Death of long only management?

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skeedaddy2's picture
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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?

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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.
 
 

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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.
I do agree with Snags, in that most people "think" they are diversified properly, when they really aren't. 
 
That being said, I've been working on my retirement income planning approach a lot for the past 6 months or so.  Right now, I'm doing a traditional 60/40 asset allocation in 85-90% of an overall portfolio (maybe not traditional in everyone's eyes, but in my eyes), using a mix of low cost/passive in certain asset classes, and active management in others.  In the remaining portion of the 10-15% of the portfolio, I'm using managed futures, vanilla commodity strategies, a bear fund (Prudent/Federated), and a very small piece in cash & U.S. Gov't securities. 
 
Obviously none of the allocations, or reasoning for them, is based on historic performance, BUT I have been trying to back-fill it through history and see if it would have failed to provide income for life at any point in time...and to this point, I haven't found a way to make it fail yet (of course, this is using a 4% withdrawal rate - I actually shoot for/use 3 - 3.75% in practice & planning, when possible). 
 
Also note:  The withdrawal rate starts @ 4%, and that dollar value is adjusted for inflation @ 3.5% per year; the 4% withdrawal rate doesn't reset each year based on the account value (Snags, I know you know what I'm trying to say here) - just to eliminate any confusing.
 
I suppose what I'm saying is that short management (IMO) is a handy tool to bridge tough markets - but I think it should be a dedicated, and small portion of the portfolio, that you only tap for income when appropriate (and don't even implement into the portfolio until retirement is close).  Trying to time when to be short, and when to be long, over time, is going to eat at your returns.  But dedicating a portion of your portfolio to play defense/thrive in a poor market is a helpful tool for income planning. 
 
Sorry this is jumbled - Vikings/Seahawks is my problem!  :-)

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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...

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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. 

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snaggletooth wrote:
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.
 
 

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BullBroker wrote:snaggletooth wrote:
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.
 
 
 

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BullBroker wrote:
 
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?

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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.

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snaggletooth wrote:BullBroker wrote:
 
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.

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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.).

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B24 wrote: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. 

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BullBroker wrote:  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.

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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.

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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.

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Welcome back Prato.

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pratoman wrote: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

By 
Grumpy Scientist - See all my reviewsMr. 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.

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pratoman wrote: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.   

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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.
 

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iceco1d wrote: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.

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skeedaddy2 wrote: iceco1d wrote: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.  Timing is timing.  Be it from equity to cash, or from long to short, it's timing.  Being "long" will never go out of style, And that's because the goal of nearly every participant in the market is for it to go up, not down. but as Snags mentioned, this decade has had the worst S&P 500/Dow performance in seventy years and clearly some managers who have played both sides of the market have been rewarded. They are rewarded because the general public, and apparently some FAs, are too blind or stupid to see they are comparing apples to oranges.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.  Really?  Show me.  There are plenty out there that "beat the market" and do so consistently No, there isn't.  In fact, the EVIDENCE and RESEARCH that is out there completely validates my statement.  . Its your job to find them before your clients do.  No, it's my job to point out that you're a salesman that has no idea what he's talking about.  Then it's my job to show them that I do know what I'm talking about, and get them to put ink on paper - which I will continue to do, with little to no concern about wtf you are talking about.  Another reality is the surge of ETFs. Now you can get S&P500 performance for only 20 basis points, Awesome.  The S&P blows.  I would take its performance for free. so why would you pay 125 points I wouldn't if your manager can't even keep up with the benchmark? If you can't outperform a static, The S&P isn't static long-only strategy, then what is your added-value?  I think I've got a general idea about where my value is added. a round of golf? I don't golf.  a birthday card?  I don't send birthday cards.PS Im not picking on you Ice but your words struck a cord.
Sorry to hear that.  Perhaps if you actually knew what you were talking about they wouldn't have struck such a cord. 

 
Right.  Not to pick on you, but you have no clue what you are talking about.  Timing can mean in/out of the market, or long/short a security.  In either case, you'll eat into your long term returns with this strategy. 
 
If you consider the S&P 500 to be "the market" than you are either uninformed, or narrow minded.  Or both.  The S&P 500 is a crappy benchmark.  It is not static, and it is subject to human input - which means it is subject to human error. 
 
I was going to write more, but I'm not.  This repeatedly discussion, over-and-over, really gets boring.  If you want to read my stance on the issue, you can search my posts.  If you care to rebut any of the facts I've posted with facts of your own, then by all means go ahead.  Until then - if you shorted the S&P for the past 8 years you did OK in hindsight.  Good job.  Here's a pat on the back...you can read the WSJ.
 

