Springs-based Capstone Investment: Maybe the Ivy League does hold

Colorado Springs Business Journal, Oct 3, 2008 by Rebecca Tonn

What are the benefits of having nontraditional assets in your portfolio?

Ted Schwartz, president of Capstone Investment Financial Group Inc., discussed these benefits and other investment topics during the Financial Planning Association's financial forum at the DoubleTree Hotel.

Schwartz uses some of the concepts of university endowment models to lower volatility or increase returns, especially for retirement income portfolios.

"Yale and Harvard have a much more diversified portfolio -- including commodities, real estate and currency -- than most investors," Schwartz said. "And there's a far greater emphasis on absolute return strategies -- trying to make money regardless of market conditions and directions. "

The Yale and Harvard portfolios have far smaller allotments to long-only domestic and international equity than the typical portfolio, he said, adding that the typical investor has 40 percent to 80 percent invested in these areas, versus Harvard, which has 12 percent and 19 percent, respectively, and Yale, which has 11 percent and 15 percent.

While Schwartz doesn't think that private investors could match the 10-year annualized returns, as of June 2007, that Harvard (15 percent) and Yale (17.8 percent) have, he does think the principal of wider diversification helps boost returns.

It's beneficial to have investments in areas that don't have returns or losses at the same time the stock market does.

In a traditional portfolio of stocks, bonds and cash, stocks are bought and held for "relative returns" -- that is, one's gain compared to the market's gain.

Schwartz prefers a non-traditional portfolio, which uses the principle of absolute gain, with the help of managed futures and long-short equity funds.

"If you are 50 percent long, and 50 percent short -- and you are right about your stocks -- you will make money regardless of whether the market goes up or down."

Show me the money

Contrary to popular opinion, "The quantity of money in circulation has never been higher," said Fred Crowley, associate research professor at the University of Colorado at Colorado Springs. "It's just that the banks are unwilling to lend."

Crowley had the audience laughing at BiggsKofford's Entrepreneurial Corner with his witty delivery of not-so-rosy news about "What Should I Expect for Growth in the Local Economy and My Business?"

The nation already has $1.57 trillion in publicly held national debt, and the Federal Reserve has committed another $1 trillion to $1.5 trillion to help the markets. And those rebate checks, of course, didn't come without a price -- "they were responsible for one third of this year's deficit," Crowley said.

As for the local housing market, it's not nearly as bad as it could be. "Colorado Springs has never had a run-up. Typically, home prices increase in the 4 to 5 percent range over the long run," he said. "A couple of years ago it was 6 percent -- that's not a bubble."

But, locally, the surge in refinancing, combined with declining home values, has caused many homeowners to owe more than their homes are worth.

During the early 1990s, only 10 percent to 15 percent of home refinances involved cash being taken out. But, 18 months ago, that number peaked at 75 percent.

And, nationally, all of these sectors are down: real gross domestic product, personal income, civilian employment, industrial production index, retail and food services sales, all employees wholesale trade, real estate loans at all commercial banks, total commercial and industrial loans including foreign related institutions, total loans and leases of commercial banks and banks credit of all commercial banks.

And all of these are up: net loan losses (average total loans for all U.S. banks), nonperforming commercial loans and loan loss reserves.

"They still say it's not a recession, but I've been saying we're in a recession for a while now," Crowley said. "And housing has been in a recession much longer."

But not because the industry overbuilt -- it's because Wall Street "over-lent."

And, for final, irrefutable proof of recession: the effective federal funds rate versus the civilian unemployment rate.

"Whenever the fed aggressively lowers the federal funds rate and unemployment goes up -- we've always had a 'recession,'" which is determined afterward by the National Bureau of Economic Research, Crowley said. "This is 100 percent accurate -- it's never, not happened."

How can one argue with that? (Other than the double negative which tends to offend English majors.)

But, I'll make an exception in this case, because, after all, facts are facts.

Next week, we'll look at local survey results of business activity and what to expect in El Paso County for 2009 business conditions.