# How do I tell good managed funds from bad ones?



## Paul24 (8 October 2010)

Having recently graduated from uni and landed a nice engineering position I've come to the situation where I'm still living at home and have lots of excess money (I know **** situation to be in hey)

The girlfriend and I just brought an investment property, and planning to buy our second one in 12 months time.

I want to put some money towards shares but at the moment I'm not comfortable in investing myself, will maybe do it myself in a year or so.

So I'm thinking about getting a margin loan and investing with a managed fund and then adding say $200 a week to it from my salary.

Now just searching the net there seems to be a plethora of managed funds all touting great returns. Who am I to believe? how do I tell the good ones from the band ones?

For example I was looking at wilsonHTM.


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## Sir Osisofliver (8 October 2010)

Paul24 said:


> Having recently graduated from uni and landed a nice engineering position I've come to the situation where I'm still living at home and have lots of excess money (I know **** situation to be in hey)
> 
> The girlfriend and I just brought an investment property, and planning to buy our second one in 12 months time.
> 
> ...




*Grumbles - Rant mode engaged*

Ok Paul let us say that you own an investment property outright that you manage yourself. Currently there is nothing between you and the asset. You joyfully collect all the cash flows and reap all the benefits from owning that asset. You also assume the responsibility for managing that asset (collecting the rent, mowing the lawns, performing maintenence etc).

A little while later you can't be bothered in going to the effort of collecting the rent yourself, so you decide to use an agent to act on your behalf. Now there is someone between you and the asset who collects a wage for acting on your behalf so you do not receive all the cashflow.

A bit later the Agent hires a gardener to mow the lawns so you don't have to do it anymore. Now there are two people between you and the cashflows of the asset so you receive a bit less again by paying the gardeners wages as well.

It's the same story with a managed fund. You own a portion of a fund and the fund owns a suite of assets that it holds directly. Between you and the benefits of owning those assets however are all the people that need to be paid, and all the expenses that need to be met *before* you receive your return. These wages and expenses can add up very quickly indeed. Pay the wages of your fund manager, his administration staff, his building costs, advertising expenses etc etc etc the list goes on. Managed Funds also have a clause that enables them to charge the MER (Managed Expense Ratio) *after* all other expenses have been met, and no matter what the level of return of the fund. 

You therefore as the client assume a much more significant level of risk than the Issuer of the Managed Fund. To beat the market level of return the fund manager must perform at a level that *exceeds* the market level of return enough to cover all the other expenses *and still grow*. Teh majority of fund managers are not able to do this. In a Price Waterhouse Cooper report from 2006 (I think) commissioned by the Government the effective level of return from managed funds across the industry was a whopping real level of return of 1% pa.

Paul as you can probably tell managed funds are not my favourite investment vehicle, because I have seen in my professional career too many times where owning managed funds has been significantly value destroying for clients. Adding a Margin Lending facility to the equation also adds an element of risk that you may or may not appreciate at this time. Please do not take this statement however as advice and seek in this order, Education in relation to the asset classes you wish to invest in and independent professional advice. Caveat Emptor however that a great many Financial Advisers are parasites IMO.

Good Luck

Cheers

Sir O


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## nukz (8 October 2010)

Theres only one good managed fund...

A self managed fund... the rest are a bunch of bean-counters who are clueless. 

Me personally i would suggest you sit back for a while on property, you have done well i assume and sold your property but i would deffinetly not rush back in just yet.

I should also add that i recently sold my property's in Melbourne due to a lack of confidence going forward so i'm not just saying something that i have not done myself.

If your looking at shares, i would not touch financial or mining shares(although that proberbly goes beyond popular belief) i would be looking at energy(even alternative energy) stocks and food/agriculture stocks.

You should also look at alocating a % of your assets into precious metals eg. gold/silver(physical bullion) 

To me it sounds like your planning allot ahead but i would suggest you take the back seat for abit and just watch what is going on in the world stage right now with currency's and money printing and make your own decision. 

Don't jump into anything right now unless you do lots of research.


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## doctorj (8 October 2010)

Sir Osisofliver said:


> It's the same story with a managed fund. You own a portion of a fund and the fund owns a suite of assets that it holds directly. Between you and the benefits of owning those assets however are all the people that need to be paid, and all the expenses that need to be met before you receive your return. These wages and expenses can add up very quickly indeed. Pay the wages of your fund manager, his administration staff, his building costs, advertising expenses etc etc etc the list goes on. Managed Funds also have a clause that enables them to charge the MER (Managed Expense Ratio) after all other expenses have been met, and no matter what the level of return of the fund.



