Thursday, April 24, 2008

NZ fund managers provide little value


Having learned some bits and pieces of how Wall Street functions, one eventually realizes the limited benefits or merit held by mutual fund managers. Buying, holding, and praying in the stock markets (or “share-markets” coined by New Zealanders) does not require any know-how, in fact a few clicks of the mouse can get it done.

Many New Zealanders have gotten ripped off from these investment businesses, and this rampant ploy has become increasingly apparent as an economic downturn descends. A deeper look reveals the involved managers as either incredibly inept, or intentionally deceptive.

Basic business models

The NZ publicly available mutual funds make money off management fees exclusively, and largely no incentive charges. While this sounds more attractive than the usual 2&20 (2% management, 20% incentive) off typical hedge funds, the NZ management teams have absolutely NO motivation to provide investors with a positive return. They make their money either way.

Buying and holding. That leaves basically most of the days freely available for advertising, widespread promotions, with sometimes misleading salesmanship. They display charts off historical growth periods (frequently cutting off downturn phases), and entice mom and pop investors signing agreements where the fine print explains ineffectual irrelevance of said pitches.

They exist to provide a false sense of security and sanctuary for the uninformed investor. Management and front-end load (entry) fees equate to guaranteed losses for the investors, and the non-active trades often result in worst transaction prices off the exchanges. A lack of liquidity results in slow and sometimes very costly withdrawals in volatile markets, in some cases frozen accounts. You get the drift?

Why do they oppose “market timing”?

The mutual funds understand that if you, the diligent and open minded trader, become informed of how the markets actually work their fallacies and shortcomings become obvious. They maintain that only “long term buying and holding” (with no exit plan) could yield rewarding profits, because as long as the public stays in the dark this business industry remains afloat.

Are they more informed?

When it comes down to it, they simply do not know any better than you or me. Whatever stocks they decide to “buy, hold, and hope”, usually result from not-so-educated guesses. These people might have had more experience writing up fudged reports, but that is it. Yes, fudged track records have become pretty common in this industry, do not trust them.

As the NZ economy correlates positively with US, these forms of funds suffer just as much as someone who bought the stocks or ETFs on their own. (See chart for NZ Telecom stock performance compared to the US S&P500 Index, ticker symbol “^GSPC”)

This means these so-called experts expose investors have no skills or intentions of mitigating inherent risks from long term stock holding.

What can you do?

Investments, like any business, will likely succeed as your expenses become lowered. Even if you still believe in the “buy, hold, and pray” schemes, going through a direct access broker offers much lower fees. My current broker charges only $1+ $0.0025/share per transaction.

If you do run into an investment run by a seemingly competent manager, do your homework and get to know underlying strategies applied. Just keep in mind that if it is simply buying and holding, you can make higher returns on your own. Here you can find an article on trading ETFs on your own, and how you could greatly increase returns selling options of invested stocks.

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