Bernie Madoff is in prison. Now, one son and another’s estate are being sued. By Erin E. Arvedlund, Inquirer Columnist Looking for some sleazy beach reading? Here’s a tale of a whole family ripping off investors: Bernie Madoff and his sons are back in the news. More precisely, surviving son Andrew Madoff and deceased son Mark Madoff’s estate have been sued, yet again, by a court-appointed trustee for over $150 million. They are accused of stealing directly from accounts of their clients, faking trades, deleting incriminating e-mails, and taking fake “loans” from the family business. I’ve long argued that Bernie Madoff’s crime was too complicated to do alone, and earlier this year, five of his former employees were found guilty of helping him – they now face prison sentences. Madoff himself took the blame entirely, in an effort to shield his brother, sons, and niece. He is serving 150 years in prison, and his brother is in jail. His niece has been granted her freedom in exchange for her assets. Now, vivid details of his sons’ involvement are emerging, and offer a roadmap of how a family-run investment shop sloshed money in and out of bank accounts and abused client money as a personal “piggy bank” (as the trustee Irving Picard called the crime). In all, Picard alleges, the brothers stole $153.3 million over the decades they worked with their father. That’s a small portion of the $20 billion or so ultimately stolen, but if successful, the suit would show the family was, it can perhaps appropriately be said, thick as thieves. Andrew and Mark are also accused of deleting e-mails that linked them to their father’s Ponzi scheme during a 2005 U.S. Securities and Exchange Commission investigation. The trustee also alleged the pair diverted tens of millions from the firm to engineer fake loans. They then used that money to buy real estate – million-dollar apartments in Manhattan and houses in Nantucket, Mass., and in Greenwich, Conn. Investment firms larded with family are a minefield for conflicts of interest. Here are some questions investors should ask before they give money to such a firm: Does the adviser have physical custody of your customer funds? Or are the assets held by a third party, such as a bank or custodian? Because they should be. Madoff had custody of his clients’ money, and that’s partly how he managed to cover up his fraud. Does an independent third party, unaffiliated with the family, administer your account? Will you get brokerage statements from an outside firm? You should. Madoff also issued false account statements to his clients, and wouldn’t provide online access. Who is the family firm’s auditor? Is the auditor related to the family in any way? He or she shouldn’t be. New rules target advisers with custody, or advisers who are affiliated with a third-party custodian, by requiring them to undergo an annual surprise audit by an independent auditor. Who has check-signing authority at the firm? If it’s family, take your business elsewhere. Don’t get tripped up by another Madoff. These types have stolen enough already. firstname.lastname@example.org 215-854-2808 @erinarvedlund
New fund aims to cash in on global opportunities
Published Monday, March 31, 2014
If you’re a fan of buying low and selling high, then some (but not all) markets outside the U.S. might represent value for your portfolio.
We interviewed Mebane Faber (his first name is Scottish, pronounced “meb-bin”), a portfolio manager running about $350 million in assets. His firm recently launched a new exchange-traded fund called the Cambria Global Value ETF (GVAL). This fund invests in roughly 100 stocks in the world’s most undervalued markets, and Faber says those are – brace yourselves – Greece, Russia, Hungary, Ireland, Spain, Czech Republic, Italy, and Portugal.
It’s not that Faber dislikes American stocks; they are just not a bargain now. He argues that based on a ratio called the Schiller CAPE model, the U.S. market is actually very expensive, and for this fund, he is currently not invested in American equities. And, yes, the Schiller is Yale University economist Robert Schiller.
Faber runs other ETFs, such as Cambria Shareholder Yield ETF (NYSE: SYLD), which do currently invest in U.S. stocks.
“Japanese equities in the 1980s were a big bubble, approaching half the world’s market cap. The U.S. market is almost there,” Faber said.
Moreover, “most investors have home-country bias,” Faber said, in an interview from his Los Angeles offices.
“This is a way to get more exposure to a globally market-weighted portfolio,” he added. “Plus, we are buying the value among value.” He means the cheapest, most liquid stocks in places where either political or economic crises have crushed stock prices.
Wesley Gray of Drexel University is one of Faber’s investment research partners, and their takeaway is to buy beaten-down stocks in beaten-down markets, what Faber calls “value among value.”
“Yes, the stocks could go down further before they rebound,” Faber said, but by investing in many markets, the fund is diversified.
We’ll keep an eye on Cambria’s newest ETF and report back when performance data are available.
