Ascend Investment Partners
Senior Investment Strategist and Junior PM
Emma Muhleman, CFA, CPA is a Junior Portfolio Manager and Macroeconomic Strategist at Ascend Investment Partners. Emma and her team specialize in understanding the dynamics that underlie and drive investment performance in today’s global financial markets. Following the global financial crisis, expansionary monetary policies of unprecedented scale implemented by major central banks across the globe (primarily those of the so-called “core economies”) have completely redefined the ways in which the global markets operate. At Ascend, it is precisely Emma and her colleagues' unique expertise in the “macroeconomics of today” that enables them to evaluate the domestic and global landscape through a lens misunderstood by the masses, leading to abundant investment opportunity.
Emma's professional experience to date includes working for several years picking stocks (long and short) according to a global macro, event-driven long/short equity strategy. She began her career performing business valuations for Deloitte's valuation consulting group, and thereafter worked as a stock picker for Allianz SE, one of the largest global investment managers with total AUM exceeding $1.7 trillion. She has also developed several client relationships of her own within the private equity (PE) and venture capital (VC) investment realm ranging from Roth Capital's Venture Group to KKR and several others, and has extensive experience performing investment analysis and due diligence, negotiation and deal structuring as part of the evaluation process associated with Leveraged Buyouts (LBOs), Early- and Growth-Equity Stage Venture investments, and potential buyouts of distressed loan portfolios and/or turnarounds of businesses under duress.
MS, Accounting and Finance, University of Notre Dame
MS, Taxation, University of Notre Dame
Harvard, School of Engineering & Applied Sciences (SEAS)
The opinion expressed represents the views of the author and should not be seen as the opinion or views of Ascend Investment Partners. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
401(k) plans are tax-deferred retirement savings accounts offered by private (non-government), for-profit employers, while 457 plans are offered only to public employees (working for schools, charities, colleges/universities, and state & local governments), and other tax-exempt entities under 501(c)(3) of the Internal Revenue Code.
Similar to 401(k) plans, 457 plans provide a way for employees to save money for retirement by deducting from pre-tax income employee contributions to the plan, which are then invested and taxed only upon withdrawal in retirement, at which point the retiree's ordinary income tax rate is applied. Since we have no active earnings in retirement (though we may have some passive income from investments or annuities and the like), our ordinary income tax rate is generally very low post-retirement and much higher while we're still part of the workforce. Accordingly, the tax deferral associated with 401(k)s and 457 plans can provide meaningful tax savings.
With a 457 plan, employees make pre-tax contributions in the form of payroll deductions, and that money grows tax-deferred until retirement. Many public and non-profit employers offer both a 457 and 403(b) plan, as well as a separate, primary retirement plan - often a Defined Benefit pension. With Defined Benefit pension plans, the employer contributes to the plan, and the plan is required to pay pre-specified installments ("defined benefits") to employees in retirement, versus Defined Contribution plans (such as 401(k)s, 457 and 403(b) plans) under which employers agree to make matching contributions but have no liability for ultimate payments or cash available upon retirement. 457 plans allow for double deferral when coupled with a 403(b), as employees can legally contribute twice the annual contribution limit by combining the two. For example, an employee can reach the contribution limit for a 403(b) plan, which in 2016 is $18,000 (and also represents the maximum allowable contribution from pre-tax income to 401(k) accounts), and still contribute the entire contribution limit to a separate 457 plan (or another $18,000 in 2016, for $36,000 in total pre-tax contributions). 401(k) plans do not offer any double deferral opportunities, and contributions are capped out at the annual limit of $18K. As previously noted, many public employees with access to 403(b) and 457 plans also have a defined benefit pension plan from which they will receive retirement income. In this manner, employees who can afford to make large pre-tax contributions (up to the maximum, double-deferral) could choose to accumulate far more employer-sponsored retirement income than most employed by corporations (or others working in the for-profit sector).
