So the Hedge Fund manager says go index!
Thursday 25 September 2008
In the FT on September 20th, a leading US hedge fund manager, Jim Chanos, who manages $7bn, warned that the crisis would worsen and suggested investors avoid picking stocks and instead protect themselves by going into index funds.
What a sensible man!
Yet, on the same page in the FT, David Einhorn, who runs Greenlight Capital and manages the Greenlight fund, valued at $6bn, has returned above 20% per year for the past 10 years. That is without doubt an impressive record…..thus so far.
Credit where credit is due but the problem is that the focus by investors tends to be on past results rather than how the results were achieved. Let me explain...
Without doubt there are individuals who have an uncanny ability to make the right calls…actually they are bets in the stock market. Looking from the outside in, any investor would love to be part of Einhorn’s success, it’s only natural. Most investors would not tend to worry or care how he makes money just as long as he makes it (by that I do not mean printing it!)
However, for the majority of investors they will never get the opportunity to benefit from such a success story. How would any investor have known 10 years ago that Einhorn was the manager to pick? There were and still are hundreds of other potential Einhorns saying the same things but perhaps they are not winning as many bets. Then there is the incidence of luck to consider. If you ask 100 people in a room to toss a coin - at the end of the coin tossing, there will be someone who calls the coin toss right…but does that make him or her an expert coin tosser…actually the random events offer legitimate explanation for the expert coin tosser. Could the same be true for Einhorn. In other words, perhaps the incidence of success is not skill but random luck.
Whilst Einhorn may have a unique ability and there are no random events in his success, investors have another problem to face. Accessibility. If Einhorn has a reputation for delivering returns, through skill or luck, how do you get to invest your money with him? The answer is you don’t! Why?
Most investors have insufficient capital. I do not know what minimums he accepts or whether his funds are closed now, but if you manage $6bn, you do not want the administration of dealing with small sums to invest. By small I do not mean £10,000, perhaps even £1m may not be enough. A pension fund valued at $50bn could allocate say only 1%, which is significantly more than most private investors’ wealth and be more of a worthwhile investor for Einhorn.
For the average investor and by that I mean investors with up to £25m to invest, it is better following the advice of Jim Chanos. You increase your chance of success to probabilities of success rather than pure luck.
Here is a statement to confirm my point.
In the FT on September 15th, James Bevan, chief investment officer, of the CCLA, specialist investment management for charities, faith organisations, and local authorities said “The probability that you will get a decent return over a rolling 15 years from equities or real estate is reasonably assured. The expectation that you will definitely get an adequate return from a skilful manager over a 15-year view has to be zero because skill by definition has to be a zero sum game.”
So why take the risk of trying to pick a manager when the chances of success are better by buying the market. Of course an investor may say but I am not investing into hedge funds. I accept that point but the reference is to all active managers.
Categories: Index Funds
posted by Murray Round Wealth Management @ 09:44,
The financial world is on a precipice..
Wednesday 24 September 2008
The news that Hank Paulson, the US Treasury Secretary, plans to bail out the banks is proving difficult for the Senate to swallow. At face value, I would agree. Yet, if you help a friend unconditionally, do you think they will walk all over you, or do you think when the time comes, they will help you in return.
Paulson’s plan is a test of integrity and trust for the bankers.
Just as the wildwest was eventually cured of gun slinging mavericks through the wisdom of crowds and democracy, perhaps we can all move forward to a banking system that has more integrity, well, I hope so!
Of course, if the bankers do not play ball, the Government's of tomorrow can always change their minds.
posted by Murray Round Wealth Management @ 11:50,
No crisis in Ireland…
I thought this may be interesting with all the issues we are facing today…
In Ireland, on 20th September, the Government has decided to increase the statutory limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per depositor per institution. The cover will apply to 100% of each individual’s deposit.
See the Government statement...click here
Here is also a link to the Irish financial regulator for more information
What’s my point?
UK individuals could open up offshore accounts with higher protection than the UK .
There is a currency issue, but some investors may be happy with the euro as they have peace of mind!
The question is, should the UK government increase the limit?
The world is changing...
posted by Murray Round Wealth Management @ 11:13,
Apt sign for present financial times
Tuesday 16 September 2008
“Sir, While walking through the pedestrian precinct between St Paul's Underground station and Paternoster Square a few days ago, I was attracted by a notice which read: "Come in and sort out your finances with a financial review", and signed RBS.
