Morningstar Doesn’t Think You Can Figure Out Investing

Indexuniverse.com reports:

“Don Phillips, Morningstar's director of corporate strategy, research and communications, told JoAnne Von Alroth of Investor's Business Daily that ETFs will never replace mutual funds.

He said: "It's natural that over time portfolios become more sophisticated, but I don't think most people have the time to get the diversity exclusively from ETFs that they can get in mutual funds. The traditional open-end mutual fund will continue to be the building block of most people's portfolio."

They must think most folk are stupid and not capable of comprehending the results of this morningstar study reported in an excellent WSJ article entitled “As Returns Sag,Investors Focus On Fees”

“After falling substantially between 2003 and 2006, the expense ratio paid by the average investor in retail mutual funds stayed level last year, at 0.9%, according to a recent study by fund-tracker Morningstar Inc”…..
…other recent developments could mean higher fees for many fund investors in the coming years. For one, investors concerned about the U.S. economy and the dollar are putting more money in foreign funds. These tend to carry higher fees than domestic funds.”

figure a basic investor could either create a portfolio of just 3 etfs from vanguard: total bond mkt index(mgmt fee.11%), total ex us international index(.25%mgmt fee), and total us index(.07% mgmt fee) and create a decently diversified portfolio with mgmt fees. That means just a little bit of effort by an investor could reduce his investment fees by more than 75% and arguably offer more diversification . Or higher an objective advisor(like me) that will steer you the right way with a more sophisticated low cost etf strategy
Of course it couldn’t be that Morningstar, which makes most of its money from selling research on actively managed mtual funds and selling advertising space to managers of actively managed mutual funds (take a look at the glitz add from a fund country that hits you before you even get to the content at morningstar.com) , has a little bit of a bias on this issue…or could it ?

Investing Seminar: Everything Your Broker (most likely) Is Not Telling You About Your Investments

I am giving monthly seminars in the Los Angeles area. The next one is July 1 4:30 -6 in Century City

rsvp to lweinman@keeleradvisors.com

Target Date Funds..A Good Idea to Look Under the Hood

I am not a big fan of target date funds since they give the investor little control over the content of their portfolio, how rebalancing is implemented and tax management. Also there is often little transparency. In my view most investors are better off constructing their own investment portfoilo by themselves or with an advisor that gives them individualized advice.

So I was not surprised to find the following in Investment News a financial industry publication. Apparently the interpretation of what the appropriate target date allocation consists of differs massively between fund companies….and it seems to be a moving target my bolds, my comments in italics

Target date funds increase equity exposure
Equities average 68% of portfolios, up from 55% in 2003, new study from FRC finds
By Lisa Shidler
June 16, 2008
“Managers of target date funds have increased their allocations to equities, on average, but some of the funds' specific investment strategies are difficult to discern, a new study from Financial Research Corp. has found. …..
…"We reviewed their prospectuses and we found that as a general rule we could find the basic features of target date asset allocation strategies in the fund prospectuses," said Lynette DeWitt, a research director with Boston-based FRC.
"However, there were cases where data [were] missing," she said. "It was difficult for us to compare one strategy against another."
“One strategy was clear: increasing equity exposure. The report found that at the end of December, the average target date fund had 68% of its assets invested in stocks, up dramatically from 55% five years earlier. “ Does that mean these folk have changed their view of the proper allocation, how much disclosure to current and future investors have they given about this ?This is certainly disturbing….funds with the same target date can have quite different allocations:But the disparities among funds are marked. For example, Wells Fargo Advantage Dow Jones 2020 fund had 51% equity exposure, while Fidelity Freedom Fund 2020 had 69% equity exposure and Oppenheimer Transition 2020 had 90% of its assets in equities.
And this is faint praise imo:

