From time to time investors, following an asset allocation approach, wonder how to select the appropriate investments for each asset category—short term bonds, large cap stocks, emerging markets, etc. The short essay attached below addresses the fundamental question: “What investments should I own?” by discussing the following issues:

• Is asset allocation merely an exercise in filling in a pie chart with suitable investments?
• What is the difference between asset allocation across asset classes and within asset classes?
• Should correlation be the primary guide for asset allocation—is a well designed portfolio merely a collection of assets exhibiting low pair-wise correlations?

I recently co-presented on the topic of “How to Deal with Changing Realities in Asset Allocation: Fiduciary Liability in Turbulent Economic Times.” Should you wish to review the accompanying course material handout, please click the link below.

The paper’s first three parts review basic principles of asset allocation, diversification, and correlation. The discussion relies on intuitive rather than formal explanations of complex topics and, wherever possible, provides geometric interpretations to facilitate reader comprehension. The presentation is primarily historical in that it chronicles the development of investment theory starting in the post great depression era, continuing through the early assertions of Modern Portfolio Theory in the 1960s and 1970s, through modern research in dynamic asset pricing theory, and ending with the post-global recession reassessment of Capital Market theory.

This issue of Investment Quarterly focuses on the role played by the third round of quantitative easing—dubbed “QE3”—in driving capital market returns this past quarter. An underlying objective of Q3 is to make riskier investments more attractive relative to fixed return investments. Thus, QE3 should stimulate ongoing economic growth, as increasing investment triggers incremental employment, and wealth effects from rising markets lead to improved consumer confidence and greater consumer spending.

The Securities and Exchange Commission has put out a list of questions entitled: Investment Advisers: What You Need to Know Before Choosing One. The pdf of those questions is attached in the link below. Please read it and our plain English answers to these questions and much more about Schultz Collins Lawson Chambers here.

Schultz Collins Lawson Chambers, Inc. has recently completed work on a 19 page booklet containing three essays of interest to trustees. The booklet addresses issues that frequently confront trustees for which they often lack straightforward information and credible answers. It may be downloaded from the link below.

The first essay explores the following questions:

• What does it mean when an investment advisor claims to act as a “fiduciary?”
• Can a firm claiming that it acts as a fiduciary require execution of an Investment Advisory Agreement that permits it to contract out of fiduciary duties?

Investors seeking to take periodic cash flows from their portfolios have found recent market turmoil to be disconcerting. Can portfolios stand the stress of distributions without risking portfolio depletion? Actuarial solutions may offer alternatives to investment-focused strategies. This essay explores the costs of such solutions, their merits and liabilities, and their feasibility for investors seeking secure retirement income.

World Market Survey this quarter includes a brief excursus explaining the origins of the European debt crisis.

Kathleen Pender quoted SCLC Principal Jon Chambers, head of the firm’s retirement plans consulting practice, in a column published on Sunday June 17, 2012, discussing Department of Labor regulations that will employers and plan service providers to provide more comprehensive disclosures of fees that apply to 401(k) plans.

A number of recent headlines have indicated that there might be hidden risks for investors in Exchange Traded Funds [ETFs]. Indeed, one headline characterized ETFs as ‘Emerging Threat Funds.’

What’s going on? Are these warnings credible, or is this yet another example of sensational headlines designed to lure readers into buying a publication or subscribing to an on-line investment advice service, that upon examination turns out to be unfounded?

We explore this topic in the article below.

Trustees and legal counsel are sometimes confused regarding the extent to which an investment advisory firm will act in a fiduciary capacity when accepting delegation of investment matters. Although the Investment Advisors Act of 1940 provides that the advisor must act as a fiduciary, it is an unwarranted leap of logic to assume that all advisory firms provide conflict-free services at a level of care skill and caution demanded from a fiduciary. Investment Advisory Services Agreements often contain contractual provisions which opt the parties out of the default prudence standards embodied in state Prudent Investor statutes. This places trustees in a true caveat emptor situation.