Category Archives: Investment firms

how much does professional investment advice cost?

May 9, 2017 By in investment advice, Investment firms, paying for investment advice, Uncategorized Tags: , , Leave a comment

the article

Yesterday’s Wall Street Journal has a curious article in its monthly “Investing in Funds & EFTs” section.  It’s by Stanford graduate Andrea Fuller, a reporter whose specialty is data analysis.  It’s about her trying to find out how much she pays for professional investment advice/management.

the outcome

As she describes it, her situation is a simple one.  She uses an investment firm that’s “one of the largest in the country,” no name though.  The bottom line for her is that she pays a yearly fee, deducted daily, of 1.40% of the assets under management, which consist entirely of ETFs and mutual funds.

The fees break out in the customary way into two parts–an overall fee, sometimes called a “wrap” fee for the service of determining an appropriate asset allocation and selecting funds/ETFs,  plus providing an interface to discuss investment issues.  In Ms. Fuller’s case, that amounts to 0.85% of the assets.  In addition, she pays an average of 0.55% per year for the portfolio construction and management of the mutual funds and ETFs she owns.

pulling teeth

What’s interesting about the story is that Ms. Fuller (1) didn’t know this information before she decided to write the story, and (2) assumed, as I would have, that the figure would be easily available with a phone call or email.  In Ms. Fuller’s case, that’s wrong.

(a longish, maybe pedantic…sorry) Note:  the article implies that all the products are “in-house,” that is, provided by a single investment firm which is also the client interface.  If so, finding out costs is straightforward–what Ms. Fuller pays in total and what she pays to the firm are the same.  If, however, the investment firm uses a third-party portfolio manager for any portfolio products, it typically demands a portion of the third party’s management fee in return for providing access to “its” client.  This means that the total fees paid consist of two parts:  the fees paid to the client-facing investment firm and amounts paid to third parties.  In my experience, investment firms are very reluctant to disclose what their fee-sharing arrangements are.  A Customer Service hotline or a plain-vanilla investment adviser would never have that information.  In that case, the answer to the fee question Ms. Fuller posed is not so simple.)

Tenaciously, Ms. Fuller made a series of phone call (and email?) attempts to get this basic information from her investment adviser.  On at least two occasions, she answer she got was wrong–and, surprise, surprise, understated fees.  Although she finally verbally received the figures I cited above, she was unable to get anything in writing.  Apparently, this basic data isn’t disclosed on the firm’s website, either.  At one point during her journey, she was told to consult Morningstar and figure the fees out herself.

My thoughts:

–Wow!

–By and large, investment firms are run by professional marketers, not professional investors.  Their emphasis is typically on cultivating a relationship that focuses on client service and peace of mind and which deemphasizes the nuts and bolts of fees and performance vs. an index or competitors’ offerings.

Still, I’ve never encountered a situation where fees haven’t been readily available and disclosed somewhere in the small print.  To me, Ms. Fuller’s firm seems to me to be either stunningly inept or to be deliberately choosing to make fee information virtually impossible to obtain.

 

More tomorrow.

 

sovereign wealth funds and ETFs

April 26, 2017 By in Qatar Investment Authority, sovereign wealth funds, Uncategorized Tags: , , , , , Leave a comment

Monday’s Financial Times notes that the Qatar Investment Authority (QIA), the sovereign wealth fund of the Middle Eastern State of Qatar, is changing its investment strategy.  Qatar is a country of 2.2 million people and 15 billion barrels of oil (that we know about), making it one of the wealthiest places on earth.

Since its inception in 2005, the $335 billion QIA has focused on expensive “trophy” assets, like the Canary Wharf property development and Harrods in the UK and film company Miramax plus 13% of Tiffany in the US.  It owns high-end hotels and office buildings all over the place.

According to the FT, however, the QIA has now decided to shift its focus to index funds and ETFs, indicating to the newspaper that the world supply of new trophies waiting to be bought is running low.

Maybe this is true, although there is a much more obvious issue with the QIA’s holdings that neither it nor the FT allude to.

Such trophies are virtually impossible to sell, except maybe to other Middle Eastern sovereign wealth funds.

Hotel companies in the US, and latterly elsewhere, have spent the past two or three decades shedding their properties–while retaining management contracts–because the returns on ownership are so low.  Iconic office buildings are a much better return bet.  But, again, there are only a limited number of possible buyers of, say, a $5 billion project.  A sharp price discount would likely be in order to compensate for taking on an expensive, highly illiquid asset like this on short notice–doubly so if the buyer sensed the seller was having cash flow problems.

It seems to me that the QIA bought into the narrative of “peak oil,” meaning a looming shortage of crude, that has been the consensus among oilmen for the past couple of decades–up until the emergence of mammoth amounts of shale oil production from the US three years or so ago. that is.  So liquidity was never a consideration.

