How to invest according to Anthony Bolton
Thursday 30 April 2009
In an extract from his book, Anthony Bolton discussed his favourite type of share...yes that’s one that goes up in value over time. But often when reading snippets from articles, or listening to lectures, sometimes little comments or points of view can be the nuggets of gold you are looking for. Anthony Bolton mentions Jeremy Grantham, chairman of GMO, who makes some very interesting observations about growth and value investing in the US:
"Growth companies seem impressive as well as exciting. They seem so reasonable to own that they carry little career risk. Accordingly, they have underperformed for the last 50 years by about 1.5 per cent a year. Value stocks, in contrast, belong to boring, struggling or sub-average firms. Their continued poor performance seems, with hindsight, to have been predictable and, therefore, when it happens, it carries serious career risk. To compensate for this risk and lower fundamental quality, value stocks have outperformed by 1.5 per cent a year."
Anthony Bolton went on to comment “I couldn't put it better. I know where I want to place my bets given these long-term odds.”
Well Anthony Bolton and I do have something in common after all. Except that stock picking value shares is likely to be elusive for most fund managers, instead invest in a collection of value shares similar to an index fund and your long term returns might outperform as Jeremy Grantham states above.
posted by Murray Round Wealth Management @ 11:08,
Why I despise fund managers using inappropriate titles…especially Absolute Funds
Wednesday 29 April 2009
Absolute Return and Absolute Growth funds claim to offer investors the elusive investment prize....making money in a falling market!
Does it work? Ask yourself this question, what does Absolute Return and Absolute Growth funds mean to you?
In my view that means a positive return on an investment over time.
These funds are supposed to use various financial tools to minimise the downside. Yet it appears not to work. The FT quoted on March 27 the following...
“Paul Branigan admits that Premier Absolute Growth is "not the easiest fund to explain". It contains a cocktail of structured products, closed-end fund of hedge funds and zero-dividend preference shares - vehicles that retail investors and even wealth managers will struggle to understand, partly because their structures are complex, partly because the underlying sources of risk and return are various and opaque.
With a crisis that many blame on the over-sophistication of finance, particularly the practice of reassembling old asset classes into new ones, have funds like Absolute Growth had their day?”
I was interested in a comment made recently, a Turkey would not vote for Christmas. The managers of these funds are not going to promote these funds in a negative way, as that would be like giving up and sacking themselves! Instead they put a brave face on, and say things like.... “Mr Branigan's defence is that the alternative offers little scope for differentiation. If you look at long-only funds, in the end they're all much of a muchness," he says. "A manager who is good one year will be bottom next year. With some exceptions, there's little consistency. A fund that is offering something different has its place."
But during the banking collapse last autumn, differentiation proved elusive for managers focused on absolute and relative returns alike. Premier Absolute Growth fell 29 per cent over the year to March 16 -a whisker above the average fund in the UK All Companies sector, which lost 33 per cent.
"We should be able to produce positive returns in normal conditions but we're not designed to cope with the kind of hiatus in markets we saw last year," Mr Branigan says. "We're always going to be impacted."
If they are going to be impacted, why call themselves Absolute return funds?
I really do believe we need more honesty in the marketing of investment products to retail consumers and certainly in my view Absolute return funds do not appear to offer what they say on the tin!
In these volatile times, with confidence low, investors need transparency and a greater understanding of what they are investing into…the fund managers have to rebuild trust but Absolute Return funds are probably not the way forward.
posted by Murray Round Wealth Management @ 11:08,
The Index Funds Win Again
Monday 27 April 2009
According to Mark Hulbert of NY Times, there is yet more evidence that it makes sense to invest in simple, plain-vanilla index funds, whose low fees often lead to better net returns than hedge funds and actively managed mutual funds with more impressive performance numbers.
Basic stock market index funds generally aspire to nothing more than matching the returns of a market benchmark. In a miserable year for stocks, index funds may not look very appealing. But it turns out that, after fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund.
The evidence comes from a new study by Mark Kritzman, president and chief executive of Windham Capital Management of Boston. He presented his results in the Feb. 1 issue of Economics & Portfolio Strategy, a newsletter for institutional investors published by Peter L. Bernstein Inc.
Mr. Kritzman, who also teaches a graduate course in financial engineering at M.I.T.’s Sloan School of Management, set up his study to accurately measure the long-term impact of all the expenses involved in investing in a mutual fund or hedge fund. Those include transaction costs, taxes and management and performance fees.
He calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualised return of 10 percent, an actively managed mutual fund with an annualised return of 13.5 percent and a hedge fund with an annualised return of 19 percent. The volatility of the three funds’ returns — along with their turnover rates, transaction fees and management and performance fees — was based on what he determined to be industry averages.
Mr. Kritzman found that, net of all expenses, including federal and state taxes for a New York State resident in the highest tax brackets, the winner was the index fund.
Specifically, he assumed that long-term capital gains were subject to a 15 percent federal tax and a 6.85 percent state tax; short-term capital gains and dividends were taxed at a combined federal and state rate of nearly 42 percent. The index fund’s average after-expense return was 8.5 percent a year, versus 8 percent for the actively managed fund and 7.7 percent for the hedge fund.
Expenses were the culprit. For both the actively managed fund and the hedge fund, those expenses more than ate up the large amounts — 3.5 and 9 percentage points a year, respectively — by which they beat the index fund before expenses.
If such outperformance isn’t enough to overcome the drag of expenses, what would do the trick? Mr. Kritzman calculates that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.
The chances of finding such funds are next to zero, said Russell Wermers, a finance professor at the University of Maryland. Consider the 452 domestic equity mutual funds in the Morningstar database that existed for the 20 years through January of this year. Morningstar reports that just 13 of those funds beat the Standard & Poor’s 500-stock index by at least four percentage points a year, on average, over that period. That’s less than 3 out of every 100 funds.
But even that sobering statistic paints too rosy a picture, the professor said. That’s because it’s one thing to learn, after the fact, that a fund has done that well, and quite another to identify it in advance. Indeed, he said, he has found from his research that only a minority of funds that beat the market in a given year can outperform it the next year as well.
Professor Wermers said he believed that it was “exceedingly probable that any fund that has beaten the market by an average of more than one percentage point per year over the last decade achieved that return almost entirely due to luck alone.”
“By definition, therefore, such a fund could not have been identified in advance,” he added.
The investment implication is clear, according to Mr. Kritzman. “It is very hard, if not impossible,” he wrote in his study, “to justify active management for most individual, taxable investors, if their goal is to grow wealth.” And he said that those who still insist on an actively managed fund are almost certainly “deluding themselves.”
Study after study says the same thing, yet many investors do not hear the message from their advisers or fund managers…why? Because it's not in the sellers' best interest to tell their clients…simply because they, as fund managers or advisers will not make as much money!
Of course those fund managers that believe they can do better may prove to do so, but as the article says, how do you know which ones will do so in advance of their success? In fact with the large number of funds that fail to beat the market average, you are more likely to choose a fund that underperforms.
If you do have an actively managed portfolio of funds or a direct share portfolio managed by stockbrokers, perhaps it's time get the odds in your favour.
posted by Murray Round Wealth Management @ 10:49,
Ten principles for a Black Swan-proof world
Thursday 16 April 2009
It is fascinating to listen to new ideas and develop knowledge. I happened to read in the FT the following 10 principles by Nassim Nicholas Taleb.
Taleb wrote "The Black Swan", so named because The term Black Swan comes from the assumption that 'All swans are white'. In that context, a black swan was a metaphor for something that could not exist. The 18th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.
Taleb also has strong opinions...take a look at this interview and make your own mind up. Whatever your views, the 10 Principles are worth thinking about.
Here are the 10 Principles:
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
In other words, a place more resistant to black swans.
The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable
posted by Murray Round Wealth Management @ 15:40,
How to spot a naive fund manager
Tuesday 14 April 2009
One thing investors need to remember is to eye ball who ever is doing the investing for them. If you use an adviser, has the adviser actually met and eyeballed the fund manager? That is in our view part of the due diligence process.
According to Sara Smith of Citywire, she says” Over the past year, the collapse of Britain’s banks has led many to question why fund manager shareholders did not challenge company management more – why did they naively accept the rosy corporate positions presented?
There were, of course, managers blowing the whistle, who showed a healthy mistrust for the glowing annual reports posted by financial institutions ahead of this crisis, but there were too many who simply accepted them at face value.
There are few challenges for wealth managers this year more important than separating the naïve from the shrewd.
