Raquel Pichardo-Allison, writing in Global Pensions on 13 April 2011, notes how the Malaysian government plans to conduct a full review of institutional investment strategies to see if any changes could lead to a more robust local economy.
Malaysia's government-linked investment companies include the RM61.5bn ($20.3bn) Kumpulan Wang Persaraan, the pension fund for government employees, and the RM112.6bn sovereign wealth fund Khazanah Nasional Berhard.
Read more about Malaysia's plans here.
Saturday 16 April 2011
Equity mandates can hit long-term investing
Michael Bow, writing in Global Pensions on 14 April 2011, reports Aviva Investors' claim that gearing equity mandates towards outperforming quarterly benchmarks could be undermining attempts to improve long-term investing.
The investment manager said building structural requirements – such as equity benchmark tracking errors – into mandates often clashes with attempts to maintain long-term investment decisions.
Aviva: “We believe we have educated our clients to understand we may not outperform the benchmark every quarter because we are a long-term rather than a short-term investor.”
Aviva predicted an increase in engagement from investors as the UK Stewardship Code (a standard for responsible investing) pushed more managers to ask tougher question of the companies they invest in.
Read the full article here.
The investment manager said building structural requirements – such as equity benchmark tracking errors – into mandates often clashes with attempts to maintain long-term investment decisions.
Aviva predicted an increase in engagement from investors as the UK Stewardship Code (a standard for responsible investing) pushed more managers to ask tougher question of the companies they invest in.
Read the full article here.
GSK buy-in impossible without transition managers
Raquel Pichardo-Allison reports in Global Pensions (15 April 2011) that GlaxoSmithKline’s £900m ($1.5bn) buy-in deal last year would not have been possible without transition managers.
GSK entered into a buy-in deal with Prudential in November of last year. Martin Mannion from GSK said, "I don't think the deal was physically possible without a transition manager because you had potential contracts you were entering into, you were attempting to hedge, you were attempting to buy into their wish-list ahead of time... So I think that's in the category of ‘don't even go there without a TM'."
The transition event lasted nine months.
Read the full article here.
Sovereign Investor: Do you use transition managers? Do you use a single firm or have access to a panel?
GSK entered into a buy-in deal with Prudential in November of last year. Martin Mannion from GSK said, "I don't think the deal was physically possible without a transition manager because you had potential contracts you were entering into, you were attempting to hedge, you were attempting to buy into their wish-list ahead of time... So I think that's in the category of ‘don't even go there without a TM'."
The transition event lasted nine months.
Read the full article here.
Sovereign Investor: Do you use transition managers? Do you use a single firm or have access to a panel?
NBIM Publishes Three Sector Compliance Reports
NBIM on 12 April published three reports evaluating the extent to which companies in 2010 met its expectations for managing risk associated with children’s rights, climate change and increasingly scarce water resources.
The reports cover companies in sectors that are particularly exposed to these risk factors and assess to what extent companies publicly disclose information on their management of these risks. The latest reports can be found on NBIM's website under the Ownership strategies section.
2010 Sector Compliance Report - children's rights
2010 Sector Compliance Report - climate change risk
2010 Sector Compliance Report - water management
Source: Norges Bank
The reports cover companies in sectors that are particularly exposed to these risk factors and assess to what extent companies publicly disclose information on their management of these risks. The latest reports can be found on NBIM's website under the Ownership strategies section.
2010 Sector Compliance Report - children's rights
2010 Sector Compliance Report - climate change risk
2010 Sector Compliance Report - water management
Source: Norges Bank
Are Mutual Funds a Scam?
If there’s one piece of financial advice that most people agree on it’s that individual investors should buy mutual funds.
A posting at Index Fund Advisors asks, Why?
Because the mutual funds do the work that individual investors don’t have the time, skill, or money to do: Figure out which stocks are good and which stocks are bad and invest your money accordingly.
But that’s a false promise, says Mark Hebner, who is CEO of a $1.5 billion asset management firm called Index Funds Advisors . The vast majority of mutual funds do worse than index funds. As a result, they cost their investors money–both from high fees and reduced returns.
The fundamental flaw in most mutual funds, Hebner says, is that even well-educated portfolio managers with huge research budgets can’t pick winners consistently enough to beat the market over time. Yes, by the luck of the draw, about a third of mutual funds will beat the indices each year. But last year’s winners are often this year’s losers. When you look at long-term performance, only a handful of funds beat the indices. And there’s no tried-and-true way of picking these funds in advance.
The reason “skilled” portfolio managers can’t beat the market, Hebner says, is that the market is primarily made up of other “skilled” portfolio managers, and they trade against each other all day long. When your competition is as well-educated, well-funded, and skilled as you are, you’re going to lose as much as you win. And when you subtract the fees that you charge your investors from your investment performance, the result is performance that lags the index.