Just a question: do you also build the house yourself? What about the electrical work and the plumbing?

Everything you say is true, but only for those long on expertise and time. If you have limited time or are not an expert, then it makes sense to engage others. Look at it this way, people are often comfortable to borrow in order to leverage their finances, why not be comfortable hiring others to leverage your TIME or EXPERTISE? 

All I'm saying is that there is no one size fits all solution. Managed funds are a good solution for some and self-managed is a good solution for others, depending or experience and circumstance. As for which fund is best for you, that's a very specific question that no one here can answer. However, there is plenty of research that suggests that bigger funds tend to earn, on average, higher returns for their investors due to economies of scale.


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## Logique (8 October 2010)

Google Cannex.
But bear in mind that you can get > 6% on cash savings.


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## Paul24 (8 October 2010)

I understand all that completely. The fact that say one of you guys here may be able to get 15% return, if i went to a managed fund they would get 15% too but then take 4% and I only get 11%. 
But the fact is at the moment if I went in myself I would probably just lose my money because I'm a complete newbee. 
There is no doubt in my mind I would love to manage my own shares, but at the moment I know its not possible and with some more research in time I will be comfortable taking the reign.

You are right about sitting back and watching, with whats happening with the US and the printing it almost seems like their setting them self up for another spectacular fall.


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## Julia (8 October 2010)

Paul24 said:


> I
> There is no doubt in my mind I would love to manage my own shares, but at the moment I know its not possible and with some more research in time I will be comfortable taking the reign.
> 
> You are right about sitting back and watching, with whats happening with the US and the printing it almost seems like their setting them self up for another spectacular fall.



OK, so why don't you use this doubtful time to educate yourself?
There's plenty of info available free.  Start with the education section of the ASX website:  www.asx.com.au.
Sir O has put together an excellent thread for beginners in the "Beginner's Forum".  Work your way through that.

You've obviously been pretty successful so far.  Don't put using the share market into some sort of esoteric, difficult category that is the province of 'experts'.

If you were to buy some shares in, e.g. Woolworths or one of the big banks (and that is not a recommendation), all you're doing is buying a small piece of that successful business.  And amongst it, you'll receive as dividends a bit of the profit of that business, plus as franking credits, some of the tax that company has already paid.

Then later when you build up some confidence, you may want to go for some more speculative shares where you can make a lot more, but also risk losing more.

I agree 100% with all that Sir O has said.  It takes less effort than you might imagine to educate yourself about shares.  Why would you want to give money away to a Fund Manager who often doesn't even beat the index?


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## Paul24 (9 October 2010)

I'm working my way through as much text as I can.

But in the mean time, let me put a question to you.
Me, you, the guy next door, we could easily be considered reasonably intelligent and with enough research/practice/experience we could be fairly successful in the share market as something we do on the side of our normal job.

But how can you not agree that someone, who has spent the last 40 years of their life researching, studying, masters, doctorates all in financial areas, running large financial institutes, how can investing your money with them not be a better option? How could someone like me who works in a non financial job ever expect to get the same returns as the experts.

Now yes I agree with you that a lot of the so called fund managers out their could be useless, but the small percent that are truly experts in the field, how could I expect to match them?


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## So_Cynical (9 October 2010)

Paul24 said:


> But how can you not agree that someone, who has spent the last 40 years of their life researching, studying, masters, doctorates all in financial areas, running large financial institutes, how can investing your money with them not be a better option? How could someone like me who works in a non financial job ever expect to get the same returns as the experts.
> 
> Now yes I agree with you that a lot of the so called fund managers out their could be useless, but the small percent that are truly experts in the field, how could I expect to match them?




There are some brilliant fund managers out there...Kerr Nielson of Platinum comes to mind, and we know he's good because he is probably Australia's wealthiest fund manager/stock picker. 

http://en.wikipedia.org/wiki/Kerr_Neilson 

http://www.platinum.com.au/

Now just compare what wilsonHTM does and there long term returns to what Kerr does and the Platinum funds returns and you will see the difference in both returns and investment style...actually prob not a fair comparison as Platinum just does international investing and Wilson is 100% Aussie i think.

EDIT: hey the Wilson HTM Priority Growth Fund has done pretty well...surprising, also nice to see they have PFL-Patties foods as a core (top 10) stock in there Wilson HTM Priority Core Fund (i own a few PFL shares too.)