“While target date funds may not make much sense for high-net-worth clients, 401(k) participants who lack investment expertise may find them useful, said Lisa Falcone, a financial adviser with Newton, Mass.-based Sapers & Wallack Inc., which manages $200 million in assets.
"If you have no investment knowledge whatsoever and you're not comfortable picking funds and don't want to be bothered, then target funds are the way to go," she said. “
In other words if you are clueless and have no desire to increase your knowledge or hire an advisor to help you with one of the most important decisions in your life then unlike wealthier folk you should go ahead with one of these funds
I actually agree with these comments by the same advisor although I don’t think it means that these funds are a good choice for anyone:
“Ms. Falcone also worries that many of these funds don't make their investment choices easily discernable.
"It's just not as transparent as other mutual funds where I can see everything," she said.
And this retirement plan administrator seems to agree that they are not a particularly attractive choice even withing 401ks:
"In a typical target date fund, you really don't know what the makeup is," said Joseph Masterson, a senior vice president at Purchase, N.Y.-based Diversified Investment Advisors Inc., which administers retirement plans having $43.2 billion in assets as of yearend 2007

No Need to Read Any More Money Magazine Articles About Mutual Funds

In an article entitled The Only 7 Investments You Need , one is a money market fund. Of the other six consisting of 2 bond funds and 5 equity funds 5 are index funds the exceptions being the vanguard inflation protected bond fund (pretty close to an index fund) and one actively managed equity fund (T Rowe Price New Horizons) a smal cap fund. And in the 2 categories where the active funds are recommended as first choice (inflation protected bonds and small cap stocks), index funds or etfs are the recommended alternatives.

Only in the Bizarro World of Hedge Funds….

...Could a manager who lost 100% of his fund’s value ($2 bln) in two weeks solicit investors for a new fund with “all the guys on the team” that managed the old fund. And do it seven months since the massive liquidation !. In fact the head manager, Mr. Grant is still winding down another of his funds (down 57.6% for the year through May) while his letter soliciting new money for his new fund is being circulated. No I am not making this up and yes he will probably raise a lot of money. As the ft article below notes, he won’ t be the first one. Ironically, I guess the new investors have noted that the past performance of investment “geniuses” is no indicator of future results. So why not invest with a manager who displayed utter lack of risk controls in his last fund ?

Yes this one wins chutzpah award of the week

From the financial times
(my bolds) my comments in (parentheses)


Peloton investment chief plans new fund
By James Mackintosh

Published: June 11 2008 03:00

One of the founders of Peloton Partners is marketing a new fund, in the latest example of how quickly investors can forgive managers of failed funds.
California-based Geoff Grant, who was chief investment officer of Peloton, plans to launch LiquidMacro in September, seven months after Peloton's $2bn ABS fund became the largest European hedge fund failure and lost everything.
The move has prompted surprise from several Peloton investors. One called it "gutsy, to say the least".
The new fund is being selectively pitched to investors but is likely to start with money from family and friends of Mr Grant and his team of nine, who made up Peloton's Santa Barbara office.
Peloton is still in the process of shutting down its second fund, Peloton Multi-Strategy. It wrote to investors last week to tell them to expect a loss of 57.6 per cent on the dollar shares for the year to the end of May, equivalent to about $920m. It expects to pay out 75 per cent of the remaining money by the end of the month.
"Since the folding of Peloton in late February, I have been spending my time overseeing the orderly liquidation of the Peloton Multi-Strategy Fund and returning as much capital as possible to investors," Mr Grant said.
"At the same time I've known all the guys on the team I built for a long time. They want to stay with me and it would seem a shame not to give it our best shot to make that happen. I will join them on a full-time basis once the wind-down is complete."

(now this is too rich even for the alternative universe of hedge funds, as soon as he finishes winding down the fund that is down 57.6% in 5 months he will devote himself full time to managing any new money you send him...and will be assisted by the team that managed the fund that lost 100% of its assets.)


