Week In Review
September 28, 2009
SEC Creates New Risk Division
The Securities and Exchange Commission has formed a new unit, the Division of Risk, Strategy and Financial Innovation, with University of Texas School of Law Professor Henry T.C. Hu in charge as director. The division combines the Office of Economic Analysis, the Office of Risk Assessment and other functions to combine economic, financial and legal disciplines.
"This new division will enhance our capabilities and help identify developing risks and trends in the financial markets," said SEC Chairman Mary Schapiro. "By combining economic, financial and legal analysis in a single group, this new unit will foster a fresh approach to exchanging ideas and upgrading agency expertise."
Commenting on his new position, Hu said the financial markets are in a "seminal time" and added, "The derivatives revolution, the risk of hedge funds and institutional investors, technological change and other factors have transformed both capital markets and corporate governance."
With the creation of this new division, the SEC now has five divisions, including: the Division of Corporation Finance, the Division of Enforcement, the Division of Investment Management and the Division of Trading and Markets.
Money Funds Must Keep Revealing Holdings: SEC
The Securities and Exchange Commission is extending a requirement under the Treasury Department's money fund guarantee program that will have the funds reveal their holdings and valuation each week through Sept. 12, 2010, in the event that their net asset value falls below $0.9975. "The Commission has found these reports very useful," the SEC said.
Vanguard Ties Bond Funds To Barclays Float Indexes
Vanguard is migrating a dozen of its bond index mutual funds to benchmarks that better reflect market liquidity. Observers say the move represents the government's unprecedented intervention in the bond markets, and will likely lead other fund companies to follow suit.
The fund company will adopt the Barclays Capital float-adjusted indexes, a type of benchmark that is more commonly associated with stocks. The move will take effect in the fourth quarter of 2009.
The previous benchmark included $1 trillion in mortgage-backed securities and $125 billion in agency bonds that have been purchased by the government to keep mortgage rates low and sustain the ailing housing market. These securities are no longer on the market and therefore no longer liquid.
"That could make it hard for the fund to track its index without [incurring] additional transaction costs and tracking errors," said Daniel Culloton, an associate director of fund analysis for Morningstar. Because trading mutual fund shares on a non float-adjusted index impedes the liquidity of those securities, it widens bid-ask spreads, which ultimately increases investing costs for consumers, according to Culloton.
Acknowledging this, Barclays Capital came out with new float-adjusted indexes at the end of July that exclude the securities held by the government, Culloton said. Vanguard has been worried that the federal government could end up owning a significant portion of the securities market, he said. "Lots of bond investors been paying close attention."
It is unclear whether Vanguard is the first to migrate its funds to Barclays Capital's new indexes. But if it is, that move would follow a similar course of action that Vanguard took involving equities. Earlier this decade, there was a big move to do this on the equity side, Culloton said, and Vanguard was an early adaptor. "Now it is standard practice that equity index funds track float-adjusted equity indexes, which only include shares of companies that trade freely on the market."
Putnam Includes Absolute-Return Strategies In Target-Date Funds
Putnam Investments has unveiled the industry's first absolute-return target-date funds, which will combine both conventional investing strategies with absolute-return methods that seek to mitigate market volatility. Putnam will invest from 10% to 50% of its target-date retirement accounts in its absolute-return funds
"Integrating absolute-return investing into target-date funds is a natural evolution in retirement savings products, bringing long-established institutional strategies to retail retirement funds," said Putnam President and Chief Executive Officer Robert L. Reynolds. "Given the challenges we face today in saving for retirement, we believe that incorporating absolute-return strategies will add powerful and much-needed diversification to target-date investing, providing investors with what we think is a stronger, more grounded long-term retirement savings vehicle."
Jeffrey R. Carney, head of global marketing, products and retirement at Putnam, added that absolute-return target-date funds could even become the core default offering of 401(k) plants in the years ahead. He called the funds the "next generation of target-date fund offerings" and "a truly defining moment in the full-service defined contribution plan market."
Earlier this year, Putnam adjusted its target-date family, the RetirementReady Funds, from a fund-of-funds approach to one overseen by an asset allocation team responsible for all aspects of the funds' management, from overall diversification strategy down to individual security selection.
Fidelity Lifecycle Funds Expand Global Exposure