Anyway have a look at this platinum comparison from a recent presentation and notice the out-performance at 3 yrs...Platinum the only one to actually make money during the biggest market downturn in 70 years....prob should disclose that i own a bucket load of PTM stock 
~


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## Iggy_Pop (9 October 2010)

The funds listed on the ASX also offer some reasonable returns - AFI 9.03% over five years, good liquidity - you can sell easily, no entrance or exit fees just brokerage. The MER for 0.16% and fully franked dividends, and opportunities with SPP to add to portfolio at a discount, usually once a year. 
No upfront or trailing commissions to financial advisors. 

I have about 20% of my share portfolio in LICs 


http://www.asx.com.au/products/pdf/lmi/lmi_performance_201006.pdf

http://www.afi.com.au/


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## noie (9 October 2010)

doctorj said:


> Just a question: do you also build the house yourself? What about the electrical work and the plumbing?
> 
> Everything you say is true, but only for those long on expertise and time. If you have limited time or are not an expert, then it makes sense to engage others. Look at it this way, people are often comfortable to borrow in order to leverage their finances, why not be comfortable hiring others to leverage your TIME or EXPERTISE?





the house example is not the best but works.. in this case as houses are like company's that have floated have been finished being "built"

If you are going to cut it up then you should have said :
are you going to prospect the countryside grow the wood, find and mine the iron, make the steel etc etc... but that would be inline with the fund manager creating all the companies in his fund....

IMO managed fund leg work can be done by anyone in the modern age all the information is available to the public, what they add is their "expertise" speed of execution bulk buying power, all at the participants cost.

As an educated  engineer i would suggest you do the following, 
List up what industries , sectors you know anything about.
Think if you want to know anything more about them if so start following companies within that interest you.
If nothing interests you think about the current economic climate and what areas in Australia you think may flourish, find an ETF or two and drop in.


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## gooner (9 October 2010)

Iggy_Pop said:


> The funds listed on the ASX also offer some reasonable returns - AFI 9.03% over five years, good liquidity - you can sell easily, no entrance or exit fees just brokerage. The MER for 0.16% and fully franked dividends, and opportunities with SPP to add to portfolio at a discount, usually once a year.
> No upfront or trailing commissions to financial advisors.
> 
> I have about 20% of my share portfolio in LICs




You also pay for the costs of running the LIC - not sure how much this is typically but close to 1% I suspect........


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## Smurf1976 (9 October 2010)

Always remember that past performance is not a guarantee of future performance.

Some time ago as an investment newbie I put a lot of $ into what at the time were top performing managed funds. I ended up with massive losses when it all went wrong and decided to educate myself and make my own decisions from that point on. 

It turned out that the managed funds I had invested in, were achieving high performance simply by skewing investment toward a narrow sector of the economy, thus outperforming their more broadly based rivals. When the bubble in that sector burst, so did their performance and my investments.

These days, I have some fairly simple rules. One of which is that I don't invest in anything that I do not reasonably understand. 

Another one is that I don't invest in declining industries (based on my own research) where financial success depends absolutely on the specific company outperforming their peers. Management changes eventually and just because they are grabbing a larger share of an shrinking pie now, doesn't mean they will necessarily continue to do so. Maybe profitable now, but there are certainly a lot of risks ahead and little prospect of major growth unless the company actually does successfully reinvent itself in some other line of business (but do I really want to be investing without even knowing what the company's future business activities will be? That is speculative at best in my opinion).

I also like to apply my own non-financial research where possible too. I've stayed well clear of a certain retailer after noting that several of thier stores are very run down in a physical sense, to the point that I noted significant issues in one of them that were very obvious to anyone with a suitable background in the building trades (for that matter, any decent handyman would also likely notice the same problems if they were looking for them). 

I'm working on the "rat theory" there - if you see one then the odds are very high that there are more, probably a lot more. All I did was walk around the store as a customer, and plenty of issues were immediately visible. A look in the ceiling space or under the floor would probably reveal a lot more problems. If they aren't even maintaing the stores in a safe condition then I can only wonder what else they might be running down in order to achieve "official" financial results. Just not worth the risk in my opinion.

So it's back to the start. Past performance is not a guarantee of future performance. The past performance might be based on a sound business, or it might be based on things which are unsustainable in the long term. I prefer to do my own research, since I don't trust others to do it for me.


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## awg (10 October 2010)

noie said:


> As an educated  engineer i would suggest you do the following,
> List up what industries , sectors you know anything about.
> Think if you want to know anything more about them if so start following companies within that interest you.
> If nothing interests you think about the current economic climate and what areas in Australia you think may flourish, find an ETF or two and drop in.