As with all Defined Contribution plans, growth is tax deferred. Upon taking approved distributions, people pay ordinary income tax on approved 457 distributions. The key difference between 403(b) or 401(k) and 457 plans involves the distribution rules. 457 plans allow individuals to withdraw funds early without having to pay the 10% early withdrawal penalty imposed on 401(k) or 403(b) holders, but only in the event that they switch employers. The drawback with a 457 plan is its strict age-related distribution limitations. Anyone still working for the sponsor of the 457 plan may not withdraw funds without penalty until age 70.5. If they wish to withdraw funds before then, they must either switch employers or be penalized for early distribution. In contrast, individuals can take 401(k) distributions without penalty any time after they've reached the age 59.5. The incremental 20 years employees must wait before making eligible withdrawals free of penalty under a 457 plan can be onerous.
Where applicable, anyone can contribute to a 403(b) plan, a 457 plan, both plans, or neither. Generally speaking, its more common for younger employees to make 457 plans their primary plan because they can take distributions at any age when they stop working for the sponsor-employer. On the other hand, those approaching the retirement age may not want to switch jobs or commit to a plan that would require they do so to avoid penalties, fearing a lower salary elsewhere. As a result, older employees generally make 403(b) plans their primary, and use 457 plans as a supplement in the event they wish to contribute more than the annual contribution limit.
A hedge fund is a privately managed investment vehicle, typically structured as a Limited Liability Partnership (LLP), that has a broadly-stated investment mandate and the ability to invest in a wide range of relatively liquid financial instruments (ranging from long and short equity positions to futures and options on commodities, interest rates, currency pairs, volatility levels, market indexes, and more). Additionally, some hedge fund strategies focus primarily on debt/credit markets, while others focus primarily on taking advantage of unique knowledge with respect to anticipated macroeconomic, market, or company-specific events (Event-Driven strategies).
Unlike hedge funds, private equity funds hold illiquid positions (for which there is no active secondary market) and typically only invest in the equity and debt of target companies, which are generally taken private and brought under the private equity manager's control.
While the private equity investor looks at an investment prospect as investing in a company, hedge fund managers often look at equity positions as investing in the company’s stock (whose performance has its own, unique set of drivers). A company's success is determined over the long-run by the performance of its products, its business model, and whether it can develop a sustainable competitive edge. A stock's success often diverges from the company's fundamental performance, especially in the short-to-medium term, due to behavioral biases, irrational behavior among investors, emotional decision-making, market hype, and supply and demand imbalances in the market for the company's shares (i.e. varying liquidity conditions).
Hedge funds typically allow quarterly redemptions, giving their managers a shorter-term mindset (generally speaking, though there are notable exceptions to this) than a private equity fund manager. The private equity manager receives capital commitments that cannot be withdrawn for a standard ten-year term (often with a two-year extension available at the General Partner’s discretion). This partially explains hedge funds’ tendency to focus more on the short-term, as they face the threat of large redemptions, even if they only underperform for a single quarter.
Similar to hedge fund structures, private equity funds often organize as an LLP, but the Limited Liability Companies (LLC) structure is also common. Both hedge funds and private equity funds typically charge a management fee against total assets under management (AUM), ranging from 1%-3% of invested capital, and take a profit share called “carried interest” or “carry,” which ranges from 20% (by far the most common) to 30% (rare). With carried interest, suppose a hedge fund began operations with $100 million AUM at the start of 2015 (1/1/2015), and had no contributions or withdrawals during the year. If the fund’s Net Asset Value (NAV) rose to $130 million at the end of the year, the fund manager would be entitled to carried interest of $6 million (20% x $30 million profits). If the fund subsequently loses all profits earned and more throughout 2016, the fund manager likely will not receive any carried interest due to high-water mark provisions (not applicable to private equity).
If a bond is trading at a premium, this simply means it is selling for more than its face value. Why would a bond trade above par (face value)? Because the fixed coupon rate on the bond trading at a premium exceeds the prevailing market rate, or the rate you could otherwise obtain by buying another bond of comparable credit quality and the same duration. As a result, the excess interest payments on the bond that trades at a premium (relative to comparable bonds offered at par) compensate for its higher price.
The premium has nothing to do with whether the bond is a good investment. Bond investments should be evaluated in the context of expected future short and long-term interest rates, whether the interest rate is adequate given the bond's relative default risk, expected inflation, bond duration (i.e. interest rate risk associated with the length of the bond term) and price sensitivity relative to changes in the shape of the yield curve. You should also consider the bond’s coupon relative to the risk free rate; returns that can be generated in the equity market - are equities priced so low that they become a better risk/reward tradeoff? Consider the opportunity cost of funds tied up in the bond that could otherwise be invested elsewhere; expected or potential foreign currency fluctuations (bonds with bullet payments at maturity are more susceptible to FX risk); these, among many other items, should be considered in assessing whether a given bond is a “good” investment. In the end, anything with the potential to impact cash flows on the bond, as well as its risk-adjusted return profile, should be evaluated relative to potential investment alternatives.
