Lessons from subprime to make a money manager squirm
MICHAEL EVANS
January 22, 2011
AS THEY devoured their holiday reading over summer, Australia's fund managers could not have failed to miss the name Mike Burry.
Burry is a doctor who stumbled into investing by writing a blog in the wee hours after his hospital shift that so impressed professional investors that they gave him the money to start his own fund.
He spent hours poring over financial accounts looking for an investment idea. And when he found it, he bet against the entire market, punting that the US subprime housing market was unsustainable. He bet millions and then waited - even after his own investors began to fret and started demanding their money back.
As one of the key figures in Michael Lewis's account of the origins of the subprime crisis, The Big Short, Burry's tale is one every money manager dreams about: spot a fundamental flaw in the market, invest your clients' money, hold your nerve when they panic and prove them wrong by making them hundreds of millions - plus a cool hundred million for yourself.
But as Australia's fund managers dragged their heels back to work this week, they would have taken less delight in another of Lewis's tales about Burry.
When he started his business, Burry disapproved of the typical manager's fee structure. Money managers typically take a slice of their total assets under management, meaning they get paid simply for amassing vast amounts of other people's money. As Lewis wrote, Burry's Scion Capital charged investors only its expenses, which typically ran well below 1 per cent of the assets. To make the first nickel for himself, he had to make investors' money grow.
''Think about the genesis of Scion,'' says one of his early investors. ''The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.''
It's the kind of news to make Australia's money managers shift uncomfortably in their seats. After all, waiting for them when they arrived back at work this week, they were greeted with a scorecard of their 2010 performance that showed that as a group they had a poor year. Investors were left wondering why they paid professionals to grow their savings given the median fund in the Mercer scorecard showed it had lagged the S&P/ASX 300 Index.
Surely investors who simply followed the benchmark themselves would have come out ahead of the median investor in Mercer's annual scorecard? And they wouldn't have paid fees.
But money managers are quick to point out that one year is too short a time to judge their efforts. Paul Fiani's Integrity Investment Management, for example, posted a three-year performance better than many other fund managers who had a stronger 2010 than he did. Over three years, Integrity is just outside the top 10 on the scorecard of more than 130 funds.
Fiani says many gains last year were made at the risky end of the market.
''Last year was all about small resources. The market was basically flat and, overall, small resources were up 30 per cent. So, if you weren't at the high-risk end of the market you lagged the benchmark. We run a pretty rigorous fundamental value investment process and there's no way you could justify being invested in that high-risk end.''
Managing client expectations is tough for money managers. Quarterly and yearly report cards add to the pressure, particularly when investors are told to invest for the medium and long term. As the world enters a low-growth phase that experts expect to last for five to 10 years as the debt hangover plays out, investors may have to adjust their hopes.
Simon Marais, who managed the best-performed fund last year at Orbis, says the importance of individual stock-picking will rise because of low global economic growth.
But what about fund managers being asked to manage their expectations? Australia's investment community enjoys a weekly flow of 9 per cent of every worker's salary into the superannuation pie that helps grow funds under management. And, remember those fees based on funds under management?
Michael Lewis was brutal passing judgment on Wall Street money managers who were being paid to manage investments but did not see the looming subprime disaster: ''What are the odds that people will make smart decisions about money if they don't need to make smart decisions - if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they're still all wrong.''
Investors rely on the experts. They are willing to pay to have an expert make decisions for them. But given the structure of the system - and the constant drip of compulsory super payments - what are the consequences of bad decisions? Not enough emphasis is placed on performance-based reward.
Aligning the interests of fund managers and investors says, ''my dinner is riding on your success too''.
This week the Australian Prudential Regulation Authority released figures showing retail super funds posted sharply lower returns than average for the sector over the past decade. And when taking inflation into account, many have gone backwards over that time.
The introduction of plain vanilla products into the retail market as a result of the Cooper super review will provide a benchmark in coming years on how they perform against active funds run by the big boys.
Cutting fees like Mike Burry may not make money managers heroes in the eyes of the industry. But if they followed his lead their images would rise a notch or three in the eyes of investors.
http://www.smh.com.au/business/lessons-from-subprime-to-make-a-money-manager-squirm-20110121-1a036.html
Related:
Learning from Michael Burry: from being a medical resident to being regarded as one of the greatest investors in recent history.
Betting on the Blind Side
MICHAEL EVANS
January 22, 2011
AS THEY devoured their holiday reading over summer, Australia's fund managers could not have failed to miss the name Mike Burry.
