The Value of a Good Fund Manager

Two professors at the Stanford University business school recently had the idea to try to quantify - in terms of real dollars - what a good mutual fund manager brings to the table. They looked at the universe of actively managed funds as measured against their benchmarks. The bottom line: The average manager overseeing an actively managed fund brings in an average of an additional $140,000 a month, or more than $2 million a year.

The research found that this was a statistically significant, repeatable skill. Truly good fund managers really do earn their keep. On the other hand, they are in the minority. Only 43 percent of all fund managers, they found, added positive value to their funds. The good ones, then, have much more of an effect on their returns than the poor ones do.

The lesson here should be clear: The best fund managers provide an awful lot of value for their investors. The research shows that among the top 10 percent of all fund managers, even the lowest-ranked was earning an extra $750,000 a month for his or her clients. With careful selection processes, actively managed funds can be a great boon for the individual investor.

Stimulating the Chinese Market

Now that the Fed has passed on its most recent opportunity to undertake another round of quantitative easing to boost the economy, American investors may be looking to a surprising source for optimism: China. The China Securities Journal reported that the government there may be trying "more proactive" policies to restore some growth to the Chinese economy.  That probably means the Chinese version of a stimulus package.

China's economic growth for the second quarter of this year has been estimated at around 7.9 percent, with full-year growth at around 8.2 percent. That may sound pretty robust compared to the American economy, but it would be their lowest GDP growth since 1999. Hence, the need for stimulus.

China is a huge and growing market for U.S. products: We exported $103.9 billion worth of goods to China in 2011, up from just $16.2 billion back in 2000.That's a 542 percent growth rate over the decade, compared with a growth of 80 percent for our exports to the rest of the world combined. Even New Jersey - not an area usually associated with exports to China - sold  $1.9 billion worth of goods to China last year. A boost for their economy would also be a boost for ours.

Consumer Confidence Belongs to the Young

The consumer confidence numbers dipped again in May, in a poor omen for the economy moving forward. The Conference Board's benchmark Consumer Confidence Survey has now fallen to its lowest level since last January, when consumers appeared to be growing more optimistic.

One interesting divide in the confidence report is between the generations. Overall, the number of people who think that the economy will be worse a year from now barely nudged upward in this latest reading, from 17 percent to 17.6 percent. But for people over 55, that same figure jumped from 23 percent to 28 percent. Not only was it higher before, but it's getting worse at a much quicker pace.

Younger people certainly are more willing to spend money now. Only 5.8 percent of those 18 to 34 said now was a bad time for purchasing major household items such as furniture or large appliances. Among those 55 and over, nearly three times as many - 15.5 percent - said it was a bad time to buy major household items.

New Homes Looking Strong

Some promising signs for the housing market yesterday, as the Commerce Department released figures showing that new home sales in May grew at an annual pace of 369,000, the most that figure has jumped in over two years. That's a 7.6 percent rise from the April number.

With the number of new homes on the market still near record lows at 145,000, builders are breaking ground for new homes at a growing pace. (The record for new homes on the market was set just before the housing bubble burst, in July 2006, when it reached 572,000.) The number of new houses started increased by 3.2 percent in May, at an annual rate of 516,000.

New construction has been making up a dwindling part of the housing market in recent years; new homes were 6.7 percent of the residential market last year, down from 15 percent at the height of the housing bubble. As sales of foreclosed homes continue to recede, we'll see new homes take up a bigger slice of the housing market - which can only be good for the economy as a whole.

Hard-Working Americans

Did you find yourself working more last year? If so, you're not alone: According to new figures released by the Labor Department, employed Americans spent an average of 7.99 hours per workday in 2011 working or in work-related activities, compared with 7.82 in 2010. Working men put in 8.39 hours per day, as opposed to 7.52 hours for women.

Not surprisingly, those who make more money tend to be the people who work more hours. Workers who made zero to $520 per week put in an average of 7.92 hours per workday, while those who made $1,241 or more per week put in 8.16 hours. The occupation that works the hardest are those in the farming, fishing, and forestry category, who log an average of 8.53 hours per workday.

But we're making up for all that hard work by getting plenty of sleep. The survey found that Americans are getting an average 8.72 hours of sleep per night, broken down as 8.45 hours of sleep on weekdays, and a solid 9.36 hours on the weekends. Sleep tight!

