Death of long only management?

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Aug 8, 2008 10:25 pm

According to the Gartman Letter:

"Massachusetts Pension Reserves Investment Management Board very prominently "fired" five long only money managers this week, many of which are virtual legends in the money management business.



We strongly suggest that long-only equity managers read, and re-read and re-read again Mr. Travaglini's comment for we fear that this is the death knell for the long-only stock fund manager. His/her age has passed. The era of money paying managers to be long of the equity market only, and to recompense them and to applaud them for relative performance is dying. Money, in the future, will pay only for performance beyond a very small fixed fee, and it will be quite happy to pay well for excess performance. At the same time, it will be swift in culling those managers who do not perform positively."



Comments?





Aug 8, 2008 11:36 pm
When the S&P averages 2% a year for the last 10 years, it's a sad 10 year span.  The 1970's yielded a whole 5% growth in the market (not including dividends).
 
I've done a little research into this and here is what I generally think.  People have been taught to diversify.  But they are, in my opinion, diversifying improperly.  The average person is diversified into large, small, and mid cap; growth, value, and core; domestic and international.
 
But as we see, when the market goes up, everything goes up, and when the market goes down, everything is down.
 
So I've looked into how endowments invest, since they have seemed to perform very well year in and year out.  Getting into things like market neutral, absolute returns, real estate, flexible funds, real assets, short positions, long positions, futures, etc.  All of these things can be bought in a mutual fund or ETF form (it doesn't exactly mimic an endowment because the average person doesn't have  $1 billion, but it gets close enough).
 
I don't know whether or not the long only manager is a dying breed, since market history has some say.  But I do know people are tired of hearing "hang in there, stay the course, the market always recovers and heads higher". 
 
I would also take BondGuy's recommendation and read Jeremy Siegle's, "Stocks for the Long Run". 
 
Not sure if this addresses your point, kind of distracted with the Olympics.
 
 
Aug 9, 2008 12:37 am

I just met with Legg Mason the other day.  He was saying that they replaced Bill Miller's $1 billion with the Russel 3000.  I don't know if that's entirely accurate, but they either apparently think Bill has lost his mind, or they just can't stomach the losses. 

But really, what do you expect with value shop like Miller's?  There was a reason he only had, what, 1/50th of the portfolio...

Aug 9, 2008 10:12 am

Be careful when reading Gartman, he is a commodity guy, always has been.  While he is looking smart right now when we are in a secular commodity bull market, he struggled during the last secular equity bull market.  I am not saying he is the flavor of the month, but his strategies are more effective in this type of market.  Take what he says with a grain of salt.  Mid-March he said it was time to go back into equities and after the brief correction ended and stocks headed south again, he backtracked very quickly. 

Aug 9, 2008 11:43 pm
snaggletooth:
When the S&P averages 2% a year for the last 10 years, it's a sad 10 year span.  The 1970's yielded a whole 5% growth in the market (not including dividends).
 
I've done a little research into this and here is what I generally think.  People have been taught to diversify.  But they are, in my opinion, diversifying improperly.  The average person is diversified into large, small, and mid cap; growth, value, and core; domestic and international.
 
But as we see, when the market goes up, everything goes up, and when the market goes down, everything is down.
 
I read a research report the other day talking about this very thing.  It showed how the correlations between the different asset classes has been increasingly positive over the last 20 years.   
 
I don't know if the industry will ever completely do away with the "long only" manager, but I do think the "Ivy Asset", and "BlackRock Global Allocation" type funds are the way of the future.  The market will demand more performance, and managers will have to lean more towards negatively correlated assets to achieve performance. 
 
So I've looked into how endowments invest, since they have seemed to perform very well year in and year out.  Getting into things like market neutral, absolute returns, real estate, flexible funds, real assets, short positions, long positions, futures, etc.  All of these things can be bought in a mutual fund or ETF form (it doesn't exactly mimic an endowment because the average person doesn't have  $1 billion, but it gets close enough).
 
I don't know whether or not the long only manager is a dying breed, since market history has some say.  But I do know people are tired of hearing "hang in there, stay the course, the market always recovers and heads higher". 
 
I would also take BondGuy's recommendation and read Jeremy Siegle's, "Stocks for the Long Run". 
 
Not sure if this addresses your point, kind of distracted with the Olympics.
 
 
Aug 9, 2008 11:46 pm
BullBroker:
snaggletooth:
When the S&P averages 2% a year for the last 10 years, it's a sad 10 year span.  The 1970's yielded a whole 5% growth in the market (not including dividends).
 
