Weekly Update – April 2, 2010

And so it goes.

A recent academic study published in the Financial Analysts Journal details (see link below) how the concept of asset allocation is not nearly as important as once believed when attempting to understand the sources of investment return for a given portfolio.  Consider this article another in a growing body of work that ultimately calls very much into question the underlying philosophy upon which the vast majority of assets are currently managed in the capital markets.  At this point, many of the core beliefs regarding optimal investment management that migrated out of the leading academic labs circa 1950-1990 have been shown to have deficiencies, in some cases so serious as to render the prior understanding erroneous.

As I have previously written here and elsewhere, I do believe that we are in a new era of capital market expectations and investor behaviors.  The world has changed.  Many of the old slogans invented by the slickster marketing departments of Wall Street (remember this one (“….it’s not “timing” the market that is important but “time in” the market that leads to the best results”).  Yikes, I have to admit that I have said that once or twice myself over the years.  Maybe I even believed it at some point.  But I don’t now.

 This is an incredibly hard business that does not lend itself to simple answers or catchy bromides.  Blind reliance on general market indexing can work, except when it doesnt.  Buy and hold works, until it doesn’t.  Both of these investor behaviors work well when the tide is rising and all boats are raised.  And they work equally poorly when the tide is going out (anyone remember 2008?).  So timing does matter.  I remember a day when Vanguard couldn’t give away its first equity Index fund.  Go check the data.  For almost ten years after its launch it had negligible fund flows.  And that made perfect sense at the time given that the underlying market was and had been lousy, and the class of investors then existing hadn’t yet been brainwashed into buying all dips.  Just why would any right minded investor accept a highly volatile series of underwhelming investment returns for an extended period of time? 

All that changed during the almost 20 year bull market in stocks and bonds that started in the early-1980′s and crescendoed into 2000.  And equity fund flows were massive over the last years of the internet/technology/Y2K derived bubble years.  Then they had a spectacular blow-off upward, and peaked.  Right at the top of the market.  And investors got crushed.  And it happened again 8 years later to equity investors.  And it will likely happen to bond investors starting somewhere around now.  Of course timing matters.  Why did we ever think otherwise?

So it makes sense to pay attention.  Do your homework.  And don’t believe in slogans.  Markets can and do go up, and down, a lot. Even bond markets.  Entry points matter.  Exit points matter.  You should never ever fall asleep at the wheel.  Something can always go wrong, and it usually does at the worst possible moment when we are most complacent.

Stay tuned.

http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v66.n2.4

Weekly Update – March 26, 2010

And now a quick word from our sponsors. 

OK, we have no sponsors.  Nor do we seek them.  Nor will we accept them.  But consider the following a commercial.

I am often asked what I believe is the best source of market, economy, or investment related information available to the public.  My response, as always, is that there isn’t one.  There are far too many information sources, in far too many forms and media formats, to select a single source as being the best repository of beneficial investment related knowledge.

Having said that, I am now going to make a recommendation.  I have found one source of market information to be consistently excellent.  Not simply for investment ideas or investable themes.  I don’t look for those in the media (nor should the investing public in my opinion).  The source of info that I am about to name typically profiles a leading investor or market strategist each week, providing a full and wide-ranging discussion that is as topical and timely as any single source that I have yet found.

Drumroll please.

Consuelo Mack| WealthTrack is a weekly TV show produced by Public Television.  It appears in my area of greater New York City on Saturday mornings.  Check your local listings below:

(http://wealthtrack.com/station_finder.php)

I wholeheartedly recommend that all investors take the time to watch this show.  The roster of recent guests interviewed by Consuelo Mack, a highly savvy journalist with decades of experience covering the financial beat, have included:  Bill Gross, Steve Romick, Bruce Berkowitz, Niall Ferguson, and Jim Grant (my single favorite episode).  All of these individuals are A-players in their respective fields.  For those seeking a balanced and measured view of what the economy/markets may look like in the months/years ahead as we recover from the market meltdown of 2008/2009 (with just a little Fed bashing thrown in for good measure), please watch the episode featuring James Grant that was broadcast earlier this year (link included below: )

http://www.grantspub.com/about/jim.cfm

I have come away from each WealthTrack show with a fuller understanding and/or a deeper perspective on many issues facing the economy/markets. 

