Map: “Tea” if by sea, “Cha” if by land

This map has been making the rounds on Twitter and I found it fascinating. I have often wondered why it is chai in India and chay in Turkish and cha in Chinese. I’d always ignorantly assumed that the the Malays and other Commonwealth countries had adopted the British word tea, yet it is the British that adopted the South East Asian word teh from their colonies. I find the below map interesting not only as a traveler and tea drinker, but also as a student of history and someone interested in markets and trade. The map shows how commerce from hundreds of years ago has shaped our modern language and world.


Quartz created the below map based on data from here.

MLK Day: Unemployment Rate by Race

In honor of MLK Day:

Now, in order to answer the question, “Where do we go from here?” which is our theme, we must first honestly recognize where we are now. When the Constitution was written, a strange formula to determine taxes and representation declared that the Negro was sixty percent of a person. Today another curious formula seems to declare he is fifty percent of a person. Of the good things in life, the Negro has approximately one half those of whites. Of the bad things of life, he has twice those of whites. Thus, half of all Negroes live in substandard housing. And Negroes have half the income of whites. When we turn to the negative experiences of life, the Negro has a double share: There are twice as many unemployed; the rate of infant mortality among Negroes is double that of whites; and there are twice as many Negroes dying in Vietnam as whites in proportion to their size in the population.

-Martin Luther King Jr, Where Do We Go From Here? speech, 1967, (emphasis mine)

Below is a chart of the US unemployment rate over the past 25 years, segmented by race. Despite the progress of the past 50 years (since Dr. King made the above speech), the black unemployment rate has persistently remained at nearly double the white unemployment rate.

sources: Bureau of Labor Statistics, Bloomberg

Two More Ways to View the Curve

Following up on my previous post about the 2s10s spread, I should note that the 2s10s is just one of many spreads. Its a benchmark. But you could just as easily look at the 2s5s, 5s30s, 10s30s, and so on. Below are a couple of alternative ways to keep tabs on the shape of the yield curve.

I like the below chart because it allows one to see how various constant maturities move in relation to one another over time. As you can see, the curve flattened during the last two major tightening cycles and so I remain skeptical of those that are calling for long-rate rises to outpace those of short-rate rises.

Another common way to view the shape and history of the yield curve is to simply view it next to previous iterations of itself. See below for an example:

Happy Friday!

2s10s Spread

A challenge (not unique) to investing is separating the signal from the noise. I find that the highly-stochastic nature of most data makes them practically useless (and thus noise). One of the few data points that I find useful to keep tabs on is the 2s10s spread.

The above chart shows the 2s10s spread, which is the difference between the 2-year Treasury yield and the 10-year Treasury yield.

Above is a graph of the underlying 2-year and 10-year yields. The 2s10s spread (the first chart) is simply the red line minus the blue line.

The reason that I and many other investors (and economists too) reference the 2s10s spread is that it is a quick and simple indication of the slope of the yield curve, which is used to measure and estimate all sorts of things. Generally, the economy and markets tend to do well when the yield curve is steep and not so great when it is flattish or inverted (meaning the short-end of the yield curve is higher than the long-end).

The first chart shows the yield curve is rapidly flattening, which is of particular interest these days since the yield curve typically flattens and then inverts just before recessions (as indicated by the gray bars). This usually occurs because the 2-year yield rises much faster than the 10-year yield (as is happening now) and eventually surpasses it. The yield curve is not inverted yet and rapid flattening often coincides with tremendous economic and market performance; it does not appear that the curve will invert for at least 6-12 months (if it does at all), so no need to panic yet.

It is worth mentioning that some of the smartest asset managers out there think that the yield curve conveys less information now than in the past, due to a variety of reasons that I won’t get into here. Those managers may very well be right, but the 2s10s spread has a much better recession-calling record than anyone I know of. Further, past episodes of yield curve flattenings and inversions were “explained” as benign signs by the top minds during those respective times. Not sayin’, just sayin’.

The 2s10s spread is just one of many data points and I’m neither supporting nor denying its significance. It is something that many people watch and I believe it bears watching as well.

Advent Conspiracy Video

This video circulates every December, but I still enjoy watching it. It’s put out by a Christian organization, but I think viewers of any faith can appreciate the message. Enjoy!