The Backwards PIN Plan

Have you heard this one? There's some helpful advice being emailed around, for anyone who gets held up while withdrawing cash from an ATM. "I just found out that should you ever be forced to withdraw monies from an ATM machine, you can notify the police by entering your Pin # in reverse," one such email reads. "The machine will still give you the monies you requested, but unknown to the robber, etc, the police will be immediately dispatched to help you."

Like so much helpful advice from the Internet, this one isn't true. For one thing, what if your PIN is itself reversible, like 2772? That would cause some problems. Anyway, the Federal Trade Commission has reiterated that no banks have instituted a reverse-PIN warning system.

But there's a kernel of truth to the story: Back in 1998, a businessman in Chicago patented a system that would warn the police if someone typed their PIN into an ATM backward. But he hasn't gotten any banks to sign on to the system, and despite lobbying several states, he can't get any legislatures to push the system into law, either. As one Kansas banking official said: "I'm not sure anyone here could remember their PIN numbers backward with a gun to their head."

The Fed's Pessimistic Outlook

The Federal Reserve yesterday announced not that it was ready to embark on another round of quantitative easing, as many had been expecting, but rather that it would push forward with more of "Operation Twist." That's the program in which the Fed sells off short-term debt while buying up longer-term bonds, with the aim of keeping long-term interest rates low.

It was somewhat surprising that the Fed didn't take stronger action, because it also announced that its forecasts for the remainder of the year show the economy slowing down more than previously expected. The Fed's estimate of GDP growth for 2012 was ratcheted down to between 1.9 and 2.4 percent, after an earlier forecast of 2.4 percent to 2.9 percent.

The latest estimate shows first-quarter GDP growing at 1.9 percent, so the Fed is, in some sense, simply taking stock of reality.  They also projected the unemployment rate to stay on its current course, with a forecast of between 8.0 and 8.2 percent by the end of the year. It's currently at 8.2 percent.

Is Legacy Important to You?

One of the most important issues that any wealth manager handles for clients is the legacy that they plan to leave behind to their children. But a new study from U.S. Trust shows that the Baby Boom generation as a whole is less inclined to leave a sizable inheritance to the next generation. Just 55 percent of wealthy Baby Boomers - defined as those with at least $3 million in investable assets - say it's important to leave a financial legacy to their children.

Just 44 percent said it was important for the affluent to pass some part of their wealth on to future generations. Another 31 percent said it was more important to leave a legacy to their church or other charitable endeavor than to leave something for their children.

No matter your feelings toward your legacy, the important thing is to maintain the financial flexibility such that it can be your decision. With proper estate planning, you can leave the gifts you want to your children, grandchildren, or favorite charity. If you are wondering about the legacy you'll be leaving behind, feel free to give me a call.

Rise of the Mega-Caps

In a topsy-turvy year for the stock market, one group of stocks is standing head and shoulders above the crowd: the mega-caps. That's the name Bloomberg News has given to the 100 largest stocks  in the S&P 500, which are showing the greatest strength relative to the market than they've had in over a decade.

So far in 2012, the S&P 100 have returned 7.7 percent. Bloomberg adjusted the overall S&P 500 to strip out the weighting adjustment for market caps, and found that the rest of companies in there had returned just 5.1 percent this year. Overall, the S&P 500 as a whole is up 6.8 percent this year.

That's a big reversal from recent years. From the market's bottoming out on March 9, 2009, through the end of last year, those 100 largest companies returned 77 percent, while the average company in the S&P 500 had returned 128 percent. Overall, the mega-caps haven't beaten the rest of the S&P 500 by as wide a margin as they're showing this year since 1999.

Looking Ahead on Earnings

The Wall Street consensus badly underestimated the S&P 500's first quarter earnings this year: After predicting roughly zero growth in profits, the companies ended up reporting 6 percent growth. That's not such a big surprise; the analysts' estimates notoriously fall short of actual corporate earnings more often than not.

So when FactSet research service released an early estimate of second quarter corporate profits to reach 4 percent, that looks like very good news. That's based on reading corporate analysts' forecasts for the second quarter, which start reporting in early July. If the companies in the S&P 500 outperform as much this quarter as the last, we'll have an outstanding earnings season.

On the other hand, that number has been getting more pessimistic. When FactSet first projected second-quarter earnings growth, way back at the end of March, the forecast was a much more robust 7 percent.