 I recommend this show without reservation.  Some episodes are better than others, certainly, but on balance I consider it time very well spent.

For purposes of full disclosure, we at HWCP receive no compensation from anybody directly or indirectly related to WealthTrack.

The commercial is now over.

Stay tuned.

Weekly Update – March 19, 2010

So I recently spent a few days on the road engaged in a due diligence mission.  After a lot of changes over the past year, one of the major mutual fund families invited a group of investment advisors (the folks who sell their funds to clients) to come by HQ and kick the tires and visit with many of the new PM’s and execs that have come on board this particular fund family over the last 18 months.  All in all, it was a very well-organized trip.  Extremely well done.  This fund family remained on point and on message throughout the visit.  Not a lot of stones were left unturned.  This fund family showcased a lot of investment talent to the gathered visitors.  A succession of very impressive people hit the stage.  Many of these folks were industry heavyweights.  After a very mixed performance over the last 10 years, my guess is that this fund family is very well positioned for the future.  It shall remain nameless since I don’t do public recommendations.

But part of me remains uneasy.  One of the main topics of discussion during the visit focused on a particular fund strategy that this firm, along with many other fund families, has recently brought to market.  The investment strategy has been described in various terms and in various ways, with “hedged equity”, “real return”, “absolute return”, and “multi-strategy, multi-asset class” being among the most prevalent of the adjectives.  This category of funds (including ETF’s) is among the fastest growing of all new strategies coming to market.  The ETF pipeline is currently bursting with vehicles scheduled to go public over the next 6-9 months that are expected to employ strategies like the ones described above. 

So why am I concerned?

Many of these funds have expressed in some form or fashion that they expect to employ an “absolute return” investment strategy.  Thats all fine, except for one thing.  “Absolute return” is not a strategy, it’s a return target.  And most of these new funds have specific return targets.  In some cases, extremely specific.  The problem is, the capital markets don’t work that way.  Simply publishing a return target in advance, even if it is a relative return target, doesn’t necessarily mean that the capital markets will provide the opportunities to generate returns up to that intended level.  Maybe they will, maybe they won’t.  The point I am trying to make is that investment strategies aren’t necessarily repeatable year in and year out.  Sometimes they work, sometimes they don’t.  It’s the nature of the beast.  Promising a return in advance to investors is dangerous, if not downright silly.

Make no mistake.  My view is that the future belongs to multi-strategy, multi-asset class investment vehicles and approaches.  Highly rigorous, highly methodical, highly diversified, and highly risk-managed total portfolio investment solutions are in (and likely to remain) the sweet spot given the dynamics of the current capital market environment.  A lot of fund families are bringing vehicles of this type to market.  It will soon become a tidal wave.  Some will thrive.  Most will fail.  But by no means are all these vehicles created equal.  Many of them have been crafted by slickster marketing types seeking to garner as much of the fund flow to this category as possible.  And when you peel back the marketing hype and peek under the hood to see what many of these funds are actually doing with the assets entrusted to them, its cause for concern.

So, be careful out there.  Don’t just read the label.  Do your homework.

Stay tuned.

Weekly Update – March 12, 2010

“But there is trouble in paradise….all is not well in the City of Angels“…….Danny deVito as Sid Hudgens, L.A. Confidential, Brian Helgeland/Curtis Hanson (writers), Warner Bros. Pictures, 1997.

So I attended an Investment Consultant Roundtable conference in New York City this week.  The main topics of discussion centered around how the investment consulting industry is navigating the institutional investor landscape so far in 2010, with a particular focus on how the turbulent market environments experienced over 2008-2009 may have taught valuable lessons.  Representatives of many of the leading consulting firms were present, as was a good cross section of the institutional investor marketplace.  Multi-family offices, pensions, endowments, foundations, hedge funds, and international consulting firms were particularly well represented as a percentage of all those participating.  Approximately 150 people were in attendance.

After sitting through a day of discussion and dialogue, my sad and unfortunate conclusion is this, and on this point I was certainly not in the minority based on my post conference interactions with others:  Investment consulting firms don’t seem to get it, and too many institutional investor clients of investment consulting firms don’t seem to listen to their advice anyway.  So whats the point of it all.