We wrote about Ingrid Robinson, a defrauded investor from California in the Remington Financial advance-fee scam, and she spoke last week at the sentencing hearing of Andrew Bogdanoff, the head of Remington, which operated from Arizona and Philadelphia. Bogdanoff received more than 18 years in prison for financial crimes.
Robinson shows how one person who perseveres against criminals – in this case, commercial brokers Bogdanoff and Andrew McManus, who were convicted of stealing investors’ “due diligence” fees – promising loans that never arrived – can prevail.
Robinson also met with members of Congress to push for legislation regulating commercial brokers. If a commercial broker has victimized you, contact her at Ingrid.email@example.com
ERIN E. ARVEDLUND
Phila Inquirer Thursday, March 13, 2014, 1:08 AM
Second, a new study out of S&P Dow Jones confirms that Wall Street is getting one over on us when it comes to municipal bonds: If you try to buy individual munis yourself, you are getting hosed on the price.
On Puerto Rico, we circled back to David Kotok, chief investment officer at Cumberland Advisors of Vineland, N.J., to find out whether he liked Puerto Rico’s new bond issue last week.
“We have certain segregated accounts that are Puerto Rico-only, and we position certain P.R. debt in them. We do not do so for high-grade accounts,” Kotok said. “We must remember P.R. is a junk credit.”
Puerto Rico muni bonds have attracted some atypical buyers, such as corporate junk-bond investors and hedge funds.
“These are not typical high-grade muni buyers, so their pricing behavior is not a reflection” of how risky these muni bonds truly are, Kotok added. Still, an 8 percent yield tax free is tough to beat. Similarly rated corporate bonds yield about 4.8 percent, according to Bloomberg data.
Want to buy munis?
Don’t do it yourself. Leave it to your portfolio manager or an exchange-traded fund (ETF).
That’s the upshot from J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, who found that a retail investor pays about twice the transaction cost for a muni bond as for a corporate bond.
In December, the average cost to buy an individual municipal bond was 1.73 percent for retail investors. An investment-grade corporate-bond transaction cost roughly half that, at 0.87 percent.
“Buying a muni bond entails an unseen transaction cost, which may not always be clear to retail investors,” Rieger said in an interview. Because muni bonds are sold without commissions, brokers make up the difference by padding the price and building a markup into the muni bond.
“We don’t know what the markup is exactly,” Rieger said, but he suggested that retail investors stick with muni bonds in either mutual funds or ETFs.
Haverford Trust executive bullish on stocks
With continued mixed economic data dribbling into the market, Hank Smith, Haverford Trust’s chief investment officer, said we should expect more volatility than in the last few years. But, overall, he is extremely bullish on the stock market.
Overseeing $7 billion in client assets, Smith is a classic equities bull. Stocks still remain the best asset class, he said:
“Tailwinds are in U.S. stocks’ favor with reasonable valuations, great balance sheets, decent earnings growth, dividend increases and share buybacks, an accommodative [Federal Reserve], and very little risk of a recession.”
Where to buy? Smith likes so-called old technology companies and industrial sectors balanced with defensive sectors like health care.
“Any pullbacks should be short-lived, because there are a lot of investors who missed the bull market” that started after the crisis of 2008, Smith claimed. “We are five years from that bear market. There is healing taking place.”Haverford has traditionally favored equities over fixed income for its clients, and Smith said that was because the investment shop owns bonds mostly to “reduce volatility in a portfolio.”
Moreover, he said, some stocks today are yielding just as much – if not more – than their company’s corporate bonds. You would have to reach back to the mid-1950s for a similar period, when many stocks yielded more than bonds as a trade-off for the risk of investing in equities, he added.
Take McDonald’s Corp. (symbol: MCD), shares of which have a dividend yield of 3.4 percent, whereas a corporate bond issued by McDonald’s and maturing in, say, 2022, carries a 2.9 percent coupon.
“You get more yield owning the stock than the bond. If you buy the bond, you get the coupon for years. You’re not taking much risk,” Smith said.
“But McDonald’s dividend yield has increased every year, and that will likely continue,” perhaps as much as 8 percent to 10 percent annually, Smith said.
Through annual dividend increases and compounding, the total return on McDonald’s stock would be higher than the bond over the same period.
“So, if you own the stock for just as many years as the bond, you get 7 percent, even if the stock does nothing,” Smith said.
The trade-off? You, as an investor, experience more volatility for that period.
Haverford highlights other holdings for which the shares yield more in dividends than do the corporate 10-year bonds: Microsoft, Philip Morris, Mattel, Intel, Procter & Gamble, and Coca-Cola.
In fixed income, Haverford owns very few Treasury bonds for clients.
“It is the most overvalued asset class,” Smith said, adding that the firm was willing to miss any short-term rallies in Treasuries.
Why is gold rising?
Charles Gave may help explain this conundrum. Gave, who founded the GaveKal research firm after managing money for many years, is trying to puzzle out the price rally in gold, which this week shot back up over $1,300 an ounce after a steep correction from $1,600 last year.
Gold is rallying for reasons that make little sense: on news that the Federal Reserve is cutting back on its long, huge bond-buying binge, and despite low consumer prices and flagging money supply. “This is particularly hard to understand for investors, who think of gold as an inflation hedge,” Gave notes.
But two things could explain it: emerging market currency turmoil, and the Federal Reserve’s low interest rate policy.
First, divide the world into two categories: those countries that keep a tight lid on foreign-currency exchanges; and those that don’t. The first includes mostly emerging economies, the second mostly those of developed countries. “If you are a rich person in one of the countries with capital-account restrictions, it can be difficult to diversify your assets abroad. In quite a few of these countries, one can buy gold. So gold becomes the substitute for international assets in a diversified portfolio.”
Since such emerging markets as Brazil, Russia, and India have experienced hyperinflation, defaults, taxes on capital flows, and devaluations, “gold becomes the best available hedge against bad policy, as well as against a bear market in the local stock market,” Gave says.
Second, Fed monetary policy has added to the volatility of exchange rates, and so, Gave concludes, “this is how we get the bizarre situation where holding gold protects against devaluation and growth/deflationary pressures in the emerging markets. Gold will keep rising as long as U.S. policy is exporting volatility – we see no imminent change in this situation under Janet Yellen’s Federal Reserve.”
We may have missed the significance to gold of wildly moving exchange rates in countries that now make up a significant portion of the world’s growth: Brazil, Indonesia, India, China. And Gave thinks if the volatility continues, then gold may keep rallying as a hedge against uncertainty.
Inquirer.com Wednesday, February 12, 2014, 1:08 AM
Let’s compare performance. The iShares MSCI Frontier 100 fund (symbol: FM) holds companies such as Qatari banks and a Nigerian brewery. That frontier market index has performed very well over the last three months, up roughly 6 percent, compared with iShares MSCI Emerging Markets (EEM), down 5 percent over the same period.
Other emerging markets’ funds have sold off similarly, such as Vanguard FTSE Emerging Markets (VWO), Schwab Emerging Markets Equity ETF (SCHE), and the closed-end funds Aberdeen Emerging Markets Smaller Company Opportunities Fund (ETF) and Morgan Stanley Emerging Markets Fund (MSF).
Why the interest? Because every other market feels wobbly. Make no mistake, “frontier” markets are highly risky, and are probably not suitable for retail investors.
Yet there is immense interest in them. Just last month, Larry Speidell, founder and chief investment officer of Frontier Market Asset Management, an independent investment management firm in La Jolla, Calif., gave a presentation here to the CFA Institute of Philadelphia. His fund includes equity investments in frontier markets such as Bangladesh, Botswana, Ghana, Ivory Coast, Kazakhstan, Kenya, and Qatar.
“Put Myanmar on your 2014 watch list of investment-worthy frontier markets,” notes Peter Kohli, CEO and founder of DMS Funds, based in Leesport, Pa. Coca-Cola and Caterpillar already operate in Myanmar, and Ford will be opening a dealership to sell trucks there. Numerous websites have sprung up with information on investing in Myanmar. (Kohli’s favorite is www.investinmyanmar.com).
Still, U.S. regulators are wary. FINRA, the American brokerage watchdog, this year issued a letter sounding warnings about mutual funds that invest in frontier markets, which were among the best-performing assets in 2013.
“Heightened risks associated with investing in foreign or emerging markets generally are magnified in frontier markets,” FINRA said in its letter. For instance, there could be no way to sell if the market is illiquid.
Remember, getting into frontier markets is easy. Finding the exit quickly could be painful to your portfolio.