Staff at the London headquarters of Peloton, including co-founder and managing partner Ron Beller, will not be joining Mr Grant.
The sudden collapse of the highly leveraged Peloton ABS fund, which fell from $2bn to zero in two weeks, angered investors and led to an emotional apology from Mr Beller. Peloton staff and partners had put their profits from last year back into the fund and lost all their investment.
But the launch of a fund by Mr Grant is in line with many of the highest-profile failures in hedge fund history. The two biggest US failures, the $4.6bn loss at Long Term Capital Management in 1998 and the $6.6bn loss by Amaranth Advisors two years ago, were both succeeded by new funds from top traders.

Why You Shouldn't Own An Actively Managed Bond Fund

As I have pointed out before an actively managed bond fund, particularly a “go anywhere” fund is a particularly bad choice for the bond portion of an asset allocation. The bond portion of a portfolio should be designed as a low risk counterweight to the equity portion of the portfolio. As such it should be largely invested in short term high quality bonds and TIPs (treasury inflation protected securities). It is important at all times to have transparency in one’s portfolio holdings and bonds are no different. Yet when investing in a “go anywhere “bond fund one is essentially betting on a genius who will exercise security selection and market timing in the fixed income area. As a consequence your monies are not really allocated to the fixed income asset class in a manner comparable to an investor that holds an etf or bond fund indexed to short term treasuries(or another specific slice of the bond market). The real asset class for the investors in the bond funds described below is “investments by bond market guru”. Since past performance is not predictor of future results and the investor never knows in real time what the bond fund manager owns it is impossible to know how the bond portion of your portfolio will perform.

This article from the WSJ illustrates the problem (my bolds)

Bond Funds' Increased Risk
May Stop Paying Off
By DIYA GULLAPALLI
June 7, 2008; Page B1
Some bond-fund managers have been posting strong results this year by rapidly taking on more risk -- an approach that could prove ill-timed as many pockets of the credit markets continue showing signs of strain.
Navigating the credit markets' darkest time lately has been especially challenging. But managers of bond-focused mutual funds like Pioneer Strategic Income Fund's Ken Taubes, Pimco Total Return Fund's Bill Gross and T. Rowe Price New Income Fund's Daniel Shackelford have beaten a key bond benchmark this year. And despite some past stumbles, they have posted good long-term records.
Many managers' thus-far successful recent strategy: They stayed parked in safe Treasurys last year and this past winter, then in March felt the danger had ebbed and moved into more-dicey holdings -- such as mortgage-backed securities, junk bonds and financial-company debt. Of course, these bets may fail, and there are hints that storms may recur. Treasurys rallied Friday amid a stock-market pullback and surges in oil prices and unemployment.
Unlike funds dedicated to one category, like high-yield or municipal bonds, these managers lead so-called go-anywhere funds, which have the advantage of flexibility. If one sector is falling, they can get out with impunity and zip into something more promising. The downside is that their bold calls may be wrong.
Thus far this year, Mr. Taubes's fund has posted a decent 2.18% total return, which is one percentage point ahead of the bond world's favorite yardstick, the Lehman Brothers U.S. Aggregate index, and 1.56 points better than his multisector bond category. Mr. Gross's fund is up 2.64% and Mr. Shackelford's, 1.55%. Over five years, all three funds handily beat the benchmark.
Less-successful go-anywhere bond funds either stayed heavily weighted in Treasurys or were in mortgage bonds that have declined and were pummeled. They have ended up trailing the Lehman index, a badge of dishonor…..
In a shift that is typical of this year's performance leaders, Mr. Taubes at the $1.4 billion Pioneer bond fund has almost completely eliminated his Treasury position in recent months to one of the lowest stakes in years. His thinking has been that "you can throw a dart and find attractive buys anywhere in the fixed-income market besides Treasurys," he says……..
But financial holdings have delivered mixed results. Some of Mr. Gross's fund's Wachovia Corp. bond holdings have declined in recent days. The reason: lingering concerns about further financial-company write-downs.
With junk bonds, the climate looks promising. The Lipper High Current Yield Bond Index is up 4.4% this quarter, much more than any other taxable-bond category.
Nevertheless, some ominous signs have cropped up. Mr. Gross's $128 billion fund and Mr. Shackelford's $8 billion fund have flagged in recent days. The managers say the declines are just short-term blips for an otherwise intact thesis.
1
URL for this article:
http://online.wsj.com/article/SB121280030295853963.html

Want to Make Money By Investing in the Energy Sector…..