A few recurring thoughts of mine throughout the day based on the presentations given and panel discussions that followed:

1.  Investment consulting firms seem to have no true analytical methodology or framework upon which their supposedly forward looking asset class returns or asset allocation recommendations are based. At best the forecasts appeared arbitrary.  At worst they were just a stale recitation of historical averages. For example, one member of a leading consulting organization stated that he used “100 year averages” to forecast future asset class returns.  Another member of a leading institutional investment consultant stated that her firm has the same annual return forecast for the equity asset class in 2010 as they did in 2008.  And this was significantly higher than the return forecast that they had carried for 2009.  The underlying logic as to why the firm was positioned this way was “we needed to catch up to the market”.  Excuse me?  Has this individual ever heard of buy low-sell high?  Lastly, the director of asset allocation policy at a global investment consulting firm that purportedly advises clients with an aggregate asset base in excess of $900 billion (thats with a B) essentially stated that they “pretty much default to historical averages” when setting their asset class returns and asset allocation policy recommendations.  When pressed to give a more specific answer as to the time periods incorporated in their analyses, his reply was “that depends”.  Yikes!  Thats the best they can do?

2. It was also quite apparent to most in attendance that much of the institutional investor complex (Pension, Endowment, Foundation, etc.) has a broken governance model.  Board of Director and/or Trustee oriented decision making mechanisms at far too many of these institutions seem hoplelessly outdated or ineffective, unable to cope with the much faster paced and complex market environments of today (especially in periods described as crises or panics). It was painful to hear how many institutions disregarded their own policy directives in early 2009 by refusing to re-orient portfolios to stated guidelines.  In effect too many of them decided to not only not rebalance equities back up to even minimum target levels, but in fact to allocate further assets away from equities as they were considered too dangerous.  Now clearly, Q1 2009 was an extraordinary period.  Many investors had been shaken by the turmoil over the prior 6-9 months.  I was shaken.  The market felt like it was coming apart.  Melting down almost.  It felt like September 2008 all over again. 

But, policy is policy.  And I don’t just mean a piece of paper called an Investment Policy Statement (IPS).  What I am referring to is the disciplined and methodical analysis that is undertaken during the planning by all internal and external constituencies that ultimately leads to the creation of the Policy Statement.  As General Eisenhower stated when asked after the War to describe the plan for the D-Day invasion, he is reported to have said ”……it’s not the Plan, but the planning, that was most important”.

If an institutional investor is not going to follow its plan, expressed and formalized through the creation of an IPS, which presumably was arrived at after careful and considered analysis, then why have one in the first place?

While sitting through one presentation after another, my lingering thoughts throughout the day were this.  Is it any wonder that we have such a pension crisis in this country?  Is it any wonder that so many investment plan sponsors across the public/private spectrum are currently experiencing such tremendous gaps in their funded status?  How did we get here?  Is this the best we can do?

Stay tuned.

Weekly Update – March 5, 2010

Hello From Squam Lake

The Squam Lake Working Group On Financial Regulation is a collection of civic minded leading academics (how ominous does that sound?) who have come together in a non-partisan fashion to offer their collective wisdom and guidance in the service of creating a more rational framework within which to regulate the national financial markets.  A report detailing several of their higher level recommendations is currently available on-line at (http://www.squamlakeworkinggroup.org/).

I read with great interest Working Paper # 6 regarding the current state of the nation’s retirement system (see link below).  Without going into detail overdrive, one of the group’s recommendations struck me as being so provocatively intuitive and right on the money, I quickly concluded that the recommendation in question has ZERO chance of being adopted.  Which is unfortunate.

The recommendation I am referring to is related specifically to defined contribution plans and their sponsors.  And how providers of investment management services should operate when dealing with plans of this type.  So as not to paraphrase, here is an excerpt:  

We recommend changes in disclosure requirements and investment options. To be eligible for defined contribution plan investments, a mutual fund should be required to provide a simple standardized disclosure of the costs and risks of investing in the fund. Our model is the nutrition label required for packaged foods in the United States. The investment label should emphasize tangible characteristics that are related to cost and risk. Expense ratios, for example, should be prominent 

When trying to forecast future investment returns, investors often overestimate the information in prior returns. Even five-year return histories are of almost no use in forecasting future relative performance. For this reason, we recommend that the standardized disclosure should not include information about prior returns.

