RenTec Will Trade Transparency for More Institutional Money

Pensions & Investments article “Renaissance to open up a bit” discusses the firm’s quest for institutional money and reads very much like a marketing piece.

Yes, RIEF performance this year is awful: -12.6% through June and -4.73% for the 2nd quarter (vs 15.93% for S&P 500)--and that’s before fees. Assets have also “plummeted 81% to $5 billion as of June 30, down from a peak of $27 billion” but if one massages bad numbers sufficiently, something positive might eventually show up. Sure enough:

"RIEF met its performance goal in all but two of the past five quarters on a rolling three-year basis, according to a Pensions & Investments' analysis of data from eVestment Alliance. In the second quarter of 2008 and the second quarter of 2009, the fund still outperformed the S&P 500, but by less than 400 basis points. RIEF's average outperformance of the S&P 500 over a rolling three-year period was 599 basis points, according to P&I's analysis."

Well, if one goes to two-year windows or looks at the since inception numbers, they don’t really look as good. Does it mean that investors have to get out of the fund after three years?

Also, P&I even created a chart “RIEF vs. the S&P 500” to support the point that RIEF is capturing a lot of market upside but not the downside:

RenTec feels that if they start providing more transparency they could regain trust (and assets, of course) from institutional investors.

"Given RIEF's performance problems and declining assets of its institutional arm, RenTech officials could offer large institutional investors a new investment vehicle with more transparency — a huge concession from the tight-lipped hedge fund manager."

I’m afraid it may take more than just “more” transparency. Investors have to come to their senses and apply the same rationale to RIEF as they do to traditional managers. For a fund with a target beta of 0.4, the appropriate benchmark is a 40/60 mix of stocks and bonds or similar. For some reason institutional investors routinely provide such risk adjusted benchmarks for their traditional managers but not for RIEF. Once the right benchmark is established, the entire story falls apart. There are plenty of low risk mutual funds that beat the hell out of RIEF. To prove the point we decided to create a couple of charts. They are self-explanatory (RIEF Ser B has 200bp flat fee).

RIEF vs Wellington YTD

RIEF vs Wellington 36M

Thus, the Vanguard Wellington fund outperforms RIEF in the first and second quarter, since inception, is more consistent on a three-year rolling basis, in various market capture measures and has identical risk characteristics. And it offers full transparency. Additionally, if Wellington underperforms its benchmark, they will probably provide something more substantive than this:

"Transparency notwithstanding, Mr. Simons said the “real issue is that the fund (RIEF) has to pull out of its slump. We came into 2009 looking very good, well ahead of the S&P (500 index) and during the first couple of months of this year, we were going like gangbusters, but in March and April we did poorly. The fund has its own mind and doesn't like some of the stocks that the rest of the world likes. People are very skittish right now.”