July 2, 2020 Advanced Investing Personal Wealth The Rational Reminder Podcast 105: Dimensional’s ETFs, Private Equity, and Prescribed Rate Loans With private equity investments increasing in popularity, you may feel the pressure to expand your portfolio. Today’s episode, we look at the data behind private equity returns to see if these investments add something to your portfolio that you couldn’t get elsewhere. But first, we discuss some big news — that slow-moving Dimensional Fund Advisors are entering the ETF marketplace. After looking at the implications of this move, we use a Harvard paper as our springboard into the topic of private equity. By exploring the shift in demand for private equity, the paper establishes the context for why investors, especially institutions, are seeking higher returns. Looking at research from AQR, we talk about their finding that private equity returns are overvalued, despite them being historically good investments. You’ll hear how the risks underlying private equity are obscured by a ‘return smoothing effect’ and why people are willing to overpay to get smooth returns. We examine how the gap between private and public equity returns has narrowed along with AQR’s argument that market changes have caused private equity investments to perform poorly. After AQR, we move onto a paper by Erik Stafford which shows that small-cap investing yields similar returns to private equity — with the advantage that you don’t have to pay high private equity fees. We round off the episode with a discussion on the benefits of spousal loans before talking about this week’s bad financial advice. This is a valuable episode for those wondering about adding private equity to their portfolios. Listen to find out why that might not be in your best interest. Subscribe to the Rational Reminder podcast Key Points From This Episode: Updates on our brilliant future guests — Jim Stanford and William Bernstein. [0:01:50] That Jim Stanford’s book provides an excellent view of money and banking in capitalism. [0:02:49] The big news; Dimensional Fund Advisors are entering the ETF marketplace. [0:04:50] The similarity between Avantis Investments and Dimensional Fund’s offerings. [0:06:05] Speculation on why Dimensional Fund Advisors are moving into the ETF space. [0:09:06] The benefit of ETFs — if you want out, then you have to pick up the spread [0:13:12] How ETFs might affect investor discipline and what ETF demand might look like. [0:14:06] Other Dimension news; 16 Canadian funds will get a management fee reduction. [0:15:39] Corrections to a chart on Twitter showing investors selling their equity holdings. [0:16:16] Hear about Capital and Ideology, Benjamin’s book of the week. [0:17:38] How private equity is becoming increasingly popular. [0:19:26] Why, generally, you shouldn’t include U.S ETFs in your portfolio. [0:21:20] The massive shift towards private equity investment from numerous entities. [0:24:08] How the timing has caused large institutions to look for higher returns. [0:25:33] Why expected returns from private equity were historically good and why this is no longer the case. [0:27:50] How private equity trading results in an artificial ‘return smoothing effect’. [0:29:10] That the valuation gap between private and public equity has narrowed. [0:31:40] What other mechanisms lead to an overvaluation of private equity. [0:32:28] Why IRRs, as opposed to PMEs, can be easily gamed, rendering them unreliable. [0:37:00] The historical conditions that led to high returns from private equity. [0:40:50] Comparing the expected return for public and private equity. [0:43:25] How Erik Stafford’s paper agrees that public equity risk is under-stated. [0:47:06] The difference in dispersion between private and public mutual equity funds. [0:49:30] Why private equity past performance isn’t a predictor of future returns. [0:50:55] How spousal loans allow your partner to make investments with your money. [0:54:24] The potential tax savings that result from spousal loans. [01:01:20] Why you should probably include spousal loan debt forgiveness in your will. [01:03:45] Hear the show’s bad advice of the week; the return of 90s investment ideas. [01:06:16] Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. The Four Pillars of Investing — https://www.amazon.com/Four-Pillars-Investing-Building-Portfolio-ebook/dp/B0041842TW Capital and Ideology — https://www.amazon.com/Capital-Ideology-Thomas-Piketty/dp/0674980824 ‘Looking for Alternatives: Pension Investments Around the World 2008 to 2017’ — https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/looking-alternatives-pension-investments-around-world-2008-2017 AQR — https://www.aqr.com/ ‘Demystifying Illiquid Assets: Expected Returns for Private Equity’ — https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiquid-Assets-Expected-Returns-for-Private-Equity Erik Stafford — https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6625 ‘Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting’ —https://www.hbs.edu/faculty/Pages/item.aspx?num=50433 McKinsey Private Market Report 2019 —https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Private%20markets%20come%20of%20age/Private-markets-come-of-age-McKinsey-Global-Private-Markets-Review-2019-vF.ashx How persistent is private equity performance? Evidence from deal-level data — https://www.sciencedirect.com/science/article/abs/pii/S0304405X16301775 Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
Investing For Your Future Episode 301 – Optimal Government Pension Claiming, and Life Well-Being w/ Prof. Meir Statman Apr 18, 2024 Investing For Your Future
Investing For Your Future Episode 300 – Abby Sussman: Financial Judgment and Decision Making Apr 11, 2024 Investing For Your Future
Investing For Your Future Episode 299: The Most Important Lessons in Investing Apr 4, 2024 Investing For Your Future