I've done a little research into this and here is what I generally think.  People have been taught to diversify.  But they are, in my opinion, diversifying improperly.  The average person is diversified into large, small, and mid cap; growth, value, and core; domestic and international.
 
But as we see, when the market goes up, everything goes up, and when the market goes down, everything is down.
 
I read a research report the other day talking about this very thing.  It showed how the correlations between the different asset classes has been increasingly positive over the last 20 years.   
 
I don't know if the industry will ever completely do away with the "long only" manager, but I do think the "Ivy Asset", and "BlackRock Global Allocation" type funds are the way of the future.  The market will demand more performance, and managers will have to lean more towards negatively correlated assets to achieve performance. 
 
So I've looked into how endowments invest, since they have seemed to perform very well year in and year out.  Getting into things like market neutral, absolute returns, real estate, flexible funds, real assets, short positions, long positions, futures, etc.  All of these things can be bought in a mutual fund or ETF form (it doesn't exactly mimic an endowment because the average person doesn't have  $1 billion, but it gets close enough).
 
I don't know whether or not the long only manager is a dying breed, since market history has some say.  But I do know people are tired of hearing "hang in there, stay the course, the market always recovers and heads higher". 
 
I would also take BondGuy's recommendation and read Jeremy Siegle's, "Stocks for the Long Run". 
 
Not sure if this addresses your point, kind of distracted with the Olympics.
 
 
 
Aug 10, 2008 12:36 am
BullBroker:
 
I read a research report the other day talking about this very thing.  It showed how the correlations between the different asset classes has been increasingly positive over the last 20 years.   
 
I don't know if the industry will ever completely do away with the "long only" manager, but I do think the "Ivy Asset", and "BlackRock Global Allocation" type funds are the way of the future.  The market will demand more performance, and managers will have to lean more towards negatively correlated assets to achieve performance. 
 
 
I think if you're able to clearly communicate correlation to a prospect, you could win a lot of business. 
 
If you explain to someone that in 2007, Ivy Asset Strategy used futures to short the market, options to hedge, loaded up on gold, and got into international currencies, that's a lot of things they probably aren't getting in their portfolio.  I almost hate to tell people that it did 40% that year with half the risk of the market...
 
If you like Ivy and Blackrock, you might look into JP Morgan's Highbridge fund (HSKCX).  Hartford's Strategic Income fund seems to be a good looking multi-sector bond fund too.
 
I would think a client would understand that you want things to zig while others are zagging in their porftolio and vice versa.  If they are positively correlated and lose 30%, it takes them 42% to get back to even.  But if they only lose 10% because they have negatively correlated investments, they only need 11% to get back to even.
 
I would like to find some sales materials that show some of this stuff...anyone know of any?
Aug 11, 2008 1:46 pm

This is such an interesting debate.  I have been using Ivy Asset Strategy, Blackrock Global, and First Eagle Global for a lot of my portfolios the past year.  I use CAIBX for the "traditional" component of the portfolio (along with other International equities and doemstic and global bond funds).

 
Sometimes I worry that the "absolute return" mentality is just an investing "fad".  My fear is that if a manager is wrong, as in WAY wrong, they could really blow up a portfolio.
 
Also, Morningstar does not do a great job of disecting these portfolios in their X-rays.  It's unnerving to have 20% of a portfolio in the "unidentifed" category.  Although they did recently add long/short analaysis to their asset class breakdown.
Aug 11, 2008 6:55 pm
snaggletooth:
BullBroker:
 
I read a research report the other day talking about this very thing.  It showed how the correlations between the different asset classes has been increasingly positive over the last 20 years.   
 
I don't know if the industry will ever completely do away with the "long only" manager, but I do think the "Ivy Asset", and "BlackRock Global Allocation" type funds are the way of the future.  The market will demand more performance, and managers will have to lean more towards negatively correlated assets to achieve performance. 
 
 
I think if you're able to clearly communicate correlation to a prospect, you could win a lot of business. 
 
I would be willing to bet that 60%+ FA's don't know and cannot explain the correlation in their clients portfolios.  I know the % in my office would be much higher.  I have definitely used this against Jones clients portfolio(who hasn't), I just take their funds (All American A-shares) and run them into a technical analysis correlation tool.  Out pops .80+ correlation of their entire portfolio and you can just see the wheels start turning and the "I had no idea".  Pen-to-ACAT!!! 
 
