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Fund Manager Scorecard

Each year Standard and Poors produce a scorecard of the performance of a regions fund managers against their comparison indices. You can find the raw scorecards here.

I decided to download the one for Australia and tidy up the data a little so it was more presentable. The chart below looks at the number of funds in various categories that have failed to match or beat their benchmark over a 1, 3, 5, and 10 year period. Just a reminder this table shows the number under performing, not the number that beat the index.

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As you would expect this is one of those – I think I have seen this movie before type of scenarios. The majority of fund managers failed to match the index in all categories over all time frames. I had a quick glance at the scorecards for the other regions and this pattern repeats itself in all regions. The reasoning for this I think is that all managers are captive to the same narrative fallacies and are caught in the same academic, philosophical and psychological delusion. It is not that markets cannot be beaten because there are clearly well known managers who have beaten their index year after year. But if you based your investment strategy on notions such as the Efficient Market Hypothesis, perceptions that you know the value of  something and plain stupid ideas such as we dont need stops because we are smart and would never buy a company that went down. Then you deserve to made to look like an idiot.

However, there is a wider implication and that is the impact that this sort of massive non performance has on issues such as retirement. As I have said before part of the looming retirement crisis could be solved simply by nationalising all superannuation funds and placing everyone in an index fund. Overnight long term returns would double and fees would be more than halved. But there is also another impact and this one in related to the impact of on performance on the broader confidence in market participants. Is it any wonder that Australians opt for real estate as the prime mechanism of passive wealth creation when they hear about this sort of rip off.

Conundrum Of The Day

I have reflected on the post I wrote last week about the great superannuation rip off in which I compared the returns from investing in an average growth fund with those derived from investing in the index. It struck me over the weekend that the majority of fund managers (read almost all ) are followers of the Efficient Market Hypothesis (EMH).  The central tenet of  the EMH is that it is impossible to beat the market because all information is seamlessly incorporated into a securities price and that investor will react in a rational manner to this information.

So the question becomes if the people managing superannuation funds believe this to be true and I think they do, why then then do they have growth portfolio’s? Growth portfolios are in simple terms stock picking portfolio’s designed to beat the market. If you believe you cannot beat the market why then bother with stock picking? This is a massive contradiction and I have no idea how they reconcile this.

But then again they managed to reconcile charging vast amounts for bringing no skill whatsoever to the investment process.

The Great Idiot Tax Continues

It is at this time of the year when superannuation funds crow about how good they have done and of their inestimable benefit to mankind in general and this year was no exception.  So as is my now annual tradition I thought I would have a look at how good they have done and compare that to the real world where delusions about how good you think you are dont exist. From the article I linked to I took this table which looks at the average return of a a growth fund since 1993.

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Source – Superannuation returns above 10% for the June Year

This piece acts as a good starting point for comparison with the market. For this I used the All Ordinaries Total Return index which used to be known as the Accumulation Index. It includes not only the price movement of the index but also folds back in the dividends of the index components so it is a good benchmark for simply passively holding an index fund or ETF.

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When the chart of the average return of a growth fund is first viewed it does create an overall favourable impression – there are only three negative years and returns seem overall to be quite robust. It is only when you compare this active management with a passive benchmark that you realise how poor local managers actually do when compared to the index. Remember these are people who are paid to beat the index and as we will see they are paid staggering sums of money. Looking at annual percentage returns is quite crude and does lack a bit of fidelity, you dont actually know what the true performance differential is so I looked at the value of $1 invested into an average growth fund and into the index and got the following.

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The market leaves the industry for dead – the market investment would now be worth $9.87 versus the industries $5.91 and for this privileged investors have been ripped off handsomely. The chart below looks at what my guess of the annual fee intake of superannuation funds is. For this I have assumed an average fee of 1.5% to cover not only management fees but also advisor commissions.

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So to produce a theoretical return of slightly better than half what the market produced  in the period above the superannuation industry has collected probably close to $310B in fees. So to once again steal from Winston Churchill – never in the field of human endevour has so much been paid to so few for so little.

Bulls, Bears & Charlatans

The word ‘charlatan’ is supposedly derived from the Italian word ciarlare, which means ‘to babble.’

