Vanguard: The Disruptive Innovation Company

Vanguard is one of the world’s largest investment companies, offering a large selection of low-cost mutual funds, ETFs, advice, and related services. From its start in 1975, Vanguard has stood out as a very different kind of investment firm. Vanguard was founded on a simple but revolutionary idea—that a mutual fund company should be managed in the sole interest of its fund shareholders. Founder John C. Bogle structured Vanguard as a client-owned mutual fund company with no outside owners seeking profits.

  • More than $3 trillion in global assets under management, as of December 31, 2015
  • About 175 U.S. funds (including variable annuity portfolios) and about 145 additional funds in markets outside the United States, as of December 31, 2015
  • More than 20 million investors, in about 170 countries, as of December 31, 2015
  • Average expense ratio: 0.18% (U.S. fund expenses as a percentage of 2015 average net assets)

 

Vanguard is different from the rest

Vanguard's unique ownership structure, the Vanguard funds own Vanguard

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Religiosity is the Highest in World’s Poorest Nations

“Gallup surveys in 114 countries in 2009 show that religion continues to play an important role in many people’s lives worldwide. The global median proportion of adults who say religion is an important part of their daily lives is 84%, unchanged from what Gallup has found in other years.

Each of the most religious countries is relatively poor, with a per-capita GDP below $5,000. This reflects the strong relationship between a country’s socioeconomic status and the religiosity of its residents. In the world’s poorest countries – those with average per-capita incomes of $2,000 or lower – the median proportion who say religion is important in their daily lives is 95%. In contrast, the median for the richest countries – those with average per-capita incomes higher than $25,000 – is 47%.

Religion by Income.gif

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BlackRock Investment Institute: Asset Class Expected Return For 5 Years and Long-Term

The BlackRock Investment Institute publishes capital market assumptions and asset class return every quarter. Five-year and long-term equilibrium annualised return assumptions are in geometric terms. There are long-term volatility and correlation assumptions. Global equities are represented by the MSCI World ex USA Index in the correlation assumptions; global treasuries by the Barclays Global Aggregate Treasury Index ex US. We break down each asset class into factor exposures and analyse those factors’ historical volatilities and correlations over the past 15 years. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted.

 

Fixed Income

Source: BlackRock Investment Institute, July 2016.

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Asset classes. Expected return from UBS

In the years ahead, selecting the right asset classes will be crucial.

Cash and Bonds

Source: UBS

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The Things Everyone Should Know About Bond Investing

“It seems that everywhere you turn, the press is asking, “When is the Fed going to raise interest rates?” While that may be the question du jour, for long-term investors, the question is irrelevant to the construction of a high-quality bond portfolio.

 

1. Understand the role bonds play in a portfolio. When it comes to managing a bond portfolio, many investors, especially retirees, are mainly focused on generating income, but investors need to be aware of the risks taken to achieve a set amount of income in today’s low interest rate environment. For example, when interest rates are low (and bond prices are high), the income approach would cause an investor to buy more bonds, extend duration or accept lower credit quality in order to maintain a certain level of income. Likewise, if you think back to the early 1980s, when you could lock in long-term bond rates over 10%, the income approach would cause investors to own fewer bonds — even though the lower prices (higher yields) were a once-in-a-generation buying opportunity.

A better approach is to divorce the cash flow decision from the income decision. To do this, an investor needs to set a rational asset allocation, periodically rebalance to that target, and allow the total return of the entire portfolio to satisfy any income needs as opposed to viewing the interest generated by a bond portfolio as the sole source of income. Once a monthly (or some other frequency) withdrawal rate that meets an investor’s living expenses is determined, some combination of interest, dividends and proceeds from maturities and sales will provide enough cash to meet the withdrawal each month. Read more »

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Russia’s emigration: is there a problem?

“For more than a century, Russia has suffered periodic waves of mass emigration. Now it could face yet another one, perhaps leading to the largest brain drain the country has experienced in 20 years. According to Russia’s state statistical agency, 350,000 people emigrated from Russia in 2015 — 10 times more than five years ago. The outflow began in earnest in 2012, driven mostly by political friction in the country, but Russia’s current economic crisis has accelerated the pace.

As highly skilled Russians emigrate, the future of innovation and private business in the country has been called into question. Meanwhile, migrants from mostly Muslim former Soviet states are entering Russia in search of work, altering the ethnic and religious composition of the population and heightening tension in the process.

In nearly every decade of its history, Russia has watched large portions of its population head for foreign shores. Between 1880 and 1914, 2 million Jews fled the Russian Empire, seeking refuge from pogroms. The Russian Revolution then sent roughly 1.4 million refugees fleeing the country, including some of the empire’s brightest minds: Nobel Prize-winning writer Ivan Bunin, author Vladimir Nabokov, helicopter designer Igor Sikorsky and artist Marc Chagall, among others.