......don’t give your money to a hedge fund with expertise in energy. It seems you would have been far better off simply putting the money in an index of energy sector stocks through an exchange traded fund(up 8.5% through May), in an exchange traded note linked to energy like JJE (up 37.9% in the same period) or probably the best choice in a diversified portfolio; allocating a small portion of the portfolio to a diversified commodity index instrument like the ipath DJP which is capped at 34% energy holdings (it rose 16.4% jan – may 2008). All seem to have crushed the hedge funds marketed based on their expertise in this area. The WSJ reported the following.


Energy Hedge Funds Missing Oil Boom
Returns Lag Even as Futures Prices Soar,
Undermining Fears of Speculators' Clout
By GREGORY ZUCKERMAN and ERIC BAUM
June 9, 2008;

If speculators are responsible for driving up energy prices, some of them haven't been doing a good job of profiting from the surge.
Hedge funds that focus on energy failed to cash in on huge moves in oil, natural gas, coal and other parts of the energy patch this year. Some were too cautious, bet against crude oil to protect other holdings or bought stocks of oil refiners and producers, many of which have struggled. Exxon Mobil Corp., for example, is down more than 7% this year.
The 97 hedge funds that focus on energy investments were up an average of almost 3% through May, after climbing 16% last year, according to estimates of HedgeFund.net, which tracks fund performance. By contrast, prices of oil-futures contracts are up more than 40% in 2008. And the Standard & Poor's Global Energy Sector Index Fund, an exchange-traded fund that tracks shares of energy companies, was up 8.5% through May. Only about a third of the 97 funds are on track to beat that ETF this year. It is unclear how the funds have fared this month, with oil prices up 9% in June.
Some of the hedge funds having difficulties may have been among those that bet against the price of long-term oil-futures contracts, while at the same time buying near-term oil futures, says Mary Ann Bartels, an analyst at Merrill Lynch. That strategy backfired in recent weeks when long-term energy-futures prices did better than near-term prices.
The strength in crude this year has caught some veteran traders by surprise, in part because oil inventories have been relatively full. "People seemed to get too scared when it neared $100 a barrel that a pullback was possible and have been gun shy getting back in ever since," said one hedge-fund manager.

Another Good Reason Not to Buy an Actively Managed Mutual Fund

A key element of constructing a successful investment portfolio is to be diversified across asset classes large and small cap for example. Many investors using actively managed (as opposed to index funds) They (or their broker) begin their research as to which funds to choose in each asset class by reviewing funds labeled as targeting each category using the information either from the fund company in its marketing material or by an organization like Morningstar or Lipper. And when picking the fund to use in each asset class they choose “top performing” funds in each of those categories. As a result, as a stockbroker I met who was poring over Morningstar research reports in a coffee shop stated with certainty, they are creating a “best of breed” portfolio.
Actually the above strategy, although on the surface it seems quite well thought out, is not a good approach to take at all. Why? Because of something called “style drift”. You don’t get truth in labeling with an actively managed fund; they often fill their portfolio with stocks outside their designated asset class. Not only does this make it difficult to construct a diversified portfolio, it makes it difficult to evaluate a fund’s performance. Even the funds listed on the box in my June 4 post may only have beaten their respective index by having a large portion of their portfolio invested in holdings outside that asset class.
To take one example, the a Dodge and Cox Stock Fund is labeled by Morningstar as a domestic large value fund it even gives it their highest 5 star rating over ten years. Yet even Morningstar’s analysis points out that the fund is 18.5% invested in non US stocks. http://online.wsj.com/public/fund/page/fund_snapshot.html?page=9&sym=dodgx Lipper also categorizes the fund as US Large Value and gives it their top rating in 4 of 5 categories. The Dodge and Cox website lists _character.aspthis fund alongside the firm’s international fund so it surely is not marketed as a global fund that has a mandate to invest anywhere in the world. Yet as one can find on the Dodge and Cox website 4 of the funds top ten holdings are foreign stocks, they alone make up 10.6% of the portfolio. The website compares the fund’s performance to the the US S+P 500 not a global index including ex US stocks. Thus they are clearly indicating they want potential investors to evaluate the fund as a domestic US fund.

