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Sancho Panza

Have You Made Your Fund Manager Rich?

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Telegraph 8/4/14

'If professional fund managers are so good at picking stocks and making the right investment decisions, why don’t they stay at home and do just that? Why, instead, do they set up businesses selling investments to other people?

An obvious answer is that it is often quicker, easier and less risky to make money selling stock market investments than to invest in the stock market yourself.

Whether a business is structured as a fund manager (such as Jupiter or Henderson, overseeing portfolios on behalf of private investors or institutions) or a broker (such as Hargreaves Lansdown or Brewin Dolphin), the profits can be large and, even better, regular.

These types of business can grow fast from little capital. They enjoy strong cash flows and can avoid taking on debt. All of this adds up to hefty profits for their founders, staff and shareholders – possibly far greater than any of the returns enjoyed by their customers.

Britain is home to a number of highly successful money management businesses which have done well for their shareholders. Peter Hargreaves, the co-founder of the broker that bears his name, still owns 76 million shares in the company, worth £1.1bn at Friday’s price. He boasts that his business – founded in the Eighties – is among the most profitable of any in the FTSE 100. Mr Hargreaves’ holding generates an annual income of £23m in dividends alone, based on yearly payments of 30p a share. And with the shares having risen fivefold in the past five years (see table, right) the value of his stake has mushroomed by far more than most of the investments his firm sells to its customers.

A similar picture emerges at other household-name brokers and fund ­managers. At Schroders, the asset management company, Bruno Schroder owns almost 14  million shares worth a total of £378m. They have more than trebled in value in five years.

At Jupiter, another asset manager popular with private investors, outgoing chief executive Edward Bonham Carter owns 12 million shares worth £52m. Mr Bonham Carter and fellow director John Chatfeild-Roberts (five million shares, worth £21m) were key figures in the successful flotation of Jupiter in June 2010. The shares have leapt over four years from 165p to 430p.

At Aberdeen Asset Management, finance director Bill Rattray owns £10m in shares, which have increased in value threefold in five years.

There are numerous other examples of firms in the business of looking after other people’s money which have, in the process, made rather more money for their founders and staff than for their clients.

Celebrated fund manager Neil Woodford oversaw portfolios worth more than £20bn for Invesco before his decision to quit last year. If the firm, whose parent company is American, charged just a modest 0.4pc per year, that would generate annual fee income of £80m.

Mr Woodford’s funds might have accounted for as much as £1bn in revenues during his time at the firm.

In America, where there is a far greater culture of private investment, the sector boasts even more wealth. Forbes Magazine estimates the fortune of Abigail Johnson, the president of the fund group Fidelity and the granddaughter of the firm’s founder, at $18bn (£11bn).

So would you be better off buying the shares in these businesses, rather than the investments they profit so handsomely from ­selling? Some would say yes.

Guinness Asset Management has for years focused on fund groups as a sector. It produced the research behind the large graph, above, based on 24 years of share price returns from a basket of 36 brokers and asset managers, including most of those British firms shown in the upper graph. Many of the other firms it analysed – such as BlackRock, Franklin, State Street and Invesco – would also be familiar to British private investors.

Astonishingly, in just four of the 24 years did the asset managers fail to beat the wider market – and that is during a spell that includes several major slumps. Guinness’s research found that these firms were more volatile than the wider market, especially during crises. But their shares also bounced back. “Though asset managers underperformed the index in 2008 and 2009, by mid-2009 they were back at parity with the broader market,” the report found.

Again, after the 2000 market crash, “while asset managers underperformed from mid-2001 to early 2003, by mid-2003 they were back at parity”.

Investors wanting exposure could buy shares in the firms such as those listed above. But, after their stunning run, you may think them expensive. Many trade at far higher price to earnings (p/e) ratios than the wider market. Hargreaves’ p/e ratio is 45, for instance, compared with 18 for the average FTSE 100 company.

Much information about the stocks is available free online, including brokers’ consensus views and financial fundamentals.

Not all asset managers do well. New Star Asset Management, a fund manager whose heavily promoted funds were popular with private investors, all but collapsed in 2008 having been saddled with £240m of debt. Shareholders were wiped out and the funds taken over by Henderson.

Gartmore, which floated in 2009 and then saw its shares plunge by 50pc in a year, was another flop for its owners. Its portfolios were also taken over by Henderson, in early 2011.

An alternative to owning shares directly is to buy funds with large exposure to asset managers. The Guinness Global Money Managers fund, launched in 2010, has returned 51pc since. It invests in many of the firms above.

