interesting thing is that while participants mostly got better on objective measures (as you'd expect) they differed on subjective measures, with some even becoming what we'd call Overconfident. We were also able to show how different individuals moved between states over time as a result of the training, as well as individual factors like confidence in their own ability to search for financial information. Great to work with this team and throw my 'modelling' skills at an interesting topic! Also for those playing along with my 'year that wasn't' last year its pretty nice to have something accepted a week into this year! Let's hope that kind of trend continues 😉

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Important to track

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Agency cost of debt as incentive for executive inside debt: Evidence from empirical study The substantial holdings of inside debt cause both academia and industry to wonder about the reasons. Jensen and Meckling (1976) suggest that debt-like compensation could lower the agency cost of debt. Nevertheless, empirical evidence is still lacking for whether the management really chooses to use inside debt as mitigation of agency cost of debt. In this study, recently published in our journal Corporate Ownership and Control, the author from the USA uses the value of non-tax-deductible deferred compensation from the ExecuComp database as the measure of inside debt, leverage as the proxy for agency cost of debt, and examines the causal effect of changes in leverage on inside debt. Using phased increases in corporate income taxes in US states between 2006 and 2016 using difference-in-differences regression, the author identifies the causal effect of tax-motivated corporate leverage on the balance of deferred compensation. Firms increase their deferred compensation balance by $85,000 with a 1% increase in leverage. This finding implies changes in the agency cost of debt as a potential reason for variations in inside debt values and provides evidence for Jensen and Meckling’s (1976) theory. #corporategovernance #debt #agencycosts #boardofdirectors #finance Find the full-text paper below https://lnkd.in/drX84AVs

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Sovereign's Charles "Chuck" Failla, CFP® had the opportunity to present for the The New York Public Library about: Sequence of Return Risk. 👉 The full replay of that presentation is now available at: https://lnkd.in/e8UdNvX2 #financialplanning #riskmanagement #CFP #wealthmanagement

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This review paper offers a great starting point for anyone interested in understanding the low-risk anomaly. It provides a thorough survey of the literature and discusses results across asset classes as well as possible reasons for why the anomaly might exist. https://lnkd.in/dCiesnTj

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Crowding into risk: central bank liquidity correlation to this weird decade in markets. Bloomberg's Odd Lots interviewed Matt King as markets began to turn but before yesterday's meltdown. Some fascinating excerpts: "... I think the biggest puzzle is why financial conditions have eased so much, even as we've had ongoing QT, even as we've had, rates at 23 year highs. And in fact, it was the main thing I was missing in the FOMC last night, nobody asked Jay Powell about how they considered this easing of financial conditions. ... And I think you need to get your head around what's been driving all of that before you can then come back and think about the outlook and, and what markets are doing at the moment." So what might that be? "I just look at my charts of what markets are doing and I try and make sense of them. But the way it seems to me is that market sensitivity to central bank balance sheet changes really hasn't changed at all. That most of the time when we thought we were doing QT, actually we weren't. And indeed a lot of the time there was almost this stealth QE effect going on... And the right way to think about this is in terms of not the security side of the central bank balance sheet, but the changes in reserves. And once you start thinking in those terms, you look globally and you say ‘Well, since 2009 we added $18 trillion worth of reserves or liquidity and we've only dialed back about $500 billion worth.’" But hasn't the Fed balance sheet fallen? "So for the Fed you just want the straight reserves number that you are looking at and you see a peak in April this year and then levels have fallen off subsequently." King's hypothesis? "You've taken money away from the private sector and there's less private money in markets, more securities needing to be absorbed and as a result what we get is a drop in the price of risk. And confusingly where that shows up on all of my charts is not necessarily in a drop in the price of bond yields where you might've anticipated or t-bill rates actually instead it shows up most clearly in the prices of equities, in the prices of credit spreads and even occasionally in things like the prices of Bitcoin. And for me, the way you make sense of that, that's weird because it's not like the Fed and the other central banks are buying and selling large amounts of credit or equities or certainly Bitcoin. But instead it's this ripple through effect. It's that when, let say it's the other way round and TGA is falling and I've just got more money in my bank account because a t-bill  matured but there's no new t-bill for me to go out and buy, well I get forced into buying something riskier and you get this cascading effect where the guy that would've bought bonds buys credit and the buy that would've bought investment grade buys high yield and the guy that would've bought high yield buys equities and you can't see all of those moving parts." And presumably the equities guy goes all in on crypto? 🤷🏻

