Ten ways to look on the bright side when some things in life are bad
Saturday 31 January 2009
Gloom and doom in the economy? Bah humbug. There are ample grounds for optimism.
When you're chewing on life's gristle, don't grumble, give a whistle, as the Monty Python team tells us.
So says the Australian in December 10 2008. I have recently visited Australia on a fact finding mission to understand how we can improve the services we deliver to our clients. I came across this article, which provides useful advice irrespective of what country you live in.
The global crunch has not only hit your pocket: it has hit the professional money managers hard too. Asset manager Russell Investments suggests many will be striving to protect their reputations and businesses…and hopefully your money!
"Regardless of the market conditions, whether they be calm or volatile, investors should be continually assessing their manager's performance," says Symon Parish, Australasian chief investment officer for asset manager Russell Investments.
How many times I have repeated this message? The answer is a great many times… but here's Russell's 10-point health check for investors to assess their managers to evaluate how well their financial needs are being looked after.
*What is the effect of falling assets under management on a manager's revenue and profitability?
If funds are falling, so is the fee income as asset values shrink by up to 40 per cent and investors withdraw. It means managers may struggle to hold key staff or to keep investing in talented juniors.
*Has the manager lost any big clients?
When a big investment mandate walks -- say, a sum of more than $500 million -- others can get itchy feet too. Firms that rely on niche products that have become unpopular may be especially vulnerable.
* Is the environment too distracting?
In times of crisis, it is important to keep clients informed, which some do through the media, but it can be a big distraction when their eye should be firmly on the ball of stock selection and asset management.
Look for the firms that have separate teams for schmoozing and investing.
* Are they are up to the job?
In a bull market, most managers make good returns, but these levels of turmoil are extraordinary and will test even the best.
Investors need to be confident the investment professionals have the necessary skill, experience and attributes to manage through the turmoil.
* Does the manager's business model rely on performance fees?
Many managers run on a fee-based model, which reward managers for better returns. Hedge funds, for example, can charge a performance fee of 20 per cent of the increase in the net asset value of the fund.
In the slump, high watermarks will be hard to achieve -- perhaps for years -- creating a disincentive for managers to focus on the ongoing performance of the strategy.
* Does the firm carry much balance sheet risk?
In recent years fund managers have developed structured products with an implicit or explicit guarantee of return, which may result in a material contingent liability on the firm's balance sheet.
In this climate a manager could be required to make good on such a guarantee, or the size of the payment could be much larger than has been anticipated.
* Are there risks involved in the manager's ownership structure?
Some managers may be at risk due to the financial health of their parent companies or joint venture partners. Managers whose parents are global financial services firms experiencing distress are particularly susceptible.
* Have there been any signs of capitulation in the manager's investment decisions?
A highly volatile environment has replaced the previous bull market and commodities rally. Check if your manager has capitulated on key portfolio positions or changed its investment processes in response to the current climate. You may not be getting the type of portfolio you once expected and the manager could be at risk of being whipsawed if the market rebounds suddenly.
* Has your manager started cutting staff?
Many money managers are coping with lower asset bases by cutting costs and firing workers, which can be quite unsettling for those left behind, or who are new and still fragile.
Check which staff are being let go and consider how involved they were in producing the investment performance to date.
* What is your manager's product strategy?
Keep an eye out for new products, as many may be relaunches of old ones with poor performance records or lower profitability.
A fund manager may try to expand its range of products to diversify revenue sources. Investors should consider whether new products are a revenue-seeking exercise or a genuine innovation that is properly resourced and positioned to add value for investors.
Launching new products takes time and can divert resources from existing products. Investors should also be on the lookout for products that have had a large withdrawal of support or have simply become too small due to poor performance.
This can leave the manager with a product that isn't really viable but may not be readily shut down. The consequence may be that the product becomes a "legacy" fund and isn't given proper attention by the manager.
Whilst these are worthwhile questions to ask…for managers of your ISAs, investment portfolios and pension funds, the answers you receive do not always get to the truth...hence the best people to ask the questions are independent of your managers. Yes, this something we can help you do.
posted by Murray Round Wealth Management @ 15:06,
It couldn’t happen….could it?
Friday 30 January 2009
A few months who could have predicted the unfolding economic events? Yes we have got through it so far, but where now?
Investors need a plan in these turbulent times as emotion will drive decision making. More of this point later….but I have detailed two independent opinions that all investors should listen to, then consider and reflect how to add such different perspectives to their decision making.
The first is Jim Rogers. Here’s a recent article in The Independent and also an interview on Sky News. Who is Mr Rogers? He and Mr. Soros's Quantum Fund famously "broke" the Bank of England in 1992, when sterling was forced out of the European exchange rate mechanism, costing UK taxpayers $1bn and making Mr. Soros and Mr. Rogers correspondingly wealthier. You may remember the event and possible the name of George Soros, but Mr Rogers possibly was not in your memory. Nevertheless, he believes what the government has done to help the banks is a terrible disaster.
