Can Index Fund Managers Police Corporate America?

Most investors own stock indirectly. If your actively-managed fund holds GE shares, you expect the manager to vote the GE shares in the best interest of you and your fellow fundholders.

Can you have the same expectation for managers of your index funds? Should managers of S&P 500 funds, for example, become active defenders of everyday investors at all 500 companies?

Bringing these questions to mind is the news that Vanguard, BlackRock and State Street, three index-fund titans, played a major role in defending DuPont from an assault by Trian.

Maybe passive investing isn't so passive after all.

Rise of the Woman Investor

When my bride opens Martha Stewart Living, she expects the first ad to feature bedclothes or kitchen appliances. In the June issue, surprise! Instead of an ad for deluxe domestic items, a two-page spread from US Trust.

Presumably the socially responsible investment service is for her, the art financing for him. (No, Martha, US Trust definitely will not advocate insider trading.)

Even in the Mad Men era, women were beginning to catch the attention of investment managers. Here are two examples from Chase Manhattan. The first is from 1963. The second, more mod, dates from 1966.

Estate Planning Seminar in Mock Mourning

Upstairs at Chicago's Goodman Theater: Women in mourning clothes. Funereal organ music. Ushers in tasteful black, some sporting veils.

The organ music faded…."Good morning friends," [estate attorney Robert] Hamilton said in a warm, tender baritone. "I am brother Hamilton, your minister for today's service, 'In Memoriam of the Estate Tax.'"

***

This was an estate-planning seminar in mourning clothes. (Indeed the federal estate tax itself is not even actually dead, just largely irrelevant to the vast majority of tax payers.) The title was "Outfoxing Uncle Sam: How to Plan Your Estate," and the goal was donations — the kind of large, end-of-life charitable donations that a theater patron might bequest in a will.

Thus does the Chicago Tribune describe estate planning enlivened by a touch of theater. Three-fifths of FUNDS, as my bride learned in her fundraising days, is FUN. Funereal fun, in this case. 

Anyone know of other examples of estate planning seminars imaginatively staged?

Dynasty Trusts? The New Money Has Doubts

David G. Klein

Although this WSJ Wealth Adviser column points out several ways to make dynasty trusts flexible, "forever trusts"seem like a hard sell to first-generation wealth:

Financial advisers and estate-planning professionals say many of their clients feel uncertain about the kind of world their heirs will inhabit…. These concerns are making it hard to steer estate-planning conversations beyond simply the next generation to thinking many decades, or even centuries, down the line….

*** 

Add in uncertainty about what the family will look like, and what kind of tax rules and other financial issues they will face…. It can make recommending… handing assets over to a dynasty trust…very tricky.

For those who can predict the estate tax rules that will be in place in 2115, perhaps dynasty trusts make sense. But if all possible flexibility (trust protectors, decanting, powers of appointment, etc.) is built into a trust, hasn't its creator essentially relinquished control over his or her "legacy"?

Because dynasty trusts represent advanced estate planning, they tend to be paired with sophisticated investment strategies. Good idea? Maybe not. Preston McSwain explains why Yale's David Swensen believes family funds should not be invested like a tax-free university endowment.

My New Executor? Software Code, of Course!

"This is the first time in legal history that the administration of a will is handed over to a non-human. In this case, software code is the executor." So boasts Bockchain Apparatus, a Bitcoin 2.0 startup.

The company says that in the foreseeable future we will have a software/network combination which is the executor of the decedent's last will and testament. Bitcoin 2.0 protocols are used to make actual dispositions and disbursements of the assets in an estate, and are able to do so while taking into consideration many facts which are indeterminate at the time of the will's creation, similar to traditional trust frameworks.

 The software "executor" function is built into a blockchain will, which can be updated and revised.

O brave new world, that has such computer code in't!

Mom and Pop Are Buying ‘Unicorns’

16th Century Unicorn Cup, British Museum

Our younger daughter loves Blue Apron, the online provider of recipes and ingredients that equip you to prepare restaurant-style dinners at home. Fidelity must love Blue Apron, too. The mutual fund giant is reportedly buying shares of the pseudo-private company at a price that puts Blue Apron's value at $2 billion.

Back when our daughter was born, the line between privately-held companies and those with publicly-traded shares seemed bright. A mutual fund would not have bought shares in a private company like Blue Apron. And even if it had wanted to, few start-ups were thought to be worth billions.

Today, writes Andrew Ross Sorkin at Dealbook, shares in high-value tech startups – known as "unicorns" – are finding their way into mutual funds that mom and pop can buy. Indeed, Sorkin points out, mutual fund investors may own a unicorn or two without knowing the creatures are hiding in their funds' portfolios.

Sorkin worries that the market value of unicorn shares is a matter of opinion, rather than being determined by an active stock market.

