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Asset Managers Or Asset Gatherers?

Tyler Durden's picture




 

Submitted by Tim Price via The Cobden Centre blog,

The Bank of England paid nearly £3m of taxpayers’ money for a report on whether any of its staff knew about or were involved in illegal manipulation of one of the world’s biggest financial markets.

 

– Caroline Binham of The Financial Times, covering allegations of foreign exchange market rigging, and showing how the Bank of England is clearly on top of things, 31st January 2015.

*  *  *

There are myths and pseudo-science all over the place. I might be quite wrong, maybe they do know all this … but I don’t think I’m wrong, you see I have the advantage of having found out how difficult it is to really know something. How careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can’t believe that they know it. They haven’t done the work necessary, they haven’t done the checks necessary, they haven’t taken the care necessary. I have a great suspicion that they don’t know and that they’re intimidating people.”

 

– Richard Feynman on ‘experts’.

*  *  *

“Sir, Martin Wolf (“Draghi’s bold promise to do what it takes for as long as it takes”) is right to dismiss many of the arguments against QE. But, while QE will not necessarily cause hyperinflation, there is a real risk.

 

“Central banks have to date simultaneously “printed money” in massive amounts in QE programmes but have then used different mechanisms to “sterilise” the money so that it doesn’t go out in the economy.

 

“There have been massive increases in reserves held by banks. I have described this as driving with one foot on the throttle and the other on the brake. This means that the money printing hasn’t been inflationary, but it also means that QE has a small bang per buck, working through asset prices rather than real investment. It hasn’t done much for the real economy but has increased stock market prices and the wealth of the 1 per cent.

 

“The unwinding of the policy needed in the medium term, to avoid hyperinflation, is to sell the assets bought in QE back to the market. So, at some date in the future, bold central banks will need to engineer negative effects more or less equal to the positive effects today. In fact, they will be selling back to the market at a time when interest rates are higher and bond prices lower, taking a loss on the sale.

 

“The worry is that central banks will find it easier to just let the money flow into the economy at the worst possible time, once the economy has recovered and banks want to lend the money out. The sums are huge, and would then lead to very high inflation.

 

“The problem with QE is that it’s the wrong monetary policy. It isn’t bold to print money. It will be bold to withdraw it later.”

 

– Letter to the Financial Times from Mr Jeff Frank, Professor of Economics, Royal Holloway, University of London, UK, 27th January 2015.

*  *  *

Ever heard of Edward G. Leffler ? No, we hadn’t either. But in the words of author and Wall Street Journal columnist Jason Zweig, Leffler was

“the most important person in mutual fund history”.

The financial services industry is not exactly awash with innovations delivering tangible social value. The former Federal Reserve chairman Paul Volcker once suggested that the only useful banking innovation was the ATM machine. Leffler’s claim to fame ? He invented the open-ended fund.

Leffler originally sold pots and pans. But he was not slow to appreciate that selling investments might be more lucrative. In March 1924 he helped launch Massachusetts Investors Trust, the first open-ended fund. Its charter stipulated that “investors could present their shares and receive liquidating values at any time.”

Its impact was similar to that of Henry Ford’s development of the assembly line. It turned asset management into an industrial process. Whereas closed-ended funds contained a fixed amount of capital, open-ended funds had the potential for unlimited growth. As Zweig fairly observes, like any human innovation, the open-ended fund could be used for good, or ill.

He cites Alfred Jaretski, the securities lawyer who helped to draft the Investment Company Act:

“As there is normally a constant liquidation by shareholders who for one reason or another desire to cash in on their shares, the open-end companies must engage in continuous selling of new shares of stock in order to replace the shares so withdrawn…. Under these circumstances, and with keen competition between companies in the sale of their shares, it [is] natural that some questionable practices should [develop]. It furthermore bec[o]me[s] extremely difficult, and in some instances impossible, for any one company or small group of companies to raise standards and at the same time compete with the others.”

At a stroke, the invention of the open-ended fund created a schism in the asset management industry. Institutional investors would thereafter have to make a choice. They could be asset managers, or they could be asset gatherers. But they could not be both. Zweig describes the split as one between an investment firm and a marketing firm. The difference ?

“The marketing firm has a mad scientists’ lab to “incubate” new funds and kill them if they don’t work. The investment firm does not.

 

The marketing firm charges a flat management fee, no matter how large its funds grow, and it keeps its expenses unacceptably high. The investment firm does not.