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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.

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I have a question for you Ice, and I'm not trying to start the portfolio management thread again, but do you think there ever is a reason the change the mix for a client?  Not including change in risk tolerance, age blah blah blah, but making a change for investment purposes?

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skeedaddy2 wrote: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.
 
That's exactly the response I expected.  When you are ready to post something factual, or quote something I actually said and address it, I'll respond.  I went into great detail in the "Portfolio Management" thread - if you care to view it and then comment factually, we can proceed.  Otherwise, continue to attack my post count - it's almost relevant. 

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Primo wrote:I have a question for you Ice, and I'm not trying to start the portfolio management thread again, but do you think there ever is a reason the change the mix for a client?  Not including change in risk tolerance, age blah blah blah, but making a change for investment purposes?
 
Sure.  Going back to the portfolio management thread...there are some places where I think market inefficiency can be exploited for a gain.  I don't think most FAs have the slightest clue where those inefficiencies a) are, or b) are most likely to be found, c) what kind of resources it takes to exploit them. 
 
It's also notable, that the further and further we get into the age of technology, and more and more countries join the "first world" from the "second world" and "third world" status, the fewer opportunities there will be.  Increased access to information on a worldwide scale = less access to market inefficiency (actually, just to less market inefficiency).  That's also the reason comparing Warren Buffett's success to someone today isn't apples to apples; he built his empire during a very different period. 
 
Not to take anything away from him of course (as if I could), he knows his stuff and is a hell of a businessman...but I'd call him more of a great leader than an investor these days. 

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Sure.  Going back to the portfolio management thread...there are some places where I think market inefficiency can be exploited for a gain.

 
 
If you wouldn't mind, please give a specific current example.

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How specific do you want? 
 
Currency inefficiency is exploited daily on an institutional level (but then again, you already knew that).
 
I've read various studies showing that writing @ the money covered calls (on various baskets of securities) has returned 75-90% of the "buy & hold" return, with 40-60% of the volatility (of the underlying security(ies)).   Better risk-adjusted return indicating some inefficiency between the two (derivative & equity) markets.
 
Geographically speaking, I would consider the BRIC economies to be the best place to look for inefficiency.
 
I'd also look at micro & small caps - perhaps even in the U.S. & Europe. 
 
Edit:  To your original question (do I make adjustments to client portfolios for investment purposes, and NOT for changes in age, situation, risk tolerance, etc.).  No, I do not make tactical shifts to my portfolios because of the current investment climate.  Most of my portfolios are constructed to be reallocated within 5 - 7 years anyway.
 
Edit #2:  If this makes any sense...for those taking income from their accounts, I make "tactical shifts" of where we draw that income from...either the "plan vanilla" allocation, or the alternative/negatively/neutrally correlated portion of the portfolio. 
 
Sorry for all the edits - I don't want my post count to continue to upset skeedaddy.

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skeedaddy2 wrote:Perfect, you've finally convinced me and all the others on this board that: Markets only go up,
 
I never said that.  I am saying they go up, more than they go down.  Your ability to pick tops and bottoms (when to be long/short) is completely random.  You will be wrong more times than you will be right.  Your returns will be lower in the end (even without considering transaction costs).
Buy & hold is the only "valid" investment strategy,
 
I didn't say that either.  I use short positions, alternatives, and negatively correlated investments in portfolios for clients that are in, or near, retirement.  I only use enough to bridge bear markets - as over time, this portion of the portfolio (5 - 15% typically) will underperform the rest. 
Selling is over-rated,
 
That almost makes sense.
The growth in alternative investments is simply a figment of someone's imagination,
 
That would be like me using the "growth in ETFs" as a way to validate my points.  Growth in products is OVERWHELMINGLY decided by what we as an industry sell.  Individuals dont' seek out products, we lead them to them.  High commission products, and "easy to sell" products are always going to be in vogue.  You simply cannot grasp how the passive route is a benefit to the client.  And that's fine.  I can.  In fact, I can grasp both sides of the argument, and see where each one fits.
 
EIA salespeople find a way to rationalize their product.
VA salespeople find a way to rationalize their product.
Suze Orman finds a way to rationalize selling everyone the S&P 500.
People who charge fees find a way to rationalize their fees.
And on and on and on.
Long-only asset managers are seeing record net in-flows of new funds,
 
Does this even deserve a response?
Well-established indexes are flawed and therefore worthless to the investment process,
 
Bear Stearns was a well established investment bank.  Enron was a well established energy company.  The Bush family was a well established political family.  Does well established have ANYTHING to do with what we are talking about?
 