Umm, did you read that last sentence? Not include prior performance when attempting to make an informed investment decision and/or selection? Are you kidding me?

When I read that sentence I couldnt believe it. It is so…..so……so….APPROPRIATE ! What a wonderful concept. Attempting to purchase investment products or services without defaulting to the analysis of historical returns as the primary, if not only, form of analysis would actually make it required for investors and/or professionals who attempt to analyze third-party investment managers to make the attempt to UNDERSTAND what the fund manager is trying to do. What a novel concept.

More seriously, it should be clear by now from the growing body of academic and practitioner research (did you read the latest blast aimed directly at Morningstar that was recently published in SmartMoney Magazine……That link is also below) that most providers of manager search/selection services really have a very limited idea about what they are doing. Not all providers, of course. Some are quite well established, if not very good. But all, or at least most, very rarely earn their elevated fees.

Historical performance is clearly an appropriate metric upon which to pass judgment of investment managers. All those performing analysis on investment managers must take into consideration the historical performance. But most manager search work being undertaken today effectively stops there. It is either done by junior personnel who “screen” databases to search for good recent track records, typically a minimum of 3-years is required, which is truly silly; or by additional junior personnel who delve deeply into 50-100 question multi-part questionnaires provided by managers so that still more junior personnel can attempt to devine the true stock selection, portfolio construction, and risk management techniques of the manager in question. OK, if it works for you so be it.

But the data is showing more clearly every day that that approach doesn’t work. More importantly, it can’t work. When will the lights go on?

Stay tuned.

http://www.cfr.org/content/publications/attachments/Squam_Lake_Working_Paper6.pdf

http://www.smartmoney.com/investing/mutual-funds/Dont-Fall-in-Love-With-These-Funds/

 

Weekly Update – February 26, 2010

Don’t buy that mutual fund if it carries a load! 

I am sorry if my previous comment upsets a significant percentage of those practicing in the wealth management/investment advisory business as it exists today.  But the facts don’t lie. 

Don’t take my word for it.  Read this. 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=265133 

The above study published in 2004 is one of the definitive, if not the pre-eminent, investigations of the returns generated by a wide sample of publicly available mutual funds.  The study made the attempt to ascertain whether their existed a statistically significant differential in the load-adjusted returns produced by mutual funds that carry a sales charge and their no-load counterparts. 

Here is an abstract from the author of the study: 

Matthew R. Morey 

Journal of Banking & Finance 

vol. 27, no. 7 (2003):1245–71 

Many mutual funds charge customers sales fees, known as 

“loads,” and the market share of such funds has increased since 

1997. The sales charges are designed to compensate financial 

advisors for their marketing, advice, and service. The author 

asks whether investors give up any performance in the 

exchange. Although researchers have shown that the performance 

of load and no-load funds is virtually identical, they did 

not take into account the effect of the sales charges. When the 

sales charges are included, no-load funds significantly outperform 

load funds. Investors must decide whether the service and 

advice are worth this performance shortfall. 

Obviously the value of the “advice” rendered must be called into question simply given the fact that investors are apparently being steered into high-cost investment vehicles which in the aggregate are expected to underperform their lower cost cohorts.  “Advice” like this can’t be worth much. 

The true value of “service” is another question entirely.  I will leave that up to others to decide. 

Stay tuned. 

 

 

 

Weekly Update – February 19, 2010

“Mixed emotions, Buddy.  Like Larry Wildman going off a cliff…..in my new Maserati !” (Courtesy of Wall Street, 1987.  Oliver Stone & Stanley Weiser, Twentieth Century Fox).

It may sound silly, but I must admit the above quote captured my thoughts perfectly when I read a story about the Capital Group of Funds as published by Bloomberg News (February 18).  The link to the story is below.

The article highlights the current adversity facing the renowned purveyor of the American Funds, once the largest and most successful mutual fund complex in the United States.  The Fund Family has on balance posted rather pedestrian results over the last three years and has been severely penalized by investors, suffering the worst outflows of assets in its almost 80-year history.

So, why mixed emotions? 