Donor-Advised Funds

An important tax planning and charitable giving tool is the Donor-Advised Fund (DAF). There are hundreds of DAFs offered by non-profits, community and corporate foundations, and so on. Since DAFs are sponsored by 501(c)(3) non-profit organizations, donations:

  • are irrevocable
  • may be tax-deductible

However, DAFs are “donor-advised,” which means that donors may continue to direct:

  • investment decisions
  • grant recommendations

Tax Benefits
Donors receive an income tax deduction when assets are donated into the DAF, but may continue to “advise” the DAF on investments and grants. Effectively, this means that donors can still direct how the assets are invested and granted.

Timing Benefits
The assets can remain in the DAF indefinitely before being granted out to the final 501(c)(3) non-profit. Thus, a donor can donate assets this year, but does not need to decide on the final non-profit recipient this year. The donor can decide where to direct the grant next year or in 10 years or beyond.

Other Benefits

  • Many DAFs can accept complex assets (such as real estate or business interests) that smaller non-profits are unable to handle.
  • If anonymity is desired, grants can simply be reported under the DAF and not from the original donor.
  • Once donated, assets can be sold without incurring capital gains tax and/or any future growth is tax-free.

A Flexible Solution
Investment considerations and tax planning often determine how and when to maximize the tax value of donations. However, these factors may not align with the charities that one supports. For instance, what if a charity is unable to accept stock options? Or perhaps a charity could use more recurring monthly donations rather than yet-another-lump-sum donation in December? A DAF is a great vehicle that can solve for these and other challenges.

Review: Operation Christmas Child

Operation Christmas Child is a program that has millions of participants, nearly 80,000 volunteers, and a sizable number of vociferous critics. It is a program that I hear about every single November from friends, colleagues & acquaintances, church contacts, and so on.

Many smart, well-intentioned people that I know choose to participate in OCC each year, mention it in conversation, or invite me to participate and many other smart, well-intentioned people that I know have nothing good to say about OCC and criticize it each year. I actually did participate once many years ago, but now decline for a variety of reasons. Of course, I do not have the self-control to simply let the topic pass when it comes up (like I should). So rather than launching into a monologue about my questions and concerns, I’ll just send them a link to this post which they can either read or disregard 🙂 . Hopefully this post can also be a resource for those caught between OCC’s promoters/apologists and it’s critics, both of whom overstate their positions IMO.

Every organization and project has some “hair” on it (including the ones that I support and donate to!), so the below should not be construed as a demonization of any organization or activity and I don’t want to discourage anyone from doing good. We each do our best to weigh the pros and cons and unknowns through the lens of our judgement, priorities, and values. The below is simply my personal research, thoughts, questions, and rationale. Keyword being: personal. There’s more than enough room for multiple priorities and values and, of course, I could be wrong (just ask my wife 🙂 )

What is Operation Christmas Child?
Operation Christmas Child (OCC) is an annual campaign that rallies millions of people to fill shoeboxes with gifts which are then distributed to kids around the world through a network of churches. It is sponsored and administered by a faith-based non-profit called Samaritan’s Purse (SP).

A Funny Thing Happened On The Way to Criticizing OCC…
One of the reasons that I stopped participating in OCC is because I think it is a terrible way to provide relief and aid. OCC promoters and participants have tried to pitch me on the idea that the shoeboxes provide for physical needs. Relief and development professionals, as well as critics (including myself), point out that the boxes do not provide for needs, can harm local economies, and that the distribution costs are a waste of resources. OCC’s online apologists have countered that the boxes likely provide some benefits, despite the costs.

The funny thing is that OCC never claims that the boxes meet needs or are beneficial in any way. OCC’s website is quite clear that the purpose is evangelism and that the boxes are tools to that end. So why do OCC promoters, participants, and apologists communicate the idea that the boxes are providing for needs? I am not sure. Perhaps they are reading too much into the oft-repeated OCC refrain that boxes are delivered to “needy children” or are making other erroneous assumptions. I was totally against OCC because it seemed like a misguided way to deliver aid, but learned that OCC does not even claim to provide aid.

Despite the above, many of OCC’s supporters believe that the boxes are meeting needs. To those people, I would say read through the OCC website and consider the below questions:

Is OCC an efficient and/or cost-effective way to distribute goods?
The cost of purchasing items in the US, collecting and processing them, and then shipping them overseas is much more expensive than simply buying and distributing goods locally. Imagine buying a pair of socks that was made in China, shipped to a US retailer, purchased at American prices, and then shipped back to India. It would be cheaper and more efficient to simply buy socks in bulk from an Indian company, which would be both lower cost and supportive of the local economy. I am not saying we need to boil everything down to dollars and cents and efficiencies, but stewardship of resources should be a consideration.

