Older Workers Left Out In The Cold?

A colleague recently passed to me an interesting article from Forbes, titled “Is There A War Being Waged Against Older Workers In The Workplace?” The article raises a number of viable arguments in support of such a claim, including specific job screening criteria for candidates with 3-7 or 7-10 years of relevant experience.  The article’s author contemplates the last time one saw a job opening posted for someone possessing 20-30 years of experience.

Based on the chart below it certainly appears that opportunities have weakened for workers aged 25-54 years-old.


It is actually a bleaker picture if one focuses exclusively on the male population in that age category, as there are roughly 2 million fewer males 25-54 working today since the start of the GFC. I suspect that most of those former employees are not sitting on the sidelines because they are independently wealthy.


Given that focus, it leads companies to a population well south of 40 years-old and definitely neglects those viable candidates in the 40+-year-old category.  What it also does is damage one’s ability to save for retirement, which is why I am particularly interested in this subject matter. As the private sector has moved from defined benefit to defined contribution retirement plans, the emphasis on funding and managing such a vehicle has fallen squarely on the shoulders of the employee, who in many cases have neither the financial resources nor the investment capability to handle this responsibility.

Given that individuals rarely save outside of an employer’s sponsored plan, losing a job in one’s 40s or 50s has a profound impact on that employee’s ability to generate a retirement balance that will help them live through retirement. Furthermore, it is often the case that older employees finally have other major expenses (children, house, college, etc.) behind them and they are counting on the last 15-20 years of employment to pad their retirement balances. The government even recognizes this phenomenon by allowing “catch-up” contributions into defined contribution accounts after age 50.

Regrettably, DC balances are often used as employment bridge loans (almost like an unemployment benefit) when a worker has been displaced. Given this scenario, contributions cease to be made, while balances weaken as opposed to growing through the benefits of compounding. For workers experiencing extended periods of unemployment, their ability to generate a retirement benefit is impaired tremendously.

We read the financial papers and listen to the rosy employment scenarios on the TV and radio, but don’t believe for one minute that our current labor conditions are appropriately captured in the published unemployment statistics. There are too many older Americans that have been displaced from the labor force whose prospects for reentry are slim, at best!


Active ETFs – Where’s The Beef?

In April 2008, I was thrilled to be part of the launch of the industry’s first active ETFs. Invesco’s quant group (IQS) created an ETF in conjunction with Invesco PowerShares that was managed actively versus the Russell 200 Mega Cap index (ticker PRA). We were very excited about the prospects of managing an Active ETF given the explosion in the use of ETFs generally.  Unfortunately, the Great Financial Crisis was wreaking havoc on markets at that time and PRA never really took off.

Fast forward 10 years and the market for Active ETFs has certainly grown, but it still represents an extremely small segment of the ETF market.  According to an article by Lara Crigger, ETF.com, Active ETFs (225 funds) represent only 2% of ETF AUM ($59 billion in total). Fixed income active ETFs are the most common (81) and the largest, as 8 of the top 10 active ETFs are fixed-income related. It shouldn’t be surprising to anyone that fixed income active ETFs dominate the universe of active strategies given how difficult it is to “index” the bond market. Furthermore, there have been 59 active funds launched in the last year, representing a 27% increase in the number of active ETFs.

Why such little exposure? Could it be the fact that active ETF performance has been spotty at best? According to ETF.com, only 31 of 166 active ETFs with track records greater than 1-year outperformed.  Within the fixed income universe, only 16 of 81 funds have track records longer than 5 years, and performance has been weak on a relative basis. That means that only 18.7% of funds outperformed in 2017. That actually seems worse than the percentage of active products in institutional separate accounts that have beaten their passive benchmark.

Fees for active ETFs are also an issue, as active fixed income ETFs (as an example) have an average fee of 0.53%, which is considerably greater than what a fixed income manager running a separate account would charge and certainly greater than a “passive” offering in the space. Now, to be fair, active ETF fees are certainly lower than those offered by mutual funds.

Finally, active alpha is not achieved overnight. The forecasted or expected annual excess return is built up over the course of the year. Active ETFs should not be trading vehicles. These products offer smaller investors the opportunity to participate in an asset class or style category that they might not have been able to given the size of their allocation, but they also need to have patience when investing so that the excess return can be realized.

Remember 130/30 Strategies?

I saw this headline from P&I:

“84% of Investors Apply or are Considering, ESG” – Morgan Stanley survey claims

To say that I’m skeptical would be a major understatement.

I couldn’t help but think about the “excitement” surrounding 130/30 products back in the 2005-2007 era when Merrill Lynch and others were predicting $1 trillion in these products within a relatively short timeframe. We know what happened once the Great Financial Crisis hit.  Is there a 130/30 strategy still being utilized?

As we’ve said many, many times, managing a pension plan is not about the return (the ROA is not the Holy Grail), but about meeting the promised benefit at the lowest cost.  How does ESG help a plan sponsor achieve that goal? There are a lot of claims as to the success of these programs, but I hear similar praise being hyped on OCIO offerings, too, with very little proof that there is consistent value added.

