The Reformed Broker
So it turns out that Web 2.0 investing isn't all exits and lollipops and blazers with hoodies underneath...
Things get serious whenever you're talking billions instead of a few million between friends. I admire Groupon founder and CEO Andrew Mason for trying to keep things the way they were. But that's not how it works when you're a public company with hundreds of thousands of shareholders - the frat boy-wonder schtick just isn't cute anymore.
Groupon’s headaches are growing more serious. Just days after an accounting snafu forced the discount website to reveal a greater-than-reported fourth-quarter loss, the company was slapped with a shareholder lawsuit accusing its top executives of a “fraudulent scheme” that “deceived the investing public” about the company’s prospects and business. As if that wasn’t enough, Groupon’s stock hit an all-time low Wednesday and it faces a probe by the Securities and Exchange Commission.
China's stock markets bucked the global trend overnight and closed higher. It's been one of the worst-performing places to be this year (up only 4% YTD and down 22% over the last 52 weeks for some context) and the implications of that continuing have hampered the industrial and materials-related stocks here in the US.
In the New York Times this morning, we're told that a sea change may be in the offing as China eases by reformation:
Chinese markets were buoyed by expectations that foreign investment would increase in line with a loosening of quotas that cap the amount of foreign capital that can flow into domestic stock and bond markets in mainland China.
The liberalization of the investment program, announced Tuesday, raised the quota for qualified foreign institutional investors from $30 billion to $80 billion — an amount that analysts said was not especially large, but nonetheless symbolically important, as it appeared to form part of Beijing’s gradual efforts to overhaul the country’s tightly controlled capital markets.
The “move is a sign of a push for greater capital account opening,” said Dariusz Kowalczyk, a senior economist at Crédit Agricole in Hong Kong. “It is also a step towards attracting more foreign investment.” At the same time, many analysts expect Beijing to continue its drive to lift the economy with measures that some believe could include an interest rate cut later this month.
This does not make me bullish just yet on China, but I'll note that their stock market has grown fairly inexpensive in both absolute and relative terms. I'll also note that economists there say an actual lending rate cut could be happening in the first two weeks of April before the release of China's official Q1 GDP report (April 13th). Worth thinking about.
Very tough to make a go of it in the journalism biz these days without the stream of revenues coming in from a terminals business (Bloomberg gets at least two grand a month per installed terminal - that pays a lot of editor and reporter salaries).
AdWeek is calling the two news n' data giants in this duopoly "The Future of Journalism"...
Awash in subscriber revenue, Bloomberg and Thomson Reuters are those truly rare things: news organizations that not only are healthy but also are on a hiring spree. Bloomberg boasts about 2,400 edit staffers, up from 2,100 three years ago, while Thomson Reuters has added 600 full-time journalists over the past four years for a total of 3,000. Each employs more newspeople than The New York Times and The Washington Post combined.
In Bloomberg’s case, the handsome newsroom salaries are legendary. “They’re spending like drunken sailors on all these top-flight journalists,” grumbles an exec at a competing media company. “It’s allowed them to corner the talent market.” That’s because Bloomberg and Reuters have something no other player in the news business does: subscription-only financial data and services that pull in billions of dollars.
Compare that to the calamitous newspaper industry, where some 13,400—about one-fourth—of newsroom jobs were lost between 2006 and 2010, according to Pew’s State of News Media 2012 report. As that carnage continues, consumers remain steadfast in their refusal to pay for news online—and news outfits are left scrambling to figure out a profitable future.
One of my big themes for this year since January was that China would have more of an impact on US stocks than Europe would - up or down. So far that's been a money call. In all of my media appearances and here on the blog I've repeatedly talked about my distaste for commodity-related plays and industrials that were levered to China. We've been underweight cyclicals and materials and plan to remain so while everyone tries to figure out how much China is actually slowing.
I can't think of any reason why you'd want to be leaning into this sector, and the valuation arguments are not compelling. Really cyclical stocks always are most dangerous when they look the cheapest - because the smart money knows the earnings are peaking for the cycle (think homebuilders with PE multiples of 6 or 7 back in 2006). They always look "expensive" precisely when earnings are troughing. Right now I think they're in no-man's-land and earnings revisions will be to the downside if China deteriorates even further.
In November of 2008, after a fifteen-year wait and numerous false starts, the sixth album from Guns n’ Roses, Chinese Democracy, was finally released. And it promptly flopped, having cost $13 million to record, spawning precisely zero hit singles and having sold only a paltry 640,000 copies here in the US to this day.