Some of the original charlatans were confidence men who would prey upon people’s misunderstandings about healthcare before modern medicine existed. There used to be traveling medicine shows where the salesperson would make promises of magic elixirs that would heal all wounds. It was only after they had moved on to the next town that people would realize they’d been swindled as these tonics were worthless forms of medicine (this is also where the term snake oil salesman comes from).

A charlatan has also been described as someone who professes to have abilities or expertise that they do not have. The term ‘charlatan’ is perfect for the finance industry because it can attract people pretending — whether they realize it or not — to know more than they actually do.

More here – A Wealth of Common Sense

PS: I was going to write something on exactly the same headline but as you can see someone beat me to it…..

Why some billionaires are bad for growth, and others aren’t

 

A piece in the Fairfax press today referenced a book by economist Professor Paul Frijters called Game of Mates. In essence the books looks at both the political connnectness of billionaires, how this affects their wealth, the wealth of a country and their contribution to innovation. In short it found that billionaires in Australia are highly politically connected with Australia ranking only behind the likes of Colombia and India in the degree to which influence guides wealth. It also shows that locally billionaires are a drain on the economy because of their stifling of innovation and the rent seeking nature of their wealth. True risk taking is not in their nature, guiding and influencing our third rate politicians is.

The piece in the Fairfax press referenced an earlier examination of this work done by the Washington Post which to my eye is a more complete analysis which offers this very salient point –

Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had zero politically connected billionaires. The U.S. also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.

When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn’t due to political connections, income inequality and poverty all had little effect on growth.

“The negative effects of wealth inequality are largely being driven by politically connected wealth inequality. That seems to be the primary channel that drives this relationship,” Bagchi said in an interview.

The researchers estimate that a 3.72 percent increase in the level of wealth inequality would cost a country about half a percent of real GDP per capita growth. That’s a big impact, given that average GDP growth is in the neighborhood of two percent per year, Bagchi said.

Why is politically connected wealth inequality so bad for a country? The researchers suggest that when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest.

None of this does anything to change my opinion that the hyper wealthy in Australia are simply a bunch of whingers who seek favour from politicians as opposed to doing anything that has a long term inter generational impact.

Its Not My Fault…But Then Its Never My Fault

Whilst sitting at my local this afternoon enjoy a cuppa and a Kit Kat I spied someone reading a piece about a company called SurfStich which to be honest I had never head of as it doesn’t sit within my universe of tradeable stocks. To save you the trouble of reading the article I can summarise it quick quickly. SurfStich lists in 2014, the listing is a bit lacklustre but price recovers from the $1 listing price to hit a high of $2.13. Stock then dies in the arse and shareholders crack the sad’s and want to sue the company. I have dropped a chart of the price action  below.

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On the chart I have plotted the listing price of $1.00 and as you can see the stock spent a good year above the listing price before beginning its precipitous fall from grace. I can guarantee you that when the stock price passed through $2.00 the investors who are now suing the company considered themselves to be absolute geniuses and when the stock began to fall those who ran the company were apparently complete dickheads for letting it happen. Here is a news flash for investors who operate on this sort of deflection of personal responsibility – you are responsible for your own actions and all the consequences that flow from them. You had ample time to exit the stock with a substantial profit but you didn’t – the decision not to was your fault – no one else is to blame.

I understand the notion of personal responsibility is an anathema to a lot of people but if ever there was a cornerstone principle for being successful at anything it is being able to accept your role in the events as they unfold. You cannot consider yourself to be the best investor in the world when price is running your way but then somehow seek to blame the company for your failure to take any form of defensive action when things do not go your way. This just paints you as a childish amateur.

This Really Shits Me

This little rant has nothing to do with trading so if you are not interested tune out now. I came across the article below whilst looking for something else and I thought it would be a good primer piece for people who wanted to know a little bit more about statistics since it uses neither mathematical notation nor formula and then I saw that I had to fork out EUR41.94 (about $AUD63.00) for the privilege of simply downloading.

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This sort of thing along with the rise of bullshit journals, pay to publish, citation mining and the general drop in quality of cornerstone publications such as Science and Nature are some of the reasons why I am glad I left this life behind.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.