In the variety of good advice you have recieved, I belive the above offers a good way forward for you, as many excellent investment opportunities exist on the ASX within the Resources, Mining and Engineering sectors.

By researching some well performing companies in these sectors, one often is able to see where the jobs are and identify career opportunities, as well as analysing some technical aspects.


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## Sir Osisofliver (12 October 2010)

doctorj said:


> Just a question: do you also build the house yourself? What about the electrical work and the plumbing?



 That's kind of a long bow to draw don't you think? I think this has been answered. I started with a simple property example because Paul said he owned property and I wanted to build on what he knew. 







> All I'm saying is that there is no one size fits all solution. Managed funds are a good solution for some and self-managed is a good solution for others, depending or experience and circumstance. As for which fund is best for you, that's a very specific question that no one here can answer. However, there is plenty of research that suggests that bigger funds tend to earn, on average, higher returns for their investors due to economies of scale.




1) My exerience tells me differently. Where people are invested in a suite of managed funds I am yet to find an example where they are ahead of the game. (with the possible except of an index fund - in which you are just paying some monkey to match the index - hardly requiring "expertise" my ten year old could do that IMO.)

2) Can I get the source for your statement that that bigger funds on average make higher returns due to economies of scale please? There is a whole branch of behavioural economics that talks about all the problems that are unique to large scale operations which would seem to counter your statement. 







> Paul24 said:
> 
> 
> > I understand all that completely. The fact that say one of you guys here may be able to get 15% return, if i went to a managed fund they would get 15% too but then take 4% and I only get 11%.
> ...


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## matty77 (12 October 2010)

I would agree with most comments here, take the time to educate yourself and buy your own shares, if you aren't too sure what shares to buy you could always just buy something like Vanguard (not a recommendation) Managed funds can be hit and miss and what was good last year might not be the same the following year.

Surprised nobody mentioned this site: http://www.morningstar.com.au

Managed funds can be useful however, if you are trying to get into different markets, eg buying shares in China or something like that which you might not be able to do directly but a managed fund can do it for you.


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## Julia (12 October 2010)

Sir Osisofliver said:


> Let me answer with a question. *How could these same individuals not have seen the global financial crisis coming?*  OK sure a great many people within the industry saw that we had a very mature share market. So if they are so good, and did see it coming, why didn't they take clients funds out?
> 
> The industry is set up to have money in the system. Without money in the system, it's like a car with no petrol in the tank. You're broken down by the side of the road. Lets say you have a model bank or brokerage house that advises all its clients to exit before the big crash comes. This corrective pattern in Australia lasted between Nov 2007 and March 2009. The average business could last *a couple of months* with no cash-flow before going bankrupt. Very VERY quickly that ethical model brokerage house or bank goes out of business.  Can you see where this is going?  In many cases it is not the fault of the adviser, they are simply doing what they are told and what they are told to do is value destroying to the client.



Hallelujah!!!   Exactly so.
Why on earth don't more stupid clients of managed funds recognise this?
All the sheep just swallowed the admonitions of advisers everywhere to "just hang in there, it will all be OK," when they should have taken preventative measures before losing around 50% of their p/f's.

Sometimes I just can't believe the incredible naivete of people who listen to popular 'advisers' without considering that these people have their own very, very important agenda as a driver.


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## doctorj (13 October 2010)

Sir Osisofliver said:


> That's kind of a long bow to draw don't you think? I think this has been answered. I started with a simple property example because Paul said he owned property and I wanted to build on what he knew.



OK, fair enough.    I doubt that we’re ever going to agree on this – you believe that it’s always best to invest in assets directly and I believe that funds (private equity, index funds, hedge funds etc etc) offer some advantages that may benefit individuals, depending on their circumstances.

For the record, I invest professionally, but hold my personal holdings directly.   Each has its own benefits.  Why don’t I invest personally in the funds we invest?  Mainly because I can’t – we manage our own funds.



Sir Osisofliver said:


> 1) My exerience tells me differently. Where people are invested in a suite of managed funds I am yet to find an example where they are ahead of the game. (with the possible except of an index fund - in which you are just paying some monkey to match the index - hardly requiring "expertise" my ten year old could do that IMO.)



I know plenty of funds that make their investors plenty of money, but anecdotal evidence or specific examples won’t really prove anything.  Here’s a paper written by University of Chicago’s Booth School of Business that shows that fund managers can/do have a statistical edge over the markets.  There are other similar reports I can share from MIT etc, but I don’t have them to hand.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477586



Sir Osisofliver said:


> 2) Can I get the source for your statement that that bigger funds on average make higher returns due to economies of scale please? There is a whole branch of behavioural economics that talks about all the problems that are unique to large scale operations which would seem to counter your statement.