Funds with a wider financial remit, embracing banks and insurers as well as brokers and fund groups, include Axa Framlington Financial, Polar Capital Financial Opportunities, JPM Global Financials, Jupiter Financial Opportunities and SWIP Financial.'

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Astonishingly, in just four of the 24 years did the asset managers fail to beat the wider market

yes, ive seen similar stats before...9/10 managers fail to beat market etc.

You'd expect them to beat it in 12 years on luck alone.

Fund managers: Crap AND unlucky :lol:

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Astonishingly, in just four of the 24 years did the asset managers fail to beat the wider market

yes, ive seen similar stats before...9/10 managers fail to beat market etc.

You'd expect them to beat it in 12 years on luck alone.

Fund managers: Crap AND unlucky :lol:

But the quote says they only FAILED in 4 out of 24 years, meaning they beat it most years? If you believe The Motley Fool etc. they hardly ever beat it, giving credence to the 9/10 figure?

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But the quote says they only FAILED in 4 out of 24 years, meaning they beat it most years? If you believe The Motley Fool etc. they hardly ever beat it, giving credence to the 9/10 figure?

It's referring to their shares not their funds.

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Astonishingly, in just four of the 24 years did the asset managers fail to beat the wider market

yes, ive seen similar stats before...9/10 managers fail to beat market etc.

You'd expect them to beat it in 12 years on luck alone.

Fund managers: Crap AND unlucky :lol:

By chance alone it's impossible highly unlikely for so many of them to be wrong so often. Clearly, they must be herding.

Edited by zugzwang

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The trouble with fund manages is.

For every fund manager that buys at the right time there is one that sells at the wrong time. And for every fund manager that sells at the right time there is one that buys at the wrong time. Therefore zero sum gain. Then you have to take away their charges so on average they will under perform the market.

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It really depends on the type of fund; top HFT hedge funds consistently make above-market returns for example, and noone is seriously arguing that its just luck. The returns of places like RenTech and WInton over the last 15 years are absolutely staggering (RenTech is something absurd like 30% average annual returns over a 20 year period, and their fees reflect this)

Edited by Smyth

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It really depends on the type of fund; top HFT hedge funds consistently make above-market returns for example, and noone is seriously arguing that its just luck. The returns of places like RenTech and WInton over the last 15 years are absolutely staggering (RenTech is something absurd like 30% average annual returns over a 20 year period, and their fees reflect this)

Another type of fund, the Black Swan type of fund, buys the index, or replicates it, and buys significantly out of the money puts on the same index. You would only expect these to under-perform the market in 9 out of 10 years, but massively out-perform it in the odd year. These are fairly unusual.

A lot of the funds are really nothing but glorified trackers and their under-performance relates to fees - the manager's and also transaction fees when it rebalances.

Not so long ago I checked my pension. There were a couple of active funds in it and compared it to the nearest passive equivalent. The performance of the two was almost identical, except that the active fund slightly under-performed the passive in each year, but about 1%. What a surprise!

One of the strengths that the fund management companies have is that they continue to make money even when stock markets fall. If markets fall 10%, the investor in a fund's entire investment falls 10%. The fund management company only has a drop in income of 10%. A drop in profits, but little else.

Fund managers and the other parasites that feed off us are a drain on the nation's wealth.

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It really depends on the type of fund; top HFT hedge funds consistently make above-market returns for example, and noone is seriously arguing that its just luck. The returns of places like RenTech and WInton over the last 15 years are absolutely staggering (RenTech is something absurd like 30% average annual returns over a 20 year period, and their fees reflect this)

You're right. Front running has nothing to do with luck.

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It really depends on the type of fund; top HFT hedge funds consistently make above-market returns for example, and noone is seriously arguing that its just luck. The returns of places like RenTech and WInton over the last 15 years are absolutely staggering (RenTech is something absurd like 30% average annual returns over a 20 year period, and their fees reflect this)

You are being inconsistent. In previous posts you have written how EMH means that all information known is already priced in. Now you tell us that there is some skull to investment after all. Or is it just all small return using massive leverage?

And who is this Noone guy who is always saying things that appear in your pays? You have tested to him several times.

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You are being inconsistent. In previous posts you have written how EMH means that all information known is already priced in. Now you tell us that there is some skull to investment after all. Or is it just all small return using massive leverage?

EMH is more about the price of individual financial instruments - it says that (for example) the current price of some stock X already incorporates all publicly available information about stock X. However prices do still undergo small fluctuations over short intervals, and they do change slightly every second - usually the price of a typical stock will bounce around its 'average' price over the course of a day, despite no new information being available, just because whenever anyone buys/sells the stock it causes it to move up/down a tiny amount. These fluctuations are largely due to liquidity (rather than informational) issues and under the no arbitrage assumption they cant cause the price to diverge too far away from its "true" price, because as soon as it does it will attract traders in the opposite direction to move it back.

