Madison Team Attends Schwab Impact Conference 2013
Schwab recently held its annual Impact Conference in Washington, DC, where registered investment advisors gather to learn about and collaborate on key industry issues and best practices. Madison’s Jim McDermott and Rick England attended the four day conference.
Pictured below is the team with Rob Arnott (second from left), Chairman and CEO of Research Affiliates, LLC. Arnott’s firm delivers solutions to some of the world’s leading financial institutions and registered investment advisors. Madison utilizes Research Affiliates as one of its trusted sub advisers.
Rob Arnott, Chairman and CEO of Research Affiliates, LLC
~ “Are we blinded by theory? Financial theories do a marvelous job explaining how the world ought to work. These theories are often provable, based on an array of assumptions. Theory is not fact; it describes an ideal world and gaps between theory and reality are normal. We’ve found that theory can be improved by acknowledging its flaws and finding improvement, not by rejecting contradictory evidence.”
~ “For example, think about a market cap-weighted index. It explicitly links the weight of each company to its price, so that the more expensive a stock gets, the bigger the weight it has in your portfolio. Why do we want to do that? It turns out that a better way is to break the link between price and the weight in the portfolio. This results in an index that has some form of rebalancing. When a company goes up, it’s likely to be trimmed and when a company goes down, it’s more likely to be bought. We’ve found that these price-indifferent strategies outperform and reduce risk. They reduce risk by helping investors avoid having too much of their portfolio in overvalued stocks and too little in undervalued stocks. While theory tells us that market cap-weighted indexes are best, we now understand their flaws. We now see that price-indifferent strategies are an improvement.”
~ “Another example of theory potentially leading us astray is the approach taken with target-date or life-cycle funds. They create a glide path where these funds typically ramp down equities as a person ages. This may feel right, but we maybe increasing risk, not reducing it. The problem is that as we approach retirement our human capital diminishes. We have less and less earnings power over the remainder of our lives. Some of this earnings power should be replaced. Which more resembles human capital, stocks or bonds? Stocks. But the automatic ramping down creates automatic buyers for government debt, which are currently offered at negative real interest rates. Baby boomers have become enablers for bad behavior by governments all over the developed world.”