{"id":2944,"date":"2016-04-12T14:24:50","date_gmt":"2016-04-12T14:24:50","guid":{"rendered":"http:\/\/astraea.net\/blog\/?p=2944"},"modified":"2017-01-24T13:29:07","modified_gmt":"2017-01-24T13:29:07","slug":"investing-your-portfolio-where-are-the-customers-yachts","status":"publish","type":"post","link":"https:\/\/www.astraea.net\/blog\/investing-your-portfolio-where-are-the-customers-yachts\/","title":{"rendered":"Investing your portfolio: Where are the customers’ yachts?"},"content":{"rendered":"

The wife of a successful entrepreneur once remarked to me that she had pointed out to her husband that there will always be someone else with a bigger yacht in the marina.\u00a0 She was hinting that it’s fine to work, but there’s a point at which you ought to stop and spend a bit of time with your family and friends.\u00a0 She’s since divorced (for him it’s the second time!).<\/p>\n

\"livingoffthepeople\"<\/a>Another boating analogy was shared by The Economist recently in a comment about the asset management industry entitled Living off the people<\/a>.\u00a0 As an asset manager, investing other people’s money, it was pertinent to my profession.\u00a0 The article offers a synopsis of the fund management industry and the challenges it faces today, the principal one being “Is there any use for fund manager’s at all?”\u00a0 The evidence has been around for decades, and now is being more actively referenced, that paying someone to beat the index is a fool’s game.<\/p>\n

You can’t consistently beat the index, and if you have to pay someone to try, that’s going to cost you even more, so don’t even try.\u00a0 Just invest in a low fee index fund, like one offered by Vanguard<\/a>.\u00a0 The article points out that a quarter of American billionaires work in finance and investment and concludes with a quote from a pre-war Wall Street mogul “Where are all the customers’ yachts?”\u00a0 Instead pay a computer pennies to put yo u on the efficient frontier<\/a>.<\/p>\n

The Economist covered this issue again at the end of March in The Tide Turns<\/a> suggesting that people were beginning to tire of paying an average of $ 690,000\u00a0 a year to those picking stocks in the American equity market and moving capital from active managers to low-load index funds managed by the likes of Vanguard and Blackrock.\u00a0 Last year $100 billion flowed out of actively managed funds while $ 400 billion flowed in to index tracking funds.\u00a0 Awareness among investors is being enhanced by regulations requiring greater transparency from managers and requiring them to put customers’ interests first, which of course should be the minimum culture any way.\u00a0 (Yes, I know that’s naive, especially after seeing the fraud at the highest levels that instigated the Global Financial Crisis, but I believe that if we don’t be moral we won’t have morality and that is the essence of trust which is the foundation of money and human relations.)<\/p>\n

Technology has pushed fund managers to the edge of extinction, making the business a utility which is effectively funneling cash from investors and pension beneficiaries in to the pockets of fiduciaries.\u00a0 That term “fiduciary” should be used with caution since most of them do not put clients’ interests first.\u00a0 (That’s one of the reasons for my disenchantment with the industry.)\u00a0 Instead practices such as churning compound the statistical fact that you can not achieve a better risk return profile than the market.\u00a0 Today computers, calculating billions of permutations and crunching data in real time can track the market at a fraction of a percentage point each year, so which star investor can beat that?\u00a0 Not one.<\/p>\n

So why would you invest in the market in any way other than a low load index fund?\u00a0 Two reasons: For fun, because you enjoy the process and you can afford to accept a sub-optimal risk-return profile.\u00a0 Or because you do not want to invest in certain things, like fossil-fuels, and do want to invest in others, like bio-mimicry or open management.\u00a0 (This is where I operate – investing in unlisted<\/em> investments which are not accessible via public markets and where value can be added in the selection and management\u00a0 process which a computer can not yet do.\u00a0 In a couple of decades, venture capitalists too will be replaced by androids, but I suppose that’s the fate of all of us unless we choose a different world.)<\/p>\n

In both cases you might make money, but you are certainly taking on risk to do so.\u00a0 In some cases, that’s worth it because ethics are more important than profit or making the world better is what you want to do.\u00a0 But the bottom line is that giving your money to a fund manager is not a good investment.\u00a0 Invest in an index fund, or unlisted investments or support philanthropic endeavour (education is one of my favourites).<\/p>\n

Once you have appreciated the need to take your pension from a risky, costly active fund manager and reinvest it in a low load, low risk product, and done so, you might reflect on where financial markets are headed.\u00a0 Clearly there has been little clean up since 2008, largely because none of the culprits have seen jail time.\u00a0 More worryingly, stagnation continues to overshadow economies and the recent downgrading of forecasts by the IMF<\/a> (again) is another harbinger of change.\u00a0 Perhaps the idea of backing private companies or engaging in philanthropy will appeal even more.\u00a0 And if nothing else, remember that it is not money or celebrity that makes people happy, but friendly relationships<\/a>, so spend some time with family and friends.<\/p>\n","protected":false},"excerpt":{"rendered":"

The wife of a successful entrepreneur once remarked to me that she had pointed out to her husband that there will always be someone else with a bigger yacht in the marina.\u00a0 She was hinting that it’s fine to work, but there’s a point at which you ought to stop and spend a bit of …
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