Why did the band behind Appetite For Destruction, G N’ R Lies and Use Your Illusion, three of the most beloved rock albums of all time, find such difficulty gaining traction with the new album? It’s very simple - the fans knew that, other than singer Axl Rose, the group was no longer comprised of the players who had made the earlier records so magical. Izzy Stradlin, the co-writer of such hits as Sweet Child O’ Mine, Paradise City, Patience, Don’t Cry and You Could Be Mine was no longer with Guns n’ Roses. Neither were propulsive bassist Duff McKagan or iconic lead guitarist Slash. And so even the diehard fans stayed away from the new album - because although Guns n’ Roses had racked up an amazing track record in the past, the men responsible for it were no longer in the band.
Axl’s split and subsequent battles with his old bandmates were very high profile and well-documented; when the new album came out, everyone knew what the deal was. The same cannot always be said for mutual fund investors, unfortunately. One of the biggest mistakes fund investors make is buying into a track record without realizing that the managers behind that track record are no longer at the helm. Even worse, in many cases new managers come with new investment philosophies and styles - this means that all the previous performance and historical characteristics of the fund’s “behavior” in different market climates should be discarded. But this concept does not get emphasized at the fund ratings firms - investors are left to dig for manager tenure when a simple asterisk next to the historical returns data would suffice.
And in some cases, an old track record is even played up in the marketing - with no (or vague) mention of the fact that this record has become a non sequitur now that someone else is in charge of the fund. I bring this to your attention because there is a very excplicit example of this type of thing occurring right now that all fund investors should be aware of.
I’m sure that Tad Rivelle, CIO of the TCW Total Return Bond Fund (TGLMX), is a nice and handsome man. I’m also sure that he is smart and doing his very best at the helm of the fund. But in my view, he has no business making the following statement in a press release about his fund’s performance:
“Less traditional fixed income asset classes have delivered strong returns for long-term investors and our outstanding track record in the areas of mortgage-backed securities and emerging markets is reflected in these awards.”
This is because Tad and his team had almost nothing to do with delivering these “strong returns” to the “long-term investors” in TCW Total Return Bond.
Before we dig in here, please be aware that I am not making any recommendations for anyone with this post - I’m simply pointing out another dimension of performance research that often gets overlooked by investors who are “chasing the hot dot.” So please don’t act on anything I say here without doing your own homework.
Anyway, the quote above from Mr. Rivelle is about the performance that resulted in the fund company accepting a Lipper Award on March 9th for five- and ten-year performance. The problem with this - and the thing that investors need to know - is that these award-winning results were actually generated by Jeffrey Gundlach and his team, about 30 of whom departed TCW in December of 2009. Anyone who had been given trading authority by Gundlach or had worked closely with him, learning his process, has already followed him to his new shop, DoubleLine.
Leaving aside all of the lawsuits and ugliness between TCW and Gundlach upon his departure, if we focus solely on the portfolio management and returns since, we see that the Lipper award and TCW’s attendant PR announcement might be very misleading to investors.
Now its not Tad Rivelle’s fault that Lipper decided to bestow an award upon the fund for long-term performance. But it is very surprising that TCW’s press release makes no mention of the fact that its current team had little to do with it. In fact, Rivelle’s first full year running the TCW Total Return portfolio without any of what Gundlach’s team had put in place construction-wise was 2011, a year during which TCW badly trailed almost all of its rivals in the mortgage backed securities fund space with a stubby 4.1% return. This places them in only the 14th percentile of the category according to Bloomberg and below the Barclays Capital US MBS Total Return Index benchmark of 6.2%. So not only did the new team not add to the fund’s long-term performance numbers, so far it has actually subtracted from them.
Is there any rule saying that they have to mention this? No. There are the standard "past performance" disclaimers and that's all. Which is why it's so important that investors look past the track record and try to understand how it was generated and by whom.
In the mutual fund world, it is said that the manager doesn’t own his track record, the suits own it, and that’s all well and good. But investors need to be aware that an actively-managed mutual fund’s track record is only valid if the same people and processes are in place. Whether or not historical performance will mean anything at all in the future is a separate issue of course, but let’s not pretend that 99 out of 100 investors don’t look at past performance before just about any other available metric out there (because I can assure you that they do).
The key is to understand that this happens all the time, with various responses by the fund families in the wake of a departing manager.
Take for example, the departure of Paul Hechmer from Nuveen Investments in June of 2009. Hechmer was managing $14 billion in assets for Nuveen at the time including the high profile Tradewinds International Value fund. After beating 96% of his peers over five years, Hechmer had a falling out with Nuveen over the company’s direction and quit, taking the knowledge and skills that built his fund’s track record with him. But a glance at Nuveen’s marketing page for the fund would never tell you that, although it proudly displays the record itself.
