SEC Creates New Risk Division

The Securities and Exchange Commission has formed a new unit, the Division of Risk, Strategy and Financial Innovation, with University of Texas School of Law Professor Henry T.C. Hu in charge as director. The division combines the Office of Economic Analysis, the Office of Risk Assessment and other functions to combine economic, financial and legal disciplines.

"This new division will enhance our capabilities and help identify developing risks and trends in the financial markets," said SEC Chairman Mary Schapiro. "By combining economic, financial and legal analysis in a single group, this new unit will foster a fresh approach to exchanging ideas and upgrading agency expertise."

Commenting on his new position, Hu said the financial markets are in a "seminal time" and added, "The derivatives revolution, the risk of hedge funds and institutional investors, technological change and other factors have transformed both capital markets and corporate governance."

With the creation of this new division, the SEC now has five divisions, including: the Division of Corporation Finance, the Division of Enforcement, the Division of Investment Management and the Division of Trading and Markets.

Money Funds Must Keep Revealing Holdings: SEC

The Securities and Exchange Commission is extending a requirement under the Treasury Department's money fund guarantee program that will have the funds reveal their holdings and valuation each week through Sept. 12, 2010, in the event that their net asset value falls below $0.9975. "The Commission has found these reports very useful," the SEC said.

Vanguard Ties Bond Funds To Barclays Float Indexes

Vanguard is migrating a dozen of its bond index mutual funds to benchmarks that better reflect market liquidity. Observers say the move represents the government's unprecedented intervention in the bond markets, and will likely lead other fund companies to follow suit.

The fund company will adopt the Barclays Capital float-adjusted indexes, a type of benchmark that is more commonly associated with stocks. The move will take effect in the fourth quarter of 2009.

The previous benchmark included $1 trillion in mortgage-backed securities and $125 billion in agency bonds that have been purchased by the government to keep mortgage rates low and sustain the ailing housing market. These securities are no longer on the market and therefore no longer liquid.

"That could make it hard for the fund to track its index without [incurring] additional transaction costs and tracking errors," said Daniel Culloton, an associate director of fund analysis for Morningstar. Because trading mutual fund shares on a non float-adjusted index impedes the liquidity of those securities, it widens bid-ask spreads, which ultimately increases investing costs for consumers, according to Culloton.

Acknowledging this, Barclays Capital came out with new float-adjusted indexes at the end of July that exclude the securities held by the government, Culloton said. Vanguard has been worried that the federal government could end up owning a significant portion of the securities market, he said. "Lots of bond investors been paying close attention."

It is unclear whether Vanguard is the first to migrate its funds to Barclays Capital's new indexes. But if it is, that move would follow a similar course of action that Vanguard took involving equities. Earlier this decade, there was a big move to do this on the equity side, Culloton said, and Vanguard was an early adaptor. "Now it is standard practice that equity index funds track float-adjusted equity indexes, which only include shares of companies that trade freely on the market."

Putnam Includes Absolute-Return Strategies In Target-Date Funds

Putnam Investments has unveiled the industry's first absolute-return target-date funds, which will combine both conventional investing strategies with absolute-return methods that seek to mitigate market volatility. Putnam will invest from 10% to 50% of its target-date retirement accounts in its absolute-return funds

"Integrating absolute-return investing into target-date funds is a natural evolution in retirement savings products, bringing long-established institutional strategies to retail retirement funds," said Putnam President and Chief Executive Officer Robert L. Reynolds. "Given the challenges we face today in saving for retirement, we believe that incorporating absolute-return strategies will add powerful and much-needed diversification to target-date investing, providing investors with what we think is a stronger, more grounded long-term retirement savings vehicle."

Jeffrey R. Carney, head of global marketing, products and retirement at Putnam, added that absolute-return target-date funds could even become the core default offering of 401(k) plants in the years ahead. He called the funds the "next generation of target-date fund offerings" and "a truly defining moment in the full-service defined contribution plan market."

Earlier this year, Putnam adjusted its target-date family, the RetirementReady Funds, from a fund-of-funds approach to one overseen by an asset allocation team responsible for all aspects of the funds' management, from overall diversification strategy down to individual security selection.

Fidelity Lifecycle Funds Expand Global Exposure

Fidelity has adjusted the holdings in its Freedom Fund lifecycle line as well as other asset allocation portfolios to include more international stocks, commodities and TIPS.