I was referring to a Morningstar report published around the time of my post – I don’t have it to hand, but you should be able to find it on their website.



Sir Osisofliver said:


> Let me answer with a question. How could these same individuals not have seen the global financial crisis coming? OK sure a great many people within the industry saw that we had a very mature share market. So if they are so good, and did see it coming, why didn't they take clients funds out?




Investors are not fortune tellers.  Without risk there is no profit.  Many funds did make profit (or at least lose less than the market) at the height of the crisis – the obvious example here is Taleb who made a stack for his fund.  Other funds did lose money, but most have also recovered exceptionally well.  One of the largest asset managers in the world (can’t say who, but they manage several billion) had their best month on record in September and are well up on the year, despite global markets being relatively flat.



Sir Osisofliver said:


> The industry is set up to have money in the system. Without money in the system, it's like a car with no petrol in the tank. You're broken down by the side of the road. Lets say you have a model bank or brokerage house that advises all its clients to exit before the big crash comes. This corrective pattern in Australia lasted between Nov 2007 and March 2009. The average business could last a couple of months with no cash-flow before going bankrupt. Very VERY quickly that ethical model brokerage house or bank goes out of business. Can you see where this is going? In many cases it is not the fault of the adviser, they are simply doing what they are told and what they are told to do is value destroying to the client.



Not sure about this example – banks make money on the buy side, on the sell side, for advisory etc etc.  But I thought we were discussing fund managers anyway?  Yes, fund managers will go bust if they can’t raise monies for new funds, but funds tend to be 3-5 years or longer, so not investing the funds at their disposal in the short term won’t put them out of a job.  The main thing that will impact their ability to raise funds in the future is the returns of their previous funds.



Sir Osisofliver said:


> I'll also let you know that there are two main forms of risk. Systematic risk and unsystematic (or diversifiable) risk. Systematic risk is the risk represented by the volatility of the market. Market crashes are expressions of Systematic risk. There is only one way to eliminate systematic risk. You must hedge your portfolio. To do so is not without considerable expense. Now go research how many managed funds use hedging to remove systematic risk in times of market downturn. I'll just wait here whilst you research several thousand products to discover that almost every single managed fund out there do not even have the ability to do such an activity. It's not part of their charter.



How can an individual hedge better than a fund?  I guess what you’re asking is can a fund generate alpha returns – there’s plenty of research both ways on this, but take a look at : http://www.create-research.co.uk/pubRes/exploituncert/downloadreport.html


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## doctorj (13 October 2010)

Julia said:


> Hallelujah!!! Exactly so.






Julia said:


> Why on earth don't more stupid clients of managed funds recognise this?
> All the sheep just swallowed the admonitions of advisers everywhere to "just hang in there, it will all be OK," when they should have taken preventative measures before losing around 50% of their p/f's.
> 
> Sometimes I just can't believe the incredible naivete of people who listen to popular 'advisers' without considering that these people have their own very, very important agenda as a driver.



Julia, your posts are usually quite well thought out and balanced, but I’m at a loss here. Are you talking about financial advisors or fund managers – it seems both or are you confusing the two? Many people who are a lot more successful than any of us here invest a great deal in managed funds and I highly doubt they are all ‘stupid’ or ‘sheep’.

I don’t want to come across as a crusader in favour of fund managers and I do agree that those with time/skills should consider managing their own money, but the vitriol here is absurd. The fact is that funds give people without the skills or the time a method of saving for the future. Even those comfortable in making their own investment decisions could benefit from investing a portion of their portfolio in funds – think improved diversification, access to different asset classes (international debt/equity, emerging markets, private equity etc) or industry sectors (e.g. someone down the board said that as an engineer, they like to focus on that sector. I’m sure most would agree this is a good strategy, but what if engineering goes through a cyclical downturn?) etc


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## Julia (13 October 2010)

doctorj said:


> Julia, your posts are usually quite well thought out and balanced, but I’m at a loss here. Are you talking about financial advisors or fund managers – it seems both or are you confusing the two?




Sorry if I was unnecessarily vehement in my support of Sir O's remarks, but it's something about which I feel strongly.  I'm just tired of hearing people say how much they are down in their Super and other managed funds since the GFC.




