The article asks three investment advisors what to do with funds that have fallen disastrously over the past year. (We are in bear market after all, falling is what stocks and stock funds do in bear markets). As a sample it posts the following list of big name losers over the past 12 months and how these funds have fared versus their peers:
The advisors go on to suggest how they would advise clients now in reaction to enormous losses. If a fund is down more than its peers or the overall index, they suggest exit strategies.
Two key points are made clear in this piece.
The first thing is that some of the world’s biggest ‘value managers’ have lost huge amounts of unit holder dollars over the past year. Although companies like Brandes and AIC talk about the importance of a disciplined, conservative approach to what they buy and sell, apparently they either have bad rules, or they aren’t following them. Where is the stop loss, sell trigger or hedge? Clearly they don’t have one.
No responsible manager worth a fee should suggest that losses like this are good, conservative or acceptable. Relative performance is no comfort during real life market storms. Explanations like the credit crunch is to blame and the market downturn was unforeseeable are bunk. Bear markets are a regular recurring end to each economic cycle and this one was overdue. Valuable managers strive to shelter and protect their clients from the ravages of a market storm. They do not leave clients fully exposed to fare as they may.
A loss of 45% requires a subsequent gain of 81% for the unitholders to get back to even. This type of recovery typically takes years not months. By then most unitholders have long jumped ship being broke, scared or counselled out of the fund by their well-meaning financial planner.
Back to the truth about mutual funds: long only, long always mandates add no real value to capital preservation. The glossy brochures, pie charts and marble lobbies have once again helped investors not at all. For this kind of passive exposure to dynamite, unit holders would fare better just holding index units themselves and skip the generous management fee altogether. Long always, buy and hold management isn’t active management, it’s a farce.
Second thing that jumps out of this is how utterly ineffective most investment advisors are in protecting their clients from bear market losses. What value is a service that helps clients sell after they have lost 30 to 45% of their capital?
Knowing when to pull the plug on a fund means having the foresight and strategy to leave it before down market losses mount. The only valuable advice is the kind that helps clients reduce risk and move out of hot funds, sectors and yes sometimes even most equities, before prices tank. Hand holding and back-patting clients through blood-letting losses are not services worth 1 to 3% a year.
A tactical approach takes more discipline, actual rules and proactive thought. But after all isn’t a job of value supposed to add value?