 

The marketing firm refuses to close its funds to new investors no matter how large and unwieldy they get. The investment firm does not.

 

The marketing firm hypes the track records of its tiniest funds, even though it knows their returns will shrink as the funds grow. The investment firm does not.

 

The marketing firm creates new funds because they will sell, rather than because they are good investments. The investment firm does not.

 

The marketing firm promotes its bond funds on their yield, it flashes “NUMBER ONE” for some time period in all its stock fund ads, and it uses mountain charts as steep as the Alps in all its promotional material. The investment firm does none of those things.

 

The marketing firm pays its portfolio managers on the basis not just of their investment performance but also the assets and cash flow of the funds. The investment firm does not.

 

The marketing firm is eager for its existing customers to pay any price, and bear any burden, so that an infinite number of new customers can be rounded up through the so-called mutual fund supermarkets. The investment firm sets limits.

 

The marketing firm does little or nothing to warn its clients that markets do not always go up, that past performance is almost meaningless, and that the markets are riskiest precisely when they seem to be the safest. The investment firm tells its customers these things over and over and over again.

 

The marketing firm simply wants to git while the gittin’ is good. The investment firm asks, “What would happen to every aspect of our operations if the markets fell by 67% tomorrow, and what would we do about it? What plans do we need in place to survive it?””

So ultimately all fund managers must make a choice. As Zweig puts it,

“You can be mostly a marketing firm, or you can be mostly an investment firm. But you cannot serve both masters at the same time. Whatever you give to the one priority, you must take away from the other.

“The fund industry is a fiduciary business; I recognize that that’s a two-part term. Yes, you are fiduciaries; and yes, you also are businesses that seek to make and maximize profits. And that’s as it should be. In the long run, however, you cannot survive as a business unless you are a fiduciary emphatically first.

 

“In the short term, it pays off to be primarily a marketing firm, not an investment firm. But in the long term, that’s no way to build a great business. Today, tomorrow, and forever, the right question to ask yourselves is not “Will this sell?” but rather “Should we be selling this?” I will praise every fund company that makes that choice based on what is right for its investors, because I believe that standard of judgment is the right standard.”

There’s a fairly easy way to tell if a firm is a marketing firm or an investment firm. Do you see its advertising on buses, cabs and posters ? Do they have a practically limitless range of funds ? This is not to denigrate marketing firms entirely. But as the financial markets lurch between unprecedented bouts of bad policy, and achieve valuations that we strongly suspect are unlikely to persist, it may be worthwhile to consider the motives of the people charged with managing your money. Are they asset managers, or asset gatherers ? The answer may have some relevance for the sanctity and stability of your portfolio. And for your peace of mind.

 

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Fri, 02/06/2015 - 13:22 | 5752261 bigdumbnugly
bigdumbnugly's picture

how about just plain Asshats?

 

Fri, 02/06/2015 - 13:51 | 5752372 Richard Chesler
Richard Chesler's picture

A thief by any other name...

 

Fri, 02/06/2015 - 18:26 | 5753467 Say What Again
Say What Again's picture

Interesting messages coming from the ZH web-servers...

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I've never been a big fan of mysql

Fri, 02/06/2015 - 13:25 | 5752281 SuperVinci
SuperVinci's picture

I don't know Tyler but this I do know:

NO MORE BUSH's and CLINTON's

Fri, 02/06/2015 - 13:30 | 5752295 1stepcloser
1stepcloser's picture

Bill loves his little clinton in much bush

Fri, 02/06/2015 - 13:40 | 5752325 e_goldstein
e_goldstein's picture

usually after he's punched the woman in her face a couple of times.

 

Fri, 02/06/2015 - 13:56 | 5752391 1stepcloser
1stepcloser's picture

who doesn't love a little fore play... 

Fri, 02/06/2015 - 13:30 | 5752296 Bell's 2 hearted
Bell's 2 hearted's picture

"The marketing firm creates new funds because they will sell, rather than because they are good investments". 

will 2x (or 3x) ETFs please stand up

Fri, 02/06/2015 - 13:31 | 5752297 2muchtax
2muchtax's picture

"taking a loss on the sale"; how do you realize a loss on "assets" purchased with newly created fiat?

