Past Performance is No Guarantee of Future Results...One More Example

Fortune Magazine November 15, 2006:


“The greatest money manager of our time

What do ant colonies, novels and river systems have to do with making money? Ask Bill Miller, the man who's topped the market 15 years running. Fortune managing editor Andy Serwer reports. …

In case you haven't heard of him, Bill Miller is one of the greatest investors of our time. Refreshingly, he isn't some sort of billionaire hedge fund recluse. Miller runs an ordinary mutual fund, the $20 billion Legg Mason Value Trust, where he has produced extraordinary returns.
As it stands now, Miller has compiled one of the most remarkable records in the history of investing: His fund has outperformed the stock market for 15 straight years. That's right, 15 years, starting in 1991 - during George Bush the elder's presidency - through the tech bull market, then the crash and now the recovery.
That puts him in the same league as Peter Lynch, George Soros, even Warren Buffett. In recent years Miller has inadvertently added to the drama of his DiMaggio-like streak by falling behind in the first half, only to come roaring back in the fall and pass the market at the last minute. This year Miller's fund again got trounced by the market in the spring, and since then it has come back, only this time there's a difference. As of early November, Miller was still about 10 percentage points behind the S&P 500. So it is almost certain that he has too much ground to make up and that the streak will be broken. If you don't believe me, ask Miller: "It's unlikely I'll beat the market this year," he says, though he certainly thinks the condition will be temporary.”

Any reader of Naseem Taleeb’s brilliant book Fooled by Randomness would not be surprised by what came next:
Legg Mason Value Trust is = - 28.4% ytd through June 30,2008 underperforming the s+p 500 by 17.46%
3 year return is -8.52% (12.17% worse than the s+p 500)
5 year return is -.53% (8.03% worse than the s+p 500)

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