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Gundlach on Donald Trump, China and Fed Policy
Asset Management
<p>&nbsp;</p> <p>Despite grabbing most of the headlines and leading in many of the polls, Donald Trump is not expected to win the Republican nomination. But Jeffrey Gundlach said that Trump has done the electorate a “big favor by bringing up issues that have been conveniently buried for quite some time.”</p> <p>Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on September 8. Slides from that presentation are available here . The focus of his talk was DoubleLine’s flagship Total Return Fund (DBLTX) and its related exchange-traded fund.</p> <p>According to Gundlach, Trump is right when he asserts that China’s infrastructure is better than that of the U.S. Quoting Trump, Gundlach said that China’s “130 shiny new airports” and “cities with glistening buildings” outclass the “collapsing bridges” and “airports that are a joke” here in the U.S. And, ironically, according to Trump, the U.S. owes China more than $1.4 trillion.</p> <p>“There seems to be something really weird about this picture,” Gundlach said. “I’m glad to see Mr. Trump is talking about these things simply because these are facts that have been there for all to see but getting very little reporting.”</p> <p>But Gundlach also criticized Trump, calling him a “full-on protectionist.”</p> <p>“We all learned in high school that it was a bad idea in the wake of flagging global growth to go to protectionist steps,” Gundlach said. Gundlach called out Trump’s plans to “build walls to keep people out and put tariffs and taxes on other countries.” Those steps might help our country’s competitiveness, but they would not increase global economic growth, Gundlach said.</p> <p>Gundlach’s comments about Trump were a sidelight to his main message – the assertion that the Fed should not raise rates and his prediction that it will not. I’ll discuss the reasoning behind that thesis along with Gundlach’s assessment of relative valuations in the bond market.</p> <p>What the Fed should – and will – do</p> <p>Economic weakness, market vulnerabilities and a lack of inflation argue against an increase in interest rates, and Gundlach cited numerous examples of each.</p> <p>“I don’t think the Fed will be able to raise interest rates this month, and I don’t really think they’re going to raise them this year,” he said. “And if they do, I think it will be a real problem.”</p> <p>Gundlach harkened to the 1970 cult-movie classic, The Rock Horror Picture Show, which included the song “Dammit Janet.” The data, Gundlach said, is “screaming ‘Dammit Janet’ don’t raise rates.”</p> <p>According to Gundlach, the World Bank and the IMF also advised the Fed against raising rates, which could risk global turmoil in the financial markets and in the emerging markets in particular.</p> <p>Indeed, the odds of a rate increase in September are only 30%, Gundlach said, based on pricing in the Treasury market.</p> <p>One key reason, according to Gundlach, is lack of growth in nominal GDP, which is growing at only 4.1% annually. That’s less than the rate of 3.7% in September 2012 when the Fed began its third quantitative easing program (QE3). Gundlach said his team at DoubleLine has shifted its focus to nominal (instead of real) GDP because “we don’t live in an inflation-adjusted world.”</p> <p>This article is an excerpt from a piece originally published by Advisor Perspectives. <br /> Photo: </p>
Colleges opt for independent investment companies in-house
Asset Management
<p>The University of Washington has joined the growing trend of U.S. universities creating investment management companies.</p> <p>Many university endowments hold enough assets to manage some, or all, investments in-house, but competition for staff is fierce. UW's $3 billion endowment says it wants better access to "best-in-class" money managers, reports the Seattle Times. Right now UW has a staff of 19 led by Keith Ferguson, formerly of Fidelity Investments.</p> <p>The University of Texas and the University of Virginia have also created more formal investment companies from their in-house investment teams, giving them more power and putting up barriers between the investments and campus politics. Harvard University established an early management company in 1974. Allowing the companies more control over compensation separate from the university can make them more attractive to skilled portfolio managers and analysts.</p> <p>&nbsp;<br /> “It’s partly to signal that we’re a mature, sophisticated operation and we function like any other investment company,” said UW spokesman Norm Arkans.<br /> UW earned 6.8% returns for the year ending June 30, a bit above the median of 3.6% for endowments over $500 million. UW's annual rate of return for the last decade is 7.5%.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;<br /> Photo: Ming-yen Hsu</p>
Well, we know one thing. Maybe. Hedge funds had a lousy month in August