If you explain to someone that in 2007, Ivy Asset Strategy used futures to short the market, options to hedge, loaded up on gold, and got into international currencies, that's a lot of things they probably aren't getting in their portfolio.  I almost hate to tell people that it did 40% that year with half the risk of the market...
 
Good luck explaining how Ivy Asset returned 40% to the average client.  For 90% of my clients I don't go into "how" they got there and they honestly could care less.  For the 10% that do care, they are very intrigued and want to know how they are positioned for 08'
 
If you like Ivy and Blackrock, you might look into JP Morgan's Highbridge fund (HSKCX).  Hartford's Strategic Income fund seems to be a good looking multi-sector bond fund too.
 
I will have to check the JP Morgan out, although I don't think it's cleared on our platform.  I'm using Oppenheimer International Bond fund, Pimco Total Return, Pimco Developing Local Markets(love this one, the manager Gomez is a bright cat), and Dan Fuss with Loomis Sayles Strategic Income. 
 
I would think a client would understand that you want things to zig while others are zagging in their porftolio and vice versa.  If they are positively correlated and lose 30%, it takes them 42% to get back to even.  But if they only lose 10% because they have negatively correlated investments, they only need 11% to get back to even.
 
I use a slick off of PIMCO's website(through Allianazinvestor.com) that touches on the correlation of "Non-US" developing fixed income, seems to work.  I think BlackRock has some good correlation slicks also.
 
I would like to find some sales materials that show some of this stuff...anyone know of any?
 
 
B24
 


 
"Also, Morningstar does not do a great job of disecting these portfolios in their X-rays.  It's unnerving to have 20% of a portfolio in the "unidentifed" category.  Although they did recently add long/short analaysis to their asset class breakdown. "
 
I get pretty frustrated with this exact same thing.  How do you explain to a client 20% "unidentified" and 30% other countries?  The only solace I have found is just hop on the phone to the internals and if they are decent they can tell you.
Aug 12, 2008 9:04 am

Bull,

 
Good point.  It's not that I necessarily want to explain it to my clients, but I want to know what's going on in the portfolio.  The last thing I want to do is get caught with my shorts down because I didn't realize what the managers were doing in some fo these portfolios  (IVY and Blackrock specifically, though I have to admit, although I use Dan Fuss a lot, I always get nervous about what he might be betting on - but the guy's a genius.  Any thoughts on what you would do if (when) he retires?  It sounds like the lady that's his #2 is pretty bright, but man, Dan's good.).
Aug 12, 2008 11:21 am
B24:

Bull,

 
Good point.  It's not that I necessarily want to explain it to my clients, but I want to know what's going on in the portfolio.  The last thing I want to do is get caught with my shorts down because I didn't realize what the managers were doing in some fo these portfolios  (IVY and Blackrock specifically, though I have to admit, although I use Dan Fuss a lot, I always get nervous about what he might be betting on - but the guy's a genius.  Any thoughts on what you would do if (when) he retires?  It sounds like the lady that's his #2 is pretty bright, but man, Dan's good.).
 
 
I completely agree, you have to know what's going on with the funds even if you don't explain it to the client.  I will tell you Ivy Asset is starting to scare me a little bit, last time the Ivy Wholesaler was here he talked about them taking heavy bets up to 20% on Gold.  With Gold flirting with 800 I think I will hold off on dropping tickets till I see how this will affect them, I will hold what I have but not add till they show me they are on top of the Dollar and Gold. 
 
I have to admit the original reason I used Dan Fuss is because everyone in my office used the Strategic Income fund and pretty much told me that I had to use it, I was new so I did.  Back in April I started dropping split tickets in PIMCO Total Return and PIMCO Developing Markets, I really like the risk/reward ratio by using them together better than using Loomis Strategic Income alone.  Plus I can't stand seeing my fixed income fund down 8%+.
 
I really think the world of the PIMCO guys and currently use them over Dan Fuss, so that would be my suggestion if Dan left. 
Aug 12, 2008 11:35 am
BullBroker:

  I will tell you Ivy Asset is starting to scare me a little bit, last time the Ivy Wholesaler was here he talked about them taking heavy bets up to 20% on Gold.  With Gold flirting with 800 I think I will hold off on dropping tickets till I see how this will affect them, I will hold what I have but not add till they show me they are on top of the Dollar and Gold. 

 
 
 
Have you listened to any of the Ivy Asset Strategy conference calls?  I usually don't, but I too want to know what they are up to.
 
