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Joshua M. BrownCitywire Berlin November 6th, 2014

The Reformed Broker Blog

October 2014:

1.1 million page views150,000 unique visitors

The Books!Backstage Wall Street

McGraw-Hill, 2012

An inside look at the brokerage industry and how investors are sold products and services.

Clash of the Financial Pundits

McGraw-Hill, 2014

An inside look at the financial media and the experts whose opinions it’s built around.

My FirmRitholtz Wealth Management

● Established New York City, Sept 2013

● Registered Investment Advisor (RIA)

● $180 million AUM, 150 clients

● Financial Planning, Asset Management

Handsome

Hungover

Angry

Referee

Sleeping

Possibly British

Needs to use the mens room

???

NYSE Mascot Also sleeping

The state of the investing industry, circa 2014

Maximum Participation, Minimum Enthusiasm

Stock Selection: Passive over Active,

the rise of “smart beta”

Bond Selection: Active, Unconstrained over

Passive

Hedge Funds: Fee pressure fuels the liquid alt explosion

Commodities, International Stocks: No way, Jose.

Tactical, market-timing: No thank you.

The Retail Investor is Back!

American households are back near maximum participation levels in equities and corporate bonds.

Previous peaks coincided with bear markets and crashes.

Modern American retirement practically demands participation

(sort of)

US Households’ Total Financial Assets: $67 trillion

US Households’ Corporate Equities: $13.3 trillion ($7.7 trillion in mutual funds)

In dollar terms...

Got to be in it to win it...

Gallup Poll: US investors’ estimate of 2013 stock market gains

Only 7% of Americans are aware that the stock market went up 30% last year.

One third believed that stocks were flat or went down last year.

The Rise of Index Investing Investor attitudes driving a preference for passivity:

“Taxes, internal fees, trading costs and other frictions reduce the benefits of outperformance.”

“Even those few managers who can beat the index cannot do so reliably, there is no way to predict persistence of performance.”

“Very few managers can beat the index, how can I possibly select them?”

“In a crash, I’m going to get crushed anyway, so why hire a manager?”

“Only the super-rich get access to the best managers so what chance do I have?”

Smart Beta

“Smart Beta = Dumb Beta + Smart Marketing”

- James Montier, GMO

Source: No Silver Bullets in Investing (just old snake oil in new bottles), GMO 12/2013

Estimates place the AUM of smart beta strategies at between $300 and $400 billion.

Smart Beta CriticismsThe extra costs and trading will erode any alpha over traditional benchmarks.

Most products based on one of two well-known anomalies: the small cap premium and the value premium

Earnings or quality screens don’t actually do anything, they’re a marketing gimmick.

Once everyone figures out a factor to weight toward, the benefits will be arbitraged away for years to come.

Bull markets are usually driven by pricey growth stocks, which smart beta selects away from

International Equities: “Why Bother?”

1. Volatility correlations are high

2. Economic Conditions / Perceptions

3. Globalization of US business

4. The Recency Effect

Liquid Alts

● 470 “liquid alternative” mutual funds● $180 billion in assets● More than 50% of these funds were

launched in the last two years

Morningstar study of 81 popular liquid alt funds:In the 30 days ending October 15th: S&P 500 down 6%, average liquid alt fund down 4.1%. 21 of 81 had positive returns, 70 lost money.

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Q&A: Joshua M. Brown