"The Testosterone Factor in Mutual Funds"

Male and female portfolio managers behave differently.

That's according to "The Testosterone Factor in Mutual Funds," Mark Hulbert's "Strategy" column in the Jan. 29 New York Times. His article reports on the findings of an academic study, "Sex matters: Gender and Mutual Funds" by Stefan Ruenzi and Alexandra Niessen.

The bottom line?

The two groups performed comparably on a risk-adjusted basis. The women excelled at style consistency and keeping turnover low. The men delivered higher absolute returns.

Do these findings make sense to you?

Problems that can trip you up with SEC

There's no single topic that trips up investment advisors or mutual fund companies again and again in SEC inspections. At least not in the experience of Michael Garrity, branch chief in the SEC's Boston District Office. He participated in the "Hot Topics for 2006" panel at the Jan. 25 "Financial Services Challenges in the New Year" conference presented by NICSA's East Coast Regional Committee.

Two other speakers ventured their opinions on likeliest hot spots.

"It's typically a new process or an activity that's new to a firm," said Nicholas D'Angelo, director, Pricewaterhouse Coopers LLP.

Stuart Fross, deputy general counsel and SVP, Fidelity Investments, said that your firm is probably in good shape if it is fully disclosing where its income is coming from and where its expenses are flowing.

Panelists focused on five topics:

1. Affiliated transactions (D'Angelo)
   
2. Fair valuation (Elizabeth Duggan, senior director, FT Interactive Data)
   
3. Hedge fund mainstreaming (Robert teDuits, director of offshore and alternative business development)
   
4. Performance fees (Fross)
   
5. Swaps standardization (Marlena Fitts, manager of product management, Advent Corp.)

Garrity commented on his inspection approach to each topic after giving the standard SEC disclaimer that his opinions were strictly his own.

Having policies and procedures is essential. Garrity seemed to mention that after each topical presentation.

Here are some additional areas that Garrity considers, by topic area.

Affiliated transactions
Garrity looks at a list of affiliates before visiting your company. He'll also ask you for a list of affiliates and he'll look at actual transactions.

Fair value
Is your process fair, verifiable and consistent? Do you use multiple pricing sources? Do you test the pricing services themselves?

Hedge funds
Hedge fund advisors are supposed to register with the SEC by February 1. "It used to be that hedge funds were run for rich people in Geneva by rich people in Greenwich," said Garrity. Now that their distribution has broadened, the SEC is more interested. Garrity would look at your investment process, types of investments, leverage (to ensure it's monitored by chief compliance officer), best execution practices, gift issues, derivatives, sideletters, performance fees and high water marks.

Performance fees
Garrity may run through actual payment calculations with you. He also looks at disclosure, allocation of hot IPOs (to see if you're favoring the account with the performance fee), risk.

Swaps
Garrity looks at disclosure and to see that you have a system for monitoring that's commensurate with risk.

Investment advice in blogs

In my posting on "Do investment & financial services companies belong in the blogosphere?" I asked if any reputable companies have started blogs in this area.

I've found some investment-related sites thanks to attending a lecture on blogs by Sree Sreenivasan, dean of students and professor at Columbia Journalism School and "tech guru." Much of the content from his lecture is covered online.

The first site I visited on his advice was Footnoted.org. It is an informative and lively site that uncovers tidbits from financial filings such as 10-k forms.

I checked out the blogroll in the right-hand column of Footnoted.org. There I found more than a dozen links to blogs. Without visiting many of them, I get the sense that some are stock-picking sites, others focus on commentary. If you get a chance to visit, tell me what you think.

I was interested to read the disclosure at the top of each posting at Stock Picks Bob's Advice. "Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website."

Seeking Alpha describes itself as the "Dashboard for the Leading Network of Stock Market and Personal Financial Blogs." The Seeking Alpha Network includes stock sector, country stock, personal finance and other investing blogs.

"The Risks You Don't Know"

Are you measuring the right kind of risk when you optimize portfolios?

In my unsophisticated opinion, that was the main point of Dr. John Blin's presentation on "The Risks You Don't Know: Why using a robust risk model should be a part of your investment process." He made this presentation to the Boston Security Analysts Society on January 9. Dr. Blin is chairman of APT, Inc.

This information has practical implications.

For example, a typical fund of funds investing in hedge funds would allocate a big chunk of assets to convertible arbitrage funds. Using risk as Blin defines it, convertible arbitrage funds would virtually disappear from the allocation.

The firm's website describes "The APT Approach" in more detail.

Dr. Blin was kind enough to comment on this article prior to posting. Here's what he said:

I would simply add that this is not only when you optimize. The question: “know WHICH risk” (systematic –un diversifiable; or “specific” “diversifiable) applies whenever you talk about risk. The only reason one takes the optimization case as an example is that optimizers using a factor-model based covariance matrix effectively seek to maximize the share of diversifiable risk in the total risk (and conversely minimize the share of non diversifiable risk)

So if you miss the mark on one type of risk v. the other optimization can actually make matters worse.

But the general central point is that when talking about risk the kind of risk is the central issue. And any estimate of risk that doesn’t’ get that right will be way off the mark –extreme events will be the rule not the exception!

Hope that helps

John

Kudos to Congress Asset Management!

Congress Asset Management is a small (about $3 billion in assets under management, according to their website) asset management firm that allows you to subscribe to its quarterly investment commentary. It's a good marketing tool that provides a gentle reminder of the firm's existence to prospective clients.

I was also glad to see that their commentary is well organized. I can grasp its thrust if I line up the topic sentences of each paragraph:

• It is increasingly evident that the devastating storms of late summer have not caused permanent damage to U.S. growth prospects. In fact, growth appears to be broadening out and accelerating as the year draws to a close.
• While the rising economic tide paints a bright picture of 2006 prospects it adds fuel to fears of renewed inflation.
• The good news is that the Federal Reserve Board is ahead of the curve, and its policy is likely to succeed in forestalling a new inflationary spiral.
• The potential for a broadening out of world growth prospects is more favorable now then it has been for some time.
• The year just ending has been characterized by natural disasters, energy crises, terrorist acts, heavy war news, and steady increases in interest rates. Despite them, the domestic economy enjoyed a year of rising employment, strong consumer spending, robust housing activity, broad productivity gains, rising business spending, and increasing dollar value.
• The year 2006 promises to be a year of solid domestic and rising worldwide economic activity.

I also like that Congress states its opinions clearly.

Could Congress do anything better?

Its commentary crams together a lot of tiny type without much white space. For easier reading, I'd like to see headings and shorter paragraphs.

What do you think? Click here to view Congress' commentary for the current quarter.