May's Winners and Losers

May was another tough one for the stock market, with the S&P 500 index losing 6.2 percent over the course of the month. But still, there were some winners amid the gloom. Here were the S&P 500's best-performing stocks for the month of May:

1. Dean Foods, up 27. 4 percent
2. TripAdvisor Inc., up 14.3 percent
3. Cooper Industries, up 13.7 percent
4. Wal-Mart Stores, up 11.7 percent
5. Scripps Network Interactive, up 9 percent

And here are the five biggest laggards for May:

1. Fossil Inc., down 44 percent
2. Alpha Natural Resources, down 35 percent
3. Abercrombie & Fitch, down 32 percent
4. First Solar Inc., down 31.7 percent
5. U.S. Steel, down 28.3 percent

The Key to 401(k)s

We have some encouraging news about Americans' retirement savings: Workers who are encouraged to contribute more to their 401(k) plans, it turns out, actually end up making even greater contributions than their plans called for. And apparently people are becoming increasingly aware of  how important their retirement savings are, because the percentages of assets going into 401(k)s is rising.

Here are the stats: Among 401(k) plans that have a default rate of 3 percent or higher of the employee's salary deferred, 30 percent of plan participants increase their contributions within a year of enrolling. That figure was only 13 percent in 2006, but has been increasingly steadily ever since.

That initial, automatic contribution rate seems to be key. Plans with a default deferral rate of 3 percent of salary have a participation rate of 95 percent. Lower deferral rates get participation of less than 90 percent, plus the employees put less away, with only 26 percent increasing their contributions in the first year. All in all, though, it's great news that Americans are making more use of their 401(k)s.

Where Are the Ultra-Wealthy Investing?

Where is the smart money being invested these days? According to a new survey from the Institute of Private Investors, ultra-wealthy Americans - defined as those with assets of at least $30 million - they're looking less at the stock market and more towards commodities and real estate.

The survey found that 45 percent of the respondents had increased their allocation to commodities. Another 31 percent had increased their allocation to real estate, and 22 percent had increased their allocation to private equity investments.

One interesting finding of the survey is that even America's wealthiest people are increasingly dependent on financial advisors. Some 62 percent of the respondents say they now rely on an advisor to help handle 50 percent or more of their wealth. That's the highest that figure has been in the history of the survey.

America's Loss of Wealth

A new report from the Federal Reserve highlights just how much America lost in the financial downturn. The median household net worth dropped by 38.8 percent from 2007 to 2010, from $126,400 to $77,300. That's the lowest median net worth has been since 1992. The mean net worth fell 14.7 percent, from $584,600 to $498,800.

The biggest culprit in the loss of wealth was the housing market, which dropped 23 percent over the three years ended in December 2010, according to the Case/Shiller U.S. Home Price Index. That combined with a 14 percent drop in the Standard & Poor's 500 over the same period.

That decline in assets meant that the wealthiest Americans have begun getting most of their income from wages rather than investments. The top 10 percent of Americans by wealth got 46 percent of their wealth from wages in 2007, but that number has risen to 55.8 percent in 2010. 

The $3 Million Lunch

It's always nice to treat yourself to a fancy, expensive lunch once in a while, but three and a half million dollars? That's how much it would cost you to have lunch with the legendary investor Warren Buffett, in a charity auction that ended last Friday night.  The winning bidder, who asked to remain anonymous, will sit down with Buffett at a cost of $3,456,789, with the proceeds going to a San Francisco charity that helps feed the homeless.

Buffett has a famous fondness for hot dogs, which would be an awfully disapopinting lunch for someone who had paid over $3 million for the meal. But this one, as in years past, will be taking place at the New York City steakhouse Smith and Wollensky's.

And the winner may well be getting more than investing tips. The winner of this auction in each of the past two years was a hedge fund manager named Ted Wechsler. After their luncheons together, Buffett was impressed enough with Wechsler to hire him at Berkshire Hathaway, his investing vehicle.

Cash Hoard Levels Off

One of the frustrating things about our sluggish economic recovery has been the notion that American corporations have been sitting on unprecedented piles of cash, waiting for the right moment to invest it back into the economy. It was reported that, at the end of last year, American businesses had more than $2 trillion in cash or cash equivalents sitting on the sidelines.