Of course, one should also consider the bond investment’s suitability with their investment objectives, as certain investments will be more suitable than others for different people depending on their unique financial situation, investment goals, and tolerance for risk. Investors seeking current income with a low risk tolerance should probably stick to high-quality bonds, whereas those with a longer-term profile and a healthy appetite for risk might prefer the riskier, yet generally higher, current income that can be earned by investing in a Master Limited Partnership (MLP). Those who can afford to lose their investment in an instrument, provided losses are limited to the cost of the instrument and the potential upside is far greater, may want to consider taking long positions in options. Call options have a risk profile that’s asymmetric, weighted heavily to the upside, while losses are limited to the premium paid.
In summary, to evaluate whether an investment, in this case in a bond trading at a premium, is a “good” one requires in-depth analysis of credit risk, FX and interest rate risk, macroeconomic considerations that could impact repayment patterns, the opportunity cost of the investment, and your unique investment objectives and risk tolerance.
I would recommend avoiding the use of robo-advisors to create your long-term asset allocation. As a Chartered Financial Analyst (CFA) and a CPA, I have learned over the years that the metrics upon which traditional asset allocation methods and quant-based models used by robo's, which generally rely on backward-looking measures of 'correlation' are fatally flawed. As I'm sure you're well aware, rising geopolitical risk across the globe, the trend toward 'anti-globalization,' and unprecedented leverage across the international monetary system create a wide distribution of potential macroeconomic outcomes over the coming year (and beyond). Investors are only in the early, early stages of catching on. Volatility can be traded in the financial markets (as can just about anything), and currently sits at astonishing low levels as consumer confidence in the US has surged following Trump's election and subsequent announcement for pro-growth fiscal policy, defined by individual and corporate tax cuts and deregulation. This confidence has already begun to wane, and should only continue to do so in the coming months - in other words, the 'hope trade' is overdone.
So how would an individual investor take advantage of such an environment? Using history a guide, it's useful to note that insanity can continue for an extended period of time, continuing to drive rallying equity markets - but once confidence is lost, you don't get it back. You just don't. Markets tank, and not just the equity markets. You see, here's where the correlation measure gets investors in trouble: during episodes of financial panic, historical correlations break down entirely, and asset classes that historically exhibited low correlation (e.g. Stocks vs. bonds vs. commodities) suddenly move decisively in the same direction ... down, fast. For example, in 2008, you couldn't even find a buyer for investment grade corporate bonds for a sustained period of time. Even Treasuries were forced to be sold at fire-sale prices - any time debt overwhelms real economic growth for a sustained period of time, you may hear things like "it's just a liquidity problem." "Liquidity problems are virtually synonymous with insolvency.
Episodes of extreme financial panic happen roughly once a century, and curiously they're always driven by borrowings to fund over-consumption to the nth degree. This simply means we're overdue for the next financial 'breakout' - which could happen in 2017, 2018, only time will tell. But one thing is certain it WILL happen, it's simply a matter of WHEN.
You can capitalize on this by buying shares in the various long volatility ETFs. During the Crisis of 08/09, when equities fell 40%, the volatility index surged some 300%+. So you needn't own a TON of long volatility positions to reap large profits from a coming uptick in recognized volatility in the global financial markets -- if you do, you may reap handsome rewards. But if you're more risk-averse, you can buy, say, 10% of the portfolio in long volatility positions - while holding a significant positions in domestic SPDRs (I recommend the Biotech SPDR, Healthcare, and Technology, and strongly urge you to avoid Financial Services - the derivatives risk inside the world's 12 largest banks, or the 'weapons of mass destruction,' as coined by Warren Buffet, are inconceivable. Derivative exposures alone could drive a collapse in the entire monetary system.