I think the QIA change of strategy is the prudent thing to do.  It’s odd, though, that the QIA is calling public attention to the shift.  This would seem to imply at least that it has no need to divest any of the trophies it now has on its shelves.

Of course, something deeper may be going on as well, since the unasked question is who else may be in worse shape and may want to offload illiquid assets before its cash squeeze becomes evident.

Surprise!  That train has just left the station.

 

 

more trouble for active managers

April 11, 2017 By in Information for investors, Investment firms, research commissions, Trading, trading commissions, Uncategorized Tags: , , Leave a comment

When I started in the investment business in the late 1970s, fees of all types were, by today’s standards, almost incomprehensibly high.  Upfront sales charges for mutual funds, for example, were as high as 8.5% of the money placed in them.  And commissions paid even by institutional investors for trades could exceed 1% of the principal.

Competition from discount brokers like Fidelity offering no-load funds addressed the first issue.  The tripling of stocks in the 1980s fixed the second.  Managers reasoned that the brokers they were dealing with were neither providing better information nor handling trades with more finesse in 1989 than in 1980, yet the absolute amount of money paid to them for trading had tripled.  So buy-side institutions stopped paying a percentage and instead put caps on the absolute amount they would pay for a trade or for access to brokerage research.

All the while, however, management fees as a percentage of assets remained untouched.

 

That appears about to change, however.  The impetus comes from Europe, where fees are unusually high and where active management results have been, as I read them, unusually poor.

The argument is the same one active managers used in the 1980s in the US.  Stock markets have tripled from their 2009 lows and are up by 50% from their 2007 highs.  All this while investors have been getting the same weak relative performance, only now they’re paying 1.5x- 3x what they used to–simply because the markets have risen.

So let’s pay managers a fixed amount for the dubious services they provide rather than rewarding them for the fact that over time GDP has a tendency to rise, taking corporate profits–and thereby markets–with it.

The European proposal to decouple manager pay from asset size comes on the heels of one to force managers to make public the amount of customer money they use to purchase third-party research by allowing higher-than-normal trading commissions.  Most likely, customer outrage will put an end to this widespread practice.

Both changes will doubtless quickly migrate to the US, once they’re adopted elsewhere.

 

 

 

what a good analysis of Tesla (TSLA) would contain

March 8, 2017 By in Autos, Industry Analysis, Information for investors, Investment firms, Uncategorized Tags: , , , , Leave a comment

A basic report on TSLA by a competent securities analyst would contain the following:

–an idea of how the market for electric cars will develop and the most important factors that could make progress faster or slower.  My guess is that batteries–costs, power/density increases, driving range, charging speed–would end up being key.  Conclusions would likely not be as firm as one might like.

–TSLA’s position in this market, including competitive strengths/weaknesses.  I suspect one main conclusion will be that combustion engine competitors will be hurt by the internal politics of defending their legacy business vs. advancing their electric car position.  The ways in which things might go wrong for TSLA will be relatively easy to come up with; things that could go right will likely be harder to imagine.

–a detailed income statement projection.  The easy part would be to project (i.e., more or less make up) future unit volume and selling price.  The harder part would be the detail work of breaking down unit costs into variable (meaning costs specific to that unit, like labor and materials, with a breakout of the most important materials (i.e., batteries)) and fixed (meaning each unit’s share of the cost of operating the factory).  An important conclusion will be the extent of operating leverage, that is, the degree to which fixed costs influence that total today + the possibility of very rapid profit growth once the company exceeds breakeven.

There are also the costs of corporate overhead, marketing and interest expense.  But these are relatively straightforward.

The income statement projection is almost always a tedious, trial-and-error endeavor.  Companies almost never reveal enough information, so the analyst has to make initial assumptions about costs and revise them with each quarterly report until the model begins to work.

–a projection of future sources and uses of cash.  Here the two keys will be capital spending requirements and debt service (meaning interest payments + any required repayments of principal).  Of particular interest in the TSLA case will be if/when the company will need to raise new capital.

 

 

Tesla (TSLA), me and momentum investing

March 7, 2017 By in Industry Analysis, Investment firms, securities markets, Technical Analysis, Uncategorized Tags: , , , , 1 Comment

Why should a company fundamentals-driven investor have a problem with momentum investing?

Two reasons:

–momentum investing is a reactive strategy, and

–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.

In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company.  Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is).  Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.

 

What kind of a thing, reactive or predictive, is my formula for TSLA of:   buy at $180 and sell at $250?  In a sense, I’ve got some fundamental underpinning.  My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price.  And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.

But how did I get the $180?

What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013.  Yes, at $180 I have better potential for upside than I do at $250.  But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.

In sum, then, the fundamental underpinning of at least the buying are pretty lame.

So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit.  On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.