Investing
An In-Depth Look At The Performance Of American Depository Receipts Since 2007
Friday, May 25, 2012 14:21

Once the darling of non-U.S. portfolios, American Depository Receipts (ADRs) are not discussed much any more, probably because of the popularity of exchange-traded funds (ETFs). Nonetheless, the ADR market is huge, representing more than $9 trillion, so someone holds them. How does the performance of ADRs compare with EAFE (Europe Australia Far East), the total foreign market, the U.S. stock market, and inflation over the past five years? The answers hold the key to vital decisions advisors face going forward.

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Investors who make the leap abroad and choose active management then face another set of choices. Should they choose managers who hold the ordinary shares of foreign companies, those who hold portfolios of American Depository Receipts (ADRs), those who hold portfolios of exchange traded funds (ETFs), or a combination of the above, known as “unrestricted”?
 
ADRs are offered on a wide variety of large foreign companies, and afford reasonable participation in foreign market performance with much more efficient trading, settlement and custody. ETFs offer similar flexibilities and efficiencies.
 
These choices should be guided by the investor’s assessment of manager skill – “Will I be rewarded for active management fees?” A new update to my 2007 study, “Perspectives on ADRs,” compares and contrasts ADRs to the EAFE, to the total foreign market, to the U.S. market and to inflation, from 2000 through 2011.
 
EAFE is the most popular index for benchmarking non-U.S. performance, and it is also offered as an ETF. The total foreign market provides an unrestricted perspective, so you can see the effects of limiting investments to just ADRs or just EAFE stocks.
 
Exposure to foreign markets has been a good thing for U.S. investors so far in this century, although the past five years have been mixed. The best choice has been the total unrestricted foreign market, encompassing smaller companies and non-EAFE regions.
 

Looking forward, diversification into foreign markets should help stabilize performance, even if U.S. stocks regain the lead. Once the decision is made to diversify abroad, the “Update on Perspectives on American Depository Receipts (ADRs)” can help in choosing between active and passive management and between ADRs and ordinary shares.

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Congressional Budget Office Joins Outcry Warning Of Fiscal Cliff
Friday, May 25, 2012 09:08

Tags: Congress | economy | U.S. debt

The Congressional Budget Office (CBO) is standing front and center of what economists are calling the upcoming fiscal cliff. The term refers to the scheduled expiration of current tax laws at the end of 2012, the same time when significant new cost-cutting measures also come into effect. The big fear is that, although letting the current laws expire would alleviate the US long-term debt problem, it would also suddenly pull the rug out from under still-needed economic stimulus.

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This could easily throw the economy right back into recession. Political gridlock between the two parties continues to push proactive solutions past this year’s presidential election, leaving the economy vulnerable to a lame-duck session to make some type of decision.
 
The CBO says that taking action before the end of the year is vital. If Congress does not come to some type of compromise, the immediate result will be a reversal of gains in the jobs sector, an increase in unemployment costs, tax rates that are too low to cover current spending (increasing the debt long term), and significantly reduced incomes that would affect consumer spending, the primary growth factor for gross domestic product.

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Continuing Uproar Over JPMorgan Chase's Trading Losses Highlights Possible Conflict Of Interest For The Fed
Friday, May 25, 2012 08:27

Tags: banks | Federal Reserve | regulation

The uproar over the JPMorgan Chase derivatives trading losses has highlighted the relationship between the Federal Reserve Bank of New York and Wall Street. The New York Fed is one of the bank’s closest watchdogs. And the bank’s chief, Jamie Dimon, is on the board of the New York Fed. This apparent conflict of interest has some calling for Dimon’s resignation.

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This is one view of things, held mostly by those who feel the government—and Wall Street—have become corrupted and fraught with fraudulent dealings. Some have even held the view that a great fraudulent conspiracy was behind the 2008 crisis.
 
The other view holds that the banks and Wall Street have done nothing out of hand. The fact is that no director, either from a bank or other financial institution, plays any role in developing regulatory guidelines of the Fed or in the Fed’s oversight activities.
 
There has always been an arms-length type of relationship between the Fed and the institutions it regulates. At the same time, the relationship between the two has to be close enough for the Fed to obtain the information it needs to formulate policy. But public perception may hold sway here as cries for Dimon’s resignation increase.
 
The arms-length relationship of the Fed to bank directors was reiterated during the passage of the Dodd-Frank Act. Yet, this still may not calm the public outcry, either for Dimon’s resignation or for claims that the Fed’s legitimacy may have been compromised.

 

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Clients With Adult Children Returning Home Are Issuing A Cry For Help That You Can Answer
Friday, May 25, 2012 07:44

Tags: Advisor businesses | investment strategies | Wealth Management

 

The economic effect that student loan debt is having on parents who may be your clients is not letting up. A recent survey noted that 35% of students have at least $1000 of education-related debt. As many as 7% have $30,000 or more debt from trying to fund their education. And with the job market still weak, many are planning to go back home to live with their parents.
 
Especially in cases where Boomer children are caring for elderly parents at the same time, the younger generation’s return home may increase the financial burden of many investors. It also makes this a wealth management issue for which they need your help.

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The large debt is having an effect on student morale, as well. Twenty-one percent said the amount of money they owe is causing their grades to suffer. Another 12% said they may not be able to graduate because they are no longer eligible to receive loans to complete their education.
 
At least one fourth of students with high debt levels indicated definite plans to move back in with their parents after graduation. Three percent indicated they would live with relatives until they could get on their feet financially.
 
Beginning a career so heavily laden with debt can take a toll psychologically as well as financially. If it’s affecting students’ grades, it could easily affect their work once they find jobs, as well. This is potentially another drag on our economy that may not be getting the attention it needs. It’s also an opportunity to help your clients alleviate the burdens of having to support their adult children as they move back home and also to help students reduce the amount of debt they have—or avoid it altogether.

 

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Indexed Annuties Shine Among Overall Decline Of Annuity Sales
Thursday, May 24, 2012 09:03

Tags: annuities | investing for income

An overview of annuity sales for the first quarter of 2012 shows that indexed annuities gained favor among investors. Indexed annuities represented 45% of all fixed annuity sales as they appealed to investors seeking higher income than traditional fixed income annuities typically provide.

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Annuities can now be included as an option for 401(k) investors so the growth in fixed annuities of all types is expected to continue. One of the features of indexed annuities is that the interest rate paid to investors can fluctuate on the upside but never will go below zero.
 
Annuities overall have been hurt during the economic downturn and total annuity sales were off 8% during the first quarter. The decline was attributed to economic factors such as low interest rates and volatility of the equities markets.

 

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