He talks about the bankers getting away scot free still driving their Maseratis when rather than intervention; they (the Banks) should have been let to go bust. The gamble the government is taking with our money if Mr. Rogers is right, could be very large indeed. Irrespective of these views, we cannot predict the future, but every investor has now a new paradigm to consider. The last 6 months investors have experienced risks they may never have fully appreciated, so taking into account the boundaries of what they thought may happen and what has happened requires investors to reassess their portfolios.
Here’s another view. Could the Eurozone breakup? According to Hugh Hendry, founder of Eclectica Asset Management, he thinks the Eurozone could break up. Listen to his views in the FT on Video. He believes that with chronic deficits the cure is either for domestic prices to fall, which includes wages, or for the currency to fall. The latter is easier historically, but as there is no lira, peso, drachma etc for this to happen, could this mean the breakup of the Eurozone? My point is once again not to agree or disagree, as it is an opinion of what may or may not happen. Yet what could happen is on the agenda now when it has never been before. This means that investors need to reassess the risks to ensure they are comfortable with their investment strategy.
So we are back to our opening point, in these turbulent times as emotion will often drive decision making, it is important to avoid knee jerk reactions.
This is achieved by having a well thought out plan.
It is also important to avoid blissful non action. Heads in the sand are in our view recipes for disaster. There is no substitute for ongoing review making sure you are on the right track and the risk is what you think it is.
posted by Murray Round Wealth Management @ 14:58,
When the skill of the fund manager is not always what it seems…..
Friday 16 January 2009
There is something special about say a private equity firm that can spot how they can improve the performance of a company by bringing their expertise to perhaps introduce new management or any other such operational improvements. Forgive my analogy, but it’s a little like Sir Alex Ferguson spotting a young Cristiano Ronaldo and through management skills allow the players talent to flourish to become the best player in the world.
Yet management skills in private equity may not be in as much abundance as perhaps one would have expected. In fact, the news suggests that some of the biggest private equity firms were simply using debt to fund performance rather than operational talent.
The findings were published on Wednesday 14th in the first annual report on the performance of private equity portfolio companies, compiled by the British Private Equity and Venture Capital Association and Ernst & Young and reported in the FT on January 15th.
Here is how it works. Debt has a multiplying effect on returns. If a company is bought with £100m of equity and sold for £200m, the investor doubles their money. But if the same deal is done with £20m of equity and £80m of debt, the investor makes a sixfold return.
The FT looked at some of the biggest deals “The aggregate investment return on 14 of the biggest deals realised in 2005-2007, including Debenhams and NCP, was 3.3 times, or 330 per cent of the return achieved by the FTSE All-Share in the same industry sectors and timeframes.
Of this 330 per cent return, 100 percentage points came from rising stock markets, 167 points came from the use of extra debt over the amount at comparable companies in the same sector, and 62 points from “strategic and operational improvements”.
So what you may say? Well, the 100 point rise in the stock market had nothing to do with the private equity firm. In effect that was available to anyone. There was 167 points from adding gearing. How many homeowners use mortgages to fund property and have become asset rich in doing so! Yet, it can go the other way. If asset prices can fall, gearing can wipe you out. As such, will investors have been aware of he risks of the gearing in private equity?
The 62 points from expertise is something I like to see and therefore the due diligence on behalf of investors is to establish the likelihood of the managers consistently applying those skills to optimise the return year on year.
This brings me back to Madoff…so many investors failed to carry out due diligence before investing. They were focused more on what they could make without understanding where the returns came from. This principle applies to every single investment you make. Whether it is a single share, an investment trust, unit trust, hedge fund or similar, the message is why am I buying this investment and have I carried out adequate due diligence to ensure I am aware of the risks.
The stock market is a wonderful place to allocate your capital, but it is also has its dangers that due diligence can minimise or mitigate.
posted by Murray Round Wealth Management @ 17:02,
2009 is the year to ask for the truth about your money.
This is my first entry for 2009. I was fortunate enough to visit Australia and the US over the holiday season. The purpose to meet and discuss with international wealth managers their experiences…and of course take some vacation time!
In the UK we can learn from a select few wealth managers…their practices really help clients.
We also believe in adding significant value and helping clients achieve all that is important to them. As our perspective is different, so is our distinction, we believe that individuals in 2009 endeavour to search out the cracks that open up in bear and recessionary markets, which have often been papered over during the bullish and growth stages experienced in recent years.
Whilst the Madoff scandal in the US is a big crack, others will appear in many places, but not all allegedly fraudulent or as large. Whilst many investors will not lose their capital, how many feel let down over their investment managers’ performance?
In 2009 investors should be asking questions about investment performance, investment philosophy and decision taking in order to understand the risks they are taking relative to the return they expect. Whilst investors may not lose all their invested capital as some appear to have done with Madoff, simply excessive risk and underperformance can in themselves detrimentally affect an individual’s future financial security.
2009 is the year to ask for the truth about your money.
posted by Murray Round Wealth Management @ 14:21,
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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