> Many people who are a lot more successful than any of us here invest a great deal in managed funds and I highly doubt they are all ‘stupid’ or ‘sheep’.



No, perhaps not, but many simply are too lazy or uninterested to educate themselves financially.  
I'm not sure how you'd know that 'many people investing in managed funds are *a lot more successful than any of us here*?
You've chided me for rhetoric, and I will do the same in return over this statement.



> I don’t want to come across as a crusader in favour of fund managers and I do agree that those with time/skills should consider managing their own money, but the vitriol here is absurd. The fact is that funds give people without the skills or the time a method of saving for the future.



Agree that the principle of ensuring people put money aside for the future is absolutely necessary.  What I'm questioning is that professional fund managers necessarily do better than individual investors who take the trouble to educate themselves and then devote reasonable time to looking after their investments.



> Even those comfortable in making their own investment decisions could benefit from investing a portion of their portfolio in funds – think improved diversification, access to different asset classes (international debt/equity, emerging markets, private equity etc) or industry sectors (e.g. someone down the board said that as an engineer, they like to focus on that sector. I’m sure most would agree this is a good strategy, but what if engineering goes through a cyclical downturn?) etc



Well, that's a matter of opinion.  Diversification doesn't necessarily reap better rewards.   Personally, I'd rather put more into a sector that's running well, go with that trend, and then exit when it falls from favour.


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## Julia (14 October 2010)

From yesterday's Business section in "The Australian":



> One of Australia's most prominent private equity figures, Carnegie Wylie cofounder Mark Carnegie, has hit out at the excessive fees and lack of transparency within his own industry, urging superannuation investors to do more to hold it accountable.
> 
> The financier has called for the alternative asset classes - including private equity, venture capital, hedge funds and infrastructure - to be subject to the same rules and regulations as public companies managing super funds, including the requirement to disclose links between performance and executive pay.
> 
> ...


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## doctorj (15 October 2010)

Julia said:


> Sorry if I was unnecessarily vehement in my support of Sir O's remarks, but it's something about which I feel strongly. I'm just tired of hearing people say how much they are down in their Super and other managed funds since the GFC.



It’s unfortunate that people lose money.    What’s even more unfortunate is that people have become particularly accustomed to the idea that losing money is the exception, rather than a real possibility.  For a long time, the markets have only gone one way, but it’s the exception, rather than the rule.  There is no return, without risk.  Many people were more than happy to book exceptional returns (15-20% or even higher) and in fact have benefited greatly from it and now they’re suffering the other side of the coin.

With a managed fund, you invest in a strategy and the fund manager has to invest within those rules.  They’re not a promise of return and they’re not a guarantee that a particular product is good for you (it’s probably a different story with financial advisors and superfunds as you’ve mentioned, but the subject is managed funds…)




Julia said:


> No, perhaps not, but many simply are too lazy or uninterested to educate themselves financially.






Julia said:


> I'm not sure how you'd know that 'many people investing in managed funds are a lot more successful than any of us here?
> You've chided me for rhetoric, and I will do the same in return over this statement.




Fair play.  My logic behind this statement is that globally, there are very large amounts of money under management – much more than can be accounted for by retail investors (which most are here at ASF).  A lot of this money comes from pension funds and insurers, but it also comes from wealthy individuals.  Anyhow, I agree it’s only relevant in trying to illustrate the argument (and the only argument that I’m trying to make) is that there are good managed funds, good fund managers and depending on an individual’s circumstances and objectives, they may benefit from investing in them.




Julia said:


> Agree that the principle of ensuring people put money aside for the future is absolutely necessary. What I'm questioning is that professional fund managers necessarily do better than individual investors who take the trouble to educate themselves and then devote reasonable time to looking after their investments.



Of course, it’s entirely possible that an experienced retail investor with a modest sized portfolio could outperform a fund in any given period.  That’s why everyone is at ASF – they desire to be in that position and their dedication is to be admired (and hopefully one day rewarded).  The problem is that there are only 24 hours in a day and people’s time may be better spent doing other things.  There’s quite a difference in the time taken to dd on a set of managed funds vs becoming a consistently competent trader/solo investor.  Aside from time, there are also other reasons an individual might be interested in a managed fund – diversification, access to different asset classes, international exposure, leverage others expertise etc.




Julia said:


> Well, that's a matter of opinion. Diversification doesn't necessarily reap better rewards. Personally, I'd rather put more into a sector that's running well, go with that trend, and then exit when it falls from favour.



As you said, each to their own.




Julia said:


> From yesterday's Business section in "The Australian":



So does that make him a good fund manager or a bad one?


