We have occasionally highlighted the insights of real estate expert Keith Jurow, who provides a unique perspective on many aspects of the general real estate environment, but mortgages in particular.  He has recently produced an outstanding analysis/article on the current environment of mortgage REDEFAULTS. The media and other real estate analysts would have you believe that the worst is far behind us and that our real estate markets have recovered following the Great Financial Crisis (GFC).  According to Keith, they haven’t and things may actually be deteriorating further!

Fannie Mae and Freddie Mac have saved 4.1 million homeowners from default, including another 68,000 in Q1’18, since the GFC. But, according to Jurow, this effort has been a massive failure, as homeowners across the country are redefaulting again once, twice, and in some cases, three times. According to Jurow’s analysis, 37% of homeowners who had received a loan modification from Fannie Mae had redefaulted by Q4’17. Incredibly, 30% of homeowners who received a loan modification in 2017 had redefaulted in three months!

“Even mortgage pros don’t really know that there is a problem. How could they? The re-default numbers … have been buried where few people can find them, said Jurow. At Bank of America, the redefault rate on “troubled debt restructurings” is 45%. At PNC, it’s 57%. At Wells Fargo, it’s 35%. These and other lenders, loan servicers, and Fannie and Freddie “have been able to pull off this charade because hardly anyone knows how bad the re-default situation really is,” Jurow said.

I highly recommend that you take the time to read his article. Furthermore, Keith’s work is worthy of a visit to his website, which can be found at http://www.keithjurow.com. You will not be wasting your time!

According to P&I, Avery Dennison Corp will terminate its defined benefit plan. In addition, they will make a $200 million contribution prior to August 15th in order to claim a tax deduction on their 2017 taxes.

The U.S. DB plan has a funded ratio below 70%. The company is looking to settle its liability, estimated to be $950 million, through a combination of lump-sum distributions and an annuity contract (which is not inexpensive). There is no mention on the path going forward for Avery Dennison employees.

I suspect that Avery Dennison shareholders have benefited from recent federal tax law changes. I guess it is too much to ask that their employees also receive some of that largesse.

According to a recent study by Irish Life, one of the largest participants in the Irish retirement industry, 90% of Irish workers are not on track with their retirement savings. Boy, if that doesn’t sound familiar.  Here’s the scary part – Irish Life is advising clients that they need to have saved enough to replace annually one-third of their salary, which doesn’t seem nearly enough for the average worker, as the “rule of thumb” in the U.S. is to replace at least 50% of one’s final salary.

The fact that 90% of Irish workers can’t replace even 30% of their compensation should truly concern the powers that be in Ireland, as the lack of financial wherewithal will negatively impact Ireland’s economy going forward. One of the key findings by Irish Life was the fact that the average worker only begins saving for retirement at age 37, and this delay is significantly reducing the potential accumulated wealth.

Auto-enroll and auto-escalate features would certainly help the average worker but in many cases, it is the lack of wage growth that is restraining employees from participating to the extent that they should. We are certainly seeing that in the U.S.

The Active versus Passive debate rages on, but the results would suggest that large capitalization active managers are about to lose on a 10-count! According to a SPIVA study of large-cap managers versus the S&P 500 through December 31, 2017, 89.5% of managers failed to beat the index for the 10-year period.  Results are slightly better for the 3- and 5-year periods at 80.6% and 84.2%, respectively, but the slight improvement shouldn’t give anyone too much confidence that the tide is about to change.

However, I believe that the percentage of large-cap U.S. equity managers will begin to outperform.  Why? At KCS, we think that there are three environments that favor active managers versus the S&P 500, including markets that favor value, smaller capitalization stocks, and bear market environments. The last 10 years have been dominated by large-capitalization growth stocks, as the Russell Top 200 Growth Index has bested the Russell Mid Cap Value index by 2.3% per annum.  The margin of outperformance has continued to grow substantially in recent periods, peaking (?) at 18.6% in 2017 (31.9% versus 13.3%).

So, what gives us reason to believe that value-oriented, smaller capitalization securities will once again have their day in the sun? History! History has a way of repeating itself, and so do market cycles. Mid-cap value ate large growth’s lunch for the 20 years ending 12/31/17 (9.5% versus 6.6%) despite the significant underperformance during the last 10+ years.  Also, valuations and fundamentals ultimately matter, and there is little justification for the valuations currently attributed to the top 200 growth stocks.

We believe that there is a role for both active and passive management in a well-diversified equity portfolio, but the large growth versus mid value cycle should be used to “tilt” one’s portfolio within appropriate asset allocation bands. If you aren’t prepared to bet that large growth will continue to significantly outperform mid value then you should act sooner rather than later before the next cycle is well underway.

A new study released by Georgetown’s Center for Retirement Initiatives questions whether defined contribution participants invested in target date funds (TDFs) are being negatively impacted by the the lack of alternatives in these products. We agree with their concerns/conclusion.

As a reminder, individuals should have an absolute return objective similar to that of endowments and foundations, which differs from defined benefit plans that have a relative objective (the plan’s liabilities). Unfortunately, only 8 of 41 target date fund managers tracked by Morningstar have any exposure to private equity, hedge funds, and/or real estate. For the most part, those products without any alternatives saddle their participants with mostly traditional fixed income and equity exposures.

