TAA not monolithic
The Oct. 13 issue of Pensions & Investments contained a negative article regarding tactical asset allocation managers, "Stock market charges past TAA models" (Page 1).
The title itself is misleading. The typical TAA model operates against a balanced benchmark, and not the equity market. That is problem No. 1.
Problem No. 2, unlike so-called "portfolio insurance," TAA models are not monolithic. They call for different inputs; forecasts will vary; and implementation isn't the same from manager to manager. Not surprisingly, then, outcomes range widely, just as they do for traditional active equity managers. Your author reports that performance is anything but uniform, but still treats TAA as homogeneous enough to qualify as a "style," like "growth" or "value," which he proceeds to indict. We would disagree.
At Mellon Capital Management, we have consistently applied the quantitative tactical asset allocation that I first developed in 1972. Through this disciplined approach, we have outperformed in periods before and after the 1987 stock market crash. In fact, our TAA strategy has shown a higher level of consistency since 1987.
Tangent-Added TAA, which targets the risk level of the S&P's 500 Index, has been operating since the summer of 1989, exceeding the equity market's rate of return by 2.19 percentage points per annum since inception. The net of fee alpha has been 1.61 percentage points per annum. A logical extension of the tactical asset allocation model was successfully made to the global markets since 1992.
Since 1987 relative asset class misvaluations domestically have become less extreme, but valuations have returned to equilibrium more quickly, providing our clients continual benefits from the TAA process. The returns have exceeded the balanced benchmark by 100 to 200 basis points. The net of fee alpha has been approximately 50 to 150 basis points. The information ratio ranges from 1 to 2.
Mellon Capital systematically exploits the relative misvaluations between the expected returns for stocks, bonds and cash. The long-term expected asset class returns are derived from a valuation process that uses consensus analysts' estimates.
Some tactical asset allocators use subjective inputs and may attempt to out-forecast the analysis. They might use regressions, top-down approaches or differing asset class valuation methods. Additionally, risk and correlation inputs may be historical, forecasted or static. Decision-making processes also vary from our method of defining and maximizing the satisfaction (utility) of the consensus investor's risk-return tradeoff. Given these vast differences across asset allocation practitioners, the painting of the TAA picture should not be done with such broad strokes.
William L. Fouse
Chairman, Executive Committee
Mellon Capital Management Corp.
Chile's false ideal
Speaking of "Flawed reactions" (Editorial, Nov. 10), your conclusions that as a result of the recent volatility in the stock markets of the world, "The Chilean way of providing direct worker ownership of Social Security is a real viable option" is as flawed as possible.
A defined guaranteed benefit as a floor for the retirement security of wage earners was essential before the recent market volatility, is true now during this volatile period, and will be true after the roiled markets calm down.
The huge fees charged in Chile, 3% of salary for administration and insurance, in addition to the 10% of wages, cost Chilean workers 13% of wages. Of course only the 10% of wages reduced by the huge management fees charged by the AFPs (pension fund management companies) are invested for retirement.
The funds certainly have supplied capital to finance the privatization of Chilean industry, but there is great doubt that wage earners will be able to spend their retirement with the dignity of financial security.
Your complete antagonism toward the current Social Security system - which provides Americans with a foundation of core protection in the event of death, disability or retirement - is frightening.
You twist every economic event that you can into a way to bash Social Security. You have as much of a responsibility to provide an accurate representation of the modest Social Security funding problems as you have to parrot the line of many of your advertisers who are leading the battle to change Social Security from a defined benefit plan into a mandatory savings plan similar to SEPs, IRAs, 401(k)s and the like.
It is time for you to think about the financial status of millions of members of the pension plans you write about instead of the financial status of your advertisers.
Chairman/UFT Pension Committee
United Federation of Teachers
Options and Market fall
In his Others' Views piece on Nov. 24 ("The darker side of options pricing theory"), Bruce I. Jacobs gave a complex subject the serious treatment it deserves. But he may have left the impression that the growth in options trading volume somehow contributed to the Oct. 27 market tumble.
While this is a popular notion in certain quarters, there is not evidence to support it. In fact, the relative calm in the options market on that tumultuous day - there was no big upward spike in volume - indicates that using equity options as a sensible way to stabilize and hedge a portfolio has caught on with large numbers of intelligent investors.
This is a far cry from 1987, when so-called portfolio insurance had traders selling into a rapidly falling market, exacerbating the crash. This time around, those who used options as a kind of insurance sat tight and rejected panic.
This is very encouraging to those of us who have expended much effort to educate the investing public. The Options Industry Council's free seminars all around the country, the Web site at www.optionscentral.com, all the programs of the American Stock Exchange, the Chicago Board of Options Exchange, the Pacific Exchange and the Philadelphia Stock Exchange, where listed options are traded, have paid off. Professionals and other sophisticated investors, the kind of people who read Pensions & Investments, have learned a lot in 10 years.
Options Industry Council