Financial-tainment operates in a world of its own making. ‘Say it and it will be believed’ seems to be a guiding principle. A CNBC feature on famous gold bull Peter Schiff yesterday is point in fact. The headline runs ‘Perma-bear’ Schiff’s funds, have been on a roll. The article goes on to describe out performance by Schiff’s company funds at Euro Pacific Capital:
“Despite his reputation as a perpetual Cassandra whose principal market call has been to buy gold and bet against the U.S. dollar, funds operated by Schiff’s firm, Euro Pacific Capital, have been doing very well against their competitors over the past several years.
In particular the article states that one of the company’s funds the Euro Pacific International Value Fund has ranked number 1 against its peers according to Morningstar rankings before adding,
“Euro Pacific has most of its funds in privately managed and brokerage accounts and is a relative newcomer to the mutual fund industry, but the results provide a glimpse into how Schiff’s strategy has performed.”
A glimpse at the Euro-Pacific fund performance here on their website reveals how this statement can be quite misleading.
First of all, we note that the fund performance is quoted from inception dates of 2010 and 2013. So the advertised outperformance is measured only during the short and extra-ordinary gain cycle brought forward by QE injections since 2010. All risk boats have risen the past 3 years, but the more aggressive and speculative [reckless] the holdings and approach have been, the higher the rise. In a treacherous twist, it is precisely those who exercise the least discipline, skill and care to control risk, that look the brightest during periods of wild speculation. But such results are also heavily mean reverting: the same assets and players also lose most in the down cycle for precisely the same reasons.
The truth is that long-always allocators have no real management strategy other than toss capital into risk markets, extract large fees, never sell (as that would lower management fees) and hope to ride the wave up as long as it lasts. When the losses hit, the managers blame unforeseeable forces or global events. We have seen this boom and bust style repeatedly over full market cycles.
In addition, investment accounts at Schiff’s firm (and elsewhere) typically do not hold just their one highest performing fund, but an assortment of different securities with varying returns the past three years. Some of which have been negative. Notwithstanding marketing material and carefully quoted start dates, the fact is that Schiff has been advising clients and directing asset allocations for many years now–not just the past 3–and recent performance is definitely not a “glimpse into how Schiff’s strategy has performed” on a longer term view.
We know this because we have heard from some of his longer-term clients over the years and we have heard him speak on media and at live conferences periodically over the past decade. Schiff is an aggressive salesman for sure; but only the gullible could mistake him for a client-focused fiduciary.
Schiff has been a proponent of commodities, metals and emerging markets all through the peak and collapse of 2007 to 2009. His main themes were the collapse of the US dollar, the US economy, US stocks and US housing. He was correct in seeing downside in US housing and stocks but he did not take meaningful steps to protect his clients from it. He spoke confidently about decoupling from US markets and a diversification benefit in holding shares and commodities focused on places like Canada and emerging markets. In fact these other risk markets are highly correlated with each other and have historically dropped more than US stocks during bear markets. As they did in 2008. Schiff was dead wrong on these theories and while he continued to collect management fees by keeping his client capital exposed to market risk, the customers suffered.
In December 2008 I received a clip link from one of my readers of a phone-in radio show where Schiff was a guest and several of the call-ins were existing clients complaining that they had lost more than 70% of their account values while with Schiff. You can see the trail in the comments here. In the radio clip, he proceeded to dismiss their concerns with comments like, “you’re still collecting your dividends aren’t you?” suggesting that they were not down 70% but actually doing well. It was one of the most nauseating, dishonest, verbal assaults that I have heard in the financial mangle-ment business in my entire career. And that is saying something.
A few months later, when I was doing a follow up article here on Blogging and the Internet, I received more tips and feed-back on losses suffered by Schiff clients. I also then noticed that the revealing radio show had mysteriously vanished from Youtube and could no longer be located as shown here.
Fortunately, a few other people remember Schiff’s historical record. Mish Shedlock wrote this helpful summary here, see: Peter Schiff was wrong.
Those that have reported the most stellar gains the past 3 years, will be the same group who will deliver the most devastating capital losses in the corrective period of the current market cycle. There is no such thing as decoupling or meaningful diversity benefit in holding some equity markets or holdings such as Europe or Asia over North America. When the leverage leaves the global financial system it will leave as it did in 2000 and 2007, suddenly and all at once. Buyer beware.