Picking hedge funds, mutual funds not about winners, but avoiding losers, says author
ERIN E. ARVEDLUND
Published Thursday, February 13, 2014, Philadelphia Inquirer
What is the main difference between a mutual fund and a hedge fund? These days, the goodies inside the portfolios are strikingly similar. The only difference might be the wrapping paper.For instance, which is riskier? A hedge fund holding hundreds of diversified stocks, or a mutual fund such as the popular Fairholme Fund (symbol: FAIRX), which has about 40 percent in one stock – the recovering insurer AIG? An investor’s aptitude for risk should be the result of analysis.
To navigate the increasingly blurred lines between mutual funds and hedge funds, we checked in with Brian Portnoy, whom I first interviewed a decade ago when he was a mutual fund analyst for the Morningstar Inc. database.
Since then, he has worked as a hedge-fund allocator, someone who funnels money to hedge-fund managers on behalf of investor clients, and now helps create alternative investment products for his current firm, Chicago Equity Partners.
“Between 2000 and 2002, you could have lost half your money in an index fund and paid very low fees, or you could have made money in hedge funds,” Portnoy said.
And yet, during this latest rally from 2009 to 2014, the markets are up strongly, and hedge funds have lagged.
“There’s no way when the market goes up like this that ‘hedgers’ can keep up,” Portnoy explained.
Instead, for investors in either a mutual fund or a hedge fund, “the goal over time is to capture a significant part of the upside and avoid the big downside losses,” Portnoy said.
The return after fees and taxes – whether mutual fund or hedge fund – is most relevant.
Here are the questions investors should ask themselves:
What does this portfolio manager do exactly? Don’t be afraid to ask what you think might be dumb questions.
Can I trust this portfolio manager? “Trust is more than forensic analysis by accountants, lawyers and due diligence specialists,” Portnoy explained. “It is tricky.”
Portnoy contended it is a psychological engagement to size up others as potential long-term partners with whom we have a clear understanding of interests.
Are these portfolio managers good at their jobs?
Are they the right fit for me?
Note that Portnoy’s suggested questions for investors don’t ask anything about performance.
“Performance-chasing doesn’t work,” he said. “Like a sugar rush, great returns feel good for awhile and then dissipate, as a manager rarely and consistently meets or exceeds our expectations.”
Portnoy goes into more detail in his new book, The Investor’s Paradox (Palgrave Macmillan 2014), outlining his investment and due-diligence process.
Online overview of municipal bonds
ERIN E. ARVEDLUNDPublished Monday, February 10, 2014, 1:08 AM
Many readers have asked me how to find out the prices and yields on their municipal bonds, and the truth is, it hasn’t been easy. But on Friday, the Municipal Securities Rulemaking Board updated its website and muni bond database.
To make it easier to find important information about municipal bonds, the Municipal Securities Rulemaking Board (MSRB) unveiled an improved design of its Electronic Municipal Market Access (EMMA) website. The home page can be found at http://emma.msrb.org/Home.
You can search by state, city or other issuer, or the most actively traded bonds.
I have used EMMA in the past to look up issuers, but the website was clunky, difficult to navigate, and hard for nonprofessionals to understand.
EMMA’s updated home page and navigation should help regular folks (the majority of muni bondholders) to make more informed decisions. Some muni bonds are notoriously illiquid – meaning they don’t trade that often – but they are a key source of income for a lot of retail investors.
Take Puerto Rico, for example. Since around 70 percent of all muni bond mutual funds hold Puerto Rican municipal debt, everyone has been paying close attention to Puerto Rico’s commonwealth muni bonds, which were downgraded recently. This website should be a great way to research these bonds.
The new home page contains a list of most actively traded munis, including one Puerto Rico issue maturing in July 2020 at a price of about 96 cents on the dollar (just under par value, the face value of the bond) and yielding 6.19 percent.
You can also look for high-yielding munis under the heading Advanced Search (http://emma.msrb.org/Search/Search.aspx). I can, for example, view all municipal issues out of my home state of Delaware maturing in 20 years, or yielding between 7 percent and 8 percent.
Beware: The database is only as good as what issuers submit. One city’s data were so bad that the Securities and Exchange Commission cited it for failure to maintain current annual financials on the EMMA website. SEC officials termed the information misleading.
Still, this is a long overdue upgrade to an obscure market. Take advantage of it to understand what is happening in your muni bond portfolio. A tour of the upgrades is available at MSRB’s website (http://msrb.org/msrb1/EMMA/pdfs/EMMA-Homepage-2014.pdf ).