Hebner’s advice is to follow in John Bogle’s footsteps and buy a diversified portfolio of index funds. Unlike actively managed mutual funds, index funds guarantee you close to a market return. And if you rebalance your portfolio whenever your asset allocation gets out of whack, you can actually do better than the market over the long haul.
Read the original article at Index Fund Advisors.
A posting at Index Fund Advisors asks, Why?
Because the mutual funds do the work that individual investors don’t have the time, skill, or money to do: Figure out which stocks are good and which stocks are bad and invest your money accordingly.
But that’s a false promise, says Mark Hebner, who is CEO of a $1.5 billion asset management firm called Index Funds Advisors . The vast majority of mutual funds do worse than index funds. As a result, they cost their investors money–both from high fees and reduced returns.
The fundamental flaw in most mutual funds, Hebner says, is that even well-educated portfolio managers with huge research budgets can’t pick winners consistently enough to beat the market over time. Yes, by the luck of the draw, about a third of mutual funds will beat the indices each year. But last year’s winners are often this year’s losers. When you look at long-term performance, only a handful of funds beat the indices. And there’s no tried-and-true way of picking these funds in advance.
The reason “skilled” portfolio managers can’t beat the market, Hebner says, is that the market is primarily made up of other “skilled” portfolio managers, and they trade against each other all day long. When your competition is as well-educated, well-funded, and skilled as you are, you’re going to lose as much as you win. And when you subtract the fees that you charge your investors from your investment performance, the result is performance that lags the index.
Hebner’s advice is to follow in John Bogle’s footsteps and buy a diversified portfolio of index funds. Unlike actively managed mutual funds, index funds guarantee you close to a market return. And if you rebalance your portfolio whenever your asset allocation gets out of whack, you can actually do better than the market over the long haul.
Read the original article at Index Fund Advisors.
Stocks in general are a bad investment
Index Funds Advisors president Mark Hebner lists some good reasons to avoid stock picking:
#1 — Let’s Make a Deal
If someone wants to invest in stock A, he or she has to first find a seller of stock A. But, if said stock is such a great investment, why would anyone want to sell in the first place?
#2 — No Risk-Return Premium
Investing in individual stocks is much riskier than investing in a diversified portfolio.
All investors and their information are basically created equal, says Hebner.
Hebner says, forget stocks and mutual funds, “all you have to do is buy the market” by investing in a diversified portfolio of index funds.
Read the full article.
Sovereign Investor: Is Hebner right? Is the market really as efficient as he suggests? If so, sovereign investors can breathe a sigh of relief that they're big enough to effectively run an index fund themselves. But what about all those active managers out there? Are they making a living out of holding your perfectly baked cake but nibbling at it as they go?
How the mighty can fall...
By Max Rottersman
The top 10 funds in 2009 will become next decade’s losers, not because they’re big, but because they’re expensive.
HANOVER, NH (ETFguide.com) – Some smokers say, ‘My Dad smoked until he died at 93.’ That’s what smokers say. We don’t hear from the smokers who died. So the lucky smokers have an influence on the living while the dead can’t be heard.
There are at least 13,356,484 people in today’s largest high-fee funds. Probably more. Those who don’t know history are bound to repeat it.
Below are the largest high-fee equity funds. For these ten funds alone the managers collect over $200 million a month in fees, or $2.5 billion a year. The management companies are supposed to earn that money through superior returns. Shareholder wealth is transferred to them whether they succeed or fail.
FIGURE 1: Largest Non Low-Cost Funds
By Assets 2008 | Return | ||
Largest Non Low-Cost Funds | 10 Year | 2008 | |
AEPGX | A.F. EuroPacific Growth | 63% | -41% |
FDIVX | Fidelity Diversified International | 68% | -45% |
AGTHX | A.F. Growth Fund of America | 37% | -39% |
FCNTX | Fidelity Contrafund | 32% | -37% |
FDGRX | Fidelity Growth Company | 17% | -41% |
FMAGX | Fidelity Magellan | -30% | -49% |
AIVSX | A.F. Inestment Company of America | 17% | -35% |
CWGIX | A.F. Capital World Growth and Income | 92% | -38% |
ANCFX | A.F. Fundamental Investors | 33% | -40% |
ANWPX | A.F. New Perspective | 50% | -38% |
Average | 38% | -40% | |
These funds grew by 38% over the past decade. Contrast that with the largest ten low cost funds which only returned 7%.
FIGURE 2: Largest Low-Cost Funds
By Assets 2008 | Return | ||
Largest Low-Cost Funds | 10 Year | 2008 | |
VASGX | Vanguard LifeStrategy Growth | 8% | -34% |
VEURX | Vanguard European Stock Index | 8% | -45% |
VGTSX | Vanguard Total Intl Stock Index | 19% | -44% |
DIA | DIAMONDS | 16% | -32% |
MDY | MidCap SPDRs | 49% | -37% |
SPY | SPDRs | -14% | -37% |
VTSMX | Vanguard Total Stock Market | -6% | -37% |
FUSEX | Fidelity Spartan U.S. Equity Index | -14% | -37% |
VFINX | Vanguard 500 Index | -14% | -37% |
VPACX | Vanguard Pacific Stock Index | 21% | -34% |
Average | 7% | -37% | |
Compare the average 10-year return of Figure 1 and Figure 2. What would you want, 38% or 7%? Of course, the former, which is what Morningstar and Lipper will focus on, and the the financial media seldom question. Like the tobacco companies, nine times out of ten, the financial industry only gives voice to the living, not the dead. Thomas Wolfe wrote Only The Dead Know Brooklyn. We could say the same for mutual funds.
