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FEATURE STORY
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Equal-Weighted
Indexing Wins Over the Long Haul
By Kristen French
Equal and fundamental indices have outperformed market-cap weighted
indices by a meaningful margin over the past 18 years, according to a
recent white paper released by Standard & Poor's. But cap-weighted
indices tend to outperform during bull markets, or when mega-cap growth
stocks are doing best, the research showed.
The finding isn't that surprising, since Standard & Poor's research
basically supports what analysts have been saying since fundamental
indexes were pioneered few years ago.
Since 1990, when it was created, the S&P 500 EWI (equal-weighted index)
has outperformed the S&P 500 (a cap-weighted index) by 1.5 percent per
year. Over the full period, the S&P 500 equal-weight index notched
annualized returns of 12.0 percent versus 10.5 percent for the S&P 500.
"Over the long term, equal weighting does perform better, on an absolute
and risk-adjusted basis," says Srikant Dash, head of global research and
design at Standard & Poor's. Unlike cap-weighted indices, which have
been around for much longer, the components of equal-weighted indices
are, well, equally weighted. In other words, there is no bias towards
market cap, dividends, sales or any other measure that may or may not be
in favor in the markets at a particular time. "Equal weighting just
randomizes your exposure to risk factors so you don't have to worry
about which risk-factor exposure you want to take."
Read the full story here.
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Top News of the Week
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Citi
Hedge Fund Blow Up Hurts Clients—And Sends Advisors Packing
By John Churchill
While Smith Barney tries its darnedest to hold on to the money of
wealthy clients that were invested in two of the firms’
failing hedge funds (subscription required), it’s also having a
hard time keeping some of its best brokers. With all the uncertainties
and troubles facing Citi, the firm’s prized retail brokerage operation
has become a favored target of recruiters, say recruiters.
According to a Journal’s “Heard On The Street” column
today, the firm is offering to make clients who invested in the firm’s
Falcon and ASTA/MAT hedge funds whole again. That is, just as long as
they sign an agreement promising not to sue the firm at a later date.
(At least one investor who put in $500,000 already filed a federal
lawsuit against Citi, says the Journal. The suit alleges Smith
Barney misrepresented the risk profile of the hedge funds, and that the
investments were unsuitable.)
According to one Smith Barney advisor, more than a few of the brokers
departing the firm in the past few months have had financial troubles of
their own. One reason, he says, is directly related to those two hedge
funds. “There are definitely some guys who overcommitted clients to
these funds, and now they’re leaving the firm. They’re leaving the
firm with the mess, saying, ‘Look what they [Citi] did.’”
Read the full story
here.
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BofA
Earnings Tank, Retail Brokerage Steady
By Christina Mucciolo
Bank of America posted a whopping 77-percent drop in first quarter
net income today, down to $1.21 billion, or 23 cents a share. The sharp
drop in earnings was the result of $1.9 billion in write-downs for the
quarter—$1.47 billion on collateralized-debt obligations (CDOs) and
$439 million on leveraged loans—as well as an increase in capital
provisions to cover future potential credit losses, which rose to $6.01
billion from a $1.23 billion a year ago, according to the firm’s earnings
release.
But the bank’s retail brokerage unit, Banc of America Investment
Services Inc., which is part of its Premiere Banking Investment
division, did all right, posting a 10-percent increase in revenue to
$170 million from $154 million in the same period last year. The firm
does not break out its profit numbers for the retail brokerage unit, but
the entire Premier Banking and Investment division generated after-tax
profits of $104 million on net revenue of $841 million.
The Premier Banking and Investments division manages $21 billion in
client assets, up just barely from the year ago period’s $20 billion.
Meanwhile, the 1,952 financial advisors in the full-service brokerage
unit generated average annualized production of $472,000 per advisor.
Read the full story here.
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Citigroup
Posts Q1 Loss; Smith Barney Unit Lackluster, Too
By John Churchill
Citigroup reported a net loss of $5.1 billion or $1.02 per share,
$0.07 per share worse than consensus analyst expectations, according to
Thomson Financial. Unlike, say, Merrill Lynch, Smith Barney’s Global
Wealth Management unit (retail brokerage), one of the centerpieces in
CEO Vikram Pandit’s revival, did poorly too. (Merrill reported earnings
yesterday, and despite CDO woes, its retail brokerage did pretty well.)
The bank’s first quarter results include another $15.2 billion in
write-downs, including: $6 billion for direct sub-prime related
exposures, $3.1 billion on leveraged finance commitments, $1.5 billion
on its auction-rate securities inventory, $1.5 billion related to credit
exposure to monoline insurers and a $3.1 billion increase in credit
costs in the global-consumer division. This week Pandit rejected talk of
a break-up in an interview
with Business Week, saying he “couldn’t get a better set of
assets.” (That said, Pandit is getting rid of non-core businesses,
such as its Diners Club International credit-card network, which it sold
last week. Yesterday, Citi announced it would sell its North American
commercial-lending and leasing business.)
In the release, Pandit notes, in today's press release, that the firm is
still in recovery mode: “Our financial results reflect the
continuation of the unprecedented market and credit environment and its
impact on hour historical risk positions.” “Despite the negative
factors in the broader markets, we continue to see strong momentum
throughout the organization with robust volumes in many of our products
and regions.”
Read the full story here.
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