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D. Murali

YOU'RE working in the trenches, making money; but how current are you? To help stay in tune with strategies that continue to be explored, and tactics that change "almost as quickly as the markets," here is Bloomberg's The Investment Think Tank, edited by Harold Evensky and Deena B. Katz, and distributed by Viva (www.vivagroupindia.com).

The book is `a gathering of eagles', a collection of thoughts from "some of the best minds in investment management", and it aims to "challenge your beliefs, reinforce your convictions, and pique your curiosity."

Jean L. P. Brunel is the opening batsman with `tax-efficient portfolio'. Don't put all your eggs in a basket located in the middle of the portfolio-activity spectrum, advises Brunel; move away from `the murky middle' and go for a `core and satellite approach' of dividing your portfolio into `two strategic baskets', not necessarily of equal size. "The first sub-portfolio aims to produce the highest possible tax efficiency, and its design therefore includes the possibility that no value added will be generated at all." The opposite is true of the second basket.

William W. Jahnke questions the wisdom of `policy portfolio' — a common practice in financial planning, whereby one sets "a fixed asset-allocation mix as part of investment policy" and avoids market timing. He cites Peter Bernstein's debunking of central values and equilibrium as myths. "Policy portfolio is a crutch for those who prefer to operate in a fantasy world," declares Jahnke.

Part two of the book is on `strategy', where S. Timothy Kochis guides you on `managing concentrated stock positions.' Concentration is theoretically unwise, we know, but Kochis deals with the practical reality of "a large position in one stock" through a repertoire of approaches.

"Incorporating taxes into the investment decision is not easy," is an empathetic line from David M. Stein in his chapter on managing the taxable equity portfolio. "Taxes represent a very large performance drag, often larger than transaction costs, management fees, or inflation," he cautions. "Taxable portfolio is a place where a great deal of value can be inadvertently and carelessly lost," Stein writes before launching into a discussion of `four stages of tax sensitivity'.

Another chapter on a related theme is by Thomas J. Boczar and Robert Gordon; they discuss `tax-efficient investing'. One advice for "an investor who is fortunate enough to own highly appreciated shares of a company that's involved in an announced tax-free stock-for-stock merger" is "to explore the potential of establishing a short against the box that will not be subject to the constructive-sale rules through merger arbitrage." Remember, however, that tax rules are country-specific.

Gobind Daryanani talks of `a different approach to asset location' — that is, apportioning of asset classes to the taxable account and the sheltered account. His is a mathematical model that assures "a net annual 20-basis point return premium over traditional methods".

Let's move on to part three, `investments'. Gary L. Gastineau and Craig J. Lazzara speak of `reinventing the investment fund' and suggest ways to cut costs. They discuss the benefits of `the stealth index fund' — using a silent index, which may outperform comparable benchmark index funds "by anywhere from a few basis points to a few hundred basis points per year," according to the authors.

Ben G. Baldwin writes on `the cost and consequences of insurance wrappers.' But what is an insurance wrapper? It is "an insurance contract wrapped around capital to protect against loss or damage by a contingent event." Baldwin compares annuity contracts to other ways to invest and opines that annuities provide insurance protection and also `peace of mind' in tough times.

To know about `alternative investments', read Mark Hurley's chapter that begins with a counsel of caution towards "hedge funds, managed futures, private equity, and real estate." Historically, these were the "sole province of institutions and wealthy investors," but not any longer. Alternative investments are like prescription drugs, notes Hurley. "Correctly prescribed and taken, they offer marvellous benefits to those who need them. Used incorrectly, they can be fatal."

Part four, on `practice and theory' begins with Moshe A. Milevsky's chapter on human capital. "A client's total — that is, human and financial capital — portfolio must be properly diversified... When one type of capital zigs, the other zags." Don't put your money where your mouths are, he advises. "You should not invest in things you're familiar with but rather in industries and companies you know nothing or very little about." If that seems dangerous, Milevsky cites the hard lesson that human capital in the computer field learnt when their financial capital invested in the same industry took a beating.

"Happy is the man that findeth wisdom," reads a proverb in the Old Testament. And wiser would be one who findeth the Think Tank.

BookValue@TheHindu.co.in

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