Fat Prophets Global Contrarian Fund

Like a number of stock market newsletter writers, Fat Prophets has been very keen to leverage their brand into active money management. 

As we well know, the high fees from money management in this country can turn mediocre investors into multi-millionaires in no time at all and as such, it’s a very lucrative field.

Regular readers of this blog will be very well aware of my utter disdain for newsletter writers.

As I’ve said time and time again, no one (and I mean no one) who has a genuine talent for picking stocks is going to sell them to you in a newsletter. This patently obvious fact is lost on many people.

Writing newsletters is a highly profitable business, it requires very little capital investment, very few staff and very little in the way of genuine ability. What is does require is good marketing and most of them are masters of that.

People who subscribe to stock market newsletters are (by default) poor investors. Good investors don’t have any use for “tip sheets”. 

It therefore follows that if the newsletter writer wishes to get involved in money management, they have a captive audience of (not particularly knowledgeable) subscribers to tap for funds.

According to the Sydney Morning Herald of 30 April 2011:

Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.

You should note that many newsletter writers show theoretical returns based on their past recommendations (that have not been achieved in reality). This in itself is highly misleading.

Do you want to invest with people who do that and then get in trouble with the regulator? 

May be you do, but before you do, you may want to read some of the very poor reviews that customers of Fat Prophets have written here:
http://www.productreview.com.au/p/fat-prophets.html

Which brings us to the new Fat Prophets Global Contrarian fund. According to the Australian Financial Review:

Fat Prophets Global Contrarian fund charges investors a 1.25 per cent management fee and 20 per cent of any positive performance per quarter, subject to a high-water mark.

The above figures are actually exclusive of GST, so the investor will actually be paying a 1.375% management fee and 22% for “positive performance”.

Now just pause for a minute to digest that and then read this excerpt from the same Australian Financial Review article:

The listed investment company shares little with a previous listed venture from Fat Prophets that focused on Australian equities. After a period of under-performance the fund was taken over by Merricks Capital and was later bought by Investsmart Group, the owner of Eureka Report and Intelligent Investor.

In other words, Fat Prophets has had a go at this listed investment company caper before and failed. So they weren’t “prophets” after all!

Never mind, come back with a different vehicle charging high fees and see if anyone bites. And bite they did! One thing you can say about the Australian market is that there is never any shortage of people willing to “believe”.

In my opinion, the fees are very high for the management you are getting in this fund. 

And I couldn’t care less if Angus Geddes has put $1m of his own money in – so what? He can put every cent he has into the fund, that doesn’t mean for one second that the fund is going to perform well. In fact, the fee structure of the fund almost guarantees that an investor will (ultimately) get a sub-par return in comparison with the major indices.

In his recent letter to Berkshire Hathaway shareholders, Warren Buffett explained beautifully why the funds management industry cannot mathematically outperform a low-cost index fund over any reasonable period of time. And yet we have scores of mindless people putting their faith in highly paid money managers to do exactly that.

The increase in equity markets since Donald Trump’s election has seen a plethora of these types of vehicles listing on the ASX. I have been contacted to invest in many of them and to all of them I have said a very quick “no thanks”. And that’s because none of the vendors have any particular insights or skills – they just want to make a profit from me through management fees. I’d rather give the money to a low-cost index fund manager any day of the week.

 Caveat emptor.

A review of “A Man for All Markets” by Ed Thorpe

I have long admired Ed Thorpe.

He has been a pioneer in a number of fields, from inventing card counting for Blackjack to the Black-Scholes option pricing formula (which he came up with before Fischer Black and Myron Scholes).

I have also always admired his intellectual honesty – publishing his findings for all to see and learn from. Could you ever imagine the academics at Renaissance Technologies being as open as Ed Thorpe? It would never happen.

Having said that, I was somewhat disappointed with this book.

Firstly, fully one third of the book comprises of the appendices, acknowledgements, notes, bibliography and index. That’s a huge chunk of the book. And I wonder whether all the appendices were necessary.

Secondly, Thorpe has reprinted (verbatim) as chapters in this book, a number of articles that he wrote years ago for Wilmott Magazine. Now these articles cum chapters are very interesting, but I had already read them in Wilmott and felt a little cheated by this.

Thorpe is hardly a household name, he is only really known in card counting and quantitative finance circles. So it follows that many quants will have read his articles in Wilmott and other places and they would be the overwhelming majority of the readers of this book, so perhaps others felt the way I did too.

Thirdly, Thorpe spends way too much of the book talking about his childhood and school days. Nobody is buying the book to read about this. 

As a result of the above, we don’t really get enough space devoted to Princeton Newport Partners (PNP), Thorpe’s legendary hedge fund that was a pioneer in statistical arbitrage.

Any investor who has been around for a while will have “war stories”. Great stories about making or losing large amounts of money (one story I like to tell was of once watching a trader friend of mine make $35,000 in two minutes flat). Other investors love these sorts of stories. But there are really very few “war stories” in Thorpe’s book. He just seems to recount the standard things we already knew from many previously published articles on PNP. I was left thinking that If Thorpe really didn’t have much more to say, why did he write this book?

If you don’t know anything about Ed Thorpe, the book is very good, but for those of us who already knew quite a bit, the book is a little underwhelming. 

None of this diminishes my admiration for Ed Thorpe, he is surely one of the great intellects of the financial world.