Active funds, more high-paid value destroyers

By J Saft
April 24, 2009

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own —

While they have avoided the opprobrium heaped on bankers during the bear market, traditional active fund managers have quietly been proving that they too are often highly paid destroyers of value.

Active managers have few bushes left to hide behind, and the release of a new report from Standard & Poor’s uproots one of the few left: that somehow they provide protection during down markets, being able to go into cash and defensive stocks.

Check out the study for the gory details but the takeaway is that across styles and markets the majority of active fund managers, often the vast majority, simply can’t manage money well enough to make up for their own costs and the costs of all of those trades.

Over the five year market cycle 2004-2008, the S&P 500 outperformed 71.9 percent of actively managed large cap funds and most active funds in each of the nine U.S. domestic equity style boxes were outperformed by indices during the disaster of 2008.

At least casinos offer free drinks and valet parking.

Beyond tighter regulation and controls on leverage, a good outcome from the current morass would be a fundamental re-think by holders of capital about what exactly it is they are paying for from investment managers. Diversification? Not really, with so many closet index funds out there.

And spare me the argument that active managers earn their keep by holding company management’s feet to the fire. With precious few exceptions, this simply is not happening and arguably is a common good which individual investors are unwilling to pay for.

Most individual investors would likely be better off paying an annual fee for an asset allocation check-up and simply putting the advice to use via ETFs or index funds.

— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund —


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“Golden Boy” Wears Off – James Saft hit the Nail

I remember the round the world Race Horse Betting Stores always filled with beggars, thugs betting their “Last Straw” where we only got in for the free coffee, every proud Dutchie or Scottishman or women would do, or student.

While $12.8 trillion was “invested to make up for snake eye bets the bankers keep keep acting like “Golden Boy”

We taxpayers said “well you don’t cry Golden Boy we gonna give you some more fiches to play with.

And out went Golden Boy again to the Casino to lay out another bet but not betting on “growth” anymore cause that lesson had been learned savagely.

But why go back to the high risk Casino’s? “Well our losses have been so great that we only can bat double or lose” was stated as an serious valuable argument by so-called ” Investors.”

Normally this people would be sitting next to the Horse Race Casino beggars but because we taxpayers gave them an other betting change they still are able to pay for their overdressed slick fancy suits.

Golden boy seems nothing more than a yellow T-shirt which has washed to many times and has become very bleak in the sun also.

But T-shirts which fit so dearly are not thrown away easily you will discover when you undress these fancy bankers.

And measuring underwear sales is watching crises.

Posted by Youri Carma | Report as abusive

Since when was fund managers creator of value?

There was a time, long time ago in the 60’s, where fund managers served some meager useful functions. They aggregated savings and ‘invest’ in bonds. They were administrators.

Then Michael Milken came along and ‘innovated’. He invented crap papers to finance mergers and acquisitions. Instead of letting companies rise and fall in market competitions, he manipulated things for a quick tidy profits. Thus began the destruction of values.

The systematic destruction of industries was a natural outcome as ever more people in Wall Street jumped for that obscene quick-buck profits as they ‘advised’ thousands of M&A to extract values, values that went straight into the fund managers pockets.

Thus rise the power of Wall Street financial manipulators. Their work got ever more sophisticated, ever more insane.

Mr Saft is being too nice to these guys.

Posted by The Real Deal | Report as abusive

2008 clearly delineated the capable portfolio managers from the less so (although as this article has highlighted, the former are very few).

The retail investor buying into ‘target funds’ or actively managed equity funds should see the fund companies’ financial statements (TRowePrice, etc). Money management, particularly equities, is an incredibly lucrative business and money managers will get paid (very handsomely) in good times and bad.

The marketing departments of these money managers (fidelity, etc), with the help of a bull market pre-08, have been able to show historical returns of equities that were higher than other asset classes, and have hence pushed investors to put a large portion of their retirement assets into equities.

It is in the fund companies’ best interest to do so, as equity mutual funds, of course, pays the fund companies the highest fees. Problem now is if the marketing literature is to include 08 in their historical performance, the historical numbers look horrible –a tough sell.

The author of this article is correct. The largest and arguably most influential institutions do not flex their muscles enough / push corporate managements to change. They simply sell the stock and move on. These investors that have potential to shake up management or improve corporate governance, are much more concerned about the current fiscal quarter and next quarters’ guidance –everyone is looking for the quick profit, including pension managers.

Posted by KP | Report as abusive

Re: ‘The Real Deal’

With all respect, in the ‘Go-Go 60s’ the hedge fund admins, most of them, explicitly referred to themselves as ‘Gun-Slingers’ and argued they could never, ever, do wrong by buying the ‘Nifty-50′, but always argued as well, that they could do even better than that. One Harvard Prof customarily greeted his MBA students, destined for careers as fund managers, with the quip ‘Good morning, greedy little bastards.’ Of course, they all knew better, they would all be the exceptions. They were all tough, they were all brave, they were all exceptional and extraordinary, they were all going to win and to live forever.