What is the importance of the above example for an investor:
1. If one is trying to keep a particular allocation % between US and foreign stocks one would have to constantly monitor the extent of foreign holdings in this fund and adjust accordingly by reducing funds that are explicitly foreign stock funds. Of course if those foreign stock funds are active, they might hold some domestic US stocks. I’m getting a headache already. Using active funds in an asset allocation can be like a Rubik’s cube.

2. The performance numbers for this fund are meaningless to compare it to other large value funds or to the index. For example, through the end of May Dodge and Cox was -5.5% ytd a tiny bit better than the -5.6% for the vanguard large value index fund. Clearly, even that minimal difference didn’t come from good stock picking within the large value category. It came from the international holdings. In fact a close look shows that Dodge and Cox in aggregate did a bad job of stock picking among both domestic and international stocks. The vanguard developed international index fund was -2.2 % ytd. So in fact an index portfolio holding 18.5% developed international stocks (as Dodge and Cox does) and the rest large value stocks would have returned -4.96 % ,which is better than DODGX.

As the WSJ article below points out, the situations with Dodge and Cox is not unusual, in fact it is quite common my bolds my comments in (bold parentheses)

<strong>Fundamentals of Investing
The Drifters

You may think you know your fund manager's investment style. But don't be so sure --especially in turbulent times.
By KAREN HUBE
June 2, 2008; Page

As the stock market gyrates, you can take comfort in knowing you have a carefully worked out asset-allocation strategy in your mutual-fund portfolio, right?
Don't be so sure...

Some financial advisers caution that your portfolio may not be invested the way you think. The reason? During sharp shifts in the markets, some managers tend to veer out of their stated investment styles, with more frequency and to a greater degree than in calmer times, says Jeff Tjornehoj, a senior research analyst at data firm Lipper Inc. (although their fund data on the wsj website don’t take account of this) With markets down and highly volatile, "there is more of a temptation for managers to reach outside of what is typical for them in order to find positive returns," he says.

Research by Standard & Poor's Corp. indicates that drift heightens during market shifts. About 32% of all U.S. stock funds had "style drift" during the reasonably calm period in the stock market between March 2004 and March 2007. That compares with 46% during the tumultuous, post-technology-bubble period of June 2000 to June 2003, S&P found. S&P judges a fund's style by comparing the portfolio's total returns with the total returns of various style-based indexes and determining which one it most closely resembles. That is known as a returns-based approach. Other firms determine style based on the characteristics of the fund's underlying securities. That is known as a holdings-based approach.

For those who strategically allocate their money across asset classes and investment styles, a manager with wide discretion "can change the risk characteristics of your portfolio in ways you may not be comfortable with," says Steven Condon, investment director at Truepoint Capital, an investment adviser in Cincinnati.((!!!)

"It gets really problematic for investors if they own several equity funds whose managers are all drifting the same way -- then they are heavily overlapping in certain areas and getting far more exposure than they ever bargained for," says Ross M. Miller, clinical professor of finance at the University at Albany, State University of New York.

