Here’s a neat little story from Bloomberg: Charlie Munger, Warren Buffett’s long-time right-hand man at Berkshire Hathaway, moonlights as the chairman of the board of a wee newspaper company called Daily Journal. Daily Journal owns a collection of newspapers so dull that they “specializ[e] in public notice advertising,” particularly notices of foreclosure sales. It also owns $128 million in marketable securities, virtually all of it ($121mm) in common stocks. This is noteworthy because, one, Charlie Munger is the one picking the stocks, and two, Daily Journal’s total book assets are only $173.8mm, its book equity is $106mm, and its market cap is around $190mm. For every dollar you invest in Daily Journal, you’re getting around 33 cents of foreclosure notices and 67 cents of Charlie Munger’s stock-picking. Charlie Munger’s stock-picking: pretty good, as it happens, and in any case a commodity that some people desire.1
Among the best established facts in finance are that (1) the average fund manager underperforms his index, net of fees, and (2) the above-average fund manager is above average due to random fluctuations and will probably be below average next year. I mean, not your fund manager, obviously, but all the other ones will have a harder time selling their services as more people find those things out. And they’re not exactly secret. Nassim Taleb writes books about them. Whole books!
The financial industry as a whole is working on various ways to solve that problem, like selling hedge funds to retail investors, but if you’re a traditional long-only mutual fund manager that can be a hard racket to get into. So alternatives are sorely needed, and a pretty amazing one appeared on the front page of the Journal this morning. It’s, basically, re-brand as Ye Olde Artisanal Stock Pickery & Son: Read more »
Mutual funds are kind of weird in that they basically aren’t allowed to get paid for performance, so they charge investors a flat percentage of assets under management, so for mutual fund managers looking dapper on CNBC is often more profitable than sitting in your office researching stocks. Still – and perhaps perversely – performance does seem to attract assets, so if you run a mutual fund company there is quite a bit of value in trying to get your portfolio managers to pick the right stocks. There are various ways to do that: you could, for instance, ask them politely to do a good job, or yell at them when they don’t, or build them a treehouse. But, who are we kidding, basically there’s money: if you give them more money for picking good stocks, and less money for picking bad stocks, then you will probably attract good stock-pickers and encourage them to pick good stocks.
We’ve talked a bit before about how there’s a booming academic business in papers finding that investment managers do or do not add value versus non-managed alternatives like passive indexing or keeping your money under your pillow and just burning a constant percentage of it every month. Part of why that’s a thing is that the data can be prodded, smooshed, or cherry-picked to say many different things, and so they are. I enjoyed this paper about mutual funds by Stanford GSB profs Jonathan Berk and Jules Van Binsbergen (NBER today here, SSRN in April here) in part for its discussion of data problems, which starts with the fact that they used the industry-standard (in the academic-papers-about-mutual-funds industry) CRSP database and compared it to Morningstar data because “even a casual perusal of the returns on CRSP is enough to reveal that some of the reported returns are suspect.” Suspect like:
We then compared the returns reported on CRSP to what was reported on Morningstar. Somewhat surprisingly, 3.3% of return observations di ffered. Even if we restrict attention to returns that di ffer by more than 10 b.p., 1.3% of the data is inconsistent. An example of this is when a 10% return is accidentally reported as “10.0” instead of “0.10”.
That is one way to get alpha. Anyway they look at the data using a (strangely) unusual metric of dollar value added, which is roughly alpha (gross excess return over some investable benchmark, in this case a Vanguard index fund) and multiplying it by assets under management, the intuition being that making 1% excess return on a $10bn portfolio is more impressive than doubling your $10 bet at the craps table. And they find that mutual fund managers are better than controlled money burning by the thinnest of margins: Read more »
This is sort of a strange footnote to the London Whale: one of the hedge funds that made money feasting off his carcass was run by JPMorgan*:
Even as a trader for JPMorgan in London was selling piles of insurance on corporate debt, figuring that the economy was on the upswing, a mutual fund elsewhere at the bank was taking the other side of the bet. …
But perhaps one of the most surprising takers of the JPMorgan trade was a mutual fund run out of a completely different part of the bank. The bank’s Strategic Income Opportunities Fund, which holds about $13 billion in client money, owns about $380 million worth of insurance identical to the kind the “London whale” was selling, according to regulatory filings and people with knowledge of the trade. It is unclear how much the fund made.
This is … not surprising. Some people want to sell CDS, some people want to buy it. That’s how there’s a market. And when you’re as big and interconnected as JPMorgan, it’s not surprising that the market often crosses between bits of yourself. That is, it’s sort of silly to think of JPMorgan as a market participant; it is rather a nexus of many many market participants. Some of those participants are “JPMorgan,” in that they’re interested in the performance of JPMorgan as an entity; others of them are “clients” in the sense that they are buying securities from JPMorgan or having their assets managed by JPMorgan in some separate or mutual-fundy way; but to think of them all as JPMorgan is silly.
But the conclusions from this unremarkable fact are sort of interesting: Read more »
Ben Stein Prefers Mutual Funds To Hedge Funds, Feels The Need To Note He Doesn’t Support Insider TradingBy Bess Levin
Bloomberg Brief recently caught up with Nixon speechwriter, actor and Clear Eyes shill Ben Stein to pick his brain on the state of the hedge fund industry. Stein’s thoughts? Investors are getting robbed on management/performance fees and the only way a hedge fund can beat the market is via insider trading which Stein wants no part of in case anyone was wondering. Read more »
You will be happy to know that some people are out there right now, tirelessly fighting for your rights. That is, the rights of the little guy. That is, the rights of the mutual fund investor. I mean, the rights of mutual fund managers. You get the idea.
The funds argue the leverage provided through TALF carries no risk to the borrower because it’s done through what are known as non-recourse loans, which they assert should not be considered a form of leverage.
If they get their way, it would enable mutual funds — and thus individual investors — to have a bigger role in buying up assets, which could help kick-start a program that thus far has been slow to catch on.
Why, after all, shouldn’t mutual funds be able to participate in wholesale manipulation and bailout sleight of hand with the same ease and slime greased grace as other massive institutions? Sure, sure, the leverage issue. But it’s not REAL leverage, is it? I mean, it’s not like there’s actually any real risk to the borrower? What do you mean “shut the hell up?” No one is listening. Look, I just mean that there are a ton of fees to earn… that is… opportunities for individual investors to benefit.
Mutual Mission [The New York Post]