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Much has been made by purveyors of gold on TV cable channels in recent years and one wonders where gold fits into a portfolio. Like all precious metals, and other commodities for that matter, there is no interest or dividend yield…so the inherent commodity’s intrinsic current value is the asset.

When viewing gold, or its surrogate SPDR ETF, “GLD,” you may consider it to be a hedge against the US Dollar. Given that gold is generally denominated in USD, it stands to reason that there is an inverse relationship in value between the two. The real question is whether gold moves against non-US currencies (also called “ROW” – rest-of-world) currencies. And this appears generally to be the case over the long haul. The world is also increasingly becoming more connected in economic booms & busts, thus holding gold inside a portfolio makes some sense. As with anything, a diversified portfolio is something the majority of experts would agree to be wise.

As a commodity, gold can be a wild ride. Follow the volatility index “GVZ” to see gold’s risk. The recent sell-off by George Soros that caused an intraday drop of over 6%, and may have kicked off multiple days of lost value is one indication that buying and holding gold isn’t a straight path upward by any means.

Is gold a hedge against equities? Well…not really. While the S&P sank in mid-2007 relative to gold, for the most part the two indices of SPY and GLD have moved in parallel. Think again if you desire to buy and hold gold as a protection against equities tanking. I just don’t see the protection of gold for an equities portfolio. Selling covered calls or buying puts in an index like SPY has a much better hedge value, although it isn’t cheap and should be done with expert advice of a financial advisor.

Macro economic factors do play a role in the value of gold unrelated to the Dollar per se. The Associated Press reported on Feb 24, 2013 that India alone accounted for roughly one-fifth of the global purchases of gold in 2012 and is likely to increase that rate in 2013. It seems that young women  getting married in India ‘must’ have a considerable amount of bling on their wedding day and families buy and save gold for years in advance of a girl’s forecasted wedding day. If you are able to predict the growth of the middle class in India, and want to make bets on buying gold today…go ahead, but such factors can’t be predicted with certainly.

Government central banks unexpectedly sell off gold without warning to raise capital. Purchases, however, tend to occur over long periods of time, partially so as to not drive prices too high in the process. This is akin to a corporation not buying too much of its own stock at once, although it must disclose such purchases in advance. Central banks do what they want, and when they want it.

So, is gold a hedge? Sure it is in the long haul against US and global currency devaluation. But you can’t eat it, you don’t receive a dividend and it isn’t likely to save you from an equities decline. Owning gold is just one small segment of having a diversified portfolio. Oh…and the real stuff? You had better have it stored safely and make sure you can get to it in a crisis.

As for me? I like stored ammunition…a topic for another post.

Tom Buckridge

- Managing Director

Nummarius LLC

Waking up early this morning, I tuned in as usual to CNBC only to hear that Vikrim Pandit and his COO are gone…not planning to leave at year-end, but gone immediately. Citigroup had been my employer of 27 years and I’d spent 30 years in banking and absolutely loved it only to curse the day Sandy Weill invaded our institution. But, what the heck happened today and what does it mean in the larger picture? The financial experts are still trying to figure out the implications for both Citi and the era of big banks in the USA.

I could throw in the global non-USA banks into this mix as well, many of whom have seen turmoil, confusion in purpose and major trading errors in the billions of Dollars or Euros; but for the moment, let’s talk US banking.

I’ve been working on an MBA-level lecture on this topic for about two months, but today’s news has motivated me to move faster on completion of this important class (offered free of any honorarium to Nummarius LLC client colleges & universities). Was this action by Citigroup’s board an isolated matter or is it broader in its implications? Only one day ago, Citi reported impressive Q3 earnings…so it can’t be just a move to punish poor financial performance, although you could argue that Citi missed a mortgage re-fi opportunity in 2012…but I quibble.

By all measures, Citi had begun moving to a more stable position and perhaps an improved credit and audit path to long-term stability in the way it is managed, even coming free from US government bailouts and being in the penalty box.

I would argue that the era of the big bank, the banks too big to fail, has ended and we are watching the requiem of the BofA-JPM-Citi dominance into something far more tame. Boards are become risk averse and mindful of federal penalties and bad PR. I’m not certain that the emergence of the community bank will dominate the landscape (the FDIC has closed many). But the small regional, perhaps with 30 or so branches in a 10 county circumference, may be the new model. Local control with local business and commercial clients and a non-derivative set of offerings…the way banking once existed…may be the future.

Investment banking is starting to separate from traditional banking, not to join up again in my lifetime and perhaps yours. House account trading and open positions are going the way of the dinosaur. Citi may be headed into three or so parts, the parts of which are of more value than the whole (anti-synergy?). We await the next moves, most of which I’d expect to be taken with shareholder intolerance for a low share price and exposure to every financial scandal and crisis in the world.

There is much material for my lecture to complete, offered in January 2013.

Tom Buckridge, Managing Director

Nummarius LLC, serving higher education and banking

I confess to really enjoying students, be they at the undergrad or B-school graduate level. Today I had an encounter with an undergrad smart young man who took me aside to ask about his personal investing. Of course, I disclosed that I was not an investment mgr, nor trader, etc. Where I led the conversation was to ask the student a series of questions around whether the funds were needed soon, whether they were current investments, new money, risk-based questions, etc. I also told the student that the healthy gains he had were impressive and that he might consider taking half off the table…noting that a decent gain is a decent gain. All my questions were directed at having the student think, make his own informed choices after reading and getting a variety of viewpoints to include an investment advisor and understand the potential outcomes.