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## Julia (15 October 2010)

doctorj said:


> So does that make him a good fund manager or a bad one?



I don't suppose it makes clear whether he is himself good or bad.

I just posted it because I found it interesting that an 'insider' in the industry could so slam the performance of many of the contributors to that industry.

Your points about the usefulness of managed funds are well made, doctorj, and I quite understand what you're saying.

From time to time I just get a bit irritated by all the people who are so critical of how their Super and other managed funds have lost money, but who are not prepared to take some responsibility for their own outcomes, even if this just means understanding the options they might have within the various types of managed/super funds.

Anyway, thanks for the civilised discussion.


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## basilio (16 October 2010)

This is a very useful thread and certainly brings up many of the issues that many longer term  investors or "observant" observers would have noticeed about the funds industry.

I thought Julia's quote from Mark Carnegie who noted how well investment mangers were doing while their clients received little was the most telling. Inside that picture there should also be the realisation that the nominal increases in market indexes have fundamental flaws which systematically overstate the increases in share value. The problem lies in that the index is always changing as companies  fall and are replaced with better performers.  That will tend to keep the index higher than  the actual investment funds which continue to  take the losses from the failed companies.

And of course any increase in market indexes isn't adjusted for inflation or the ongoing management costs of investment bodies. As mentioned a few times these fees are taken at many levels and through good times and bad which magnifies the costs.

On a personal note I can offer the experience of knowing one particularly ethical and effective financial planner who was very good and attempted to look after his clients. The problem? By being so professional and careful with his clients interest his employers were not making enough money... That had it's inevitable consequences and that probably says it all.


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## doctorj (16 October 2010)

Julia said:


> From time to time I just get a bit irritated by all the people who are so critical of how their Super and other managed funds have lost money, but who are not prepared to take some responsibility for their own outcomes, even if this just means understanding the options they might have within the various types of managed/super funds.



Agree here. Whether it’s a fund or the latest hot spec stock, there is only one rule - caveat emptor.  By taking shortcuts, you only risk your own coin.




Julia said:


> Anyway, thanks for the civilised discussion.



It’s been fun.  Apologies if I got a bit agitated, but I felt that people were encouraging the OP to write off an option without due consideration for his or her circumstance.


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## Sir Osisofliver (22 October 2010)

doctorj said:


> OK, fair enough.    I doubt that we’re ever going to agree on this – you believe that it’s always best to invest in assets directly and I believe that funds (private equity, index funds, hedge funds etc etc) offer some advantages that may benefit individuals, depending on their circumstances.
> 
> For the record, I invest professionally, but hold my personal holdings directly.   Each has its own benefits.  Why don’t I invest personally in the funds we invest?  Mainly because I can’t – we manage our own funds.




OK we can agree to disagree if you would like, I take the view that the results are the most important factor here...having said that...



> I know plenty of funds that make their investors plenty of money, but anecdotal evidence or specific examples won’t really prove anything.  Here’s a paper written by University of Chicago’s Booth School of Business that shows that fund managers can/do have a statistical edge over the markets.  There are other similar reports I can share from MIT etc, but I don’t have them to hand.
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477586




From your above link..... _We find overwhelming evidence that the hedge fund managers in our sample have stock-picking skills. The average one-, two-, and three-year raw returns of long recommendations submitted to the site over the January, 1 2000 to December 31, 2008 period are 17.11%, 45.02%, and 74.39%, respectively. *After controlling for market risk, size risk, book-to-market exposure, and momentum risk, via a control portfolio,* we find excess one-, two-, and three-year returns of 9.52%, 19.03%, and 23.60%, respectively. These results are all highly statistically significant and are well in excess of any management and performance fees these managers charge their investors._

I'm sure you've heard the statement, there are lies, damned lies and statistics right?  What exactly do you think the bolded line above means? I'll tell you what it means to me. They have removed MARKET RISK from their comparisons. So I will say it again in a different way. Hedging is the only way to remove market risk. Whilst managed funds do perform hedging, they are generally hedging specific types of risk (eg Currency) rather than whole market risk. Managed Funds on the whole are *unable* to hedge in this way because it has considerable expense to do so, and doing so locks the value of the fund. So the investors only option to remove Market risk is to remove their funds from the product (paying any exit fees applicable). 

Comments?



> I was referring to a Morningstar report published around the time of my post – I don’t have it to hand, but you should be able to find it on their website.




Can't be stuffed looking for as I simply cannot spare the time. If you link it I'll gladly look at it. 



