Tag Archive for: alternative assets

Morgan Creek Capital’s Yusko riles up Tweeters with comments on investment fees

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Mark Yusko, CEO and chief investment officer of Morgan Creek Capital, got off easy when he spoke to the annual meeting of the Financial Planning Association of Massachusetts (FPAMA) last week. Nobody at the FPAMA questioned Yusko’s opinions about investment management fees. But plenty of my Twitter followers took issue with Yusko. Still, nobody’s saying that one should always choose the cheapest fund.

What Yusko said
Yusko seemed to suggest that fees rise along with the investment manager’s ability to deliver performance.

He made the following statements:

  • “If you pay low fees, you have your money managed by the worst people” 
  • “In what business does the best person not charge more?”
  • “The idea that you want to minimize costs makes no sense.”
  • People say they know that indexing beats hedge funds, but for a 20-year period, S&P 500 returned 6.5% vs. 13.2% for hedge funds.

Disagreement
@BillWinterberg was the first to weigh in on my tweets of Yusko’s comments.

 
@MariposaCap agreed with Bill.

@NathanGehring raised another issue, saying “By charging higher fees the manager may feel a need to take additional risk to justify the fee.” He also questioned Yusko’s hedge fund returns.

Paul Puckett (@investiphobia) emailed me saying, “Disagree, over the long term the opposite is generally true. Expenses are one factor, not the only factor when choosing managers.”

One lonely defender, but some room for higher fees
Only one person tweeted in Yusko’s defense.

Still, as Paul Puckett noted, nobody suggests that expenses suggests that expenses should be the only consideration when you’re choosing a manager. In fact, this theme came up later in the day at the FPAMA conference. 

Fees matter, said Karen Dolan, Morningstar’s director of fund analysis, in “Beyond Stars: Using Fund Analysis to Improve the Investor Experience.” As her slide stated, “Advisors have responded by moving assets to cheaper funds, but there’s more we can do to close the gap.” 

Stewardship and portfolio analysis are also keys to choosing good funds, said Dolan. The fund families on her list of “Top Wealth Creators” over the past decade–American Funds, Vanguard, Fidelity Investments, Franklin Templeton, and PIMCO Funds–have all been good stewards, she said.

The great debate about what really matters in fund selection is likely to continue.


Related posts
* Morgan Creek Capital’s Yusko on investing
* “Using Trading Costs to Identify Better Mutual Funds” in Advisor Perspectives (2007)

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Copyright 2010 by Susan B. Weiner All rights reserved

Small-cap investing opportunities according to Artio’s Dedio

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“Opportunities in Smallcap Investing” was the title of the presentation that Samuel Dedio, head of US equities for Artio Global Management, delivered to the 2010 annual conference of the Financial Planning Association of Massachusetts. The growth of options trading was his most interesting theme, in my opinion. By the way, if you don’t recognize the name Artio Global Management, it was formerly Julius Baer. 

Where the opportunities lie 
Dedio identified opportunities in financials sector, including regional banks, online brokerage companies, and insurance. He figures that “industry consolidation and stimulus spending may potentially benefit this area.” 

Industrials and materials stocks will benefit from emerging markets’ demand. For example, Dedio likes silver, where supply is not keeping up with demand. Compared with gold, silver has many more industrial applications, yet it trades at a discount to gold.

In healthcare, Dedio likes companies that can help implement cost savings. This means companies in diagnostics, medical technology, pharmaceuticals, and home healthcare providers.

The survivors of the 2009 shakeout in retailers will benefit in 2010. “We expect margins (and earnings) to recover more rapidly than in prior cycles,” wrote Dedio in the consumer discretionary section of his handout.

Finally, in technology, Dedio focused on the undervalued importance of semiconductors. 

Options: Why online brokerage may thrive 
Dedio particularly likes online brokerage companies with exposure to options trading as a play on demographics and rising interest in making money through options. 

“The younger generation eats it up,” said Dedio, referring to options trading. This is apparently tied to younger investors growing up with computers and to educational efforts by companies such as Think or Swim.

“Don’t 85% of options expire worthless?” asked an audience member. That’s exactly what makes options a great business, according to Dedio. Investors have to buy more options on an ongoing basis. 

Dedio displayed a graph showing that total monthly equity option trading volume has more than doubled since the year 2000. Monthly trading volume, which was under 100 million until January 2004, has been  200 million–and sometimes exceeded 350 million–during the period January 2008 to September 2009.

Dedio’s one concern about options trading is pricing pressure. However, cost cutters are at a disadvantage in the options arena, where education remains critical. Education requires more robust margins than cost cutters manage.
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Copyright 2010 by Susan B. Weiner All rights reserved

Morgan Creek Capital’s Yusko on investing

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“Alternative Thinking About Investments” was the topic addressed by Mark Yusko, CEO and chief investment officer, Morgan Creek Capital Management, when he spoke at the annual conference of the Financial Planning Association of Massachusetts on May 7. Yusko’s wide-ranging talk was provocative and entertaining, with some great one-liners that became tweets that I quote below.