Fri, 02/06/2015 - 13:35 | 5752309 Bell's 2 hearted
Bell's 2 hearted's picture

sounds like they need a new accountant ... ship the old one back to the 1950s

Fri, 02/06/2015 - 13:47 | 5752300 nakki
nakki's picture

The "stock market" has Always been a fraudulent entity. The same people serve on the same boards. The banks get free stock when they work out a deal with companies, when in trouble print money, and when they want to pull the rug on the "market". The biggest lie ever told was that there ever was, or will ever be a free market. We still have penny stock that are nothing but pure fraud 99% of the time. How many Enron's are still out there, how many companies cook their books on a quarterly basis. How many CEO'S and Board members load up their companies with debt, buy back shares while giving themselves shares of said stock. It always has and will always be a fraudulent entity. 

 

Fri, 02/06/2015 - 13:32 | 5752301 SmallerGovNow2
SmallerGovNow2's picture

OT:  Good news is... well good, bad news is... well good...

WASHINGTON (MarketWatch) — The only apparent sour note in an otherwise strong January employment report was the increase in the unemployment rate from 5.6% to 5.7%.

But was it really a sour note? Not really. It was actually good news, because the increase was due to a large increase in the number of people participating in the labor market. And we all know that one of the economy’s biggest problems has been a low participation rate.

Fri, 02/06/2015 - 13:38 | 5752321 Bell's 2 hearted
Bell's 2 hearted's picture

employment is lagging indicator

 

much of recent macro news has been poor

 

macro news needs to get better pronto

 

or employment will catch down

Fri, 02/06/2015 - 13:42 | 5752331 Creepy A. Cracker
Creepy A. Cracker's picture

A lot more burger flippers does not an economy make.

Fri, 02/06/2015 - 13:33 | 5752302 Bell's 2 hearted
Bell's 2 hearted's picture

it may be worthwhile to consider the motives of the people charged with managing your money. 

let me guess

 

they'll always pick the option with highest commission?

Fri, 02/06/2015 - 13:40 | 5752308 Quinvarius
Quinvarius's picture

Reading the text of this, I can't figure out how the article pertains to the conclusion.  How do you compare the mutual fund industry to Central Banking?  That is like comparing Government to an Ice Cream factory.

Fri, 02/06/2015 - 13:37 | 5752318 SMC
SMC's picture

Looters.  

Last Keiser Report was very good and touched on this subject.

Fri, 02/06/2015 - 16:49 | 5753113 Larry Dallas
Larry Dallas's picture

SMC

Do you have the link to this article?

Thank you. Larry.

Fri, 02/06/2015 - 13:38 | 5752322 carbonmutant
carbonmutant's picture

One need to "gather" in order to "manage"

Fri, 02/06/2015 - 13:43 | 5752336 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

The sad truth is that a lot of "financial advisors" function ENTIRELY as asset gatherers. 

They then turn over the assets to whatever asset allocation models are pimped by their respective firms. 

They are then funneled into whatever investment dujour (those with the healthiest fees, of course). 

Quite the racket...

Fri, 02/06/2015 - 13:46 | 5752349 the grateful un...
the grateful unemployed's picture

or you simply index and collect a management fee for buying the etf

Fri, 02/06/2015 - 13:45 | 5752345 the grateful un...
the grateful unemployed's picture

assuming there is some advantage to managing 10B rather than 1B, the marketing firm wins, but if being small and nimble is better, you might actually close your doors to new investors. most firms have provisions which specify how much float a company can have before they can invest, this is why stock offerings are not dilutive. the process of company share buybacks then creates a lot of tension, should the available float shrink too much.

Fri, 02/06/2015 - 14:19 | 5752443 NoDebt
NoDebt's picture

"assuming there is some advantage to managing 10B rather than 1B, the marketing firm wins"

That's a big 'if'.  But I suspect you already knew that.  When using funds, and I don't know how this happens exactly, I somehow end up using a lot of "small nimble" funds and/or funds that are generally closed to new investors (for which I have an exception).  I don't INTEND to do that at the outset, but that's where I end up more times than not.  Funny how that happens.

 

Fri, 02/06/2015 - 14:42 | 5752517 Dr. Engali
Dr. Engali's picture

Likewise. I find that if you invest in a large mutual fund that you might as well just buy the index for clients. it's a lot cheaper for them.  I tend to use the smaller funds who limit assets for the bulk of my clients.

Fri, 02/06/2015 - 13:55 | 5752385 nakki
nakki's picture

The real question is how many independent fund managers are out there and over a 10 year period do they do any better than if you just bought a stock index. How many fees do they collect, what is the percentage they receive for that period of time. 

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