Hedge Funds
<p>Yes, it's time for another measurement of hedge fund performance. Preliminary data shows the Barclay Hedge Fund Index fell 2.09% in August, its worst month since May 2012.</p> <p>But Hedge Fund Research reports a 1.87% drop for its HFRI Fund Weighted Composite Index in August, also HFRI's worst since May 2012.</p> <p>Unless it wasn't all that bad, as SS&amp;C GlobalOp suggests in its August report, in which hedge funds edged down 1.02%.</p> <p>Everyone agrees the S&amp;P 500 has slipped year-to-date 4.75%; hedge funds are up more. We'll leave it at that. (BarclayHedge says they're up 0.62%.)</p> <p>Everyone also agrees that Greece and China were not good for performance -- although we always thought volatility was good for traders. The biggest winner still appears to be Biotech finds. The Barclay's Healthcare &amp; Biotechnology Index climbed 12.6%.</p> <p>So why the discrepancy in performance numbers? The biggest issue hedge fund data has is that it's all self-reported. Not that hedge funds aren't totally on the up-and-up, but they may leave some data open to interpretation when they report it. Services like HFR, Barclay, and SS&amp;C only share about 60% to 70% of the same firms and data. "While we all draw from a similar universe of hedge funds, we don't draw from the same universe of hedge funds," says Sol Waksman, founder of BarclayHedge.</p> <p>Even assets that look the same may be quite different. Equity long short is a popular category for hedge funds. Barclays breaks up this category into equity long short and equity long bias, depending on what percentage exposure the funds have. Other trackers likely don't break it up this way, making Barclays measures for equity long short smaller than other firms, says Waksman.</p> <p>"There is no best [index]," says Waksman. "If you want a better estimate, take two, three, or four of them."</p> <p>"We're not there to say, 'hey this is the best'," he adds. "We're more there to save the time of managers," by offering a filtered look at hedge funds and their performance.</p> <p>This discrepancy between funds is really unique to the alternative world that is more gray, and relies on self-reporting. Mutual funds, for instance, are required to report their holdings and performance, says Michelle Swartzentruber, senior research analyst at Morningstar. Morningstar data may differ a tiny bit from, say, Lipper, but it's going to be much more similar data across the board than with hedge funds.<br /> Photo:Moni Sertel<br /> &nbsp;</p>
Hedgie loses discrimination suit
Lifestyle, 4:01
<p>Hedge funder Alphonse "Buddy" Fletcher has lost his four year discrimination battle against a New York City co-op.</p> <p>In 2011 Fletcher accused The Dakota, made infamous as the location of John Lennon's murder, of racial discrimination, reports the New York Post. Fletcher is a longtime Dakota resident, but wished to purchase a fifth apartment in the building. The co-op says it turned down Fletcher because of his deteriorating financial situation, but Fletcher, who is black, called foul. A Manhattan judge sided with the board, throwing out the case.</p> <p>It's been a rough year for Fletcher. The hedge funder's firm, Fletcher International, is bankrupt, after a court-appointed trustee accused it of being a Ponzi scheme.</p> <p>Fletcher's wife, Ellen Pao, has had her own legal battles. Pao lost a sex discrimination case against her former employer, venture capital firm Kleiner Perkins, earlier this year, and just recently announced that she wouldn't be appealing the decision due to lack of resources.<br /> Photo: Alejandro Lavin, Jr.<br /> &nbsp;</p>
European banks battle old enemies and get it wrong again
Capital Markets
<p>I hate to say this, but European banks have a penchant for adopting similar strategies—and usually strategies that deal with yesterday’s problems instead of tomorrow’s opportunities. The recent flight from investment banking is a case in point. Swiss, German, French and British banks all have cut back their investment banking operations sharply. Some of them are embracing instead the mantra of “wealth management”.</p> <p>Rich folk, it appears they believe, will pay up for service, even though there is little magic to so-called wealth management. Wealth management is little more than portfolio diversification, combined with good tax strategies for passing wealth to succeeding generations. Asset allocation, low-cost mutual funds, and a good tax accountant or lawyer are what is called for. High management fees are not required, though perhaps the rich are willing to pay them on the theory that you get what you pay for. And maybe some like to boast about which gold-plated bank has their money.</p> <p>I do admit that a profitable part of wealth management is lending wealthy customers money they do not need. The customer wants a new Rolls, no problem. The customer wants a new yacht or an expensive painting, why spend money? Credit is available, so long as there are securities in the vault.