Do the contents of the shoe boxes meet actual needs?
OCC-suggested items include: “a ‘wow’ item (such as a toy or clothes), personal care items, school supplies, clothing and accessories, crafts & accessories, toys, and personal notes.”

OCC critics point out that it is either naive or arrogant to think we can give a gift to someone without knowing anything about them. OCC apologists contend that many of the suggested contents are basic necessities, such as toothbrushes or school supplies. I can see both sides, but would point out:

A. Needs are often contextual. For instance, OCC suggests socks as a possible gift. I’ve been to a ton of places where kids do not typically wear socks. This is not to mention other OCC-suggested items such as scarves, mittens, things that require batteries, or articles of clothing. It is difficult to understand wants/needs with no context and OCC does not let donors know their box’s destination ahead of time.

B. Giving a useful item is not always providing for a need. What I mean by this is that toothbrushes might be a necessity, but are also not difficult or cost-prohibitive to procure (especially relative to effort and cost of buying one in the US and shipping it to Africa).

A Personal Story: Closet Full of Sweaters
Back in 2008, my wife and I volunteered at a couple of orphanages in Cambodia (today, I’d have reservations about doing something similar again). One day, a staff member led me to a closet to grab some office supplies. When he opened the closet doors, I saw both school supplies and shelves and shelves stacked with winter sweaters. The sweaters looked new and I could not imagine them ever being worn in tropical Phnom Penh (especially thick, holiday-themed ones). I asked the guy, “What the heck are all these sweaters?!”

Laughingly, he replied, “Americans keep sending us sweaters every year.”

I asked, “Why don’t you tell them to stop sending sweaters?”

“We don’t want to make them feel bad.”

It is very difficult to provide aid or give gifts when you know nothing about a person or their context. I am sure some boxes meet some needs, many boxes fulfill wants, and others bring joy. With 12M boxes delivered, I don’t think that is debatable. However, it seems that many more needs and wants could be met and more joy delivered if the program was run differently. OCC’s promotional videos highlight success stories. This is what marketing, sales, and fundraising is all about. It is not deceptive in any way, but any action or program will result in a range of outcomes. OCC sends 12 million boxes, so there should be an ample number of success stories. The question is not whether there are some successes, but what does the distribution of outcomes look like and what are the costs? What is the mean and median outcome? What do the tails look like? How does the skew look? And, of course, how does OCC’s distribution compare to those of its peers and other similar organizations?

Do the boxes disrupt local economies?
In other words, does the importing of free goods undercut local businesses and economies? Donors do not know where their boxes will end up, so it is difficult to say whether boxes will negatively impact their respective destination. I’m sure some boxes have a neutral economic impact, while others will have a more negative economic impact. Personally, a range of outcomes that is neutral to negative sounds pretty bad to me.

The OCC apologists make a valid claim that we do not know the economic impact of each box and that the quantities may be too little to do much harm. Yet, OCC advertises that they will deliver 12 million shoeboxes in 2017. In light of these figures, I believe it is hard to argue that the aggregate economic impact is unknown or marginal. Questions #1 and #2 above are about whether the program provides benefits and/or whether those benefits can be achieved more efficiently. This Question #3 is entirely different in that the answer may be that OCC has a negative impact. Other methods of relief/development has costs and negative externalities as well, so just pointing out that these factors should be taken into account and weighed against any potential benefits.

The Objective Part
If your goal is to provide for needs and/or deliver aid/relief, then OCC is not the program for you. Firstly, because they do not aim or claim to do these this. Secondly, even if they did, it is not an efficient way to do it.

If your goal is to support the evangelism activities of Samaritan’s Purse (SP), then OCC may be for you. The next question is whether participating in OCC or simply donating money is a better way to support SP.