International exposure throughout all of the Freedom Funds will rise from an average of 20% to 30%, with exposure to U.S. stocks falling commensurately to make up the difference.

Fidelity said the changes are designed to improve the risk and return characteristics of the funds for the benefit of the more than five million shareholders who have invested nearly $90 billion in them.

"Since launching the Freedom Funds in 1996, we have regularly evaluated and tested the asset allocation and portfolio construction methodology, and we've made enhancements to the portfolios from time to time based on our findings," said Derek L. Young, chief investment officer of the global asset allocation group at Fidelity Management & Research Co.

Young noted that non-U.S. markets now account for more than half of the exposure of the aggregate world equity market capitalization, world economies are increasingly interwoven, and foreign markets have improved information flow, thereby diminishing risks in long-term investing.

Nearly 50% of 401(k)s Auto-Enroll Workers

Nearly half of U.S. companies are now automatically enrolling workers into 401(k) plans to encourage them to save for retirement, and an additional 33% are considering it, according to a survey by Watson Wyatt. In addition, 62% of companies are using target-date funds as their default investment option, up from 62% in 2006.

Companies that automatically enroll employees in 401(k)s use a median initial contribution rate of 3%, with 1% to 7% the range. Fifty-one percent of the companies using auto-enroll increase the contribution rate by a certain amount each year.

"Employees need to participate more effectively in their company defined contribution plan, as this is increasingly the primary vehicle they use to save for retirement," said Chris DeMeo, senior investment consultant at Watson Wyatt. "Taking an interest and actively participating in their plans will allow employees to make more informed decisions and develop investment strategies that take into account their goals and risk profiles."

PowerShares to Offer Build America ETF

Invesco's PowerShares subsidiary has filed to offer an exchange-traded fund that will primarily invest in the Build America Bonds being issued as part of the stimulus plan.

Eaton Vance has also filed to offer a mutual fund tied to the bonds being offered as part of the American Recovery and Reinvestment Act of 2009. Since Invesco's offering is an ETF, it will track the Merrill Lynch Build America Bond Index.

State Street Starts Preferred Stock ETF

State Street Global Advisors, the investment management arm of State Street Corp., has launched the SPDR Wells Fargo Preferred Stock Exchange Traded Fund.

The fund tracks the performance of the Wells Fargo Hybrid and Preferred Securities Aggregate Index, which includes nonconvertible preferred securities listed on the New York Stock Exchange or the NYSE Arca that have a par amount of $25; are rated investment grade by Moody's Investors Service Inc. or Standard & Poor's; and have had a minimum monthly trading volume during each of the past six months of at least 250,000 trading units.

State Street Global Advisors is the second-largest exchange-traded fund provider in the United States and globally, with more than $160 billion of assets under management at Aug. 31.

Scant 3% of Hedge Funds Closed in Second Quarter

The pace of hedge fund liquidations is sharply dropping, with only 3%, or 292 funds, shutting their doors in the second quarter, according to Hedge Fund Research. By comparison, 22%, or 376 funds, liquidated in the first quarter. Throughout 2008, 1,471 funds, or 19% of the hedge fund universe, shut down.

Meanwhile, the number of hedge fund launches is on the rise, with 182 new offerings in the second quarter, up from 148 in the first quarter. Nonetheless, hedge fund fees are edging down, averaging 19.18% in the second quarter, compared to 19.34% in the first quarter.

"As hedge fund industry consolidation continues, multiple data suggests the impact of a tumultuous 2008 remains both widespread and sustained," said Hedge Fund Research founder Kenneth Heinz. "Performance gains for 2009 have been the strongest since 1999, but investors are making demands for greater transparency and structural improvement, setting the state for the next period of industry expansion."

Investors Return to Overly Rosy Retirement Outlook

So much for the recession impacting the American consumer for years to come. When it comes to their outlook on retirement, the majority of Americans, once again, are overly bullish on their expectations for quality of life, Allianz Global Investors found in a survey.

Seventy-eight percent of investors expect their standard of living in retirement to be the same or even better than it is now, and 80% believe they have adequately planned for the future and are confident they will have a secure retirement. Seventy-four percent expect stocks will bounce back to annual mean returns of 9%.

 

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