Phi in the investment sky?

Does the investment world need another Greek letter? State Street and the CFA Institute must think so. Paul Sullivan's Wealth Matters column introduces us to their creation: Phi.

Phi's meaning is murky, but it seeks to measure something like motivation,  the presence or absence of purpose in an investment program. Investors can measure their Phi level by taking a quiz. Here's the first page:

The suggested answers are eccentric. Don't people invest to gain or preserve financial independence? Don't some hope to get rich? Phi's motivations seem to ignore wealth building or decent investment performance.

Your obedient blogger took the test and learned he suffers from low Phi. Suggested ways to improve include investing more from current income, avoiding trading, watching expenses and (whoops, forget the expense part) hiring an investment adviser.

Phi may represent the glimmer of an idea, but it needs work.

“Psychic Phenomena and the Law”

Couldn't access the article on psychic mediums mentioned by the Wills, Trusts and Estates Prof, but the effort led me to a gem, Blewett Lee's 1921 Harvard Law Review article, Psychic Phenomena and the Law. 

Lee discusses cases involving ghosts, like the spirit of Thomas Harris. When Harris' will was questioned, endangering his children's inheritance, his ghost repeatedly pestered William Brigs and gave Brigs a message for Harris' brother, reminding him that they had discussed how the estate should be managed in the best interests of the children. The brother complied. (Why the ghost didn't speak directly to the brother is not explained.)

In the 1920's magical writing, seances and such were in vogue. Lee wrote that messages from the dead deserved respect.

In determining what legal effect is to be given to spiritualistic communications believed to be genuine by the recipient, the communications should be treated for legal purposes as if the supposed communicators had still survived, and made the communications. *** 

If, for example, a person believes that his dead mother told him to make a certain devise, the communication should be dealt with, so far as the believer is concerned, as if it had in fact been made by his mother. 

"The more importance is given to these communications," Lee explained, "the easier it will be to break wills or contracts made under their control."

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Son of a Confederate general, Blewett Lee was notable in his own right. After Harvard Law School, he won appointment as clerk to a United States Supreme Court Justice. "He was the only clerk not to have attended an elite preparatory school, the only one not a graduate of Harvard College, and the only law clerk from south of the Mason-Dixon Line."

Some ghosts can fly, but that probably doesn't explain Blewett Lee's interest in early aviation law.

Blewett’s ideas and methodology concerning aerial laws, published nearly a century earlier, remain influential today. In a 2012 article referencing the legal issues posed by the popularity of drones, Dr. Timothy T. Takahashi of Arizona State University cited Blewett’s work as a viable model for current drone regulations.

The Internet has its flaws and its trolls, but I'm grateful for the introduction to Blewett Lee.

Who Gets the $7 million townhouse?

The Horatio Street townhouse 

Back around the time young Bob Zimmerman moved to New York and legally changed his surname to Dylan, Bill Cornwell and Tom Doyle moved into an apartment in a West Village townhouse on Horatio Street. Cornwell later bought the building, and there they stayed. Although gay marriage was unthinkable half a century ago, the two men became a well-known couple in the West Village.

In 2014 Cornwell died at age 88. His will left his personal possessions and his townhouse to Doyle. But the will is invalid, signed by only one witness – New York State requires two. So Cornwell died intestate. Nieces and nephews will inherit. Could Tom Doyle lose the only home he has known for over five decades?

Not without a fight, writes Attorney Arthur Z. Schwartz:

Tom has come to my office and we have come up with a plan. While New York never recognized common law marriage, Pennsylvania did until recently. Bill Cornwall and Tom Doyle vacationed there a number of times, and New York Courts will recognize common law marriages if they would be recognized in a state where a couple visited, even if the visit was brief. I have made Tom Doyle’s rightful claim to 69 Horatio Street. It is a claim born of love and the cruel refusal of New York to recognize gay marriage for so many years.

Could the plan succeed? In any event, the moral of the story is that Bill Cornwall should have shaped his estate plan sooner and better.

Politics: Another Reason to Pick a Professional Executor

Is It OK to Cut My Trump-Supporting Relatives Out of My Will?

Are Actively Managed Funds Worth the Gamble?

The rise of passive investing – index funds and such – has triggered a series of Wall Street Journal articles. The rise seems unstoppable:

[F]or the last 10 years… between 71% and 93% of U.S. stock mutual funds either closed or failed to beat their closest index funds.

The Journal gives two prominent mutual fund leaders the thankless job of defending stock pickers. 

Capital Group's Tim Armour cites in-house research indicating that "active funds with low expenses and a substantial amount of the manager’s own money invested in the funds on average beat their benchmarks 89% of the time over 10-year rolling periods." 

Michael Roberge, co-CEO of MFS, refers to a study showing that bold fund managers willing and able to hold their favorite stocks for long periods do better than average. 

Both Armour and Roberge also hint that active managers may be able to limit losses by timing the market. And both point out that stock returns in the foreseeable future are expected to be below par. If so, investors who bank on index funds to provide the same growth they have enjoyed since the Great Recession will fall short of their goals. 

So why not gamble and buy active?

Alternative Assets Blur Annual Returns

The average university endowment has about half its money in alternative assets – real estate, private equity, hedge funds, whatever. Over 70 percent of Yale's endowment is in alternatives. As this article from  the Yale Daily News points out, calculations of these endowments'  annual returns cannot be precise. Five or ten years returns are a better guide to actual performance – and over those time periods, Yale looks pretty good.

Quiet Old Firm Launches Marketing Blitz

Brown Brothers Harriman, an old-time Wall Street partnership, shed its securities underwriting and sales units when Glass-Steagall came along. As a private bank it has gone about its business quietly – until last month. To my surprise, this ad greeted me on the last page of The New York Times news section. The following Sunday, BBH ran a two-page spread in the Times magazine. Banner ads popped up online, directing viewers to the BBH web site.

The web site, content rich, offers briefings on services, staff bios and  generous helpings of articles from three publications – for investors, business owners and women – arranged by issue and sorted by subject. Under "Wealth Management and Trusts" is this exemplary article on spousal access trusts. (The design of these trusts undoubtedly guards against the risks associated with spouses who plan to become ex-spouses. Even so, spousal access trusts must be grist for at least one financial thriller.)

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From 2010 to 2015, according to Spectrem data reported in Penta, the number of households with investable assets of $20 million to $100 million grew by more than 105,000. That's a 64% increase. Over a million households now have investable assets of $5 million or more. Among those with $5 million but less than $10 million, many should cross the $10 million threshold as their business and real estate wealth gets transformed (bring on the Gatorade barrel!) by liquidity events.

As wealth managers gear up for the growing market now emerging in the top financial tiers of the nations's 124.6 million households, they may find BBH's marketing blitz worth studying. 

Warren Buffett's Shocking Income Tax Rate

Donald Trump defended his $916 million tax loss by suggesting other billionaires, including Warren Buffett, used the same tax-cancelling strategy.

Not so, Buffett declared. He has paid federal income tax every year since 1944. In 2015 Buffett paid tax of $1,845,557 on an income, after deductions, of $6,086,237.

That works out to a tax rate of over 30%.

Aha! He doesn't pay at a lower rate than his secretary after all. No, but he probably never did. His much-publicized calculation included payroll taxes.

Trump's Tax Loss Was Really Yuge

Any resemblance between a $916 million tax loss and a real loss, especially in the real estate business, is purely coincidental. Still, who wouldn't enjoy 18 years of tax-free income?