The Subjective Part
As mentioned, I do not personally support OCC or SP for that matter. This post is focused on OCC, but I also have questions and concerns about SP. To be brief:

  • If SP sponsors and runs OCC, what do their other projects and operations look like?
  • Is OCC indicative of a larger problem of viewing evangelism through a Western-centric lens of consumerism and providing “stuff?” Conversations with other Christians in the non-profit sector lead me to believe the answer is yes. I’d dig deeper if I was interested in supporting SP, but am not.
  • SP is led by Franklin Graham. I have a lot of respect for Franklin’s parents, the late Ruth Graham and the famous Billy Graham (who was buddies with my grandparents). However, Franklin has a history of questionable financial moves and is overtly (and overly IMO) political.
    • In 2009, Graham was publicly questioned about his combined salary of $1.2M and then immediately decreased his salary to nearly nothing. He has since raised it back up, albeit less publicly. There is nothing illegal about this, but why was he taking a salary so high that it was reduced when publicly disclosed? And why reduced to zero and raised back up? Why not simply adjusted to a reasonable level? And why all of this in the midst of revenue declines and layoffs at his organization?
    • According to public filings, Graham’s 2015 compensation from SP was over $500k. Not a huge amount for the president of a large non-profit (especially for someone with a recognizable name that can bring in donor dollars), but quite high for: an organization of its size and especially for a Christian/religious organization. Of course, perhaps SP would not do as well with another leader. Again, nothing illegal here, but it raises eyebrows and elicits questions of board independence and stewardship.
    • In addition to his SP salary, Graham receives an additional $250k for his work with the Billy Graham Evangelistic Association (BGEA).
    • BGEA recently changed its IRS status from a “non-profit” to an “association of churches.” SP has also requested to be reclassified. Coincidentally, “association of churches” do not need to report financial or compensation data. Its a curious move to seek a change to your IRS status after compensation/stewardship controversies, especially after operating as a non-profit for decades.
    • I can deal with someone being far-left or far-right, but good ol’ Franklin was proponent of the Obama “birther” conspiracy theory (among others), has said ridiculous and hateful things about Muslims and immigrants, and these days is implicitly defending child molester and US Senate candidate Roy Moore. Hearing Christian leaders take political positions is bad enough, but some of his extra-political comments just make me sick.
    • Perhaps SP is insulated from Graham’s personal views and financial issues, but he is the president of the organization. He has influence. I’m sure he has some positive qualities too, but there are enough questionable things that I don’t personally feel comfortable supporting OCC or SP.

Final Words
All of the above is simply my personal view, based on speaking with OCC participants, browsing the OCC website, and speaking with other development professionals. Not deep due diligence, but enough to get a feel for the organization. Of course, there’s multiple sides to every issue and I’m open to learning more, being proven wrong, or simply continuing the conversation as we all find our way. Merry Christmas!

What Thanksgiving Can Teach Us About Risk Management

Thanksgiving is a great time to consider the plight of countless turkeys and what they can teach us about risk:

“[There is] a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days. Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.”
-Nassim Nicholas Taleb

My takeaways are that perceptions can be misleading, present conditions are not indicative of future conditions/events, and comfort can mask risk.

Happy Thanksgiving!

Donating Cash vs Non-Cash Assets

In honor of National Philanthropy Day, below is a brief primer on the tax benefits of charitable contributions/donations.

Fortunately for US taxpayers, the IRS provides income tax benefits for charitable donations and capital gains tax benefits if those donations are made with appreciated assets. See below:

Income Tax Deduction
Capital Gains
Tax Avoided
Short-Term Appreciated Assets
(Held <1 year)
Cost Basis
Long-Term Appreciated Assets
(Held >1 year)
Market Value
Depreciated Assets
(don’t donate these 😉 )
Market Value

Obviously, the dual impacts of receiving an income tax deduction and avoiding capital gains tax are beneficial. Consequently, the above methods can be used to dispose of assets or reallocate/rebalance portfolios in a tax-efficient way. I should note that the above is a high-level overview and there are additional tax issues to consider, so donors should consult with their tax adviser before making any donations.

What assets can be donated?

  • Liquid securities suchs as stocks, bonds, mutual funds, ETFs, derivatives, and so on.
  • Illiquid assets such as insurance contracts, restricted stock, employer stock options, business interests
  • Real assets, such as real estate or commodities
  • Other complex and esoteric assets

Many organizations are setup to accept liquid securities, but most do not have the resources to accept illiquid and/or complex assets. Typically, these can only be donated to (larger) well-resourced organizations or contributed to a foundation or donor-advised fund before being granted out to the end charity. Future posts will cover various charitable vehicles and strategies.

Active versus Passive: Fixed-Income

Actively-Managed Bond Funds Underperform…
Given the nature of fixed-income markets (see here, here, and here), one might assume that the majority of active managers should be able to outperform. However, this claim does not hold up. The below chart indicates that although active managers occasionally beat the Bloomberg Barclays US Aggregate Bond index (or simply, “the agg”), most do not in most years.

The plot thickens in our next chart, which shows that active managers generally underperform the same index. However, these managers have bursts of outperformance which consistently coincides with an increase in interest rates.

And our final chart below smooths the above chart even more by extending the rolling performance period from 12 months to 60 months. Again, some episodes of outperformance, but those times are the exception rather than the rule.

…Because The Wrong Benchmarks Are Being Used
Besides implying that most intermediate-term bond managers underperform, the above charts also suggest that the actively managed universe of intermediate term bond funds consistently maintain both a lower duration and credit quality than the benchmark, which means that perhaps the wrong benchmark is being used. Vanguard has done much analysis on this topic and reaches similar conclusions (see: Active Bond-Fund Excess Returns: Is It Alpha…Or Beta?). Anecdotally, I can say that many fixed-income funds that I come across benchmark to “the agg,” despite no semblance of similar holdings or characteristics. The below chart does a good job of illustrating that many benchmarks are misspecified. Adjusting for a fund’s holdings reduces tracking error.

Of course, all of the above charts simply relate to intermediate-term bond funds and not other popular sectors such as high-yield/bank loans or any international bonds. However, the SPIVA data is not too supportive of active fixed-income managers’ value in these sectors and I was hard-pressed to find any supporting charts that showed anything different (at least for anything more than brief windows of time).

Many funds that I know and use are benchmarked to the agg, LIBOR + x spread, or some other arbitrary benchmark. When I ask fund sponsors what they benchmark to, they usually say something to the effect of, “Well we benchmark to the [you name your index]. It’s not a perfect fit or even a good one, but that’s what it is.” A huge number of intermediate bond funds are benchmarked to the agg, but are not trying to beat it or even hold similar assets. This is also true for many other bond funds and indices. Comparing funds to arbitrary indices is not a good way to select funds, as the comparison is meaningless and can easily be gamed.

What To Do?
Of course, if the agg outperforms various other sectors over time and thus represents an opportunity cost, then why not just invest in the agg? I think that is a fine choice for very long-term investors. However, since the agg and other high-quality benchmarks’ outperformance is neither universal nor consistent AND (as we saw in the last post) credit has periods of outperformance and underperformance AND returns can be approximated ahead of time, I believe investors can do better. To apply Klarman’s framework, bonds are better “trading sardines” than “eating sardines.” Even a brief glance at the below comparison of the agg and high-yield index shows that credit returns swing like a pendulum. Buy when attractive, avoid when not.

source: Bloomberg

Several of the above charts above refer to the number of funds outperforming or underperforming, which ebbs and flows but generally more underperform. However, the data does not show how persistent outperformance or underperformance is for individual managers, nor does it show the degree of out/underperformance for individual managers. There are funds that have consistently beaten their stated benchmark and the agg over long periods of time, which means that some managers can outperform over multiple rolling periods with persistence. Even if the majority of active managers fail to beat their benchmark, there is a group that can beat their benchmark. I will not get into it here, but many of the funds that I have found have some common structural traits.

Lastly, in both order and importance, is that much of the data we have dates back to the early 1980s. Active managers outperform during periods of rising rates (see second chart) and rates have basically fallen for 35 years. This is not a prediction that the trend will reverse, but a recognition that passively managed funds have benefited from a tailwind that cannot be repeated to the same degree (rates only have 2-3% to fall until zero, not 15-20%).

The Bottom Line
So, what does this all mean?

  • Most fixed-income funds fail to beat their benchmark.
  • However, the benchmarks are often arbitrary and/or misspecified.
  • Fixed-income returns are both lumpy and predictable, so an active approach can add alpha relative to a benchmark.

One final thought is that the above all relates to relative performance. There is a lot of debate over whether to take an active or passive approach and performance metrics, but those are really secondary questions. Fixed-income is often used for an absolute return (ie. provide $x of income) or to simply diversify equity exposure. Investors should define the role of fixed-income in their portfolio before moving on to more complex and nuanced issues.