I have always regarded the Capital Group of Companies in general, and the American Funds mutual fund family in particular, as being at the top of the food chain when it came to the acquisition and retention of investment talent.  The Capital Group guys & gals were among the best in the business.  They recruited very smart people and trained them well, and compensated them well, and generated industry leading results across the board.  They were investors, not faddists like so many other one-trick ponies in this business.  Nobody ever left CapResearch.  They were like a medieval castle.  An impenetrable fortress.  They could do no wrong.  They navigated the market melt-up in the late 1990′s to perfection by not being drawn into the Internet hype and tech hysteria that ensnared so many other investment behemoths, in the process shielding billions of dollars of their investors capital.  They were the adults, the stock pickers, the best of the best.  They werent Janus.

So it pains me to see them marginalized.  If they can’t make it work, then who can?

Nothing mixed about that, right.  Now for the other side.  Throughout its history, the Capital Group levied an unconscionably high sales charge to allow investors to gain access to their universe of funds.  The loads were egregiously high in the past, and in many cases remain so to this day.  Shame on them.  They by no means are the only fund family to do so.  Many fund families opt to sell their retail mutual fund offerings only through the so-called ”Full Service” broker-dealer (think Merrill Lynch, Smith Barney, etc.) sales channel at a very considerable up front cost to the investing public, as opposed to other fund families (think Vanguard, Fidelity, etc.) that offer a variety of much lower cost funds (or no-load funds) offered directly to investors or through the fast growing Independent Advisor sales channel.  For a Fund Family with so many wonderful attributes, I never understood why the Capital Group had to resort to such a neanderthal-like business model.  They were/are better than that.  I repeat, shame on them.

Full disclosure:  My business Horizons West Capital Partners offers investment advisory and consulting capabilities on an outsourced basis to Independent Advisors.

And maybe, just maybe, times have changed in the investment business.  In my activities as an investment advisor and consultant, I have studied the returns of public mutual funds going back almost 35 years.  And the ultimate conclusion of my research is that based solely on an investment perspective, there simply exists no reason today for investors to purchase a public mutual fund that has an initial sales charge attached.  Ever.  The easy availability of very low-cost retail investment selections across an enormous number of investment strategies, specifically open-end mutual funds and Exchange Traded Funds (ETFs), that perform in the marketplace as well or better than many other popular higher cost alternatives, could and/or should render most unjustifiably expensive investment vehicles obsolete.  Perhaps the American Funds recent experience suggests that investors are finally on to this fact?  Perhaps the American Funds is the test case, the canary in the coal mine so to speak, of a new age of investing?  Perhaps the American Funds portfolio managers aren’t up to the task of turning back the clock on their collective investment performance?  Perhaps the future is only for the indexers?

We shall see.

My money is on the Capital Group to turn it around.  But eliminate those sales charges.  Now.

http://www.bloomberg.com/apps/news?pid=email_en&sid=aBSLKmwuvh1E

Weekly Update – February 12, 2010

Interest rate cycle blues ???

An interesting performance phenomena is occurring beneath the surface of the markets, and I am not sure many investors are paying attention.  For reference, HWCP has created and tracks five separate model portfolios that serve to represent the work product of our investment consulting services offered to institutional investors.  There are three components to this consulting service:  Investor risk profiling, efficient frontier portfolio creation, and manager search.  All these services are intertwined in the attempt to construct highly customized portfolios for specific investor types utilizing the most efficient and timely asset class allocations and most appropriate manager selections.

The performance of these model portfolios is tracked daily and published weekly on the HWCP website.  For the first time in memory, a performance phenomena is occurring.  That is, the most defensive of the five model portfolios (predominantly comprised of cash, short & intermediate-term fixed income securities, and low volatility multi-strategy managers) is underperforming (at least so far in 2010) the most aggressive of the model portfolios (predominantly comprised of equity, equity-like, and more market oriented multi-strategy managers) in a down market.  That is not supposed to happen.