</p> <p>There used to be another aspect to European wealth management: Tax evasion through placing funds in secret accounts and tax haven jurisdictions. There still is some of that, and it never will be entirely eradicated. But the world is moving away from permitting such shenanigans, and in twenty or so years, the jig likely will be up. It is pretty much up for U.S. taxpayers already.</p> <p>Too many banks focusing on wealth management is likely gradually to reduce fees and profitability for many of them. Building a boutique bank like Julius Baer based on wealth management still may make sense. A Credit Suisse based on wealth management will have to be a much smaller Credit Suisse.</p> <p>But if we look to the future of European finance, we can see that Europe is going to need stronger and more diversified capital markets. That is the direction in which the world naturally progresses. Traditional banks are relatively inefficient intermediators. It is naturally inefficient or dangerous to engage in spread lending and its attendant maturity transformation. That is why traditional banks have had to be subsidized—and somehow recapitalized when they fail.</p> <p>Capital markets, by contrast, match investors and borrowers/equity sellers, usually in less leveraged ways. Capital markets lenders and borrowers lose money or fail without systemic consequences.</p> <p>Yet what is happening in Europe is that the banks are impairing their ability to participate in capital markets and the authorities are trying to impair European capital markets by regulating “shadow banks”. Thus, by learning what they see as the lessons of the last crisis (they are wrong even on that, by the way), they are impairing the ability of European businesses and consumers to obtain funding. And the banks are reducing their future profitability.</p> <p>The American banks and investment banking boutiques will be only too glad to fill the void and to try to get around whatever rules the Europeans make to try to prevent efficient funding mechanisms.</p> <p>In wondering why the European banks are shooting themselves in the foot, I am guessing that they have not understood that the investment banking business as practiced in the 2000s was really two very different businesses: Trading, on the one hand, which is capital intensive and, being a zero sum game, is dangerous; and the combination of broking, underwriting and M&amp;A that is highly profitable, uses relatively little capital, and has dangers only to the extent that personnel costs are high. Managements must understand that simple distinction. But if they do, then I do not understand why they would abandon a capital-efficient, potentially highly profitable business, unless they just think they cannot compete with American ag
Daily Scan: Stocks rally ahead of Fed decision; Raul Castro headed to NYC
Capital Markets
<p>Updated throughout the day</p> <p>September 15</p> <p>Good evening.</p> <p>U.S. stocks rallied just before the Federal Reserve begins discussions about whether to raise interest rates. The Dow had a 1.4% boost Tueday, the S&amp;P 500 gained 1.3%, and the Nasdaq added 1.1% after steady gains all day. Oil gained more than 2.5%, ending the day above $45/barrel. In Asia, the Shanghai Composite closed down 3.5%, and Hong Kong's Hang Seng fell 0.6. Meanwhile, the Stoxx Europe 600 closed with a 0.92% gain.</p> <p>Here is what else you need to know:</p> <p>Cuban President Raul Castro headed to New York. Castro will address the U.N. General Assembly later in September. The visit will be the first to the U.S. for Castro as the Cuban head of state. Castro's brother Fidel holds the record for longest U.N speech, at four and a half hours. Reuters</p> <p>Survey says: Insiders are beating the market before event disclosures. Researchers at Columbia and Harvard universities found that executive and board members regularly beat the market with returns from buying and selling stock before they disclose significant events. Wall Street Journal</p> <p>Judge all you want. Facebook is adding a "dislike" button. Founder Mark Zuckerberg revealed that the social media network is "very close" to having a dislike button ready for user testing. Since the "like" button was introduced in 2009, users have steadily requested a dislike button. BBC</p> <p>Died: Subway co-founder Fred DeLuca. The cause of death has not been revealed, but the 67-year-old DeLuca was diagnosed with leukemia in 2013. DeLuca helped found the sandwich chain in 1965, and had just recently turned the day-to-day operations of the company over to his sister. New York Times (paywall)</p> <p>House considering a lift on the oil exports ban. Republicans are planning to vote in the coming weeks on a bill to lift the 40-year ban on oil exports. Oil companies have been lobbying Congress to allow them to benefit from the domestic oil boom. Wall Street Journal</p> <p>Credit Suisse nears deal to settle claims over dark pool Credit Suisse is expected to pay at least $80m to settle allegations that it misled clients about its dark pool, trading venues meant to allow asset managers  to trade large blocks of shares without moving the price against them. Financial Times.