But yesterday, the Federal Reserve made a serious revision to that figure. As of the end of March, corporations (other than financials) were sitting on $1.74 trillion in liquid assets, according to the Fed's Flow of Funds report. That's about $500 billion less than had been previously reported.

Still, it's an astonishing sum of money. Ten years ago, in 2002 that figure was right at the $1 trillion mark. According to the new data, that number grew fairly steadily through 2009, but rather than continuing on that growth curve, it now appears to have leveled off.   

The Fed Looks at New Jersey

The Federal Reserve released the latest of its periodic Beige Book yesterday, the eight-times-a-year report from the Fed's 12 regional offices. New Jersey's territory is evenly split between the New York and Philadelphia offices, so to get a handle on what's happening in our state, you have to read both regional reports.

The differences between the two regions are slight, but they exist. New York's report - which also covers North Jersey - says that economic activity "has continued to expand at a moderate pace," while in the Philadelphia region - which covers South Jersey - the economy "continues to improve, but the pace has slowed slightly."

The outlook was slightly more optimistic out of New York in several areas, including manufacturing and hiring. Tourism was a big growth area for New York in the springtime as well. One area in which the Philadelphia report was a bit stronger than the New York one was commercial real estate, which showed "several signs of improvement." Overall, the signs for New Jersey are about what you'd expect: improving, but very slowly.

Fear Factor

It certainly has been an eventful year for the stock market: After the S&P 500 returned more than 4 percent in each of the first two months of 2012, it then proceeded to drop by more than 6 percent in May. Yet the market's primary measure of volatility, VIX - also known as the investor fear gauge - has been relatively calm recently, and has even dropped in the past week.

The long-term mean for VIX is 20; a reading of 30 is supposed to indicate extreme fear on the part of investors. As of earlier this week, the number was sitting it around 25, indicating more volatility than normal, but far from a panic.

Is that a good thing? It depends on whom you ask. If investors aren't showing much fear even after a 6 percent drop in the market, it shows that their confidence has not wavered. On the other hand, some market experts fear that the lower reading simply means there is further for this market to fall, in several senses of the term.

Depending on Europe

The European crisis has still not reached any sort of resolution, with Greece still teetering on the brink of exiting the Euro. At least 12 European nations have officially entered recession again, which is defined as having the overall economy contract for at least two quarters.The fear, of course, is that Europe's woes will tip our own economy back into recession.

The American industry that may be most affected by the problems in Europe, surprisingly enough, is the energy sector. According to Deutsche Bank, the energy companies in the S&P 500 derive 29.2 percent of their revenue from Europe. Here are the percentage of revenues from Europe for some other industries:

* Technology: 27.8 percent
* Utilities: 0.9 percent
* Telecommunications: 0.0 percent

Overall, the companies in the S&P 500 get 17.5 percent of their revenues from Europe.

A New Light on 401(k) Fees

The Labor Department is about to start requiring 401(k) plans to be much more upfront about the fees they charge, as Gretchen Morgenson pointed out in her New York Times column yesterday. If you're asking, "What fees?," you're not alone. A recent survey by the AARP found that 71 percent of all 401(k) account holders thought they paid no fees on their accounts.

But they do. And as you might expect for a vehicle in which the fees aren't widely publicized, they can vary greatly. A study last November found that expense ratios for 401(k)s ranged from 0.28 percent to 1.38 percent. The median expense ratio was 0.78 percent.

By far the biggest reason for those expenses is investment management fees. Those fees make up a whopping 84 percent of all 401(k) expenses. Increased transparency in 401(k) fees is more than likely to have a beneficial effect on those expenses for consumers.

A Dismal Jobs Report

More  bad news on the employment front  this morning as the Bureau of Labor Statistics reports that only 69,000 jobs were added to the economy in the month of May. At the same time, April's already disappointing figure of 115,000 new jobs was revised downward to 77,000, and the overall unemployment figure crept upward from 8.1 percent to 8.2 percent. In the first quarter of the year, the average monthly jobs gain had been 226,000.

Transportation and warehousing was the sector providing the biggest number of new jobs, at 36,000, followed by health care at 33,000. Professional and business services, which has been a bright spot in the employment reports in recent months, was described as "essentially unchanged." The sector dropping the most jobs was construction, which was off by 28,000.

Economists estimate that the nation needs to add around 125,000 jobs a month simply to keep pace with population growth. Seeing the number of new jobs added fall below that for the second month in a row is very disappointing.