Sometimes the fault lies with lazy journalism, one example comes from the high ratings accorded to Harbor International in US News & World Report’s “Best Funds” rankings. The magazine, aimed squarely at relatively unsophisticated investors, makes no mention of the fact that lead manager Hakan Castegren passed away in 2010 after putting up great numbers for the fund since 1987, making up the majority of the fund’s long-term performance.
In contrast to these examples of obfuscation, we can point to some scenarios where the transition was handled in an orderly way. Superstar equities manager Chuck Akre (13% annual returns from 1996-2009) left FBR in 2009 to start his own Akre Focus Fund. Akre had built up quite a reputation as a value guy who was able to find faster-growing value stocks in the haystack and the FBR fund he ran soon topped a billion in assets. But eventually, he wanted to do his own thing. The good news is that two of Chuck’s top research lieutenants who had been schooled in the Akre methodology were given the reins. So here we have an example of some continuity, some sense that although the manager was leaving, his process would live on lending some legitimacy to marketing that track record.
Another positive example can be found at First Eagle Global, a fund I own for almost all of my clients and one that exemplifies how the torch should be passed from one manager to the next. It was obvious that the legendary Jean-Marie Eveillard (a track record spanning decades) couldn’t run the value-oriented fund forever and that sooner or later a younger manager would have to take over. The relationship between Eveillard (pictured at left) and his replacement Matthew McLennan at the $30 billion fund is said to be one of mentoring and frequent communication. This is helpful to me as an advisor in understanding how the historical values and performance of the fund make the transition.
TCW is not the only fund to lie by omission in its marketing - managers jump to new funds all the time after all and even the long-term superstars have to retire at some point. Often the journalists and fund-rankers make no mention of these changes so it is very important that advisors and investors take this upon themselves. Because there are more examples like TCW Total Return Bond out there than there are examples like the Chuck Akre or the Jean-Marie Eveillard case.
While band names and fund families may keep the same names, finding out if there are different players behind the scenes can mean a very different final outcome.
Full disclosure: The author is currently invested in DoubleLine and First Eagle Global mutual funds for both clients and personal accounts.
Disclaimer: Any discussion here of historical track records and performance data for products sold under a prospectus is solely for the purpose of exposition. Past performance is not a guarantee of future results. Investors should not rely on the opinions of the author as statement of fact or make investments in any of the funds mentioned without first pursuing their own course of research and determining whether their own risk tolerance and goals align with the stated objectives of the products themselves.
This is great - I was out with Joe Weisenthal the other night after he spoke with the St Louis Fed people by phone, he was blown away at the output of such a small group of people when it comes to the FRED charting section. I guess this is an example of a quasi-government thingie actually exceeding our expectations in terms of productivity.
FRED charts have exploded all over the internet now and virtually any presentation you attend will feature them in the speaker's slide deck. The site is easy to use and addictive if you're a data hound or a market nerd or whatever.
Just how big has the site become? Some stats from Joe's piece:
- 1.9 million visits from 200 countries (42% increase over 2010)
- average 6,000 visits per day
- 14.5 million page views during 2011
- 13,000 visits from Twitter during 2011
- Approximately 600,000 custom FRED Graphs were created during 2011
- GeoFRED received 15,000 visits during 2011
- ALFRED received 48,000 visits during 2011
- During Q4 2011, 14.7 million data calls sent through API
- 15,000 new series added during 2011
Anyway, Joe goes behind the scenes and interviews the team behind this phenomenal site, click over!
I was very proud of my industry when I saw this article over at Investment News about how the large money managers are constructing portfolios in a brand-agnostic way. This is how asset management for the sake of the client is meant to be done:
MONEY MANAGERS are using more and more of one another's exchange-traded funds as portfolio tools — significant because ETFs are the only major example of an instance in which investment management firms are using their competitors' products...
BlackRock Inc., the largest money manager and ETF provider in the world (through its iShares unit), is one of the largest users of other firms' exchange-traded funds, according to an analysis by State Street Global Advisors. BlackRock had $8.9 billion invested in 98 different ETFs at the end of 2011, of which about $2.8 billion was in other firms' offerings. It had $1.7 billion with SSgA, $436.2 million with The Vanguard Group Inc., $410.3 million with ETF Securities LLC, $176.4 million with Van Eck Global, $52.1 million with Sprott Asset Management LP, $22.5 million with Invesco PowerShares Capital Management LLC and $1.1 million with WisdomTree Funds.
BlackRock's ETF holdings are only a small piece of its $3.5 trillion under management.
Another big user of other firms' ETFs among large money managers is Pacific Investment Management Co. LLC, which had $2.9 billion invested in ETFs at year-end 2011, of which more than $2.1 billion was in other companies' funds, according to SSgA. The bulk was invested in just two: $1.2 billion in the Vanguard Emerging Markets ETF and $893.7 million in SSgA's SPDR Gold Shares.