<br /> Suspected Mississippi gunman dead after shooting himself. A professor who allegedly killed his live-in girlfriend before shooting and killing a fellow professor on the campus of Delta State University killed himself during a police pursuit. Washington Post<br /> North Korea Nuclear site "in operation". North Korea says its main nuclear facility, the Yongbyon complex, has resumed normal operation</p>
The myth of active hedge fund management
Hedge Funds
<p>A new academic study adds yet further proof to the growing mountain of evidence that "active management" is largely a myth, at least among hedge fund managers. Mikhail Tupitsyn and Paul Lajbcygier of Monash University in Australia highlight that not only are two out of three hedge fund managers actually "passive" in their investing approach, even those that are active managers at first tend to become passive over time.</p> <p>The authors also point out that passive managers tend to outperform active managers, especially over the long run.</p> <p>Read the details at ValueWalk.</p> <p>Photo: yuki55</p>
The bank that is also an operating system
<p>The accepted wisdom around fintech currently is that banks need to think of themselves as technology companies if they want to stay relevant and ride out the oncoming wave of disruption. </p> <p>Few banks has take this message to heart as much as Germany’s Fidor bank which just unveiled its new banking platform: FiderOS. </p> <p>Broadly speaking, this so-called bank operating system is a way Fidor bridging the gap between traditional banking and new fintech-enable banking. </p> <p>The platform uses something called APIs (application program interfaces), these are similar to kinds of protocols that let you use popular internet services, like Facebook or Google, with third party services. Banks have been making limited use of APIs for a while.</p> <p>But Fintech blog Finovate explains that banks like Fidor are at the vanguard of an API revolution in banking. Why is this important for banks? In short, it is helping banks stay relevant by connecting, and not competing with fintech. </p> <p>These protocols are not only at the core of the next wave of  fintech innovation but are key to linking the old and the new. The flexibility afforded by the cloud computing and APIs offer banks a way they can apply fintech solutions that enhances their ongoing operations without the massive infrastructure cost.</p>
Transferring wealth to the next generation
Asset Management
<p>Succession planning and achieving a smooth transition of wealth from one generation to the next can be a messy process. Feuding siblings in the shadow of a controlling (usually) father make for fun soap opera but can quickly dissipate hard-earned riches and forge lasting enmities.</p> <p>HSBC Private Bank is one of several wealth managers who recognize that their role extends beyond portfolio management or simply finding the best investment returns.</p> <p>The UK-based bank recently hosted events entitled “Exploring the Future of Wealth as part of its Next Generation Programme” in London and Miami where opportunities and obstacles faced by the children of family business owners were discussed.</p> <p>Topics on the agenda included the latest entrepreneurial trends, leadership best-practices, sophisticated investment strategies, philanthropy and social awareness, explained Gerry Joyce, US head of private wealth solutions at HSBC Private Bank in an interview.</p> <p>“Equally important, they were a chance for young people to share their experiences with their peers,” he said.</p> <p>Managing inevitable conflicts, especially when business and family interest overlap, and creating and communicating a clear framework for succession that is then committed to by all parties is critical, he added.</p> <p>“The transference of control is the acid-test for a wealthy business family,” he stressed.</p> <p>But, the big challenge for HSBC and other banks will surely be Asia. Here, maneuvering and scheming for position as an octogenarian patriarch’s powers decline is as much a staple of tabloid coverage as are the daily dramas of the Kardashian clan in the US.<br /> Photo: Tom Brandt</p>
Women and VC: The aftermath of Ellen Pao vs KPCB
&nbsp; Last week we saw Ellen Pao finally throw in the towel and drop her appeal after losing her sexism case against former employers Kleiner Perkins Caulfield and Byers, a Silicon Valley-based venture capital. In article published in Re/code, the former Reddit CEO draws a line under her three-year-long battle, detailing exactly what she was up against, and why she