Adding Zip

Style drift can occur for positive reasons: Funds focused on small stocks, for example, can migrate into the midcap arena if the stocks they own have risen in price. "That's a good problem to have -- it means your small-cap manager has picked good companies," says Jay Berger, partner at Independent Wealth Management, an investment-advisory firm in Traverse City, Mich. In this instance, you may want to hang onto the fund for your midcap exposure and buy a new one to fill the small-cap space, he says
.(that’s pretty convoluted logic imo and pretty hard to implement: how often do you monitor it ? At what point do you make the adjustment he recommends, holding onto the fund that has more mid caps and buying more another small cap fund. Do you do this when the small cap fund’s holdings have risen to 25%, 50% 75% ? And where do you get the cash to buy another small cap with what cash ? by selling what ? And what about the problem of generating taxes (except in an ira) if you need to generate cash to buy that other small cap fund. My head is spinning already. And this problem would be totally eliminated by using only index funds.)


Some investors might like that their managers take the initiative to capture the best returns possible and add much-needed zip. "I believe the best way to go is with good managers who use their best judgment and invest wherever that takes them," says Jeff Bernier, managing director of TandemGrowth Financial Advisor, a wealth-management firm in Roswell, Ga. (yes if you don’t care much about asset allocation and believe in genius managers.)

An example is CGM Mutual fund, where manager Kenneth Heebner has one of the best 12-month returns of any U.S. mutual fund, up 35.6% through May 29. Earlier this year it had roughly 70% of its money in metals, mining, energy and bank stocks -- and 27% in debt securities. ( and its ten largest holdings make up 57.8% of the total portfolio so the fund is far from diversified, holding this fund is a big bet on the manager being a genius and continuing to make big money on his big concentrated bets. Though classified by Morningstar as a diversified large-stock fund, CGM Mutual says in its prospectus that it sometimes goes heavy on bonds, depending on Mr. Heebner's view of the economy.

Studies have come to different conclusions about whether style drift pays off in superior returns. In a 2002 study, Russ Werners, an associate professor of finance at the University of Maryland's Smith School of Business, found that managers of U.S. stock funds with style drift beat "style-pure" managers by three percentage points a year during the 15 years through 2000.

But Keith C. Brown, a University of Texas finance professor, found that style-pure funds beat drifters by 2.7 percentage points a year over a 12-year period that overlapped with the Maryland study. Mr. Werners used a portfolio-based analysis to determine style, while Mr. Brown used a returns-based one.
Any possible outperformance by drifters is largely irrelevant to those investors in the style-pure camp, because they aren't gunning for the highest possible returns. They say strategic asset allocation delivers high risk-adjusted returns, and they want managers sticking to what they are paid to do.

Don't assume that just because a fund's name specifies a style, it is therefore rigidly purist. Stock funds with names that reference a small-cap, midcap or large-cap style of investing must have at least 80% of their holdings in line with that style, according to a rule passed by the Securities and Exchange Commission in 2001. But there is a loophole: The rule says investment companies can take "temporary defensive positions to avoid losses in response to adverse market, economic, political or other conditions." In addition, the rule permits investment companies "to depart from the 80% investment requirement in other limited, appropriate circumstances, particularly in the case of unusually large cash inflows or redemptions."

"You only have to stick to that 80% during normal market conditions," says Bruce Leto, chairman of the investment-management group at law firm Stradley, Ronon, Stevens & Young LLP in Philadelphia. Because there is no official definition of what normal or abnormal market conditions are, "it's totally subjective to the manager," he says. "If you think the market is going into a tailspin, you can continue to call yourself by the same name and invest less than 80% according to your style." The SEC declined to comment.

Do Your Homework
It is hard to pinpoint style drift precisely as it is happening because information on fund holdings isn't available to investors on a real-time basis, Lipper's Mr. Tjornehoj says. "It's something that's only known for sure upon reflection."
The closest thing to a timely read for many funds is quarterly updates on funds' Web sites and in the SEC's Edgar database online (www.sec.gov4).