In theory, it is possible to profit from these fluctuations; if we believe that the true/average price of the stock is X and can see it bouncing around that due to liquidity, then in theory you can buy the stock when it fluctuates below that price, and sell it once it returns for a profit. However in general this cant be done due to transaction costs (buying/selling costs money, so that will eat up the profit you make), so in order for this to be profitable the fluctuations would have to be large enough to balance out the transaction costs. And under the no-arbitrage assumption; if it was really possible to make a risk free profit from just trading the fluctuations then everyone would be doing it and so the size of the fluctuations would necessarily shrink down to the size where it was no longer profitable (visually, every time the price of the stock fluctuated away from its 'true'/average price by enough to balance out the costs, someone would notice and trade it back down). Additoinally, it is impossible to distinguish between a fluctuation due to liquidity and a change in average price until after the fact, so there is still a lot of risk here (the price may not rise back to where you thought it would) which again prevents people from getting risk free profit.

However the above just says that whenever a profitable fluctuation exists, 'someone' will notice and trade it, so it will disappear almost immediately. The point of HFT is to be that 'someone' - i.e. these are the guys that cause no-arbitrage to happen, since they are the ones removing arbitrage from the market by being the people taking it. This sort of microstructural trading doesnt really violate EMH because it has nothing to do with predicting the price of the stock in the conventional sense, its just about making trades over intervals of milliseconds to profit from liquidity fluctuations.

Technically, HFT is a bit more intricate than the above because so many people are watching the prices of major financial instruments that its almost impossible to profit from fluctuations trading even if you are incredibly fast (and also, there is no guarantee that the prices will indeed revert back to the true/average price - there is no way to tell a 'fluctuation' from a change to a new 'average' until after the fact, so its still very risky). As such, modern HFT is more about exploiting ultra-short term discrepancies in prices between groups of financial instruments that must move together in the long run. If you have (for example) a 5 and 10 year treasury bond then you know that price of these must be incredibly close to each other. If in the short term liquidity causes the prices to move away from each other, then you can profit from this by buying one and selling the other (so you are essentially betting they will move back together). This is a form of (statistical) arbitrage, and can result in genuine risk-free profit. However since everyone is trying to do this, its very hard to do and you need to be incredibly fast and algorithmically clever aobut it, which is why the top HFT funds (with the best people/algorithms and fastest computers) can be consistently profitable.

Short version: HFT doesnt really violate the EMH because its more to do with exploiting ultra-small ultra-short term price divergences caused by liquidity, not about trying to predict the 'true' price of finanical instruments. And yes, it does tend to be small returns using massive leverage.

Edited by Smyth

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EMH is more about the price of individual financial instruments - it says that (for example) the current price of some stock X already incorporates all publicly available information about stock X. However prices do still undergo small fluctuations over short intervals, and they do change slightly every second - usually the price of a typical stock will bounce around its 'average' price over the course of a day, despite no new information being available, just because whenever anyone buys/sells the stock it causes it to move up/down a tiny amount. These fluctuations are largely due to liquidity (rather than informational) issues and under the no arbitrage assumption they cant cause the price to diverge too far away from its "true" price, because as soon as it does it will attract traders in the opposite direction to move it back.

In theory, it is possible to profit from these fluctuations; if we believe that the true/average price of the stock is X and can see it bouncing around that due to liquidity, then in theory you can buy the stock when it fluctuates below that price, and sell it once it returns for a profit. However in general this cant be done due to transaction costs (buying/selling costs money, so that will eat up the profit you make), so in order for this to be profitable the fluctuations would have to be large enough to balance out the transaction costs. And under the no-arbitrage assumption; if it was really possible to make a risk free profit from just trading the fluctuations then everyone would be doing it and so the size of the fluctuations would necessarily shrink down to the size where it was no longer profitable (visually, every time the price of the stock fluctuated away from its 'true'/average price by enough to balance out the costs, someone would notice and trade it back down). Additoinally, it is impossible to distinguish between a fluctuation due to liquidity and a change in average price until after the fact, so there is still a lot of risk here (the price may not rise back to where you thought it would) which again prevents people from getting risk free profit.

However the above just says that whenever a profitable fluctuation exists, 'someone' will notice and trade it, so it will disappear almost immediately. The point of HFT is to be that 'someone' - i.e. these are the guys that cause no-arbitrage to happen, since they are the ones removing arbitrage from the market by being the people taking it. This sort of microstructural trading doesnt really violate HFT because it has nothing to do with predicting the price of the stock in the conventional sense, its just about making trades over intervals of milliseconds to profit from liquidity fluctuations.