It is difficult to get reliable migration statistics for the early Soviet period. All five of the Soviet statistical chiefs between 1926 and 1940 were shot, and under the Soviet government, demographic statistics became more propaganda than science. But generally, emigrants found their way out of the Soviet Union in three major waves over the union’s lifetime. During World War II, 700,000 to 1 million Russians — mostly anti-Communists, Soviet prisoners of war or those dodging the draft — fled the Soviet Union to settle in the West. Decades later, about 2 million Jews emigrated mainly to Israel and the United States, seeing an opportunity when Soviet General Secretary Leonid Brezhnev somewhat relaxed the Kremlin’s monitoring of the Soviet Jewish community. Then, with the loosening of border controls in the 1980s, people began to move across Russia’s border in both directions. Three million ethnic Russians living in the Soviet and Communist bloc outside of the Russian republic returned to Russia. At the same time, leaving the country were 700,000 ethnic Russians, along with 300,000 Soviet Jews — a number that jumped to over 1 million after the bloc’s collapse.

The rise of Russian President Vladimir Putin brought emigration from Russia to a relative crawl. Between 1999 and the mid-2000s, living standards in Russia quadrupled, the country’s economy stabilized, and the overwhelming popularity of Putin’s administration put an end to political turmoil. Russia’s renaissance had begun. As a result, emigration by ethnic Russians was consistently outpaced by the number of immigrants pouring in, particularly from former Soviet states. After peaking in 2000, the number of Russian emigrants dropped from about 146,000 that year to a mere 32,000 in 2009, even in the middle of an economic crisis.

 

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Is only a small minority of stocks actually driving market gains?

“Quick, before you read this post, ask yourself these questions:

1. What percentage of stocks beat their benchmark index over their lifetime?

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Not sure? The answers to all three questions are below.

 

When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

 

Key findings:

  • 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
  • 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
  • 64% of stocks underperformed the Russell 3000 during their lifetime (Most stocks can’t keep up with a diversified index)
  • A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common) Read more »
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Value in a post-Brexit world

Prior to the Brexit vote, there was a wide range of valuations but few cheap assets globally, as shown in the chart below. With most asset valuations still looking fair to expensive, it’s important to focus on relative valuations.

 

 

Modest economic growth, low inflation expectations and easy central bank policies have sent yield lower, intensifying flows into income-oriented assets. This partly explains extreme valuation differences between equities and government bonds. Valuations tell us little about short-term returns but can potentially shed light on medium-term returns. Starting valuations explain roughly 10% of U.S. equity market returns over the following year but 87% of returns over the next 10 years, according to the analysis back to 1988.

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About Britain’s role in the EU…

While we may not be able to measure the precise impact of EU membership on Britain’s economy, we can demonstrate the interconnectedness of Britain and the EU. The following is extracted from the EU membership and Bank of England Report, published October 2015. British pounds have been converted to U.S. dollars based on an estimated exchange rate of 1.42.

 

Population

  • 505 million people live in the EU, approximately 7% of the world’s population.
  • Britain is home to 12.5% of the EU’s population, the second most populous EU country.

Economies

  • EU is the largest economy in the world with GDP worth £11.3 trillion (approximately $16 trillion) in 2014, which is larger than the U.S. ($15 trillion).
  • Within the EU, Britain is the second largest economy.
  • The U.K. GDP was worth £1.8 trillion (approximately $2.6 trillion) in 2014, nearly one-sixth of EU output.

Cross-border trade

  • One-third of all global trade is with the EU, the largest exporter and importer in the world.
  • The EU is Britain’s biggest trading partner.
  • The U.K.’s exports and imports are worth 60% of its GDP.
  • 70% of Britain’s largest import and export markets are fellow EU members.

 

Britain: A major importer and exporter in the EU


Chart01_2YL4

Source: EU Membership and the BoE Report, Published October 2015

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Facebook, the world’s most addictive drug

Facebook has defied even optimists’ projections of how big the 12-year-old firm could one day become. Today the company’s flagship social network claims 1.6 billion users, around a billion of whom log on each day. Facebook has attracted and engaged so many users by engineering features that are highly addictive and relevant to their lives, so people keep coming back for more hits (otherwise known as updates). Including the other apps it owns, such as WhatsApp, Instagram and Facebook Messenger, Americans spend 30% of their mobile internet time on Facebook, compared to around 11% on Google search and YouTube combined.

 

 

The amount of data Facebook collects on users has helped it become the world’s second-largest advertising company on mobile devices. Last year it claimed 19% of the $70 billion people spent on mobile advertising globally, compared to Twitter’s paltry 2.5%. Read more »

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