Stay away from emerging markets, whose debt burdens denominated in a strengthening USD and weakening currencies are crippling the prospects for economic growth. Avoid China altogether - the country is going broke, and this is second grade math. At the end of 2015 it had $4 trillion in reserves. At the end of 2016, this fell to $3 trillion, by and large due to capital flight, legal and illegal. Of the $3 trillion the country currently has, $1 trillion is tied up in illiquid investments such as hedge funds by the banks. Another trillion is borrowed funds. Now, the country is burning through $80 billion yuan/month, meaning, as the math simply illustrates, the country will be broke by the end of 2017. Major restructuring, and bailout by global lenders (likely to drive contagion, particularly into Europe and Japan) will be required.
When investor sentiment reverses, the shift typically happens abruptly and can cause investors like yourselves to lose much of your savings, including those in your 401(K)s, 403(b)s and 457(b)s -and I wouldn't count on your pension - the US (and global) pension funds face a crisis that can only be fixed in one of two ways: (i) bailout by the government, through the creation of ever more new money (from thin air), handed to the pension funds to pay out retiree benefits, but by the time you'll be eligible to receive such benefits inflation will act as a hidden tax, making the same, dollar-denominated promised benefit payments worth far less from a purchasing power perspective; or (ii) the pension funds will simply go broke, and default on their promises. In any case, I'd be remiss if I didn't advise you to rely on non-pension sources of retirement income. In your other accounts, I recommend only holding exposure to domestic (U.S.) equities, and only through the NASDAQ (NOT the S&P 500, because the Nasdaq does not include Financials). This can be done by buying QQQ. You can hedge your risk of global catastrophe with long volatility positions in a selection of ETFs or ETNs, which can be found here: http://etfdb.com/etfdb-category/volatility/. I recommend VIIZ. Don't fall into the investor's trap, saying, well, that hasn't done so well lately. Well yes, that's precisely why it's cheap, and what makes it attractive. As Buffet once said, do you buy a more expensive house rather than a comparable house that's recently declined in value, simply because it's gone up in price? Of course not, this thinking is backwards, and should be kept in mind when investing in the stock markets.
Hope this helps. Please touch base if you would like further financial advise, my contact information (including email, phone) should be listed along with my profile page.
Generally speaking, at the time a publicly traded company announces it will undergo a Chapter 7 or Chapter 11 Liquidation process, its stock price would decline materially unless investors already expected the announcement. If the market was already aware of the company's financial struggles, its stock price prior to the liquidation announcement may incorporate the coming liquidation, but a more likely scenario is that the stock price prior to the announcement reflects only doubts about the company's ability to continue as a going concern and not a full-on liquidation. Why? Because companies undergoing a liquidation process are generally insolvent, meaning the value of their assets is less than the value of their liabilities. Said differently, after all assets are liquidated, cash received from the sale of company assets goes to pay off the company's creditors (the bank, trade vendors, property lessors, taxing authorities, etc.), who are unable to recover their claims in full. Creditors are always fully paid-off before equity-holders receive anything and as a result, the publicly traded equity/stock of companies undergoing liquidation proceedings generally isn't worth much (if anything). Equity-holders often receive nothing when a company liquidates, as creditor claims exceed the total cash recoverable by selling off company assets. In situations where the value of a company's assets is sufficient to pay creditors in full and still have money left over, liquidation usually isn't the optimal route (reorganization under Ch 11 is generally preferable).
So to answer your question directly, yes, the stock price should decrease substantially after a company announces plans to liquidate.
If the company announced for the first time it would be liquidating after the market close today and you want to know what to do with the stock, you can go onto YahooFinance anytime today/tonight (before trading opens tomorrow morning) and look just to the right of the stock price denoted "at Close 4pm EDT." If the stock is selling off in the aftermarket, you'll see another price (and % change) with a notation below it that says "After Hours" - if the stock is relatively liquid (a large company or a company whose shares are frequently traded, generally on a major exchange), trading in the after-market can give you a good indication of how severe the sell-off may be and where you should expect the stock to open tomorrow morning. This can serve as a guide if you plan on placing a limit order to sell the stock at tomorrow's open, or if you just want to know how bad things may be. If you do intend to sell the stock with a limit order in the morning, place the limit below the stock's price in the after hours as you'll likely be competing with other sellers at the open; if your limit price is too high, you won't get anything sold.