Rational Advisor

Here are some key notes on the Fund industry from the Economist dated March 5th 2008 - A Special Report on Asset Management

“Retail investors can feel overwhelmed by the thousands of funds on offer, so they are inclined to choose names they recognise. This favours funds that spend a lot on marketing and advertising. As a result, clients may not choose the best funds. But there is nobody to steer them in the right direction, because giving clients individual advice is too difficult and too expensive.” - Pg 18

Rational - Hence the need for a Financial Advisor, instead of just gravitating to a “name” that you’ve heard of. There is no comfort in having a BIG name behind the fund management, after all they are also going to fish out of the same pool.

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“The difference between professional-led and business-led companies. In the first sort, the fund managers are in charge. The second kind are in danger of becoming too preoccupied with short-term profit, increasing the proportion of assets under management and running the risk of damaging the culture and long-term reputation of the firm.” - Pg 15

“The bigger you are, the more sales-oriented you become because you are tapping into the mass market. Fund managers become less important than the marketing and compliance people.” Pg 15

“Eventually, the business and marketing people came to lead. The risk was that they ran the company on the basis of what was best in the short term.” - Pg 15

“For example, marketing people may persuade firms to launch funds in hot areas (such as technology in 1999-2000) even when investors think the top of the market may be in sight.” - Pg 15

Rational - This is a key point in the investment community. Fund firms that were led by people that understood investments created great track records. They were professional-led (run by professionals who understood the dynamics of the industry and the clients) as opposed to business-led (run by people who know how to market or are good bean counters). Many of Canada’s great investment firms were started and run by investment specialists, and then as soon as the bean counters took over… eg Temple-thingy, Tri-thingy, Mack-thingy etc. The culture suffers when the bean counters become the chiefs, as the focus on the end investor is lost, instead it’s all about how much more effectiveness can you create, which means that customer service suffers, and dis-satisfied end investors increase. The compliance and the marketing departments become much more important than they group making the investment decisions - this is why there were so many tech funds created at the top of the tech market - it was the “me too” attitude of the marketing group and the bean counters, that said “We have to grab a part of this “hot” asset group”. Whereas the managers were saying, “Uhmmm, I think it’s a little too expensive”. Who ended up paying for these marketing and bean counters mistakes - the investing public!

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“When lots of capital flows into an asset class, it starts to behave like other markets. The recent problems in the British commercial-property market are a good example. Retail investors flocked into the sector as a diversifier from equities, and in the ten years to 2006 it performed brilliantly. But property is an illiquid asset. When prices started to fall last year, investors rushed to redeem their holdings. But it was impossible for the funds to realise on their properties in such short order, so many of them have been forced to suspend dealings in their shares and units. The asset class was simply not liquid enough to be a real diversifier for so many investors.” - Pg 12

Rational - this is why it is not good to chase a “hot” investment. Even if it seems immune. People in UK did not think Real Estate could fall like it did, because for ten (Yep, 10) years it was doing great. Think carefully, whether it could happen here in Canada as well, when you consider Real Estate here.

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“Hedge funds are rapidly deteriorating in quality. There is a nasty accident waiting to happen,” says Jeremy Grantham of GMO, a fund-management group.” - Pg 11

Rational - One of the scariest things happening in the markets right now, is the immense number of hedge funds popping in and out. Much of these running on very good short term numbers, lots of leverage, and sometimes with managers that have never experienced a downturn. They have become cheaper to be a part of, and Pension companies and otherwise smart institutions are jumping on to this band wagon. Let me remind you, it was These same pension funds, such as Teachers Pension Fund, that were also one of the larger shareholders in Bre-X and Nortel.

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“There is no point in buying what everyone else is buying.” - Pg 16

“If you live by short-term performance, you can die by it too.” - Pg 18

“According to a 2004 paper by two academics at the University of Chicago, Henrik Cronqvist and Richard Thaler. But despite the large choice, most participants put their money into funds with an alluring recent record. The favourite fund at launch, specialising in technology and health care, had risen 534% in the five preceding years. Over the next three years, however, it lost 70% of its value.” - Pg 19

“People thinking about their retirement are not really interested in whether their portfolio has beaten the S&P 500 index or outperformed its peers in the global-equity-funds sector. What they want to know is how much income they can expect and how much spending power it will command.” - Pg 19

Rational - Read these last points carefully. Buying something with a hot performance numbers over the last five years is dangerous, and really quite meaningless. All that you should be caring for is that at retirement or when I need the income, can this investment best meet my needs, and along the way, does its volatility best fit my tolerance.

Rational - Dick Cheney and Barack Obama are cousins see link below

http://www.msnbc.msn.com/id/21340764/

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