The S&P 500 is flawed as an "index."  It is not mechanical.  It is not formula driven.  It is subject to approval by a board of human beings.  A group that allowed it to be overweight technology at the turn of the century.  Human intervention in what is supposed to be, and accepted to be, a mechanical process, will cause a problem. 
 
and Those that pursue higher risk-adjusted returns are either stupid or blind.
 
In certain markets, absolutely.  I bet I can count the number of people on this board that actually put in the time to research both sides of this argument on one hand.  Don't criticize me for taking the time to learn wtf I'm doing before I formed an opinion on the subject. 
 
You can't even grasp the concept of "the market" - let alone the root of what I'm talking about.  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.
 
I am at the top of my game, and I always will be.  Once again, my post count is irrelevant - sorry you don't have the time & freedom to do as you please with your spare time.

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Let me start by saying that I, fortunately, do not have as much free time as you do (self-admitedly) to engage in mental masturbation on this forum.

iceco1d wrote: skeedaddy2 wrote:Perfect, you've finally convinced me and all the others on this board that: Markets only go up,
 
I never said that.  I am saying they go up, more than they go down.  Your ability to pick tops and bottoms (when to be long/short) is completely random. 

Does YOUR investment process only allow you to go "long" at market bottoms? If so, please share with us in which academic journal did this breakthrough first appear?

According to your criteria, when I decided to short CountryWide, it only counts if I did it at the absolute top ? Also, please explain how my choice was a random one?

You will be wrong more times than you will be right.  Your returns will be lower in the end (even without considering transaction costs).
Incorrect again. Over the last 16 years that I've been in this business, I am only right about 65% of the time, which is more than enough to justify my "value proposition".

Buy & hold is the only "valid" investment strategy,
  I didn't say that either.  I use short positions, alternatives, and negatively correlated investments in portfolios for clients that are in, or near, retirement.  I only use enough to bridge bear markets This sounds like "timing" to me folks, you too? It's at least a hedge statement at minimum.- as over time, this portion of the portfolio (5 - 15% typically) will underperform the rest. 
Selling is over-rated,   That almost makes sense.This is not a valid answer.

The growth in alternative investments is simply a figment of someone's imagination,
 
That would be like me using the "growth in ETFs" as a way to validate my points.  Growth in products is OVERWHELMINGLY decided by what we as an industry sell.  Individuals dont' seek out products, we lead them to them.  High commission products, and "easy to sell" products are always going to be in vogue.  You simply cannot grasp how the passive route is a benefit to the client.  And that's fine.  I can.  In fact, I can grasp both sides of the argument, and see where each one fits.
 
EIA salespeople find a way to rationalize their product.
VA salespeople find a way to rationalize their product.
Suze Orman finds a way to rationalize selling everyone the S&P 500.
People who charge fees find a way to rationalize their fees.
And on and on and on. Yes, I'm sure that the investment committees at the country's top endowment funds have been influenced by Suze Orman and top VA salesmen too.

Long-only asset managers are seeing record net in-flows of new funds,
 
Does this even deserve a response?
Well-established indexes are flawed and therefore worthless to the investment process,
 
Bear Stearns was a well established investment bank.  Enron was a well established energy company.  The Bush family was a well established political family.  Does well established have ANYTHING to do with what we are talking about?
 
The S&P 500 is flawed as an "index."  It is not mechanical.  It is not formula driven.  It is subject to approval by a board of human beings.  A group that allowed it to be overweight technology at the turn of the century.  Human intervention in what is supposed to be, and accepted to be, a mechanical process, will cause a problem.  Be careful what you wish for. Your argument overlooks the aspect of intuition. Portfolio managers around the world sit with reams of computer printouts. However, they (myself included) must make judgement calls on a constant basis. You can't buy/short everything on your screen. This is what I call, the "art" that compliments the "science". Some of us have it and others don't.
 
and Those that pursue higher risk-adjusted returns are either stupid or blind.
 
In certain markets, absolutely.  I bet I can count the number of people on this board that actually put in the time to research both sides of this argument on one hand.  Don't criticize me for taking the time to learn wtf I'm doing before I formed an opinion on the subject.  Yes, you sound like you've read more than just Sport Illustrated, but sonny, you might impress the rookies here but you'd better think twice before whipping out your flame thrower.
 