Jacob Schmidt, director of Schmidt Research Partners, said one of the keys to filtering out naïve fund managers is finding those who can prove their ideas as genuinely original. Managers who tend to follow the crowd can easily be caught in market sentiment and not challenge company management.
He said: ‘When it comes to picking fund managers it is imperative that your due diligence procedure establishes whether they are serious idea-generators or just copycats. Most managers give you a fantastic presentation; they’ve got all these qualifications and so on, but not every fund manager is really original. If he’s not being original and he’s piggy-backing on other managers’ ideas, you really need to determine whether he is doing the appropriate research on the companies or simply taking everything at face value.’
Schmidt said the best way to identify a manager with original ideas is to spend time with them, if possible at their desk, talking about how they find their ideas and watching them at work.
Kevin Gundle, director of Aurum Research Limited, agreed that experience can go a long way in helping managers to see through the initial facts and figures put forward by companies. However, there is a difference between recklessness and inexperience, warning that experience can in fact lead to arrogance.
He said: ‘You need to look for someone who is clearly level-headed; managers who can express their opinions having had the benefit of experience. At the same time, you need to look out for arrogance; those who assume they know more than the market and those who don’t have the humility to accept that things can go wrong quickly.’
It is interesting that when we meet new clients, so many have neither had the opportunity of meeting their fund managers and most advisers have not interviewed or even met the fund managers that they recommnd to their clients. In this changing world we now live in, not only do investors need transparency but also confidence that what they are investing into has been thoroughly checked.
..and investors, do your due dilligence today.
posted by Murray Round Wealth Management @ 08:00,
iShares Latest
Thursday 9 April 2009
We understand that today the Board of Directors of Barclays Plc announced the sale of the iShares business to CVC Capital Partners.
CVC Capital Partners is a leading global private equity and investment advisory firm, headquartered in Luxembourg with a network of 19 offices across Europe, Asia and the USA.
Rory Tolbin, the Managing Director and CEO of iShares Europe provided this statement on the sale:
'As the global leader in Exchange Traded Funds, iShares' success is built on our commitment to serving investors around the world. This commitment will continue under the new ownership of iShares. We will accelerate the development of exchange traded funds in Europe and continue to innovate our products and services.
Since the start, iShares has developed its own unique culture and way of doing business, valued by our clients and partners. This is what has made iShares such a valuable acquisition to our new owners, and they now want to build on this foundation through:
Product excellence
Commitment to providing outstanding service to our clients
Firm belief in local market expertise
Employing the industry's top talent
Recognition of the value of a strong brand
Passion about the European ETF opportunity
The current leadership team will remain in place and once the transaction is completed, iShares will begin the transition process towards an independent stand alone entity that will create, manage and distribute products.We look forward to further building our relationship with you in the future. We will keep you informed of developments over the coming months.'
posted by Murray Round Wealth Management @ 14:00,
In times of trouble, head for hills and buy gold…
Generally gold is a safe haven if you mistrust the paper economy.
We were in conversation with the FT Investors Chronicle in response to a readers question about investing in gold. Click here for the article by Moira Oneill of the FT.
In our view gold is not an investment, rather it’s a speculation. There is a difference. In fact, the long term confirms this point.
Jeremy Siegel is a professor of finance at the Wharton School of the University of Pennsylvania…in an article by Mark Miller, he states "a dollar investment in gold way back in January of 1802 would have grown to just $1.62 by the end of 2005. Contrast that with the growth of other investment types: T-bills would have grown to be worth $293, bonds to $1,083, and a dollar investment in stocks would have grown to be worth a staggering $666,180. Not a thousand times better than gold. Not 10,000 times better than gold. But more than 400,000 times better than gold! So much for the claim that investment quality gold has actually outperformed stocks."
The point is that gold isn't so much an investment as it is a trading opportunity. If you're a trader or speculator, with knowledge of all the factors that influence the price of gold, and the dedication to watch your trades closely and dart in and out of the gold market, it may hold some appeal. But if you're an investor, whose desire is to make a reasonable return on your money over time without a huge time commitment, gold is probably best left out of your portfolio.
Sure there will be periods when gold races ahead of traditional stock and bond investments. But when you hear the clever commercials of the gold promoters trying to insinuate that recent short-term price movements are anything more than that, just smile and know that the path to long-term increase is more likely to be found if your pockets aren't filled with gold.
Reader comments from Investors Chronicle
posted by Murray Round Wealth Management @ 10:50,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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