Compensating for something?

Picking an investment manager is hard.

Not only is the difference between luck and skill hard to distinguish between, but you also have to worry about changes in the investment manager’s circumstances over time.

Maybe he (it is usually a “him”…) worked hard in early years, but becoming rich and splitting time between his new beach house, the ski fields and the city pad he bought for his mistress can have a negative influence on investment performance.

Asset consultants (who choose fund managers for large investors and financial planners) try as hard as they can to cover a range of esoteric factors, but I often feel that asset consultants are trying to quantify the unquantifiable.

With that in mind, a recent paper gives yet another “box to tick” in the selection process. I suspect the research paper was written for the headline only (to be perfectly honest I didn’t bother reading beyond the abstract):

Sensation Seeking, Sports Cars, and Hedge Funds

We find that hedge fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios than do car buyers who eschew performance. In addition, performance car owners are more likely to terminate their funds, engage in fraudulent behavior, load up on non-index stocks, exhibit lower R-squareds with respect to systematic factors, and succumb to overconfidence. We consider several alternative explanations and conclude that manager revealed preference in the automobile market captures the personality trait of sensation seeking, which in turn drives manager behavior in the investment arena.

Full disclosure: I drive a minivan. Having said that, I have too many kids to fit into a sedan (let alone a sports car), and so you’ll have to make up your own mind on whether that will influence the performance of the MB fund…

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  1. To be fair, Mr T. drove a minivan and he helped the A -Team to many victories.

    You can be Mr K…
    “In 2017 a crack financial unit was sent to prison by the property lobby for a exposing the Ponzi scheme which currently powers their nation. These men promptly escaped from a maximum security stockade to the Terra Nullus underground. Today, still wanted by the MSM, they survive as economists of fortune. If you have a problem, if APRA can’t help, and if you can find them, maybe you can hire the MB-Team.”

  2. arescarti42MEMBER

    I’d love to invest in the MB fund, but here’s my problem – the stats seem to show that after fees, the vast majority of actively managed funds under-perform a simple market index, and the funds that do outperform the index in a given year don’t do so consistently.

    Will I be better off investing in the MB fund than passively investing in indexes? What’re your views on this Damien?

    • A lot of those studies us data from the US and arent immediately replicable to Australia. Their market is far more liquid than ours, making it much harder to beat the index. Consistently beating the AllOrds actually does happen.

    • Damien KlassenMEMBER

      Lots of embedded issues there arescarti42!

      I will write up something longer in February to address these issues. To tide you over in the meantime:

      * Keep in mind index fund are for individual asset classes (for example bonds or australian equities), there is not an official index that spans asset classes.

      * For many people (especially the generally disinterested in investing) an index fund rebalanced a few times a year is a very good option. There are a number of robo-advisers offering to do the rebalancing for you.

      * Getting your asset allocation right is the difficult part though, there isn’t an “index” for all assets like cash, bonds, international shares & aussie shares – these are an artificial construct. You can dump all of your assets into a standard one (through a robo-adviser) but you may have to wait a long time to get you average returns – robo-advisers don’t look at currency or bond rates and the risk of investing at the wrong point in the cycle.

      * Also, you do have to remember that index funds have fees and trading costs as well – although they are pretty low for most ETFs nowadays. There are a number of studies that compare managers after fees vs an index pre fees, and the fees from more than 15 years ago were pretty high – so the longer term studies that don’t adjust for fees make active funds look worse than they really are.

      * There are often tax benefits from holding shares in your own name

      * In the end the market has to add up – i.e. if someone is outperforming then someone else must be underperforming. My broad brush is that professional managers as a group (there are big differences in individual funds) tend to outperform and then take most of that back in fees; index funds slightly underperform (due to fees) and individual investors underperform (although there are big differences in individual investors). The guys taking the fees win every time…

    • @ Damien … a lot of the value of a professional is on the flip side. I have had a mainly depression portfolio since 2003.. last bank shares sold in late 2006. Despite this I have a financial adviser who I never have let make investment decisions for me but whom I do let talk me out of my decisions. He has stopped me from doing some stupid things. With the geo-political landscape we have risk management ( a mainly lost art in Oz ) is going to be more important than ever.

  3. Damien,

    Have you decided on the minimum starting investment? Hope it is of the order of 5K-10K — I am a small time grocer and can’t compete with most of the rich MB commentariat.

    • Damien KlassenMEMBER

      Its going to be higher than that $10K – the platform providers have a fixed annual fee that would take too much as a percentage for us to recommend that you invest.

      We are going to provide some transition portfolios/ advice for people with small balances.

      • Bleedy Elites!!!111!!!

        Depending on balance, a tiered structure for your fund and/or your services would be great.

  4. scottb1978MEMBER

    Damien, is the MB fund intended to be something that you could have your super managed in? My super makes very poor returns so I’d be happy to move in there if it is possible.

  5. boomengineeringMEMBER

    Original John,
    Mcintosh of Mosman just up the hill from you where you can buy a proper car.

    • Blah – know the Tynan family and would pass business to Keiran for a Merc before going to McIntoshes. He can also get me the new Alfa when my number comes up

      • Possible – I changed my picture from my friends 75 cruiser to my real fav (thx to TTW) See your honour, the gloves don’t fit image

  6. Other than Australian assets are preferred as if we own a house / town house / unit it’s probably here in Australia along with cash in the bank. So a fund would need to balance out those Australian exposures by having some OS. If you are 60 years old and smoke (etc) you’ve got about 15 years to play with so your carry cost is 7% (100/15=7) and so you’re fund needs to return 7% but just spending it means you’ll be stuffed when your super can’t match the wage price index (even inflation bonds won’t keep up). If you are just starting out, ie 20s, look out. EM markets look absurdly overvalued when placed alongside commodity indexes making this a game of 1. Buying big EM dips and then getting the hell out or 2. Taking developed economy exposures and then praying that central banks can just do something before the next sovereign default wave (economist Reinhardt) triggers 20%, 30%, 40% soverign defaults globally. If your Christian and have offloaded cash to help the needy, your risk of failing to be able to gift anything in the future means you are forced to take a conservative stance (but still pester hell out of MB).

  7. i thought it was all about diversification? Look for a fund manager with a minivan and a sports car and a bogan ute for good measure.