Alternative Thinking

Yield Floors and Asset Allocation: When Is the Role of Bonds Impaired?

We explore how different levels of a so-called “floor” for bond yields would affect the return generation and diversification properties of bonds. We find that only very restrictive yield floor assumptions would have the potential to materially impact the role of bonds in a portfolio over the next year.

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Tax Aware

Why You Might Defer Your Gains, Even When Tax Rates Are About to Increase

With the current proposals for (and the future expectations of) various tax rate hikes, investors with appreciated portfolios might feel like sailing into a storm and wondering, is it still better to defer gains if tax rates were to increase?

Macroeconomics

Inflation Outlook: the Macro, the Micro, the Transitory

Financial markets have had a relatively muted reaction to the recent bout of higher than expected inflation. We assess what might explain markets’ sanguine response. We explain why we believe there are factors suggesting a return to low inflation readings is unlikely in the near term, and what the investment implications might be of such a scenario.

Portfolio Risk and Performance

When Stock-Bond Diversification Fails

The events of 2020 to 2021 have increased uncertainty around the future path of inflation. We review how different inflationary outcomes can impact investor portfolios and evaluate what assets and strategies may enhance portfolio resilience to inflation.

Tax Matters

All Is Not Lost: Trader Fund Losses under the CARES Act

Hedge funds are commonly perceived as investments that allocate large amounts of taxable capital gains and income to their investors. But what if a hedge fund realizes a taxable loss? Under the new rules in the TCJA and the CARES Act, can hedge fund investors still benefit from tax offsets offered by realized losses and deductions—and to what extent?

Fixed Income

Sustainable Systematic Credit

Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.

Tax Aware

The Value of Integrating Income and Estate Planning

In this post, we discuss challenges of wealth preservation and growth faced by high net worth families. While a family that invests with income tax and estate tax efficiency in mind is more likely to achieve its financial legacy goals, the numerical advantages of tax efficiency are quite striking. In addition, we show that there is a significant value in integrating income tax efficiency and estate tax planning.

Are Value Stocks Cheap for a Fundamental Reason?

The value spread remains unusually high, which has led investors to be concerned that value may be cheap for a reason. In this short presentation, our Portfolio Solutions Group (PSG) explains how we evaluate this spread and illustrates our view that the current high value spread is forecasting higher expected returns, and not low fundamental growth rates.

Tax Aware

Does Tax Efficiency Just Delay the Tax Burden?

We often hear the sentiment that tax-efficient investing just delays the inevitable: Eventually, a day will come when the tax-efficient investor will have to true up on years of deferred taxes. And, with the proposed Biden Tax Plan sending many investors scrambling to plan for higher taxes, we feel that now is as good a time as any to put this long-standing myth to bed.

Fixed Income

What Drives Bond Yields?

In this overview of the various factors that influence government bond yields, we show that both in theory and in the data, non-monetary policy factors drive significant variation in yields, particularly at longer maturities. Despite the exceptionally low yield environments we have witnessed, fundamentals continue to drive bond markets.

Factor/Style Investing

Pricing Without Mispricing

We offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. Prominent multifactor models do not satisfy this condition – while multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct.