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By Ben Johnson, CFA | 08-15-2013 12:00 PM

Do Yield-Chasers Understand What They're Chasing?

In their search for income amid Fed taper fears, investors are optimistic about unfamiliar, higher-yielding assets, but State Street's Chris Goolgasian questions their judgement

Ben Johnson: I’d like to delve a little bit more into the details of some of the funds that you're managing. We’re in a market environment where investors are hanging on Fed chairman Ben Bernanke's every word, and most recently the market threw a bit of what's been branded a taper tantrum in response to some of the comments coming out of the Federal Reserve. I'm curious to know how that affected SPDR SSgA Income Allocation ETF and what you've done in the wake of the market’s taper tantrum to reposition your portfolio.

Chris Goolgasian: I think the first point on that is the shareholders, the clients, and the marketplace need to have a perspective that given how big the problems are in the world, the vocabulary changes of politicians and central bankers have an incredibly larger impact than we ever thought they would when the problems of the world were smaller. Their vocabulary changes disproportionately impact markets, and that's because the problems are so big. If the problems were smaller, we wouldn't be leaning on every bated breath of the next announcement and what the word change is. When the taper comes out, that is a significant change of pace for Bernanke, and the markets reacted accordingly. And I think as long as globally we have these types of significant debt issues, we’re going to have to continue to live with vocabulary-induced volatility.

What we've been talking about for investors is a concept called the optimistic unknown, and the optimistic unknown is that when you have something in front of you that’s really unattractive, say, in this case certificates of deposit, money markets, and short-term bonds with near-zero rates, when you have that you know for sure that that's not attractive. What it causes you to do is to optimistically buy something that you may not fully understand. But you know that on the surface it has a better yield, and you’re optimistic it will turn out okay. This decision path exists in many walks of life. It exists in politics where people move elections in the same pattern, where the person who is in office now, you are for sure certain that you do not like them. You don’t really know this new candidate, but you’re optimistic he'll turn out better. So you vote for the new candidate.

It happens the same way in the medical field in terms of some amazing statistics about only one in three men even have a physician. They are making these decisions, and when I give these speeches, I talk to the crowd and say, "Raise your hand if you have physical in last 12 months." Very few hands go up. Then I say, "Raise your hand if you have walked into a casino, bought a lottery ticket, or bet on a football game in last 12 months?" And most of the hands go up. Some people say they wished they had three hands. There's an optimistic unknown there too: I really don't want to know what the doctor is going to say, but I'm optimistic that when I gamble something good will happen.

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