You can't even grasp the concept of "the market" - let alone the root of what I'm talking about.  Incorrect again. When will you start referencing your sources? I don't see you mention the names of Sharpe, Markowitz, Fama & French, George & Hwang, etc. or Instutional Investor, Pensions & Investments, the Investment Company Institute or the Journal of Finance?
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.
 
I am at the top of my game, and I always will be.  Once again, my post count is irrelevant - sorry you don't have the time & freedom to do as you please with your spare time. Again, please see above. I am busy making money. Post away, champ!

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skeedaddy2 wrote: Let me start by saying that I, fortunately, do not have as much free time as you do (self-admitedly) to engage in mental masturbation on this forum.
Seems like you do to me.  If you really think that posting 4 times a day renders me unproductive otherwise, perhaps you don't know how to type?  You're right though - I'm in my 20's, I go where I want, I do what I want (and for the most part I do it when I want)...I'm such a loser.iceco1d wrote: skeedaddy2 wrote:Perfect, you've finally convinced me and all the others on this board that: Markets only go up,
I never said that.  I am saying they go up, more than they go down.  Your ability to pick tops and bottoms (when to be long/short) is completely random.  Does YOUR investment process only allow you to go "long" at market bottoms? If so, please share with us in which academic journal did this breakthrough first appear?
 
No.
According to your criteria, when I decided to short CountryWide, it only counts if I did it at the absolute top ? Also, please explain how my choice was a random one?
 
I didn't say that either.  I never said you couldn't make money with your strategy.  The problem lies with you having to short while the security in question is still on the way down, and then cover prior to it going back up too far.  Not only do you have to execute those trades "against the grain" (market and securities go up more than they go down), but you have to be so efficient at it, that you do it well enough to cover extra transation costs, dividends, etc.  In addition, your clients go from risking everything invested, to risking infinite. 
More importantly, you have to do it consistently, in real life, with other peoples money.  Not brag about what you allegedly did on the internet.  If you did (re: short countrywide), good job.  You will be wrong more times than you will be right.  Your returns will be lower in the end (even without considering transaction costs).
Incorrect again. Over the last 16 years that I've been in this business, I am only right about 65% of the time, which is more than enough to justify my "value proposition". Once again, I could tell you I'm Dan Marino on the internet.  What exactly are you "right" about 65% of the time?  You made money that percent of the time?  Exactly what is your point here?
Buy & hold is the only "valid" investment strategy,
 
I didn't say that either.  I use short positions, alternatives, and negatively correlated investments in portfolios for clients that are in, or near, retirement.  I only use enough to bridge bear markets This sounds like "timing" to me folks, you too? It's at least a hedge statement at minimum.- as over time, this portion of the portfolio (5 - 15% typically) will underperform the rest. 
 
It has nothing more to do with timing than reducing your exposure to equities as you get older does.  It's simply something I integrate into portfolios as retirement approaches.  It isn't influenced by investment climate.  It's influenced by client age/risk/life cycle.  It becomes a static piece of the portfolio used only to avoid having to draw a paycheck from depressed assets. 
Selling is over-rated,
 
That almost makes sense.This is not a valid answer.
What kind of answer were you expecting to such a brain-dead statement?
The growth in alternative investments is simply a figment of someone's imagination,
That would be like me using the "growth in ETFs" as a way to validate my points.  Growth in products is OVERWHELMINGLY decided by what we as an industry sell.  Individuals dont' seek out products, we lead them to them.  High commission products, and "easy to sell" products are always going to be in vogue.  You simply cannot grasp how the passive route is a benefit to the client.  And that's fine.  I can.  In fact, I can grasp both sides of the argument, and see where each one fits.
EIA salespeople find a way to rationalize their product.
VA salespeople find a way to rationalize their product.
Suze Orman finds a way to rationalize selling everyone the S&P 500.
People who charge fees find a way to rationalize their fees.
And on and on and on.Yes, I'm sure that the investment committees at the country's top endowment funds have been influenced by Suze Orman and top VA salesmen too.
 