Like new recruits puffed up for battle before there are guns in their face, one supposes, all brave, all macho, all heroic, all destined for glory and to live forever, the other fellows to be the victims.

When the downturns of the 70s began to roll in the vast majority of them blew away like leaves in the late fall winds. They discovered human values. They discovered their personal lives. They discovered wives and children (they were very nearly all male, of course) were what mattered. They concluded that money wasn’t everything. They went home to Kansas and to teaching and selling real estate and insurance. They discovered their inner lives. They discovered ‘the deeper meaning of it all’.

The pattern of it wasn’t new then, and it isn’t new now.

The average person, the average professional investor, can’t beat they averages. They *are* the averages.


Another nice piece, James, thanks :)

Posted by notsilentnotbob | Report as abusive

This is the final nail in the coffin of Wall Street and the fundamental tenets of economics. Why? Because it reveals that investors have never done any due diligence, that the whole “expert” thing is essentially a fraud and that the stockmarket as it has developed is no more than a legalized crap shoot, pun intended. The actual rules are found in the herd mentality, egotistically posturing and insider trading. The people who make their living in this largest of all ponzi schemes are not your friend, nor your “reliable, professional advisor”. They are parasites, living off the productivity of society. And I am a free market capitalist. But not a corrupted free market capitalist.

Posted by Jonathan Cole | Report as abusive

Once upon a time every village had their healer or witch-doctor. It was considered ‘state of the art’ to have leaches placed on oneself for healing. Washing ones hands was considered outlandish because if they looked clean, they must be so. Everyone knew and everyone said so despite the fact the patients died or were riddled with infection.

This went on for hundreds of years. We now have a new group of shamans who claim powers of financial healing.

What they really do is drain the creative/working classes of hard won assets. They establish corporate structure which maximize their own gain, while destroying
the foundation. Having met people of this ilk I can say they are selfish narcissists. Nothing more than leaches in suits.

Posted by Edward | Report as abusive

“This is the final nail in the coffin of Wall Street and the fundamental tenets of economics.”
Sadly, the truth is that US taxpayers will have to keep funding Wall Street’s non-productive activities for many more decades to come.

Posted by YR | Report as abusive

I suspect that the intersect that exists between finance and politics in its present form will continue to play out its hand. I also suspect that that hand, given the extent of the crisis, will also prove to be a losing hand, at which point there will be the opportunity for some serious reshuffling of the deck.

To abandon the conceit: I think that they’re getting away with it for now, but that the overall economic decline will take down a great deal of the present extant structure.

Let’s watch . . .

Posted by Snidely Whiplash | Report as abusive

“Sadly, the truth is that US taxpayers will have to keep funding Wall Street’s non-productive activities for many more decades to come.”

I suggest that investors put their money in economies that are still grounded in the real world. New Zealand come to mind.

The best response is to vote with your investments. If the government can’t and won’t regulate and the U.S. financial industry continues to loot, then people can stop supporting the corrupt activities. Those that continue throwing money at Wall Street will have no one but themselves to blame.

Posted by Jonathan Cole | Report as abusive

One has to stop thinking of these as investment people, money managers, financial analysts, guardians of wealth and protectors of the small investor. Imagine instead your prototypical used car hustler, small time drug dealer turned aluminum siding salesman, or timeshare greeter and closer working the beaches. Can you spell hustler, con-artist, sleaze bag. But it is even worse than that. Just imagine your southern condo if you left the frig open, food on the counter and unwashed dishes and pots in the sink, turned off the A/C and came back two months later. They would fit right in.

Posted by John Lee | Report as abusive

Joseph Stiglitz’s Nobel awarded book spells all out very clearly. Markets are inherently in efficient at adjusting to demand and valuation regarding equities, bonds and most investment instruments. The herd mentality is analogous to the functionality of all markets whether one buys or sells. Due diligence is irrelevant. The fact that prospectus’ are incomplete or fraudulent, and the rest are opaque further compounds the problem of valuation. No one should be surprised to find sociopaths competing for investors money and executive positions at financial institutions.

The planet is running out of space and resources. This is unavoidable. We burn fossil fuels at a breakneck pace altering the environment. Even if we are able to put greed in check the fundamental principal of growth will still run up against a brick wall when resources become scarce. Capitalism cannot exist without growth. Materialism and how we provide for human need will have to be reexamined at all levels. There is much work to do. It is time for a new way.

Posted by Anubis | Report as abusive

Your article reminds me of when the Congress eliminated the depletion allowance which meant that their investors were left with the movie studios; who Art Buchwald, after his successful lawsuit, would have told you are the world champions of creative accounting. At least, the oilmen would take you out for drink and a good steak and regale you of stories of in the Patch.

Posted by Dan Purdy | Report as abusive