It is amazing how many college CFO’s do not engage their investment managers in such dialogue and in a numb state simply accept whatever comes their way in risk and returns.

Nummarius LLC and its cousin, Implexus Planning Solutions highly encourage college & university CFO’s to challenge their investment advisors regarding endowment risk, rewards and an ever changing financial and political environment.

Occasionally, students can get it right in ways their colleges don’t.

One could argue that equities markets seem no longer to have as their basis the underlying sector and individual equity values controlling the day to day volatility of the markets. That is not to say that endowment managers and those overseeing large accounts will abandon the major equities markets in favor of near zero interest rates. BUT one must evaluate the wisdom of being dragged in the street (sorry for the pun) by each and every move of governments and their central banks.

Take stock of the movements in the past few months where earnings appear to be drowned out by an anticipation of QE3, potential gov’t intervention in the housing market, EU actions and the IMF support of the  EURO along with the G-8…etc…etc. One can openly question why the DOW and S&P have had continued strength during what appears to be a fairly strong economic slowdown. Even Paulson is urging restraint upon the FED in further market interventions.

Yet there appears to be little restraint among politicians interested in a ‘smoke & mirrors’ good face being placed upon the US economy in anticipation of the coming elections. Worse yet are continued calls for market interventions, most recently by Senator Schumer for the Fed Chairman to act because the Congress and Administration can’t (or won’t). Thus, the clarion call is for additional monetary actions because fiscal policy action is no longer possible.

Watch all the equities market gyrations every day as driven by governmental actions or inaction and it will make any endowment manager ask himself/herself “I’m making long-term equities bets why?”

It’s tough out there.

- Tom Buckridge

July 18, 2012

A sad state of affairs will emerge on Jan. 1, 2013 when the so-called ‘death tax’ will revert back to a 55% (to 60% in some cases) level on all assets transferred upon death above $1m.

The existing 35% Federal tax rate on assets over $5m will expire unless our congress and President alike take action between now and then. State estate taxes could well push the death tax combined rate higher than 55% depending upon one’s state of residency.

Colleges & universities must be concerned about this situation and become vocal as to its potential impacts as traditional wills and living trusts have fewer funds to distribute once the all-consuming Uncle Sam gets his cut on assets transferred upon death. The US Treasury gets ‘first dibs’ on all assets prior to any heirs & charitable institutions. No doubt, at a time when governmental guarantees on student loans are being debated and student grants are being cut, to be slammed by a massive hike in estate taxes could have a devastating impact upon endowment giving.

Higher education’s institutional advancement departments should consider taking a pro-active role in educating potential donors (alumni, boards, friends, etc.) in estate planning measures such as irrevocable trusts and other existing tools which could preserve assets for charitable giving.

Donors should seek solid advice from a certified financial planner, a CPA specializing in estate matters and/or an estate tax attorney. Colleges & universities should be well armed to guide potential donors in that direction.

- Tom Buckridge

In trimming my property’s hedges the other day, it occurred to me that keeping our endowment hedges under proper management is not all that easy to accomplish (my mind does wander in such directions).

I’m reminded of a question I had asked MBA students about hedging strategies: “Do you stop paying your homeowners insurance because your house didn’t burn down in the prior year?” Of course, all agreed to continue paying their premiums. In the world of hedging one’s endowment, that answer was not all that clear when I suggested that endowment portfolios are subject to major disasters in the marketplace, yet often go ‘uninsured’ (aka ‘hedged’) by universities.

Ah…but there is a cost…true. One can calculate such costs, ex. the purchase of put options contracts, and measure the costs as if they were insurance premiums used as an expense offset to (a hopefully) growing endowment portfolio. Hedge a great deal, and your costs go up with the purchased protection that becomes evident in a bear market. Hedge little and your exposure rises as do your profits in a ‘risk-on’ bull market. There is a tradeoff that is measurable.

This balance is one of mathematics and risk management/control. Hedging strategies can be applied to many different asset classes and the mix of such classes measured. Your investment manager should be talking to your university’s CFO and board’s investment committee about the right strategy(s) to implement. If not, your university’s endowment is subject to the insects, heat and poor soil of the marketplace… i.e. the Fed, fiscal policy, EU, etc. 

Tom Buckridge

-   Managing Director   Nummarius LLC

Effective July 1, 2012, Florida becomes one of the last states to enact its own version of UPMIFA in what is called the “Florida Uniform Prudent Management of Institutional Funds Act” under the rather long acronym, FUPMIFA.

FL tax-exempt organizations have the responsibility of assuring certain economic and financial conditions are met in their endowments.  There are nuances to the regulation where your university’s internal and external CPA’s and legal counsel had best be consulted to assure all regulatory conditions are met. Nummarius LLC highly recommends that contracted investment managers over endowments also be brought into the review to assure all parties are on the same page.

Nummarius finds that university investment policies have often not kept pace with the most recent risk tolerance practices of institutions, nor has donor documentation been updated to reflect the most current best practices. Risk, policy, management, compliance and reporting all converge to form a strong endowment platform.

In the application of FUPMIFA, universities would also be wise to have their Board’s Investment Committee be advised as to the institution’s compliance level with the law, and then to have the Board adopt a resolution as to its compliance and its understanding of the regulation.

Other References: http://www.akerman.com/documents/res.asp?id=1094

http://pnlc.rollins.edu/resource/resmgr/florida_uniform_prudent_mana.pdf

University endowments are slowly giving up the gains made earlier in 2012.  With May giving up 6% in equities (on avg.) June started off poorly on EU weakness and awaits potential volatility from both Greek & Spanish issues…with others right behind them.