Burry is a doctor who stumbled into investing by writing a blog in the wee hours after his hospital shift that so impressed professional investors that they gave him the money to start his own fund.
He spent hours poring over financial accounts looking for an investment idea. And when he found it, he bet against the entire market, punting that the US subprime housing market was unsustainable. He bet millions and then waited - even after his own investors began to fret and started demanding their money back.
As one of the key figures in Michael Lewis's account of the origins of the subprime crisis, The Big Short, Burry's tale is one every money manager dreams about: spot a fundamental flaw in the market, invest your clients' money, hold your nerve when they panic and prove them wrong by making them hundreds of millions - plus a cool hundred million for yourself.
But as Australia's fund managers dragged their heels back to work this week, they would have taken less delight in another of Lewis's tales about Burry.
When he started his business, Burry disapproved of the typical manager's fee structure. Money managers typically take a slice of their total assets under management, meaning they get paid simply for amassing vast amounts of other people's money. As Lewis wrote, Burry's Scion Capital charged investors only its expenses, which typically ran well below 1 per cent of the assets. To make the first nickel for himself, he had to make investors' money grow.
''Think about the genesis of Scion,'' says one of his early investors. ''The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.''
It's the kind of news to make Australia's money managers shift uncomfortably in their seats. After all, waiting for them when they arrived back at work this week, they were greeted with a scorecard of their 2010 performance that showed that as a group they had a poor year. Investors were left wondering why they paid professionals to grow their savings given the median fund in the Mercer scorecard showed it had lagged the S&P/ASX 300 Index.
Surely investors who simply followed the benchmark themselves would have come out ahead of the median investor in Mercer's annual scorecard? And they wouldn't have paid fees.
But money managers are quick to point out that one year is too short a time to judge their efforts. Paul Fiani's Integrity Investment Management, for example, posted a three-year performance better than many other fund managers who had a stronger 2010 than he did. Over three years, Integrity is just outside the top 10 on the scorecard of more than 130 funds.
Fiani says many gains last year were made at the risky end of the market.
''Last year was all about small resources. The market was basically flat and, overall, small resources were up 30 per cent. So, if you weren't at the high-risk end of the market you lagged the benchmark. We run a pretty rigorous fundamental value investment process and there's no way you could justify being invested in that high-risk end.''
Managing client expectations is tough for money managers. Quarterly and yearly report cards add to the pressure, particularly when investors are told to invest for the medium and long term. As the world enters a low-growth phase that experts expect to last for five to 10 years as the debt hangover plays out, investors may have to adjust their hopes.
Simon Marais, who managed the best-performed fund last year at Orbis, says the importance of individual stock-picking will rise because of low global economic growth.
But what about fund managers being asked to manage their expectations? Australia's investment community enjoys a weekly flow of 9 per cent of every worker's salary into the superannuation pie that helps grow funds under management. And, remember those fees based on funds under management?
Michael Lewis was brutal passing judgment on Wall Street money managers who were being paid to manage investments but did not see the looming subprime disaster: ''What are the odds that people will make smart decisions about money if they don't need to make smart decisions - if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they're still all wrong.''
Investors rely on the experts. They are willing to pay to have an expert make decisions for them. But given the structure of the system - and the constant drip of compulsory super payments - what are the consequences of bad decisions? Not enough emphasis is placed on performance-based reward.
Aligning the interests of fund managers and investors says, ''my dinner is riding on your success too''.
This week the Australian Prudential Regulation Authority released figures showing retail super funds posted sharply lower returns than average for the sector over the past decade. And when taking inflation into account, many have gone backwards over that time.
The introduction of plain vanilla products into the retail market as a result of the Cooper super review will provide a benchmark in coming years on how they perform against active funds run by the big boys.
Cutting fees like Mike Burry may not make money managers heroes in the eyes of the industry. But if they followed his lead their images would rise a notch or three in the eyes of investors.
http://www.smh.com.au/business/lessons-from-subprime-to-make-a-money-manager-squirm-20110121-1a036.html
Related:
Learning from Michael Burry: from being a medical resident to being regarded as one of the greatest investors in recent history.
Betting on the Blind Side
1 comment:
When you see funds company that are having tens of billions of AUM, it is a good idea to buy the fund management company if it is listed rather than the funds itself. Public Mutual is a fantastic business, too bad it is not listed as a separate entity outside Public Bank.
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