During my 37 years in this industry, I’ve witnessed many cycles, which always seem to come with the next “greatest” product offering.  Wouldn’t it be refreshing if we just got back to basics within the retirement industry by securing the promise without playing games with the employee, employer, and taxpayer money?


No, It Doesn’t!

The U.S. Government does not have a spending problem just because recent outlays have eclipsed receipts and the U.S. Federal deficit is projected to be close to $1 trillion in 2018! Several U.S. states do have a spending problem, as well as many (most?) Americans, but trying to equate the federal government’s ability to meet its debt obligations with those other entities is just wrong! The only difference that matters is that the U.S. Government has a fiat currency, while the others do not. Can you imagine New Jersey issuing its own currency? As my friend and former Invesco colleague, Charles DuBois, recently noted, our current fiscal stimulus should be greeted with shouts of “Happy Days are Here Again!”.

According to the Monthly Treasury Statement, budget results for the month of May have been in deficit for the 63 of the last 64 fiscal years since 1955. Yet, the sky hasn’t fallen, and our economy is certainly much larger today than it was back then. What’s up?

We’ve mentioned in previous KCS blog posts that a large part of the deficit increase feeds right into business profits. When the private sector (both corporations and individuals) are incapable of generating economic activity, we need the government to step into the fray, as they did so wonderfully in 2009 and beyond. According to Charles, this increased fiscal stimulus is why the stock market is proving to be resilient despite numerous “risks”, including interest rates, tariffs, investigations, etc.

Most Wall Street analysts are concerned with the wrong elements of the U.S. Government debt.  For instance, the fear of rising interest expense is misplaced, as the cost to the government is actually the private sector’s interest income.

They also worry excessively about the crowding out myth – believing that higher Treasury issuance will push up rates.  This is false, as all the selling of Treasuries does is mop up the reserves created by deficit spending – so there are no such upward pressures on rates.

As we have shared, the potential problem is none of these referenced above, but rather too much of a good thing (happy days…).  If private sector income is too high because of the deficit spending, inflation could become a problem.  That is if our economy was already at full capacity.  However, according to Bill Mitchell, and other MMT disciples, the U.S. economy still has excess capacity providing further room to grow.

Anyway, if the government is spending more into the economy than it is taking away through taxes, that’s “obviously” a good thing.  No one seems to get the basic accounting that the public sector deficit = the private sector surplus.  It is about time that they did!

Will Long Bond Demand Weaken?

We sincerely appreciate when friends share with us meaningful graphs/charts/articles – thanks, Chris, for the chart below!

According to Deutsche Bank Research, demand for stripped securities has been very strong from pension plans. Despite this increased appetite, long rates have been rising.  Come September, corporate plans will no longer be able to deduct pension contributions at the previous 35% rate. As a result, have pension plans accelerated their contributions? We think so, as they try to beat the 9/15/18 deadline. A $1 billion defined benefit contribution would save the company $350 million under the old tax laws, but only $210 million beginning later this summer.


Will long interest rates rise as a result of likely lower demand for long bonds?  Again, we believe that they just might. Couple the lower demand from pension systems and the stronger US economic growth, and you have a formula for rising rates.

We’d be happy to discuss our strategy to cash flow match near-term liabilities chronologically, which we believe is a much more cost-effective strategy in a rising rate environment.

Colorado (PERA) Initiating Pension Reform?

Samantha Fillmore is reporting on the Heartland Institute’s website that Colorado Public Employees’ Retirement Association has enacted some reform measures to help them close a huge funding gap. However, the reforms seem quite modest, at best.

It is being reported that the State’s defined contribution plan will be made available to local government members in the PERA defined benefit plan, which until now had only been available to state workers.  In addition, contribution rates for those remaining in the plan will escalate from 8% to 11% of pay during the next two years.

But, it doesn’t seem that PERA employees will be mandated to now participate in the DC plan. Sure, employees participating in the DC plan will now have the option to move assets with job changes, but they are still going to be responsible for funding, managing, and dispersing this retirement benefit with no promise of a set benefit upon retirement. We wonder just how many local government employees see this as a positive change?

What isn’t addressed is how the pension assets are being managed. Are they still going to be trying to generate a return commensurate with an ROA target or will they take the prudent course and begin to manage their assets against a liability focus? Continuing to do the same old, same old doesn’t seem to reflect the reform that is needed to right this ship.



Why Are Americans Tapping Their Retirement Accounts?

As a follow-up to our previous blog post, the St. Louis Federal Reserve is reporting that “real” weekly wages since Q1 1999 have only grown from $335 to $350 through Q1 2018. Is it not surprising that a significant percentage of Americans are either not saving for retirement or they are forced to tap into their retirement accounts to meet an outstanding debt or an emergency bill.

Come on, the cost of everything, including housing, education, healthcare, food, clothing, etc. would have a worker needing far more than an additional $15 per week for the last 20 years! Even the WSJ is reporting today that the anticipated wage bump from tax changes and the perceived tighter labor market are not being reflected in workers’ pay once adjusted for inflation. The timetable that they are highlighting is the most recent three years.

Despite recent strength in retail sales, diminishing real wage growth should negatively impact the US economy as the consumer gets more stretched. A further increase in debt will naturally lead to more Americans tapping into their retirement accounts, which just exacerbates an already untenable situation.