How to Kill a Black Swan Remy Briand and David Owyong ...

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Editor’s Note Got Risk? Jim Wiandt Editor The basic theme of this issue is one we’ve all become acutely aware of over the last year: risk. Risk of default, risk of a depression, risk of standing on the sidewalk in front of your (former) front yard, shirtless. Over the past year, things we never dreamed could be real risks suddenly became frighteningly real. The index business has gotten in on the act, reflecting as always, the soaring hopes and then the terrifying fears of investors—all in brutally clear numbers, available for easy reference. When the pendulum shifts toward fear, products that track and help manage risk become popular with investors, and the index industry has been working hard to deliver. One question that’s been on everyone’s minds recently is, “When it feels like the ‘six sigma’ or ‘black swan’ event has become a near-daily occurrence, what can we do about it?” An outstanding submission from Remy Briand and David Owyong of MSCI tells you. The article “How To Kill A Black Swan” not only explains how to systematically manage tail risk, but proposes an entirely new methodology for thinking about asset allocation in a risk-managed context. David Krein of Dow Jones takes a different tack. Krein wonders why, if asset allocation explains 90–100 percent of portfolio risk and return, people spend so little time creating good asset allocation benchmarks. He proposes a set of first principles for building better ones. Next up is an interview with Susan Mangiero, president of Pension Governance, Inc., and one of the leading pension plan risk management experts in the world, examining the latest thinking on risk mitigation at the institutional level. Gary Gastineau joins in with a practical examination on how investors can minimize the risk of getting scalped when trading ETFs, while Sabrina Callin and Steve Jones of Pimco examine how portable alpha strategies must adapt to the new era of risk. Rounding out the issue is John Bogle, who issues a broadside against the American financial system and examines the urgent need to embrace fiduciary principles, and David Blitzer, who argues that many of the biggest risks in the market lie with investors themselves. And don’t forget Dave Nadig, who takes a humorous back page look at how that iconic barometer of market sentiment, the Dow Jones Industrial Average, really picks its constituents. Risk may not be something we want to focus on during these halcyon days of summer, when we’d rather be thinking about BBQ, apple pie and the Fourth of July. But if last year taught us anything, it’s that risk—and how to manage it—should always be kicking around somewhere in the back of our minds. Enjoy the summer, Jim Wiandt Editor 8 July/August 2009
READ IT IN FIRST 2007 2008 2009 TheStreet.com 1+1 ≠ 2 “Over the long-haul, [these funds] come nowhere close to doubling the performance of the indexes.” By MATT HOUGAN, JUNE 1, 2007 Why Short Sector ETFs Aren't Always Smart “These levered and short sided ETFs are an endless series of paradoxes.” By ERIC OBERG, DECEMBER 23, 2008 One-Day Wonders “Leveraged ETFs' numbers don't always add up.” By TOM EIDELMAN, JANUARY 12, 2009 18 months ahead of our competition www.indexuniverse.com/ETFR
Page 1 and 2: How to Kill a Black Swan Remy Brian
Page 3 and 4: www.journalofindexes.com Vol. 12 No
Page 6 and 7: FREE subscRiption oFFER! The Journa
Page 8 and 9: David Smith Publisher dsmith@fa-mag
Page 12 and 13: How To Kill A Black Swan Risk and a
Page 14 and 15: Figure 2 Comparison Of Asset Return
Page 16 and 17: Figure 5 Historical Real Returns Fo
Page 18 and 19: Figure 8 Subset Of A Multi-Asset Cl
Page 20 and 21: Benchmarking Policy Portfolios How
Page 22 and 23: investor has decided to benchmark 8
Page 24 and 25: An Interview With Susan Mangiero By
Page 26 and 27: How To Minimize Your Cost Of Tradin
Page 28 and 29: Figure 2 Offer NAV Proxy Bid Using
Page 30 and 31: ETF Trading Volume Is Huge, Growing
Page 32 and 33: Figure 5 Hypothetical ETF Limit Ord
Page 34 and 35: Gastineau continued from page 31 th
Page 36 and 37: Portable alpha approaches—which e
Page 38 and 39: to write the book “Portable Alpha
Page 40 and 41: sitated more routine adjustment in
Page 42 and 43: Bogle’s Corner The Fiduciary Prin
Page 44 and 45: at the direct expense of the invest
Page 46 and 47: Talking Indexes Managing The Risks
Page 48 and 49: News CVC To Buy iShares … Or Mayb
Page 50 and 51: S&P Introduces Risk-Controlled Inde
Page 52 and 53: News New SPDR Offers Twist On Mortg
Page 54 and 55: Global Index Data Selected Major In
Page 56 and 57: Morningstar U.S. Style Overview: U.
Page 58 and 59: Exchange-Traded Funds Corner Larges
Page 60:
“For a strong foundation in my cl
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