At least the Square Mile retains a sense of humour.
Derek Coggrave, London N3, UK”
This comment in the FT September 16 , letters page, made me smile as well. But it does have a serious point.
I also read a comment made by Bonham Carter, CEO Jupiter, on the Lehman events, that it is time for investors to review their portfolios. He pointed out that ..”while the investment environment remains volatile, investors should recognise that it is in these conditions that significant investment opportunities can emerge. “ As such, he sees buying opportunities for those prepared to take a long term view.”
So what do I make of all this?
It is time for investors to review their portfolios. In our experience when reviewing portfolios for new clients, invariably we find there is no real structure. This means they will often get blown like the wind from one crisis to another.
Secondly, there is bias. The sign by RBS above is a typical example. If you have your portfolio managed by a bank, the adviser is paid by the bank. The bank has a responsibility to its shareholders to make profits…in fact, as much a possible. That actually puts investors in conflict with the bank because they also want profit.
The answer to the dilemma is actually simple. Now is the time to review your portfolio, not quick a fix but be prepared to really build a portfolio that stands the test of time.
Then make sure you use an independent adviser, preferably on a fee only basis, to avoid conflicts of interest.
Perhaps then when the next crisis hits our screens and newspapers, knee jerk reactions are not required and more investors can withstand short term events because their portfolio is right for them.
I know I am biased on the basis we give this advice, its what we do...but actually, its not bias, its common sense.
Download our document “We have been able to improve every portfolio we have reviewed. What are you waiting for?”
Categories: Asset Class Management
posted by Murray Round Wealth Management @ 14:50,
Lehmans? Who?
Monday 15 September 2008
Many private investors may not have heard of Lehman Brothers, the 150 year old financial institution, other than the headline news over the past few days and the effect on markets globally after it said it would file for bankruptcy Chapter 11 protection in the US. Merrill Lynch another of the world's largest investment house over the weekend rushed into a $50bn takeover with the Bank of America…by all reports it appears the financial world is in turmoil. Investors everywhere will feel the repercussions in one way or another.
What action do you take?
Most investors should remember they are invested for the long haul. If today you are questioning whether you should move or remain in cash, or change asset classes, the answers lie in behavioral finance. Investors tend to sell when markets are falling and buy when markets are rising. So to avoid making knee jerk decisions about the credit crisis, your focus should be on understanding your risk and long term objectives.
Building a portfolio based on your risk gives you good foundations to deal with the credit crisis today and whatever else may happen in the future. Assessing your portfolio now is a positive step, especially as any changes mitigate or at least help reduce taxation and also transaction costs are likely to be lower as valuations are lower.
All financial institutions are reviewing how best to handle the news of the day as they do everyday, and if you want to talk about the effect on your portfolio, what action to take and obtain some peace of mind, we will be pleased to help.
Categories: Asset Class Management, Behavioural Finance, Risk
posted by Murray Round Wealth Management @ 15:24,
Well, I’ve told you $51bn times already….
Wednesday 10 September 2008
If you read our blog and investment philosophy, we are clear about what does and what does not add value. Whilst we accept that some managers do find excess returns (sometimes referred to as alpha), the problem is that its difficult to know in advance which manager will do it…also the cost of achieving alpha is eroded by the extra expenses in finding it! So no real added value.
Most investors with £100,000, £500,000, or over £1,000,000 may think that the traditional routes of investment make sense to them even though the added value is somewhat illusionary. To any of you out there...read on.
Rather than believe us, just look at the Massachusetts Pension Reserves Management Board in the US. It manages not a few hundred thousand, but $51bn.
As reported in the FT on Monday 8th September….”Active US equity managers had almost two-and-a-half decades to prove their worth to Massachusetts’ state pension system. They failed. So the $51bn (£29bn, €35bn) Massachusetts Pension Reserves Management Board decided to dump all its active domestic equity – usually a mainstay in public retirement portfolios – and invest the money in cheaper index products. “
It went on to say "The Massachusetts plan last month decided to fire a slew of firms running $1.8bn worth of active US equity and reinvest the funds in cheaper products expected to return just as much. Executive director Michael Travaglini says that over the system’s 24-year history, active US equity managers have lost money exactly as often as they have made it."
"We’ve been around since 1985 and when you look at that entire track record, there were 12 years where our active domestic equity managers added value and 12 years when they detracted value, and if you look in the aggregate net of fees, our performance was right on top of the [Russell 3000] index,” says Mr Travaglini. “We looked at the issue in 2003, and at the time the analysis didn’t support this conclusion. But we’ve done [the analysis] over a longer period of time and we think we’ve got a better mousetrap."
