If at first you don't succeed, invent another index.
Last month, the regulator of fund marketing in the US, FINRA, approved the usage of backtested performance data for exchange-traded funds. As a result, ETFs may now publish the performance of the indices that their portfolios replicate for time periods that pre-existed their indices. In other words, ETF and index providers can tinker around with the rules for a proposed new index until that index shows fabulous pre-history results, then publish those performance numbers as if the index had existed at the time.
This is nothing new. When S&P launched its MidCap 400 Index in the 1990s, it created a back history for the index that showed the performance of the MidCap 400 before it existed--quite the trick for an index that involves human judgement. When Research Affiliates launched its popular Fundamentally Based indices in the early 2000s, those indices were supported by journal articles that cited decades' worth of performance history. So, this sort of thing has been done before, many times and in many ways, without official FINRA approval.
Also, this approval is only valid for institutional use--the ETF provider won't be permitted to show the figures to you. And, yes, FINRA is likely correct in that most institutions realise that the validity of the back-test declines as the rules for an index's construction become more complex. Past history for a simple, straightforward index is reasonable information. It needs to be regarded as only a starting point, as does all investment history, but at least it's a clear starting point. However, most of the simple, straightforward indices are already taken. The new ETFs that are being launched tend to be an esoteric bunch. The institutions, by and large, recognise that this is the case.
So, this decision is hardly a disaster. It ratifies what is already common practice, and it does so carefully. But I am not applauding. Back-tested results presented by investment managers are overoptimistic and misleading to investors. As disclosures go, this type of disclosure is distinctly unhelpful.
Not So Main Street Anymore
Merrill Lynch this month announced that it had hired a new chief investment officer, Ashvin Chhabra, for its brokerage platform. The appointment was headlined as Merrill's shift to "goals-based" advice. This is an intriguing topic on which this column will chew over the next few days.
For today, though, I'd like to point out a less obvious aspect of the hiring--Merrill has come a long ways from its populist roots. Back in the day (the day being the '20s and '30s), Charlie Merrill wooed the 99%, writing that his firm, as opposed to most, did not "despise the modest sums of the thrifty." He cut commissions, established scale, and went after the middle-class man who previously was considered beneath the attention of Wall Street banks. As Joe Nocera showed in A Piece of the Action, Charlie Merrill was every man's Charlie 50 years before Schwab assumed that role in the US.
The hiring of Chhabra sends quite a different signal, however. Chhabra's advice explicitly targets those who have more money than they know what to do with (his rather more-diplomatic term is "aspirational" assets); his goals-based approach has a specific plan for that segment of a portfolio. No surprise, then, that his work is best known by so-called family offices--financial advisory organisations that serve investor groups worth $100 million or more. (In Chhabra's research paper, his sample investor is worth the more modest but still pleasant sum of $4.5 million.)
As rebrandings go, Merrill's has been a long and gradual process, taking some 85 years. But where it has landed, Charlie Merrill would scarcely recognise.
Slapping Around Alternatives
Another sidelight of the Chhabra announcement was the casual potshot taken at so-called alternative investments--a phrase that encompasses long-short strategies and commodities, among other items--by a source asked to comment on the hiring. Per Renee Neri in a FundFire article, "A lot of our family office CIO work now is moving away from a heavy allocation to alternatives and much more to risk-budgeted or goals-based investing."
If that doesn't elicit an immediate "yikes" from you, perhaps it should. For the past five years, mutual fund companies have pushed alternatives as being the wave of the future. And now it turns out that the wave is passe with the big money. Alternatives, apparently, is what the little people do.
I don't think things are quite that bad. Alternative investments remain popular with high-net-worth and institutional investors, and for good reason. They can be very useful in a portfolio, particularly when priced attractively. But it's also true that the current interest in alternatives came largely as a reaction to the 2008 stock market plunge. Suddenly, alts became an emotional favourite. They were bought by the heart, rather than by the head, which, with investments, tends to lead to regret. I suspect that a stretch of bad publicity for alternatives is about to begin.
The Worst CEO in America?
Several years back, my then-colleague Pat Dorsey shocked me by claiming that Steve Ballmer was the worst CEO in America. At the time, 
Microsoft (MSFT) wasn't far removed from being the nation's most admired company. People grumbled about the company's software, to be certain, but the organisation was widely regarded as being very, very good at making money.
By now, it's common knowledge that Microsoft missed just about every boat that launched, from search engines and smartphones to social media and tablets. But realising that at the time, before the stock goes nowhere for a decade, is another skill altogether. Credit to Dorsey for seeing past the company's powerful brand, positive press and sharply rising earnings to see the cracks in the armour--to see how it was missing opportunities that seemed small at the time, but which would represent major product gaps five to 10 years out. I failed to see that with IBM (IBM) in the 1980s (when it was the world's largest and most-admired company), I missed it with Microsoft circa 2000, and whenever Apple (AAPL) in hindsight will be deemed to have peaked, I will have missed that, too.
And for the question: Is Steve Ballmer the worst CEO in America? I have no idea. But did I have words for him last night, when my favourite computer game would not install on a new computer because that big new beastie that is about 1,000 times more powerful than the system for which the game was designed allegedly lacks sufficient "system memory." Really? You're going to go with that?
Grrr. Ballmer. Grrr.