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Curious about how target date funds with embedded annuities can impact your retirement planning? NEPC's Bill Ryan, MBA CAIA SPHR, Partner and Defined Contribution Team Leader says, "we're missing the human wealth manager that actually helps the individual trigger the annuity. There's nobody holding the hand of the participants to successfully facilitate that transaction ... and that human behavior is where I think this breaks down." Do you think this approach could redefine retirement security? Read the full article by Pensions & Investments to learn more: https://hubs.ly/Q02-2bG30

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Actuaries and math puzzle-solvers, here's a question. Several novel target date funds (TDFs) have come to market in which deferred annuities are embedded as one of the investment sleeves. These TDFs are intended to be distributed through 401(k) plans as qualified default investment alternatives (QDIAs) for auto-enrolled participants. Here's how they work: When participants who are auto-invested in the TDFs reach age 45 or 50, increasing percentages of their contributions begin to spill over into the deferred annuity sleeve. At age ~65 or so, the participant must decide whether or not to convert the amount in the annuity sleeve to guaranteed lifetime income. The conundrum concerns the asset-based fee on the contents of the deferred annuity sleeve during accumulation. Starting at age 50, the participant might pay as much as 100 bps/yr on the assets in the sleeve; in return, typically, the annuity issuer sets a floor under the sleeve's accumulation. But the floor (as I understand it) is contingent on the participant's decision at age 65 to convert the sleeve assets to guaranteed income. If there's no conversion, the floor vanishes and the participant has only the amount in the sleeve. Some people have worried that participants who have paid the annual 100 bps for 15 years but never opt into the annual lifetime income stream (~5% - 6% of an amount no less than the floor) may feel robbed of the fee (which may have eroded their accumulations along the way). But one witness at a meeting of the ERISA Advisory Council this week suggested that those participants might be like people who buy car insurance but never have accidents: they shouldn't feel robbed of their premium. So, is the 100 bps drag on the TDF sleeve an unfair charge for participants who don't opt into the annuity at retirement? Or does it have value either way? What if the participant could see that her account balance was higher than the floor, and so declined the income benefit because it wasn't "in the money." Did her 100 bps have insurance value? Some rabbinical wisdom is needed here, perhaps. Future plaintiffs' attorneys may examine this question carefully. BTW, this is not a new problem. Living benefit riders on individual annuities have posed similar ambiguities. Now the 401(k) world is about to experience it. Thoughts?

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Value-at-risk is riddled with shortcomings and is widely derided as a risk measure. It's due to be eliminated from Basel rules according to #FRTB and the Fed's #BaselEndgame plans (if they happen). But (hear me out) there's a lot to be gleaned from existing Fed VaR backtesting disclosures, including Goldman Sachs trading loss on two days during Q3, which was Global Trading's most read article of 2024. Such insights are powered by the Risky Finance Ltd database. https://lnkd.in/eH7wPAEg

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I’ve said this a few times on the Alpha Exchange podcast, the 10 year note IS the risk asset. It’s not to be taken too literally but it’s to emphasize the point that from a systemic risk standpoint, a true malfunctioning of the US gov’t bond market would be a disaster. This is hardly new. All at once everyone and no one is paying attention. The debt dynamics are formidable to say the least, and the agency costs are exceptionally high. We wouldn’t be here if they weren’t. When the CBO projects debt to rise to 200% of GDP by 2050, is it reasonable to think a financial accident, perhaps a serious one, will not occur along the way? The Treasury market ought to represent the best of the U.S…a tremendous tax base, vibrant/deep markets, low and stable inflation, independent monetary policy. Instead, it is burdened by a win at any cost political system that simply cannot make difficult choices. When there is political gain to be had from kicking the can, it will get kicked. In this 20 minute pod, I make the case for overlaying 3 assets on top of a base SPX exposure: put spreads, gold and bitcoin. All have option-like characteristics that can play a role in making the inevitable equity drawdown more bearable. Have a listen. Hope you find it interesting. https://lnkd.in/egq-iP66

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Practical Applications of How Many Is Too Few? Revisiting the Number of Names in Equity Portfolios: https://lnkd.in/gE-YXauQ. By: Jennifer Bender and Xiaole Sun In How Many Is Too Few? Revisiting the Number of Names in Equity Portfolios, from the February 2024 issue of The Journal of Portfolio Management, Jennifer Bender and Xiaole Sun of State Street Global Advisors find that the primary determinant for the optimal number of names in a portfolio is tracking error. Read the full practical application report at Portfolio Managment Research. #equityportfolio #portfolios #research