The University at Albany's Dr. Miller says investors can look for signs of drift by periodically comparing a fund's performance with that of its benchmark. "If returns aren't behaving the way they used to relative to the benchmark, that should give you cause for concern," he says.

Fund researcher Morningstar helps to pinpoint fund styles by plotting them on a grid of nine style boxes, including small, medium and large capitalizations and "value," "growth" and "blend" characteristics. (Value stocks are those considered cheap in terms of ratios such as stock price to per-share earnings, while growth stocks are those of companies whose earnings are expanding faster than the broader market's. Blend funds include both styles.) This information can be accessed free at www.morningstar.com5.

Morningstar President John Rekenthaler cautions that "the style boxes should be used as a guide, nothing else." If a fund crosses to blend from growth, for example, it doesn't necessarily mean it has made drastic changes. The fund may have been near the edge of the blend box all along, and moved into it after selling a few growth holdings.

Whether you are a style purist or willing to go with the flow of a style buster, there is no shortcut to doing homework on managers(or you could choose index funds in each asset category and not have to worry about this issue), says Steven Rogé, portfolio manager for R. W. Rogé & Co., a money-management firm in Bohemia, N.Y. He recommends reading the fund's prospectus and poring over any old reports of funds previously run by the manager.

Truepoint's Mr. Condon says the best way for most style-pure investors to ensure they get what they want is also the cheapest and least time-consuming: Invest in index funds.--.((obviously I couldn't agree more with that)
-- 6.

Chutzpah Award of The Day

This Could Only Happen in the Bizarro World of Hedge Funds


From the June 5 WSJ


I don’t think much comment is necessary other than my bolds and my one observation noted in in bold italics. But this is not really atypical of the hedge fund industry

Drake Capital Management
Ending Two Hedge Funds
By MARGOT PATRICK

LONDON -- Drake Capital Management LLC is to return roughly $4 billion to investors within the next year, after deciding to wind down its two remaining hedge funds this week.
But showing that heavy losses are no barrier for re-entry in the hedge-fund world, the New York-based firm said it will start accepting cash later this year for new funds following "substantially similar" strategies.
The closure of the two funds comes after Drake told investors in late April it would shut its flagship $2.5 billion Global Opportunities Fund. The firm, a specialist in fixed-income and global-macro investment strategies, had managed as much as $6 billion across the three hedge funds before losing about $2 billion over the past 17 months from poor performance and investor redemptions……
.
In a filing to the Irish Stock Exchange late Tuesday, Drake assured investors there wouldn't be a fire sale of assets, saying the portfolios are "well-positioned to avoid forced sales." A spokesman for the firm declined to make any further comment Wednesday about the funds' closure.
Most investors in the three Drake funds had already asked for their money back after last year's heavy performance losses. In an effort to guard against further losses from asset liquidations to meet the requests, Drake suspended redemptions on the funds earlier this year.

Drake Capital Management was founded in 2001 by Anthony Faillace, who had worked for BlackRock Inc. and bond giant Pacific Investment Management Co., and Steve Luttrell, a former BlackRock director who had also worked at Pimco. Mr. Faillace, the firm's chief investment officer, was lauded for making savvy bets on interest rates and currencies after the Global Opportunities fund clocked a 41% return in 2006.

Global Opportunities went on to lose nearly one-quarter of its capital in 2007,(that gives an investor who was in for 2 years a total return of 5.75%, for the unfortunate soul that chased the 2006 performance and began investing in 2007 he would have to earn 33% on his capital before getting back to breakeven )and Absolute Return was down 14% for the year. Global Opportunities had dropped a further 5% as of mid-May, and Absolute Return was off 12% as of mid-April, according to performance data reviewed by Dow Jones Newswires.