> Investors are not fortune tellers.  Without risk there is no profit.  Many funds did make profit (or at least lose less than the market) at the height of the crisis – the obvious example here is Taleb who made a stack for his fund.  Other funds did lose money, but most have also recovered exceptionally well.  One of the largest asset managers in the world (can’t say who, but they manage several billion) had their best month on record in September and are well up on the year, despite global markets being relatively flat.




Wow that's a great chestnut. We aren't fortune tellers, we can't tell the future. (It sound suspiciously like a black swan event kind of comment.) No profit without risk. Great! lets disavow all responsibility towards the people who entrust their life savings to us.... and hey it's not our money so lets not have any risk protection in place either.

So in August 2007 when BNP Paribus said it couldn't value the assets in two of it's funds because of a "complete evaporation of liquidity" in the market, or when the European Central Bank pumped 63 billion euros to try an improve liquidity and then added another 108 billion when that was enough a week later; Or when the Federal reserve cut interest rates and warned that the credit crunch "could be a risk to economic growth"..... how much of a fortune teller did you need to be to put risk protection in place?

How about September, when Northern Rock had to apply for Emergency financial support from the Bank of England as lender of last resort causing the biggest run on a Bank seen in a century... Did we still need to be fortune tellers to put risk protection in place?

Perhaps October when UBS announced losses of 3.4 Billion dollars from sub-prime related investments...did we need to be fortune tellers then to protect the assets?

When exactly during the storm of negative overseas announcements over the next three months would it have been appropriate as an Australian Fund manager to *protect* the assets under their control?

Yet how many did so? Your comment about unable to predict the future - when the issue is one of *risk management at an appropriate time frame*
 sounds to me like a control statement. 



> Not sure about this example – banks make money on the buy side, on the sell side, for advisory etc etc.  But I thought we were discussing fund managers anyway?  Yes, fund managers will go bust if they can’t raise monies for new funds, but funds tend to be 3-5 years or longer, so not investing the funds at their disposal in the short term won’t put them out of a job.  The main thing that will impact their ability to raise funds in the future is the returns of their previous funds.




Yeah regardless of the time period that the 3-5 years crosses in terms of economic cycles.  Since the average length of an economic cycle (In Australia at least) is 6.8 years, shouldn't that mean there is a window of opportunity that is ideal for construction of a buy and hold portfolio? What do funds do during the other 60% of the time when the market is not in its ideal buying window or falling? Oh yeah they are strutting around in thinking they are the smartest guys in the room as the markets are going up.



> How can an individual hedge better than a fund?  I guess what you’re asking is can a fund generate alpha returns – there’s plenty of research both ways on this, but take a look at : http://www.create-research.co.uk/pubRes/exploituncert/downloadreport.html




I think I have already answered this above.

In relation to your post immediately above.... I *absolutely* encourage everyone who thinks that managed funds are an appropriate investment for them to look *very very * carefully at what they are buying.

Cheers

Sir O


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## roland (22 October 2010)

I haven't really read much of this thread, but having been in a few managed funds, with my super, my wife's super and her investments still sitting with Colonial First State, I would suggest that the management of the funds is not dynamic enough.

Why there are not stop losses in place to avoid things like the GFC killing all the funds is beyond me. With Colonial I believe that the funds are reviewed every 6 months and rebalanced according to this schedule. So if a portion of the fund tanks within this time frame, then tough luck.

Of course you could rebalance the funds yourself, but lose out on entry and exit margins.

Having said all that, there is still a place for managed funds - for non active investors - but without the risk management that we are all used to with trading, then they don't produce the returns they should.

I sent an email to Colonial about stop loss strategies on the managed funds and was totally ignored...


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## Julia (22 October 2010)

roland said:


> Why there are not stop losses in place to avoid things like the GFC killing all the funds is beyond me.



Perhaps because to have moved to cash when the GFC threatened would have cut off the commissions received by the fund managers.


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## Tukker (23 October 2010)

Julia said:


> Perhaps because to have moved to cash when the GFC threatened would have cut off the commissions received by the fund managers.




A senior portfolio manager in the east told me exactly the same thing over a beer.  

To add my own belief however, couldn't the massive shift from equities to cash be one of the *main* contributing factors of the GFC? The result of said dodgy fund managers/advisers signaling a financial event horizon, compounding the spiral of doom?

If sophisticates control 90% of the stock market's trend, isn't it fair to assume that if they all dumped at the same time then there would be no significant market to trade? 

Imo its a game of follow the leader really.


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