What that means is that the supposedly safer short/intermediate term fixed income securities are not currently providing the defensive characteristics that investors typically associate with investment vehicles of these types.   While rare, this situation is easily explainable.  Short/intermediate/long-term interest rates are now and have been at unsustainably low levels, driven down by the massive liquidity injected into the system by the powers that be due to the huge dislocations experienced in 2008/2009.  The Federal Reserve has acted as lender of first, second, and last resort by massively inflating its balance sheet to stave off economic collapse.  And it worked.  The system didn’t crash.  At least not much anyway.  But there is a price tag for all this activity, and the bill is coming due.  Perhaps not this year, or next.  But it is coming.  Investors need to be aware of the risks of this market.  Cash is earning nothing.  The yield curve is likely to not only rise in the future, but also materially steepen.   There arent a lot of places to hide.  Investors clinging to shore by keeping a majority of assets invested in “low” risk fixed income securities may be unpleasantly surprised down the road when the statements are opened to show material losses when the expectation of small gains had previously existed.

Interest rate cycles can and do last for decades.  Since the early 1980′s investors of all stripes have been the beneficiaries of a massive tail wind that was driven in large measure by a collapsing rate structure, forcing the price of most assets ever higher.  Even sweeter, the valuations that existed in the early 1980′s across the capital markets were extremely low based on most historical comparisons.  Them was certainly some ripe pickins.  All this explains the extraordinary market returns generated across the board over the period 1982-2000.  It was quite a run.  Now, unfortunately, the reverse is likely to happen.  Head wind investing can be quite demoralizing to those with elevated expectations.  The equity market at present is likely within a 5% – 10% band of fair value on either side, not expensive but not cheap either.  No real danger but no real attraction.  Even after going nowhere for ten years (has it been that long already??).  Obviously, some individual names present opportunities, but in the aggregate the prospects for the general market are nothing to write home about (this calls into question the unblinking and unquestioned devotion by many to a passive buy & hold market indexing strategy, but I will leave that discussion for later).

So, in my opinion, investors should get used to the concept of mid-single digit diversified portfolio returns as a baseline expectation for the foreseeable future.  At best.  Anything above that level simply does not take into account an interest rate cycle working against us.  Stay tuned.

Weekly Update – February 5, 2010

Peter Lynch Legacy…….R.I.P ???

Am writing this in response to a recent article published in Bloomberg News (see below for link) that discussed the supposedly “fading legacy” of one of the leading lights of the Boston based investment management industry.  Let’s get this out of the way first.  If there is such a thing as an investors Hall of Fame, Peter Lynch is a charter member.  If there is such a thing as a Mount Rushmore for portfolio managers, Peter Lynch would be depicted front and center.  Peter Lynch is one of the most accomplished investors of this or any other generation.  The returns he generated in the Fidelity Magellan Fund over his tenure of leadership surpassed not only the overall market return but also those of his professional peers by such a wide margin as to be almost unbelievable.  The idea that Mr. Lynch’s legacy has faded through time is silly.

The article got me to thinking.  Stock picking has become a lost art.  Relatively few investment practitioners today truly adhere to the craft at its essence, which is nothing more than attempting to discern the genuine intrinsic value of a security in the attempt to potentially profit from any discrepancy from prevailing market prices.  In the past, portfolio managers would seek out undervalued securities and purchase them.  If they couldn’t find bargains, they held cash.  On balance, there were not a lot of other considerations.  It was a relatively straightforward way for portfolio managers to attack the markets. Do the work, place your bets, and see what happens.   The best ones performed well and attracted assets from the investing public.  The less skillful ones faded away.  It’s the way markets work.  Or at least are supposed to work.  Yes, that seems like a horrible oversimplification.  But, thats the way it was.  And from that approach to investment management rose giants, Peter Lynch among them.

Now, what one predominately hears about the practice of portfolio management is all efficient markets, and tracking error, and market timing, and high frequency trading, and alpha, and beta, and blah blah blah.

According to the article, “stock picking” is now completely out of vogue, apparently.  Indexing is now all the rage (which is conceptually an exceedingly appropriate way for most investors to have some portion of their assets managed).  At least it is for the non-accredited investing public, which is the focus of my writing.  But consider this.  If one believes in the concept of “The New Normal” as professed by various leading investment practitioners (I am a subscriber to this notion), which on balance describes a current capital markets environment likely to provide limited opportunities to generate anything other than nominal investment returns for a meaningful period of time going forward, why on earth would investors want to be excessively indexed?  In the “New Normal” environment, investing according to a strict indexing strategy would mean that investors are willing to accept in advance the average market return even though they expect the average market return to be underwhelming.  Does that make sense? 