Alternatives deserve more attention

Yusko thinks investors should put more into alternative strategies. A small allocation simply cannot have a big enough impact.

This is a lesson that target date fund (TDF) managers should consider, suggested Ryan Alfred, co-founder and president of BrightScope, in response to my tweet. As he explained,

Going back to Yusko, he also suggested that your clients should have at least one-third of their assets in illiquid investments because such investments “win” after recessions. He’s assuming that your clients have plenty of money that they plan to pass on to others in their wills. Yusko didn’t specify which illiquid assets he was talking about.


Provocative 
Yusko isn’t fond of mainstream media. “Cancel your subscriptions to The Wall Street Journal and The New York Times. It’s all wrong, it’s all biased.” He used the example of the war between Russia and Georgia to make his case, mentioning that Morgan Creek pays someone to read Russian newspapers for them. 

Yusko also spoke in favor of high fees. He seemed to suggest that fees rise along with the investment manager’s ability to deliver performance.

Humorous Yusko 
In closing, here is some Yusko humor.


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Copyright 2010 by Susan B. Weiner All rights reserved

The power of analogy: U2 and alternative investments

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What could the band U2 and hedge fund-style investing have in common? 

This unlikely combination came up in a March 15 presentation to the Boston Security Analysts Society by Robert Kaimowitz, CEO and portfolio manager, Bull Path Capital Management.  

Kaimowitz asked the audience, “How many of you think U2 is an alternative band?” No hands went up. The band is mainstream now. Yet it was considered an alternative band when it first emerged.

So-called “alternative investments” will follow a similar path, suggested Kaimowitz. They’re new and poorly understood, so they’re considered “alternative.” That will change as they become accepted. He figures alternatives will become mainstream partly because a long-only fund can’t be conservative because it’s 100% exposed to the market.

Kaimowitz’ comments about U2 and alternative investments demonstrate the power of analogy. They stuck with me long after the details of his fund’s performance faded.

If you’re trying to convince your clients to adopt alternative investments, consider trying this U2 analogy on them. I’d like to hear if it works for you.

Harry Markopolos on "next Ponzi scheme"

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“Where do you think the next big Ponzi scheme will occur?” That’s what I asked Harry Markopolos, author of No One Would Listen, during the Q&A following his March 30 talk to Boston Security Analysts Society (BSAS).

Markopolos isn’t too worried about seeing another big Ponzi scheme soon. He gave two reasons.

  1. Markets are down. That’s what triggered the redemptions that brought down Madoff and others.
  2. The SEC is now making Ponzi schemes a high priority.

However, most Ponzi schemers don’t register with the SEC, said Markopolos. That helps them to stay hidden from the SEC. Markopolos said the SEC typically finds out about Ponzi schemes through tips. The many poor-quality tips submitted to the SEC make it hard to sort out the good from the bad. 

If you’d like to learn more about Markopolos’ perspective, check out his book. Many BSAS members lined up after the talk to have him sign their books. He’s a hometown favorite and past president of the BSAS.

Related post
* Tweets on talk by Harry Markopolos, Madoff whistleblower


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Copyright 2010 by Susan B. Weiner All rights reserved

The best private equity opportunity in generations

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“Our database tells us we’re in a multigenerational opportunity to be a private equity investor,” said Martin Grasso, CEO of Pearl Street Capital Group, a private equity fund-of-funds manager. He believes that investors with longer time horizons can get above-benchmark returns without significant volatility. Grasso made his comments as a panelist on “The State of Private Equity: Opportunity Through Crisis,” presented to the Boston Security Analysts Society on November 5.

Data suggests that capital growth and buyout private equity get the highest returns in years with the lowest levels of EBITDA leverage, said Grasso. That’s the situation we’re in now.

It also pays to invest with the best, according to Grasso. Top quartile and top decile private equity fund managers show much higher levels of persistence than long-only public securities managers. In other words, top performers in private equity have a greater tendency to remain top performers. The difference in performance between top and bottom quartile managers is much greater in private equity than among public equity managers.

Implications for advisors:
* Access to top firms is still difficult, so go with a fund-of-funds to gain that access.
* Invest in 10 vintage years and consider some secondary offerings, which are available now that some investors can’t meet their funding obligations as limited partners.
* Best private equity opportunities now are in small-medium companies where there’s less competition and where private equity managers are more inclined to partner with management to “accrete value” and make minority investments.
* Diversify across geography and sectors.


The last two paragraphs of this post were revised on Dec. 7, thanks to some clarifications by Martin Grasso of Pearl Street Capital Group.