Once again...what is your point?  Here's something for you to ponder:  are you familiar with the Efficient Market Hypothesis?  Where do you suppose (some of) the people that run those endowments fall?  h0?  h1?  h2?  Now, where do YOU fall from your office in podunk nowhere, USA?  
You speak of your "value proposition."  Where, my friend, do you get YOUR information that enables  you to make these market beating decisions, to such a degree that you are able to consistently overcome the excess costs incurred by your strategy?  Please tell me.  Please tell everyone.  I wonder how many mutual funds alone were long on Countrywide, while you were (supposedly) shorting it?  How did you out-do all of those Ph.D's and CFA's with all of their millions of dollars of research and technology (and maybe even some inside info), and their miniscule transaction costs?  Please tell me.  I'd like to know.
Long-only asset managers are seeing record net in-flows of new funds,
 
Does this even deserve a response?
Well-established indexes are flawed and therefore worthless to the investment process,
 
Bear Stearns was a well established investment bank.  Enron was a well established energy company.  The Bush family was a well established political family.  Does well established have ANYTHING to do with what we are talking about?
 
The S&P 500 is flawed as an "index."  It is not mechanical.  It is not formula driven.  It is subject to approval by a board of human beings.  A group that allowed it to be overweight technology at the turn of the century.  Human intervention in what is supposed to be, and accepted to be, a mechanical process, will cause a problem.  Be careful what you wish for.
 
I'm sorry, did I wish for something? 
 
Your argument overlooks the aspect of intuition.
 
Ah, intuition!  How absolutely SILLY of me to overlook the reliable tool of INTUITION!  Yes, there we finally have it - your gut feeling.  Awesome.  Millions of client dollars riding on your gut.  Awesome.  You DA MAN.  You asked where my comment of randomness came from?  You just provided one of several possible answers for it.
 
Portfolio managers around the world sit with reams of computer printouts. However, they (myself included) must make judgement calls on a constant basis. You can't buy/short everything on your screen. This is what I call, the "art" that compliments the "science". Some of us have it and others don't.
 
Alright alright.  You win.  You have the "art"' of investing down.  Your gut & intuition is a reasonable explaination of how you beat the market 16 years running.  At this point in time, I almost regret dignifying your argument with a response in the first place.
and Those that pursue higher risk-adjusted returns are either stupid or blind.
In certain markets, absolutely.  I bet I can count the number of people on this board that actually put in the time to research both sides of this argument on one hand.  Don't criticize me for taking the time to learn wtf I'm doing before I formed an opinion on the subject.  Yes, you sound like you've read more than just Sport Illustrated, but sonny, you might impress the rookies here but you'd better think twice before whipping out your flame thrower.
 
Lets get a few things straight.  a)  I don't give a shit about what anonymous people on the internet think of me.  I joined this forum to learn about various aspects of the business I had interest in and needed improvement on.  This subject is not something I came here to learn about.  This means no offense to various friends I have made on this forum - I do appreciate them and value their opinions greatly.  b)  I didn't "whip out my flame thrower" - you did.  You called me out.  Not the other way around.  I'm so bored with this topic, I hope to never have to participate in such a discussion again.  I half-assed my responses to you because it's tedious at this point.  You can read my position in a more refined series of posts under another thread if you really care.  And even that doesn't really scratch the surface.  c)  I'm not "sonny" pal. 
You can't even grasp the concept of "the market" - let alone the root of what I'm talking about.  Incorrect again.
 
If that's the case, why the constant reference to the S&P 500?  Why no acknowledgement of the factual flaws with it?  Do you even understand truly how to benchmarket your investment strategies? 
 
When will you start referencing your sources?
 
1.  When it pays me to do so.
2.  When I'm involved in an intellectual debate that is actually worthy of citing a source.
3.  When you do.
 
I don't see you mention the names of Sharpe, Markowitz, Fama & French, George & Hwang, etc. or Instutional Investor, Pensions & Investments, the Investment Company Institute or the Journal of Finance?
I am surprised to see those names listed...do you know what any of them did/do?
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.
 
I am at the top of my game, and I always will be.  Once again, my post count is irrelevant - sorry you don't have the time & freedom to do as you please with your spare time. Again, please see above. I am busy making money. Post away, champ!
 
No kidding?  1 AM on a Sunday and you are out making money?  Sweet.  I'm watching the Bengals/Lions game on NFL Network, browsing the internet.  I should probably be cold calling right now I suppose.  The funny thing is, I really am making money while I'm sitting here watching football and bantering back and forth with you...cool huh?  Tomorrow morning I'll put my FA hat back on make money at that too. 
 
 

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pratoman wrote: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 received a very nice gift from my Allianz/PIMCO wholesaler today...the El-Erian book.
 
Thanks for the heads up about this book Prato...now can you please come read it to me?

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