Unfortunately, for most investors it probably does.  And that is because there are far too many one-trick-ponies, quick buck artists, and other purveyors of high cost portfolio management services masquerading as responsible members of the investment community, who in fact simply exist to maximize their own fee income at the expense of their investors.  Or, almost as regrettable, the true investment talent in the business is often times so constrained by the ridiculous impediments thrown up by the current practices of the investment consultant community (please see reference above to tracking error, alpha, beta, blah blah, blah), that much of this talent jumps to the accredited investor side of the house (hedge funds), in the process rendering their talents unavailable to the vast majority of the investing public.

I am not sure that the young Peter Lynch, if he were starting out as a mutual fund manager today, could reach the heights that he ultimately reached in this wonderful business, where talent and hard work, and some degree of luck can be richly rewarding for all those involved.  The investment gatekeepers, who in my opinion spend an inordinate amount of time trying to justify their own existence to their clients, and who, also in my own opinion, have never met a fee that they didn’t attempt to increase, wouldn’t let him.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akU.T5b3edZg

Weekly Update – January 29, 2010

Well that was an interesting week. 

From the multitude of corporate earnings reports that on balance suggested a slight firming in the current environment, albeit with several notable exceptions, though leaving the trajectory of future corporate earnings levels and growth still considerably in doubt; the release by the Commerce Department of the surprisingly strong 5.7% growth rate in 4th Quarter 2009 Gross Domestic Product (GDP) which was immediately panned in many corners of the market as being so overstated due to technical factors (by at least half in some accounts) as to be unbelievable; the release of the new multi-functional device known as the iPad by Apple Inc. (AAPL – $192.063) which generated so many snickers by the technical cognoscenti that it must have the folks in Cupertino contemplating taking the historical playbook off the shelf for at least a quick glance to see what might have gone wrong this time (see, Apple IIE, Macintosh, iPod, iTouch, iPhone); the commitment by the Bill and Melinda Gates Foundation (see link # 1 below) of an additional (I repeat, additional) $10 billion dollars over the next 10 years to help develop vaccines in the world’s less fortunate countries; and finally to the President of the United States in an affront to decorum calling out the United States Supreme Court in his initial State Of The Union address to voice his disapproval with one of that august body’s rulings concerning campaign finance reform (has there ever been a more oxymoronic term than campaign finance reform???). 

It has been quite the week.

But to me, the most impactful and worrisome headlines of the week related to the confirmation battle of the current (and now future) Chairman of The Board Of Governors of the Federal Reserve System of the United States, Dr. Ben Bernanke (see link # 2 below). Chairman Bernanke was confirmed by the US Senate for a second four-year term as Chairman of the Fed, but only after an exceedingly rancorous and public debate emanating from all sides of the political spectrum.  The 70-30 vote does not signal nearly the unanimity as would be expected by a typical 40 point margin of “victory”.  In truth, Dr. Bernanke’s candidacy to remain as Fed Chairman was in doubt through the early part of the week.  Does it matter ???

I believe it does.

When it becomes expedient for the predominantly uninformed political class to assail an internationally respected (although far from perfect) institution such as the United States Federal Reserve System, especially in these uncertain times, for the sole purpose of promoting a particular personal governing philosophy (from members of both the major national parties), and in particular to demean and potentially undercut its leader who is arguably the foremost scholar of Depression Era economics, one almost begins to wonder where the adults are in this conversation.  History has definitively shown that exerting such overtly populist political pressure on supposedly independent national monetary authorities has more often than not resulted in the forced future adoption of a range of muddled and confused economic policies leading to potentially dire (more dire ?) economic circumstances over the passage of time.

Lets hope that the responsible parties in Washington, DC, should there be any left, recover their collective senses in time to start promoting the primary interests of the country again and not the continued pursuit of their own minimalist partisan interests.

 (http://www.bloomberg.com/apps/news?pid=20601124&sid=axdteNmgQGw4);

http://news.yahoo.com/s/ap/20100129/ap_on_bi_ge/us_bernanke_senate_26