In Figure 3 are the largest ten equity funds in 1997. These are the funds investors piled into ten years ago. These are the funds that represent the experience of most investors today. These are the funds conveniently forgotten by the people who sell today’s fund sausage.
FIGURE 3: Largest Non Low-Cost Funds
By Assets 1997 | Return | ||
Largest Non Low Cost Funds | 10 Year | 2008 | |
FPURX | Fidelity Puritan | 22% | -29% |
AEPGX | American Funds EuroPacific Gr A | 63% | -41% |
TWCUX | American Century Ultra Inv | -27% | -42% |
FAGOX | Fidelity Advisor Growth Opportunities T | -52% | -55% |
FCNTX | Fidelity Contrafund | 32% | -37% |
FMAGX | Fidelity Magellan | -30% | -49% |
JANSX | Janus | -26% | -40% |
AIVSX | American Funds Invt Co of Amer A | 17% | -35% |
AWSHX | American Funds Washington Mutual A | 12% | -33% |
FGRIX | Fidelity Growth & Income | -41% | -51% |
Average | -3% | -41% | |
The mutual funds in Figure 3, the ones that were supposed to beat the market, lost $3 dollars for every $100 whereas the low-cost funds actually made $7.
How can you avoid repeating the simple mistake made by millions of mutual fund investors? And how can you resurrect the dead money you’ve invested in over-rated fee gobbling mutual funds? One way is to allow fundanalyze.com to help you locate corresponding fund replacements that save you money. Let your money work for you, not a middle-man against you.
These are the largest top 10 low-fee funds: (NasdaqGM: VASGX) Vanguard LifeStrategy Growth, (NasdaqGM: VEURX) Vanguard European Stock Index, (NasdaqGM: VGTSX) Vanguard Total Intl Stock Index, (NYSEArca: DIA) DIAMONDS , (Amex: MDY) MidCap SPDRs, (NasdaqGM: SPY) SPDRs, (NasdaqGM: VTSMX) Vanguard Total Stock Market, (NasdaqGM: FUSEX) Fidelity Spartan U.S. Equity Index, (NasdaqGM: VFINX) Vanguard 500 Index, (NasdaqGM: VPACX) Vanguard Pacific Stock Index
These are the top 10 fund today that may become next decade’s casualties: (NasdaqGM: AEPGX) A.F. EuroPacific Growth, (NasdaqGM: FDIVX) Fidelity Diversified International, (NasdaqGM: AGTHX) A.F. Growth Fund of America, (NasdaqGM: FCNTX) Fidelity Contrafund, (NasdaqGM: FDGRX) Fidelity Growth Company, (NasdaqGM: FMAGX) Fidelity Magellan, (NasdaqGM: AIVSX) A.F. Inestment Company of America, (NasdaqGM: CWGIX) A.F. Capital World Growth and Income, (NasdaqGM: ANCFX) A.F. Fundamental Investors, (NasdaqGM: ANWPX) A.F. New Perspective
Max Rottersman is a principal of Hanover Technology Group, LLC.
Sovereign Investor: This article is aimed at the retail investor. Do you feel it contains lessons for the sovereign/institutional investor too, given that selecting winners during a manager selection process is unlikely to get you fired. BTW are the quoted returns before or after fees, are they GIPS compliant?
Welcome
The Sovereign Investor aims to collect articles of interest, well, to sovereign investors. The selection will be somewhat eclectic and won't represent the complete view of everything that's happening in the world of investment management. Issues chosen are those in which a known set of readers have an interest, and that includes articles on personal investing.
Editorial policy means that you won't find any stock picks here, so if you're seeking hot tips, you'll be disappointed. Rather, you'll find articles that support a long-term strategic approach to investing. Articles about the active/passive management debate. Articles about the CAPM model. About managing costs. Investment risks. Governance. Transition management. That sort of thing.
For the meantime, the primary focus will be on the equity and bond markets, but we'll be keeping a weather eye on real estate.
Editorial policy means that you won't find any stock picks here, so if you're seeking hot tips, you'll be disappointed. Rather, you'll find articles that support a long-term strategic approach to investing. Articles about the active/passive management debate. Articles about the CAPM model. About managing costs. Investment risks. Governance. Transition management. That sort of thing.
For the meantime, the primary focus will be on the equity and bond markets, but we'll be keeping a weather eye on real estate.
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