They are very quick to say they will miss the beginning of the rally.  That's ok for those of us that invest in the fund for its purpose, not thinking it will return 40% again.  They aren't investing for today or tomorrow, but for 3-4 years out.  I think their long term returns speak for themself and they can act quickly to change overall positions. 
 
Even in new accounts, I think a 10-12% overall weight to Ivy and a 10-12% weight to Blackrock Global Allocation is a good hedge.  I am using this as opposed to a 25% weight to Ivy that I was using.
 
I think I mentioned Hartford's Strategic Income fund, but I'm also liking Hartford's Check and Balances fund.  For diversification in REITs, I'm looking at ING's Clarion Global Real Estate fund...might be a good time to start adding here.
Aug 12, 2008 11:47 am

I have not spent much time looking at Hartford Strat Income, but their Checks & Balances is great for the traditional portion of a portfolio.  It's nice that they have the single-fund for Checks & Balances now.  I used to use Franklin Founding Funds, but I don't really like what happened to them this past 12 months - partially my fault, I ignored the high-yield componant in the Income Fund and got burned.

Aug 12, 2008 11:46 pm

A good read - i am almost done reading a book that is very relevant to this debate. Highy recommended. "When Markets Collide" by Mohamed El-Erian. Author is former manage of the Harvard Investment Management Co (not sure if thats the exact name, but its the Harvard Endowment) and is now co CEO and Co CIO of PIMCO. His views will be considered extreme by many, but he makes the point that investor behavior favors the status quo. He purports the theory that what we are seeing and have seen in the markets the last 12 months is not just noise, but a signal of a sea change. That the U.S. economy will by slow growth slow returns for a number of years to come, and traditional views on Asset Allocation are no longer the way to get a reasonable risk adjusted return. I could go on and on, but the last point i'll make is that in his baseline allocation, he has 15% of portfolios allocated to U.S. equities, and a total equity allocation of 55% (i might be off by a % or two.) Its not an easy read, and you may not agree with his theories, but if you are considering the debate in this thread, you really need to read and consider his views. He is a genius and cannot be ignored.

Aug 12, 2008 11:49 pm

Welcome back Prato.

Aug 13, 2008 12:07 am
pratoman:

A good read - i am almost done reading a book that is very relevant to this debate. Highy recommended. "When Markets Collide" by Mohamed El-Erian. Author is former manage of the Harvard Investment Management Co (not sure if thats the exact name, but its the Harvard Endowment) and is now co CEO and Co CIO of PIMCO. His views will be considered extreme by many, but he makes the point that investor behavior favors the status quo. He purports the theory that what we are seeing and have seen in the markets the last 12 months is not just noise, but a signal of a sea change. That the U.S. economy will by slow growth slow returns for a number of years to come, and traditional views on Asset Allocation are no longer the way to get a reasonable risk adjusted return. I could go on and on, but the last point i'll make is that in his baseline allocation, he has 15% of portfolios allocated to U.S. equities, and a total equity allocation of 55% (i might be off by a % or two.) Its not an easy read, and you may not agree with his theories, but if you are considering the debate in this thread, you really need to read and consider his views. He is a genius and cannot be ignored.

 

 
Look at what this douche on Amazon wrote as a review.  I started laughing because it's retards like him who are DIYers.  What a freaking moron.
 
I am interested in this book, but a lot of what El-Erian and Gross say have to be taken with a grain of salt.  Bond guys want the equity markets to tank.  But I do agree current asset allocation models may not be what's best.  I say do what the endowments do.  That's what makes the Academic Strategy sub-account in Pru's VA so appetizing.
 
I have been thinking of ways to prospect on this endowment strategy.  I wonder if a prospect would understand this:
Me:  If you were worth a billion dollars, how would you invest?
Prospect:  I wouldn't need to.
Me:  Right, but if you had to, say like an endowment, where they need to have conservative growth and avoid big losses to pay for scholarships, etc., would you agree that there has to be a better way than how you're currently invested?
Prospect:  Well I guess so.
Me:  Well, with your retirement on the line, I can show you a way with $100,000 to do exactly that, what time would you like to get together?
 
I don't know, I'm interested in it though.  Here's another piece comparing the endowment holdings http://seekingalpha.com/article/80674-el-erian-s-recommended-allocation-vs-harvard-yale. 
 
