In Australia there has been no shortage of fee hungry
fund managers rushing to launch global funds in recent times.
The word “global” is probably an over statement, the
vast majority of these “global funds” are allocating most of their money to the
fully priced US market.
During 2017 we saw the listings of the Magellan Global
Trust, VGI Partners Global Investments and the Montgomery Global Equities Fund.
In 2016 we saw the listing of the (so far) very poorly performing Watermark
Global Leaders Fund and my spies tell me that Wilson Asset Management will join
the fee party and launch a global fund sometime this year.
So why all these listings?
They aim to capitalise on the disillusionment of retail
investors with the poorly performing Australian market and offer the chance to
invest in sectors which are absent from the Australian market. I have no
problem with that.
The fundamental problem with these listings is that
they are investing at a time when the US market is at all-time highs, but the
fee hungry fund manager knows that this is precisely the time at which the
public have the greatest appetite for investing. The time to invest is when
there is blood in the streets, not when everything is rosy, and right now, as
far as markets go, everything is rosy!
The fees, (of course), are high. As I wrote on this
site, the VGI Partners Global Investments fee structure is absolutely
outrageous, but it didn’t stop naïve retail investors from jumping in. The
other funds have more reasonable fee structures, but they are still very high
in comparison to what the investor is going to ultimately get (which is below
benchmark performance). As I’ve said before, the high fee structures of these
vehicles practically guarantee that over any reasonable period of time, the
fund will under-perform its benchmark.
As a side note, please do not take a fund manager’s own
reported returns (on their web site) as being factual (especially where
unlisted funds are concerned). I have
seen all sorts of chicanery being employed here, e.g. using simple interest returns
rather than compound interest returns etc. Work it out yourself. If it doesn’t
look right, don’t invest. Unfortunately, the vast majority of retail investors
do not understand the mathematics, and this is where the fund manager can
easily lead them astray.
The Magellan Global Trust and the Montgomery Global Equities
Fund are offering potential distributions that simply will not be achievable
out of actual profits and they are likely to resort to capital distributions
(i.e. giving investors back their own money in the guise of a “dividend”). But
you can always sucker the naïve investor into these vehicles with the right
type of bait and high distributions are the bait that has lured many an
Australian investor into a poorly performing listed entity – the Beta Shares
Dividend Harvester Fund (HVST) immediately comes to mind.
The other aspect of these listings (with the exclusion
of the Watermark Global Leaders Fund), is that they provide either no (or
minimal) downside protection in the event of a market correction or crash.
Given that these funds are allocating most of their money to the US market and
that market is at a very high level, it would make good sense to put downside
protection in place. As mentioned previously, our own fund uses put options to
significantly hedge out a lot of risk, but we of course manage our own money
and must be extremely cognisant of risk, the fund manager who offers his wares
to the public is only interested in fees, risk is a secondary consideration, if
considered at all. Put options also place a small drag on performance when the
index is rising and this is an anathema to fund managers because they all have
performance fees in place for “outperforming” a benchmark, so they have
absolutely no incentive to use risk mitigation products such as put options.
It will be very interesting in a year or two, to show a
chart of the relative performance of the above named funds against some
benchmark indices. And with all of them being listed entities, there will be
nowhere for these managers to hide. Of course, they don’t care, because the
money is now all captive to their respective management companies in the
closed-end funds.
Incidentally, Warren Buffett recently won his $US1m (2007)
bet that US hedge funds as a group would not outperform the S&P 500 index
over 10 years (the index absolutely clobbered the hedge funds). I’m sure he
would happily take the same wager against the above mentioned global funds.