Time may be ripe soon to buy Puerto Rico bonds
ERIN E. ARVEDLUND
Inquirer.com Tuesday, February 4, 2014, 1:08 AM
Wall Street is starting to treat Puerto Rico’s municipal bonds as if they have already been downgraded to “junk” status. But what does that mean for our portfolios?The news is grim for the island commonwealth. Due to budget deficits and unfunded pension liabilities, the Moody’s, S&P, and Fitch rating agencies rate general obligation bonds issued by Puerto Rico at the lowest investment grade. The agencies have hinted at downgrades to below-investment grade, also known as “junk,” possibly within 30 days.
Why do we care? Roughly 70 percent of U.S. muni bond mutual funds hold Puerto Rico debt, which is tax-exempt. A downgrade to junk may prompt massive selling because some money managers can’t buy securities rated below investment grade.
The upside to Puerto Rico bonds is that they offer tasty yields. Since the start of 2014, the average yield of bonds in the S&P Municipal Bond Puerto Rico Index has improved by 0.11 percent to 7.33 percent. But the underlying prices of the bonds have plummeted; the index itself in 2013 fell 20.46 percent.
Since retail investors make up the bulk of municipal bond holders, this is a key development. When and if Puerto Rico is downgraded, much of the bad news should be priced into the bonds, and it will be time to look at buying.
“Events are still unfolding,” says Michael Comes, portfolio manager vice president of research at Cumberland Advisors’ Sarasota, Fla., office. “When things are still going downhill, it’s not a good time” to look at buying the debt.
Not all PR muni bonds are equal, he adds, noting that some bond issues, such as those backed by the commonwealth sales tax, are still rated investment grade.
Other PR issues currently yield 8 percent, and trade at around 70 to 80 cents on the dollar. Since muni bonds are tax-free, a taxable bond would have to yield about 15 percent for a similar return, he estimates.
You can see why PR bonds are so interesting. Still, there will be a ton of investors selling on any downgrade. Just on Friday, the S&P Dow Jones Indices removed bonds issued by Puerto Rico and other territories from the S&P National AMT-Free Municipal Bond Index. “It’s symbolic,” Comes says, “and could create more selling pressure.”
Keep your eye on Puerto Rico.
Look to emerging markets for higher bond yields
ERIN E. ARVEDLUND
Inquirer.com, January 29, 2014
For the last 30 years or so investors achieved three things when buying, say, 10-year U.S. Treasury bonds: income, stability, and an offset to stock market volatility in their portfolios.
They could accomplish all three goals with that one bond.
Those days are over. Still, there are alternatives, says Douglas J. Peebles, chief investment officer and head of Fixed Income at AllianceBernstein in New York.
Today, “if you only want to offset volatility, there’s nothing wrong with the 10-year Treasury,” as proven seemingly every time the stock market drops, says Peebles. “But it offers very little income. You have to find some other bond to buy” to solve that problem.
Currently, the 10-year Treasury yields 2.75 percent, barely ahead of the inflation rate of 2 percent, which leaves investors with a measly real return of just 0.75 percent.
For income, Peebles says, Europe and emerging markets debt look attractive from a valuation standpoint. “We like to sell when bonds are expensive and buy when they’re cheap,” he says, exercising the old adage. In particular, AllianceBernstein’s fixed-income department likes European corporate bonds and is examining which emerging market debt to start buying.
For example, some Brazilian bonds boast yields in the high teens, nearly triple what corporate bonds are yielding in the 4 percent to 5 percent range. The fixed-income team favors Brazil, but is avoiding Argentina and Venezuela for client portfolios, because of instability and poor economic policy decisions in those countries, Peebles adds.
Emerging markets are cratering in part due to tapering, or slowing, by the Federal Reserve of its latest bond-buying program, called quantitative easing, or QE. The first round of quantitative easing in the financial crisis helped restore bond markets; the second round helped boost real estate values and emerging markets, and the third round boosted the developed U.S. equity markets, which is why the S&P 500 rallied over 30 percent in 2013.
But the taper of QE? “Any change in liquidity has an impact on the riskiest markets first – which are the emerging markets. We’re seeing it right now,” Peebles explains of the sell-off.
For income, Peebles recommends investors try a multi-sector bond fund with higher yields, such as AllianceBernstein’s High Income Fund (ADGAX). Full disclosure: I’m an alum of Wall Street and worked at Bernstein’s Private Client division. You can read their research at AllianceBernstein’s blog (http://blog.alliancebernstein.com).