Technically, HFT is a bit more intricate than the above because so many people are watching the prices of major financial instruments that its almost impossible to profit from fluctuations trading even if you are incredibly fast (and also, there is no guarantee that the prices will indeed revert back to the true/average price - there is no way to tell a 'fluctuation' from a change to a new 'average' until after the fact, so its still very risky). As such, modern HFT is more about exploiting ultra-short term discrepancies in prices between groups of financial instruments that must move together in the long run. If you have (for example) a 5 and 10 year treasury bond then you know that price of these must be incredibly close to each other. If in the short term liquidity causes the prices to move away from each other, then you can profit from this by buying one and selling the other (so you are essentially betting they will move back together). This is a form of (statistical) arbitrage, and can result in genuine risk-free profit. However since everyone is trying to do this, its very hard to do and you need to be incredibly fast and algorithmically clever aobut it, which is why the top HFT funds (with the best people/algorithms and fastest computers) can be consistently profitable.

Short version: HFT doesnt really violate the EMH because its more to do with exploiting ultra-small ultra-short term price divergences caused by liquidity, not about trying to predict the 'true' price of finanical instruments. And yes, it does tend to be small returns using massive leverage.

Doesn't the 0.5% stamp duty wipe out any profits. I can only think that some how these HFT have found away round the tax laws.

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Afaik stamp duty in the UK only applies to shares and not to anything else (eg futures). Many hedge funds prefer trading futures/derivatives than the underlying stocks because its easier to leverage up (for example in a typical futures contract you only pay/receive the difference in the price between the start of the day and the end of the day, you dont need to pay the upfront cost of actually buying the stock).

Although stamp duty is a universally bad thing and should be scrapped entirely rather than extended.

Edited by Smyth

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EMH is more about the price of individual financial instruments - it says that (for example) the current price of some stock X already incorporates all publicly available information about stock X. However prices do still undergo small fluctuations over short intervals, and they do change slightly every second - usually the price of a typical stock will bounce around its 'average' price over the course of a day, despite no new information being available, just because whenever anyone buys/sells the stock it causes it to move up/down a tiny amount. These fluctuations are largely due to liquidity (rather than informational) issues and under the no arbitrage assumption they cant cause the price to diverge too far away from its "true" price, because as soon as it does it will attract traders in the opposite direction to move it back.

That was an interesting post on high frequency trading. Thank you

I am not convinced about EMH - it was only a hypothesis rather than a proven law, so is a useful starting point in theorising market behaviour.

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Afaik stamp duty in the UK only applies to shares and not to anything else (eg futures). Many hedge funds prefer trading futures/derivatives than the underlying stocks because its easier to leverage up (for example in a typical futures contract you only pay/receive the difference in the price between the start of the day and the end of the day, you dont need to pay the upfront cost of actually buying the stock).

Although stamp duty is a universally bad thing and should be scrapped entirely rather than extended.

I would rather stamp duty be lowered and extended. It's quite reasonable to say that a share holder putting money into a company helps the company and therefore should get a dividend reward. It is hard to see that someone owning shares for 5 milliseconds adds anything to that companies profits. HFT is just theft plain and simple.

Edited by gf3

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By chance alone it's impossible highly unlikely for so many of them to be wrong so often. Clearly, they must be herding.

Pension funds buy what the analysts tell them is good value.Thnking back to the late nineties and the tech bubble,it amazed me how fund management types bought the hype.But then I doubt they've got there money in there.

Edited by Sancho Panza

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Another type of fund, the Black Swan type of fund, buys the index, or replicates it, and buys significantly out of the money puts on the same index. You would only expect these to under-perform the market in 9 out of 10 years, but massively out-perform it in the odd year. These are fairly unusual.

A lot of the funds are really nothing but glorified trackers and their under-performance relates to fees - the manager's and also transaction fees when it rebalances.

Not so long ago I checked my pension. There were a couple of active funds in it and compared it to the nearest passive equivalent. The performance of the two was almost identical, except that the active fund slightly under-performed the passive in each year, but about 1%. What a surprise!

One of the strengths that the fund management companies have is that they continue to make money even when stock markets fall. If markets fall 10%, the investor in a fund's entire investment falls 10%. The fund management company only has a drop in income of 10%. A drop in profits, but little else.

Fund managers and the other parasites that feed off us are a drain on the nation's wealth.

ETF's have been a good innovation in this respect in terms of their fee structure tending toward the 0.5%.

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