Clearly you're seeing this type of thing because these large purveyors of asset management products are smart enough to realize that they don't each have the best-in-class suite of funds for every asset class. They are responsible, in the end, for performance and part of that responsibility means keeping fees low and choosing holdings that are the most efficient and utilitarian toward a specific outcome. I'm sure Pimco could start their own version of GLD tomorrow, but it would not serve their clients' purposes or their own or the market in general. It would be a less-liquid, higher-cost product by the very nature of its construction. So Pimco does the right thing and uses the SPDR version like everyone else.
In the old days, when Morgan and Merrill and Smith Barney were still relevant, you would never have seen this kind of sharing and cooperation. Everything had to have the firm's name on it and you could never recommend the fund of a competitor - the clearing department of your firm wouldn't even hold another firm's fund if you tried to transfer it in! "Liquidate Upon Transfer" would be scrawled across the paperwork!
But those Border War days are at an end.
The walls are coming down, slowly but surely. The resistance to change is melting and the embracing of holistic asset management with the clients coming first is at hand.
Way to go, guys.
This morning Apple ($AAPL) announced a $10 billion share buyback and a $2.65-per-share quarterly dividend to be paid out going forward - a yield of roughly 1.77% at today's prices around $600. Apple was smart to start relatively small, it gives the company room to raise both the buyback amount (should the stock get hit) and the dividend on a regular basis.
The company sits on over $100 billion in cash, equal to roughly a hundred dollars a share. It is also generating an obscene amount of new cash, $16 billion in the last quarter alone.
“We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure. You’ll see more of all of these in the future,” Apple CEO Tim Cook said in a statement.
This was pretty much what I expected although the yield is slightly below the 2.5% The Street "wanted". Apple does a great job at pretending it cares about what Wall Street wants.
Move along folks, nothing to see here, business as usual for the greatest company on earth.
An interesting take on what the investor class needs to wrap its collective head around given the some new realities from Jean L. P. Brunel, chief investment officer at GenSpring Family Office:
Mr. Brunel argues that the classic link among the return premiums for bonds over cash and stocks over bonds still holds, but they are substantially lower because of the low interest rates set by the Federal Reserve.
Here is how it works. The return on cash is typically the expected rate of inflation plus some real interest rate that is derived from the rate a central bank sets to promote growth. The return on bonds is cash plus some additional amount to account for the duration of the bond. The return on equities is the bond returns plus some premium for the risk associated with stocks.
He noted that cash typically had a return of 4 percent, putting bonds at 6 percent and stocks at 8 to 9 percent. With cash now yielding zero, that has lowered bonds’ return to 2 to 2.5 percent and stocks to 5 percent. The problem, as he sees it, is that too many people are stuck on the old numbers.
“I don’t want you to read into this that we have precise information on real returns,” he said. “I could be wrong. It wouldn’t be the first time. But whichever way you cut it, the environment is radically different."
The above comes from a New York Times story. Brunel is from the family office world so you can bet the portfolios he allocates (or oversees) are as plain vanilla and buy-and-hold oriented as possible.
In my view, there are two ways for affluent investors to get around these new low return expectations, each comes with its own set of risks:
1. Tactical Asset Management (Maximizing the market's upside potential at the right time and missing as much of its downside as possible when the trend changes - this can be done but most do not have the tools)
2. Alternative Strategies and Asset Classes (This could encompass hedge funds or hedge fund-like vehicles that are truly non-correlated, master limited partnerships, futures, real estate, fine art, gemstones)
But again, these are not necessarily easy for the average investor to research, choose between and then deploy. Which is where professional help comes in. If 5% returns are to be the new norm for stocks, this kind of help will be more important than ever.
It was reported last night that the SEC is close to bringing some kind of action against several players in the Private Stock Markets that have proliferated over the last few years. You knew this whole concept was too good to too few people to last...
I address this in my latest piece for the Wall Street Journal today:
Ya gotta admire the spirit of this whole thing – “The rules of the regular stock market and going public are too restrictive and annoying. So let’s just make our own stock market based on the West Coast where only us venture guys and founders and our employees can trade amongst each other.”
It could’ve been blissful, Utopian even.
Imagine a private market where tech-savvy people and the Digerati could buy and sell within their own little bubble stretching from San Francisco to the off-campus housing around Stamford to the Diablo Mountain range bordering the eastern fringe of San Jose. There would be no need for all that physical “dead tree” paperwork or the prying eyes of CNBC and the Wall Street Journal. There could be less rules because, frankly, these would be negotiated transactions between millionaires and billionaires – a brotherhood of enlightened self-interest, in it for the challenge and intellectual self-satisfaction with the money being a mere afterthought.