The study suggests that the dearth of alternatives has its roots in the lack of internal expertise, poor liquidity (need to have mark-to-market capability), and higher fees associated with these products in an era of growing litigation related to expenses.

Given equity valuations and the current interest rate environment in the U.S., we, too, are concerned that defined contribution participants may be saddled with an inferior product in this environment. Given that DC participants (on average) are already facing a retirement funding shortfall, the last thing that we need is another market correction in a rising rate environment that would adversely impact fund balances.

We think that the inclusion of TDFs in a fund lineup has been a very positive development for the average DC participant, just as auto-enroll and auto-escalate features have enhanced the participant’s experience. However, let’s strengthen these product offerings in order to maximize the benefit.

As the football (soccer for us Americans) world prepares for the World Cup semi-finals, it appears that global equity market participants knew at least some of the teams that would and wouldn’t be playing during the next couple of days.  Despite the fact that both Germany and Brazil were strong favorites entering the tournament, their equity markets performed poorly during the latest quarter producing -3.4% and -26.4% returns, respectively. On the other hand, the UK (+3.0%) and France (+0.3%) produced positive market returns in an environment in which the All Country World X U.S. Index (appropriate since the U.S. failed to make the tournament) was down -2.4% for the second quarter.

It was a difficult equity environment for most of the participants in the tournament, as Japan, Korea, Mexico, and Russia (despite an impressive run for the hosts) were also down during the last three months with each producing results that were -2.8% or worse. Given that the finalists are all European, you won’t be shocked to read that EAFE-Europe produced the best return during the second quarter (-0.9%), while EM Latin America was down -17.7% and EAFE – Far East was down -2.8%. Maybe I should pay more attention to how global equity markets are performing during the second quarter in 2022 before filling in my bracket pool.

According to a recent analysis from The Senior Citizens League (TSCL), a nonpartisan group that represents the interests of senior citizens, the purchasing power of Social Security dollars has been falling precipitously since 2000.

In the “2018 Social Security Loss of Buying Power Study,” which included more than 1,000 seniors from across the country, participants were surveyed about their annual cost-of-living adjustment (COLA) and the expenses they’ve paid.  The study determined that Social Security benefits have lost 34% of their purchasing power since the year 2000.

There are 45 million aged (62 years old or greater) beneficiaries who receive a monthly Social Security benefit and 62% of these recipients rely on this monthly check to provide at least half of their monthly income. Sadly, one-third of recipients rely on this payment for at least 90% of their monthly income. Also, according to data from the Social Security Administration, the average retired worker only received $1,412.14 in May 2018, or $16,946 a year.

TSCL notes that the average Social Security benefit has increased by 46% since 2000. However, the 39 costs it examined, which are representative of expenses that seniors often deal with, rose by an average of 96.3% over this same time period. Assuming an average benefit of $816 per month back in 2000, the typical retiree today needs $410 more a month from Social Security than they’re currently receiving just to be on par with where they were 18 years ago.

One of the contributing factors to the deterioration in the purchasing power of Social Security has to do with how inflation is calculated. Currently, COLAs are determined by the CPI-W and not the CPI-E (Consumer Price Index for the Elderly), which would more accurately account for expenditures that 62 years-old and older incur. The CPI-E isn’t perfect, but it is a far better measure for our Senior population. It doesn’t seem like changing the inflation index would be that difficult other than it would cost the Federal Government more each year.

In a blog post from earlier today we commented that remaining in the workforce is not always the employee’s choice. Just how many of our Seniors will actually find part-time work to supplement their retirement benefits? It doesn’t look promising, as we can’t even find jobs for those ages 55-64. According to the June BLS report, there are 1.1 long-term dsicouraged workers that are not included in the “official” unemployment numbers because they have not looked for a job in more than one year. Regrettably, 38% are poor, and their economic situation continues to deteriorate.

It was once the rule that those nearing retirement would be debt-free before moving on to the next phase of their life. Regrettably,  times have changed dramatically for later in life workers who now are burdened with student loans, mortgage debt, revolving credit, and car payments just as they are preparing for retirement.

Per capita debt among 65-year-olds increased by 48% between 2003 and 2015, according to the Federal Reserve Bank of New York. Of all types of debt mentioned, student loans were the biggest culprit (both for the individual and a family member), with the per-capita student loan burden increasing 886% for 65-year-olds during that time frame. Second to student loans was mortgage debt, increasing 47% for those approaching retirement.

We read frequently how good this economy is, but as we’ve written in previous blogs, family wealth has deteriorated substantially since 2007, with only those ranked in the top 10% by income achieving any growth in family wealth. The bottom 80% have actually seen their wealth decline by roughly 25%. Accumulating debt has obviously been the course chosen in order to make up for this shortfall in wealth.

Couple this debt accumulation with the fact that most retirees will only have access to Social Security and a DC plan balance. As we reported yesterday, the median account balance for a participant at Vanguard is only $79,000, and roughly 50% of our population doesn’t even have an employer-sponsored plan. Unfortunately, remaining in the workforce is not always the employees choice. Just how many of our Seniors will actually find part-time work to supplement their retirement benefits?