Anyways, here's the review from Deputy Dipshit:
 
10 of 14 people found the following review helpful:
Not for the average investor, August 4, 2008

Mr. El-Erian's book reflects his high-level knowledge and understanding of economic issues. It is perhaps suitable for people at his level, policy makers etc. However for individual investors it is not worth the money, nor the time reading it. His writing style is exasperating as it sounds much like some Harvard publications. His long, complex sentences are time-consuming to understand. He loves to use all the most recent jargon to impress his readers. His ultimate recommendation for investing for the future is banal, buy a bit of everything! After finally finishing the reading of this book (it was painfully boring) I was left with the feeling that I didn't learn anything worthwile for my purposes.
Aug 13, 2008 11:32 am
pratoman:

A good read - i am almost done reading a book that is very relevant to this debate. Highy recommended. "When Markets Collide" by Mohamed El-Erian. Author is former manage of the Harvard Investment Management Co (not sure if thats the exact name, but its the Harvard Endowment) and is now co CEO and Co CIO of PIMCO. His views will be considered extreme by many, but he makes the point that investor behavior favors the status quo. He purports the theory that what we are seeing and have seen in the markets the last 12 months is not just noise, but a signal of a sea change. That the U.S. economy will by slow growth slow returns for a number of years to come, and traditional views on Asset Allocation are no longer the way to get a reasonable risk adjusted return. I could go on and on, but the last point i'll make is that in his baseline allocation, he has 15% of portfolios allocated to U.S. equities, and a total equity allocation of 55% (i might be off by a % or two.) Its not an easy read, and you may not agree with his theories, but if you are considering the debate in this thread, you really need to read and consider his views. He is a genius and cannot be ignored.

 
I have been trying to read everything ever said or written from Mohamed El-Erian since I got in the industry, the guy is head-and-shoulders above everyone else.  He is right about the slowing growth in the U.S. economy, I believe his book came out before we have had this pull back due to the credit market.  On the PIMCO website he talks about how he sees a slowdown in U.S. growth and put that in his book, but he didn't see it happening this quickly, and didn't think his call would be so right, so fast. 
 
Our CIO lowered his overall equity allocation to 50% back in April and everything we hear from the research team, they won't raise it in 08'. 
 
I have really jumped both feet into PIMCO and really like PLMAX the developing market play.  I think Michael Gomez has the experience and knowledge to take advantage of alpha opportunities in the developing fixed income class.  The information ratio on PLMAX is off the chart, the guy is really getting some excess return for the risk he is taking.   
Aug 13, 2008 10:07 pm

Bullbroker - he actually talks about the pullback in the credit markets in his book, so it had started to happen prior to or as he was writing the book


Snaggle - the retard reveiwer on Amazon clearly needs to start reading Batman comic books for market direction - thats what he seems to be looking for.
 
I am actually going to call my Pimco wholesaler to see if i can start getting more info pushed out to me on El Erians current views.
 
Aug 14, 2008 4:30 pm
iceco1d:

I don't think that the long-only money manager is dying - and if it is, it certainly shouldn't be.  If you are expecting equity managers to go both long/short, you are asking them to time the market, beat the market, and know what they simply cannot know.



When most people hear the word "timing", most think of "anticipating" when to get in and get out of the market which is never the case. Being "long" will never go out of style, but as Snags mentioned, this decade has had the worst performance in seventy years and clearly some managers who have played both sides of the market have been rewarded.

This is the reason for the dramatic growth in performance-based portfolio management. If you maintain an old-fashioned overweight/underweight, fully invested investment policy, you will lose business. There are plenty out there that "beat the market" and do so consistently. Its your job to find them before your clients do.

Another reality is the surge of ETFs. Now you can get S&P500 performance for only 20 basis points, so why would you pay 125 points if your manager can't even keep up with the benchmark? If you can't outperform a static, long-only strategy, then what is your added-value? a round of golf? a birthday card?

PS Im not picking on you Ice but your words struck a cord.


Aug 16, 2008 9:49 am

Perfect, you've finally convinced me and all the others on this board that:



Markets only go up,

Buy & hold is the only "valid" investment strategy,

Selling is over-rated,

The growth in alternative investments is simply a figment of someone's imagination,

Long-only asset managers are seeing record net in-flows of new funds,

Well-established indexes are flawed and therefore worthless to the investment process, and

Those that pursue higher risk-adjusted returns are either stupid or blind.



Well-done Ice. It's clear to me/us that you must be at the top of your game...when you're busy posting 4 times a day on this forum.