So what does this mean to you?
Active managers, according to Massachusetts, have lost money exactly as often as they have made it. So where was the added value? Remember also, that these are institutional funds. That means most investors are paying even higher charges for funds that on average have lost money exactly as often as they have made it. In fact, retail investors (that’s you if you are reading this) are likely to have lost because of retail costs.
The answer is simple.
Forget the marketing hype that fund managers and advisers try to impose on you and instead take a different course just as the Massachusetts’ state pension system have done…thankfully at Murray Round will believe in similar principles. Moreover, unlike Massachusetts’ state pension system, you do not have 24 years to test your existing investments…its too late. If timing has any value, its getting on the right track now and follow the lead of managers like Massachusetts’ state pension system. They have $51bn reasons, and your we know your £1,000,000 is just as important. Act now.
Categories: Research, Asset Class Management
posted by Murray Round Wealth Management @ 16:21,
Keeping you ahead of change..pension saving accounts
Monday 8 September 2008
The Olympics aren’t the only thing happening in 2012. You may or may not have heard, but the Government is planning to bring in a new system for pension saving in April 2012 called ‘personal accounts'.
So why are they doing this? It’s a well known fact that people simply aren’t saving enough for retirement. By launching personal accounts the Government hopes to increase the number of people saving. Most employees will have to be automatically enrolled into a pension scheme. This will help overcome many of the current barriers to joining a pension plan in the first place.
What does it mean for employers?
Although the fine detail of personal accounts is not yet known, the shape of the scheme is becoming clearer. Here are the facts so far:
You will have to enrol all your employees aged between 22 and state pension age, earning more than £5,035 per annum, into either a ‘good’ pension scheme or a personal account. A ‘good’ pension scheme is one which has at least the same contribution levels as personal accounts.
Employees younger than 22 or older than state pension age can opt-in.
You’ll be required to make a minimum contribution of 3% of pay, sitting alongside a minimum employee contribution of 4% and 1% from the Government in the form of tax relief.
What does it mean for employees?
If you’re aged between 22 and state pension age, and earning more than £5,035 a year, you’ll be automatically joined by your employer. Your employer may offer their own company pension plan rather than personal accounts, and if this is the case, you may be automatically joined to this instead.
Because you’ll be automatically joined into either personal accounts or your employer’s company pension plan, you’ll have the option to opt out. This means you’ll have to let your employer know if you don’t want to be a member of their pension plan. However, because it’s unlikely that your circumstances will stay the same, if you choose to opt out you’ll be re-enrolled by your employer after 3 years.
If you decide to stay in your employer’s pension plan or personal accounts, your employer will be required to make a payment to your pension pot of at least 3% of your pay. Under the personal accounts scheme you’ll also have to make a 4% payment, and the Government will make a 1% payment in the form of tax relief. If you qualify for additional higher rate tax relief you can claim this too.
Personal accounts will offer a basic retirement solution so if it’s your objective to engage and retain your employees, while giving them flexibility in the future, then it may not be the right option for you. For example, personal accounts are unlikely to have the same range of features and benefits that your current pension scheme provides to you and your employees, such as high quality customer service, wider investment choices and different retirement options.
A useful web site for information for employees, employers can be found at www.standardlife.co.uk/keepahead.
Categories: Retirement Planning
posted by Murray Round Wealth Management @ 11:45,
Your health is more important than anything...
The FT reported on Thursday 24th July “When Steve Jobs took the stage to deliver his keynote address at Apple’s worldwide developer conference last month, his gaunt appearance raised unsettling questions in the minds of those familiar with the Apple founder’s battle with pancreatic cancer in 2004.”
Steve Jobs is a very talented and rich man. Having pancreatic cancer as reported will change anyone’s perspective.
My point is that it is important to remember that accumulating wealth is not a end in itself, rather it is living and having fun and accumulating wealth that is important! Getting this balance right is not always simple though. A client said to me once, you need to stop, look around, reflect and check you are heading in the right direction from time to time. In other words, adding a sense of perspective to your life.
Whilst we manage wealth, more importantly we help manage expectations. Sometimes no amount of wealth can help solve certain health problems. Enjoy your life every day.
Categories: Wealth Management
posted by Murray Round Wealth Management @ 10:40,
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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