Drake continues to manage several billion dollars in long-only mandates and funds. According to its Web site, total assets under management are more than $10 billion.

As they say risk and return are almost always linked.

Why Am I Not Surprised By This ?

The wsj reported this week that despite active managers’ refrain “that it’s a stock picker’s market” (one of the great all purpose clichés of wall street) which is supposed to apply more in down than in up markets, the performance of active managers has been dismal so far this year:

As the article below shows, the useless cliches were coming hard and fast from the active managers (my comments in bolds)



Though Stock Pickers
Struggle, Tech Shares Revive
Managed Funds Fail to Outpace Indexes
By DIYA GULLAPALLI
May 31, 2008;

If this is supposed to be a stock picker's market, the stock pickers need to start picking better stocks.
Bearish periods are touted as stock picker's markets because money managers are supposed to deftly hand-select winning companies rather than rack up losses along with broad benchmarks that are tracked by popular index funds.
Money managers, who charge far higher fees than index funds, have happily promoted this idea. It's "a stock picker's market" that should validate "human-based fundamental analysis," noted one Janus fund in the past year. It's "a stock picker's market" that doesn't "reward broad ownership of sectors or industries," said the $257 million Schroder U.S. Opportunities Fund in a recent filing. It will "continue to be a stock picker's market" since "not every corporation will be able to grow its earnings" in a slower economy, the $22 million Adams Harkness Small Cap Growth Fund said in a recent shareholder letter.
Active funds held up well last year. But so far in 2008, they have fallen behind indexes in six of nine major categories of U.S. stock funds. In the three areas where they are ahead -- small value, small blend and large blend -- it's by about a half-percentage point or less.

Actually the number cited above which is based on aggregate returns in each category is less important than the numbers in the box which show that your odds of picking a fund that outperformed their category ranged from a bit over 2 in 10 to a bit over 6 in 10. And since research has shown that “winners’ seldom persist in beating their relevant index, the argument for active investing is even weaker than it appears from the short term data.


While the data above is only for the first five months of 2008, it is in line with historical experience:

Stock pickers' record during the six bear markets from 1973 to 2007 is three for six, according to research by Vanguard, which pioneered the index fund, but also runs actively managed funds. Beating the market half the time doesn't bolster the case of stock pickers' outperforming during downturns. During economic recoveries, stock pickers beat the market half the time in the 12-month periods following the bear markets. In the bear market from February 2000 to February 2003, active managers in a Lipper general equity average trailed the Dow Jones Wilshire 5000 index by two percentage points…..

That might explain why investors have been looking elsewhere. Last year, nearly 60% of net new cash to funds was captured by index and exchange-traded funds, according to data from the Investment Company Institute. As recently as 2006, index funds and ETFs garnered only 36% of the new dollars.

One hopes that the trend to low cost index and exchange traded funds is a sign of greater knowledge than investors rather than a short term phenomena which will reverse should active funds produce a short period of very strong performance.
Below are the reasons given for this current round of poor performance, but the big picture remains constant: it is very very hard to beat the relevant index.;

A variety of missteps have contributed to fund managers' sluggish results this year. Many value funds that prospered in the past by buying financial stocks on the cheap have done so again in recent quarters only to see financials keep getting pounded. ….
….Meanwhile, many growth funds have resisted buying booming energy stocks, which aren't normally considered growth stocks. Instead, these funds have stuck to typical favorites such as technology and health-care shares, which are down more than the S&P 500 overall.

Active large-growth funds are among those having the toughest time. Only 25% are beating the Russell 1000 Growth Index this year, the lowest percentage since 1996. Mid- and small-growth funds are posting similar results, and are behind their benchmarks by the widest margin of all nine stock-fund categories.
Large-growth funds are seeing some of the widest differences in returns, a situation that often helps a good manager stand out.

Perhaps the growth of index funds and etfs is indication that the tired claims of active management are gaining an increasingly skeptical audience.