Where is the value?

A story in Saturday's Globe April 5, “Knowing when to pull the plug on a loser fund,” makes a classic point about why the investment world is full of expensive and ultimately useless advice and commentary.
The article asks three investment advisors what to do with funds that have fallen disastrously over the past year. (We are in bear market after all, falling is what stocks and stock funds do in bear markets). As a sample it posts the following list of big name losers over the past 12 months and how these funds have fared versus their peers:

The advisors go on to suggest how they would advise clients now in reaction to enormous losses. If a fund is down more than its peers or the overall index, they suggest exit strategies.
Two key points are made clear in this piece.
The first thing is that some of the world’s biggest ‘value managers’ have lost huge amounts of unit holder dollars over the past year. Although companies like Brandes and AIC talk about the importance of a disciplined, conservative approach to what they buy and sell, apparently they either have bad rules, or they aren’t following them. Where is the stop loss, sell trigger or hedge? Clearly they don’t have one.
No responsible manager worth a fee should suggest that losses like this are good, conservative or acceptable. Relative performance is no comfort during real life market storms. Explanations like the credit crunch is to blame and the market downturn was unforeseeable are bunk. Bear markets are a regular recurring end to each economic cycle and this one was overdue. Valuable managers strive to shelter and protect their clients from the ravages of a market storm. They do not leave clients fully exposed to fare as they may.
A loss of 45% requires a subsequent gain of 81% for the unitholders to get back to even. This type of recovery typically takes years not months. By then most unitholders have long jumped ship being broke, scared or counselled out of the fund by their well-meaning financial planner.
Back to the truth about mutual funds: long only, long always mandates add no real value to capital preservation. The glossy brochures, pie charts and marble lobbies have once again helped investors not at all. For this kind of passive exposure to dynamite, unit holders would fare better just holding index units themselves and skip the generous management fee altogether. Long always, buy and hold management isn’t active management, it’s a farce.
Second thing that jumps out of this is how utterly ineffective most investment advisors are in protecting their clients from bear market losses. What value is a service that helps clients sell after they have lost 30 to 45% of their capital?
Knowing when to pull the plug on a fund means having the foresight and strategy to leave it before down market losses mount. The only valuable advice is the kind that helps clients reduce risk and move out of hot funds, sectors and yes sometimes even most equities, before prices tank. Hand holding and back-patting clients through blood-letting losses are not services worth 1 to 3% a year.
A tactical approach takes more discipline, actual rules and proactive thought. But after all isn’t a job of value supposed to add value?

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2 Responses to Where is the value?

  1. Anonymous says:

    I was wondering what would be your prescription for the market as a whole with respect to market timing given that a) the money supply is fixed at any one point in time and the market as an average cannot increase the amount of cash it holds and b) that given (a) it it only takes small marginal changes in preferred percentage cash holdings to move markets.
    For example with a “market portfolio” of 10% cash, 30% bonds and 60% equities an attempt by the market to increase cash holdings to 20% by selling equities would cause an equity market decline of 83%.
    If everybody were to move out of equities completely we would have the proverbial stampede for the exits.
    Andrew Teasdale
    The TAMRIS Consultancy

  2. Anonymous says:

    A, The masses always head for the exits eventually anyway. That is how we get big sell-offs, bear markets and the capitulation that forms the final bottom each market cycle. Those that wish to leave their capital in the path of the stampeding crowd on a “supporting the markets” thesis are free to do so.
    As a fiduciary my duty and preoccupation is focused on protecting our clients and getting their capital out before the mass exodus tramples prices down.
    We all have a choice each market cycle: we get to leave early, late or not at all. Leaving late is painful and leaves lasting capital damage and often fear and aversion to getting back in. Leaving not at all leaves losses that can take years into the next business cycle or even secular cycle(decades) to recoup. And that is if the person has the strength and means to wait. Many don't and won't.
    Leaving early preserves capital, retains gains and makes us ready, objective and rationally looking for the next attractive buying opportunities.
    If markets were to crash 80% as your math suggests, I am confident there would be a great many buyers rushing in to buy shares. We, at our firm, certainly would. And all the many other tactical managers and investors who have cash set aside would be happy to scoop up value in a panic sale. They always are and do. Actually they style their approach for just those opportunities.
    Avoiding big loses is key to a useful management discipline. In real life market cycles, there can be no meaningful buying opportunities unless we also devise methods to recognize and act on the 'selling opportunities' that come first.
    Advisors who always give clients the buying opportunity speech but never highlight selling opportunities before the downturn are worthless to real life clients. Sale prices are only of value when clients have capital ready to put to work. They can't do that if the bulk of their life savings chips are always left in the game. D

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