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My latest note looks at what the Fed's balance sheet reduction has done so far (not much) and why (reasons on both the asset and liability side) https://lnkd.in/ePtuWvdx

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“Too bearish on retail credit, haan? So we are back in big NPA cycle for banks?” my old colleague asked after reading this interview. “Not really a big NPA cycle. Just a marginal uptick.. say 1-3% increase in GNPA in retail segment” I said. “I don’t think that’s enough to call for distress” he quipped. “My point isn’t about significant stress in retail lending. It’s that the era of SECULAR retail debt growth in India is likely ending. Going forward, retail debt performance will experience cycles, which is a new development and isn’t priced into markets. ….The average analyst, equity investor, or banker loves retail portfolios for delivering ‘growth without stress’. I m suggesting it’s time to reassess that ” I said “But our retail debt is very low. And has space to grow? ” he said. “At 42% of GDP, retail or household debt is not low for our level of national income. …Also, the third of retail debt is unsecured in India. Its 10% in the US. Growth in unsecured portfolio at 25% over past 4-5 years is certainly alarming” I said. “So you are saying it won’t grow now?” He asked. “Our retail debt will still grow to 60-65% of GDP in 20-25 years. (China 2024 level). But that will only mean retail credit growth is at nominal GDP + 1%. So growth of just 10-11% …Poll the analysts and you will likely hear expectations of 15% CAGR” “Hmm…Until Sept, numbers don’t suggest any major stress. Wonder why you being so pessimistic” he said. “MFI, unsecured portfolios are seeing significant increase in stress. Not so much in secured loans yet… …But given that bank mortgage credit growth has slowed to 12% vs 15-16% (CAGR since 2011, ex HDFC effect), it signals shrinking space for rapid lending growth” i said. “That’s speculative” he said. “I know, but you know this, don’t you that stress takes time to reach analyst calls….And did you not see RBI pointing out that banks may be hiding the higher delinquencies by aggressive write offs.” I said He sent me data on 1. Most loan growth in India has happened in Super prime segment. 2. Share of NTC (new to credit) borrower has come down from 17% to 10% in last 5 years 3. NTC approval rate has come down from 33% to 22% I too sent him some 1. India home buyer’ EMI to income ratio is not low. It’s actually worse than US. 2. Retail Credit gap in India is flashing red as per IMF (10% gap creates instability) 3. Household (deposit - borrowing) as % of GDP has come down from +2.8% in 2013 to -1.7%. He wasn’t convinced. I wasn’t convincing. Then Bajaj Fin rallied because someone upgraded the stock. That proved that I was wrong in any case :) https://lnkd.in/dtfqg6Sq

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Institute For Portfolio Alternatives’ Coverman On The Registered Funds Conference Watch Now: https://lnkd.in/ejKdKZm5 #RIA #RIAChannel Institute for Portfolio Alternatives Anya Coverman

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🚨 FINAL REMINDER - Annual GIPS® Compliance Notification Form Deadline Is June 30, 2024 Organizations that claim compliance with the GIPS standards are required to notify CFA Institute of their claim of compliance by submitting a GIPS Compliance Notification Form. Organizations that are newly claiming compliance with the GIPS standards must submit the GIPS Compliance Notification Form before publicly claiming compliance.  Once an organization claims compliance, it must submit an updated GIPS Compliance Notification Form annually, between 1 January and 30 June of each year. Required information includes the name of the organization, contact details for a primary and secondary contact, and whether or not the organization has been verified within the past 24 months.  Answers to other questions, including types of portfolios managed and total assets managed, are optional. All information provided must be as of the most recent 31 December. Organizations submitting a GIPS Compliance Notification Form for the first time should use the Initial Form link. Organizations submitting an annual update should use the Update Form link. https://lnkd.in/gYEsxVth

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How many investment advisers registered in Rhode Island use Altruist? Let's find out with ADVDB advanced search. Advanced search enables searching by... • Custodian • State registration And will soon include... • Client type • SMA asset classes • Discretionary/non-discretionary assets • And more... Advanced search is free for the next couple of weeks while I work out the kinks. Search 32,000 investment advisers for free with advdb.co. p.s. There are four advisers registered in Rhode Island using Altruist.

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