It’s virtually impossible to know exactly how the mutual funds determine the value of private companies. Not one of the mutual fund companies with which I spoke was willing to fully explain its methodology.

Fortunately, Sorkin points out, even when unicorns are held in a fund, they represent a small fraction of the fund's holding. "So if you’re an investor looking for a lot of exposure to unicorn technology companies, these mutual funds are hardly going to give you a concentrated bet. And that’s probably a good thing."

Why Farm and Business Owners Hate Estate Tax (Continued)

Republicans call it the death tax and claim the levy forces the sale of family farms and businesses. Liberals demand evidence of such sales. That's hard to find, as this column demonstrates.

Nevertheless, farm and business owners are right to wish the death tax would go away and stay away. We explained why some years ago. Whether the business or farm owner is paying the last generation's tax on the installment plan or paying insurance premiums to fund the present generation's tax, the annual expense can be a significant drag on operations.

Under the current estate tax, most owners should die tax free. Their advisers may tell them to set aside funds anyway. Better safe than sorry.

Art Investment Sells for $179.57 MIllion.

Picasso's "Les femmes d'Alger (Version 'O')," above, sold at Christie's for a hammer price of $160 million. Christie's fees bring the total cost to $179.57 million, a new record.

In 1997 the painting sold at auction for $31.9 million. In another 18 years, assuming the same rate of appreciation, the Picasso should fetch $800-900 million. In twenty years, maybe a billion!

Will art as an asset class really perform that well? For billionaires, borrowing money to purchase art costs next to nothing these days. Even semi-billionaires may find lenders willing to consider art as collateral. But sooner or later the flow of easy money is likely to slow. What do you think?

Update: Later media reports put the total price at 179.4 million.

It's Not Easy Being Fiduciary

Investment advisers who aspire to the fiduciary life don't have it easy, as Steven G. Blum explains here.

What about online investment services, so-called robo advisers? Are they fiduciaries? Yes, writes Norb Vonnegut. Robo advisers stand on the buy side – that is, the client's side – not the sales side.

But as Vonnegut illustrates, even human fiduciaries can succumb to temptations offered by the sales side. Remember when bank trust officers were criticized for pushing the bank's own products? In Vonnegut's example, the tables are turned: a trust officer puts a client in an outsider's relatively expensive S&P index fund instead of the bank's lower-fee version.

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Norb Vonnegut has written novels skewering brokers (Top Producer) and hedgies (Gods of Greenwich). I hereby remake my resolution to read them. 

The 4% solution

The New York Times discusses the "4% rule" of thumb that says if a retiree uses a 4% withdrawal rate from a retirement portfolio there is no chance of running out of money during retirement—at least based upon the past performance of the financial markets.  The rule has come in for criticism in todays ultra-low interest rate environment.  The article does a nice job of presenting the origins of the rule and recent variations.

I found the comments quite entertaining, ranging from astute to woefully ignorant, as usual.

Should Investors Divest From Fossil Fuels?

Maybe yes 
From a Reuters dispatch at Business Insider:

Since the divestment movement launched three years ago, some 650 individuals and 180 institutions, including 50 new foundations, which hold over $50 billion in total assets, pledged to divest from fossil fuels over five years using a variety of approaches.

Would Rockefeller go green?

One of the signatories is the Rockefeller Brothers Fund. Stephen Heintz, an air [sic] of Standard Oil tycoon John D. Rockefeller, said the move to divest away from fossil fuels would be in line with his wishes.

“We are quite convinced that if he were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy...."

(At least they didn't call him an airhead.)

The Church of England also has decided to sell its investments in coal and oil-sand producers.

Maybe no
Swathmore, described as the birthplace of the divestiture movement, has declined to dump its fossil-fuel stocks. The college opts to stick with its investment guideline that requires management for “the best long-term financial results, rather than to pursue other social objectives.”

Two big guns of university investing, Harvard and Yale, also have declined to divest.

What next?
The Rockefeller Brothers Fund has dumped its coal investments and proposes to gradually ease out of oil. Institutional investors who decline to do the same may see socially responsible investing as a slippery slope. Few public corporations are free from all social stigmas.

For instance, maybe endowments should  divest companies that pay CEO's more than twice what said CEO's are worth. But then, where could they reinvest?

He Willed His Ashes to Islay

Kilnaughton Bay, Islay

Tonight's 60 Minutes included a segment on the Scottish island of Islay, where peaty whisky comes from. Left incomplete at Bob Simon's death. the segment mentions a novel will provision. One testator so loved his Islay whisky that he required his ashes to be taken there and sprinkled at sea, near the distiller of his favorite drink.

I would have loved to have been executor of that will.

Here is a glimpse of Bob Simon interviewing the laird of Islay, whose ancestors once owned the whole island.