Monday, February 23, 2009

Index funds win again

Yet another study confirms that investments in index style funds beat hedge funds and mutual funds run by supposed investment geniuses - by a shockingly wide margin. This is especially true for wealthier investors paying taxes at the highest levels. Mark Kritzman of Windham Capital Management shows that for a New York State taxpayer, an index fund returning just 10% annually beats a typical hedge fund returning 19% per year and an active mutual fund returning 13.5% per year. The results are even more startling in California where we pay a state tax of 9.25% (and growing) compared to NY State's 6.85%.

This means that a hedge fund would need to beat the index fund by 10 percentage points every year and the active fund by 4 percentage points. Finding such funds is almost impossible since so few exist. And the very few that do have a record of winning by such wide margins are almost certainly there by luck.

Once again we find that on Wall Street, the bigger the story, the worse the results.

Thursday, February 19, 2009

The Obama Mortgage Plan

Its a mixed bag:

Essentially the plan makes it a lot easier for people who have equity of less than 20% and are having trouble making their mortgage payments to refinance at very favorable rates. As expected there will be income limits on the borrowers and the loans must be conforming loans. The hope is this will keep more people in their homes and also put a floor under housing prices.

The problem is that this is not just about the government bailing people out, its about the government forcing lenders to renegotiate mortgages in a way that lenders would not do on their own. While this may keep some people in their homes - a very good thing - it will also raise lending costs for the rest of us. Banks will need to start charging more for their loans simply because now they need to worry that the government may force them to renegotiate on unfavorable terms. Yes - its only banks who took TARP money but even healthy banks were forced to take the money so that there would be no stigma attached to being bailed out (less of a stigma?)

What this means is that the overall cost of loans will go higher not lower - exactly what we don't need. The question - as yet unanswered - is whether the benefit of the subsidized refinancings will outweigh the higher lending costs that the rest of us face.