DFA Chair: 'It's Night and Day From A Year Ago'
March 7, 2011
NEW YORK-Unemployment may still be 9%. Single-family home starts may be down again. But the outlook from the corner office of fund managers is increasingly sunny.
"It's night and day from a year ago," said David G. Booth, chairman and co-chief executive officer of Dimensional Fund Advisers, which had $206.5 billion under management in mutual funds across the globe at the end of 2010.
Most changed, perhaps, is the way that the Obama Administration now is trying to involve big business in shaping a recovery of the economy, now in its third-year of a credit crisis-related stall.
Most notable, to panel members speaking on the future of capital markets at the 2011 TradeTech conference held by Worldwide Business Research at Pier 60: the creation in January of a White House advisory board on job creation by the private sector. Heading the jobs council: Jeffrey Immelt, chief executive of General Electric. On the council: Robert Wolf, chairman of UBS Americas and president of UBS Investment Bank.
Wolf was also a member of the TradeTech outlook panel and called the economy "very buoyant." The repeated golf partner of President Barack Obama said "clients are ready to take on new ideas and new paper." He cited surges in stock buying and high-yield bond purchases. The Dow Jones Industrial Average in the first two months of the year, for instance, rose 5.6% from 11,577.5 on January 1 to 12,226.4 at the end of February.
Changed ... This Month
"The tone has changed, for both sides," said Robert L. Reynolds, president and chief executive officer of Putnam Investments, which has $123 billion under management in 79 mutual funds and a variety of variable annuity and variable life products.
The days, early in the Obama Administration, when big business was the subject of "demonization" for the country's economic plunge, are over, Reynolds said. For now.
"I think this month he's changed," he told operations and technology executives attending the conference. But, "I don't believe it. We'll see. It's one thing to talk. It's another thing to do."
Among the biggest tasks still to be tackled by the Obama Administration, Booth noted: What to do about the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), whose lending practices and lax oversight contributed significantly to the nation's mortgage crisis and whose balance sheets remain suspect.
In effect, the Dodd-Frank Wall Street Reform Act that is generating hundreds of new regulations is largely dealing with "peripheral issues" from the crisis, Booth said.
"We'll get to the epicenter eventually," Reynolds said, speaking of reform or replacement of Fannie Mae and Freddie Mac.
The reform act does not promise reform, even if credit default swaps end up on centrally cleared exchanges and consumers are protected by a new federal agency. "When you have a 2,800-page bill, it's hard to say you're really focused on the problems," Reynolds said.
Reynolds, formerly chief operating officer at Fidelity Investments, said there were fairly practical ways to encourage companies to create jobs and to make ends meet at the Social Security program that faces an overhaul if it is to finance itself long-term.
On the job creation front, he suggests tax breaks for companies who can demonstrate increased employment, year over year.
A 1% organic increase in the workforce would entitle the company to shave 10% off its federal income tax, he suggested. A 10% increase would eliminate the tax on its business altogether, for that year.
The economy and the government would both gain, by increased spending on the part of the new hires and taxes on their personal income, he said.
As for Social Security, tax revenues are slated to permanently fall below program costs in 2015, by the estimate of the Social Security Administration.
This "is the easiest thing for this country to fix," Reynolds said.
His prescription: Raise the age at which an American can receive full Social Security benefits; raise the "wage base" from $106,800, to bring in more revenue; and, begin to move toward a program that pays out benefits to individuals based on what they put in. Right now, one year's payroll taxes pay the same year's benefits.
Reynolds suggested a Universal Individual Retirement Account program that features funds that are age-dated, should be promoted at employers, nationwide, as defined benefit plans give way to defined contribution plans. He called the 401(k) system the nation's new pension system.
The Real Enemy
But, even if "we're going to be in an uncertain period" for a while, as Reynolds put it, there will be plenty of investment opportunities for mutual funds, the panelists indicated.
Dimensional Fund Advisors, for instance, got its start with funds that invested in "small cap" stocks in the United States.
Now, Booth said, the firm has "half again as much invested outside the United States" as it does inside the United States. The company, for instance, now has both international and emerging market small-cap funds and a "selectively hedged" global fixed-income fund.
UBS, Wolf said, has been "de-risking" and "de-leveraging" itself. Where it possessed $2.4 trillion in debt worldwide, it's got that down now to $1.0 trillion, he said. And the firm's debt-to-equity ratio is way down from the 50:1 ratio before the credit crisis exploded and Lehman Brothers disappeared.
Manufacturing has growth 19 months in a row in the United States. Exports are up 20 percent year over year. And the average work week has gone up from 32.5 hours to 33.5 hours.
But keeping the economy buoyant will mean economic growth and, in Booth's opinion, opening up some markets, such as South Korea, to trade.
In the end though, Reynolds said, unemployment "is the real enemy out there."