“Nobody reads ads. People read what interests them. Sometimes, it’s an ad.”
Get your Free
financial review
Insurance, it is often said, is not so much bought as sold. Does the same hold with regard to asset management ?
One of the most famous names in advertising is that of David Ogilvy. After studying at Oxford, his career was, how shall we say it, somewhat haphazard. It involved working in hotel kitchens, selling cookers, emigrating to the US, working with the Intelligence Service in Washington, and ultimately founding the New York ad agency that became Ogilvy and Mather, one of the largest advertising companies in the world.
Specifically, David Ogilvy wrote the book on advertising, ‘Confessions of an Advertising Man’. Just some of its many highlights:
“The consumer is not a moron. She is your wife. Don’t insult her intelligence.”
and
“Search all the parks in all your cities; you’ll find no statues of committees.”
and perhaps our favourite,
“Only First Class business, and that in a First Class way.”
But Ogilvy was writing, and working, in what now looks like a different age. George Orwell saw nothing to celebrate in advertising, which he contemptuously called “the rattling of a stick in the swill bucket of society”. If that wasn’t true in the golden era of Ogilvy and Mather, it is certainly true now. Big Media colluded with Big Tech during Covid, to the detriment of all. There are now big questions hanging over digital media and its reliance on consumers effectively pimping out their own data amid the illusion that the services they receive are free. It’s all a long way from “First Class business, and that in a First Class way.”
The world of advertising is changing, seemingly at light speed, in ways that many of us can barely understand.
Wherever you sit on the political spectrum, it’s difficult to argue that advertising or marketing don’t have a legitimate role to play in business. You may consider that all advertising is the devil’s work, but in a world of almost limitless consumer choice, how is the consumer to hack their way through these increasingly crowded jungles of competing product ? One answer is that good advertising can enable us to remain informed of things that might genuinely improve the quality of our lives. (One observation that Ogilvy made is that the idea that all advertising is pernicious, all-powerful persuasion is completely untrue. However, very good advertising is more than capable of destroying a very bad product.)
Now let’s consider how investors can be apprised of products and services that might be of genuine benefit.
There are, we would suggest, three broad types of product or service provider to the individual investor.
The first is the financial adviser / financial planner. This is primarily a ‘structural’ service. Are your financial affairs appropriately structured to benefit both you and your dependents in a tax-efficient way ? Have you made full use of your tax-free allowance and any tax-advantaged wrappers such as ISAs (Individual Savings Accounts) or SIPPs (Self-invested Personal Pensions) ? Have you conducted any inheritance planning ? Perhaps most importantly to start the process, have you made a will ?
The second is the wealth manager / private banker. This is arguably a more investment-focused service, crucially dependent on appropriate asset and capital allocation. Is your portfolio appropriately arrayed according to your investment and income needs and objectives ? Have you made provision for certain specific capital needs in the future (a pension; school or university fees; a new house) ? Have you deployed your investments in such a way that they are appropriately diversified by asset class, by geography and by type of risk ?
The third is the fund manager. This is inevitably a more product-specific role. Whereas a wealth management portfolio will (or at least should, in our view) be typically bespoke according to the specific needs and objectives of the client, a fund investment is inevitably a standalone product. What you see is what you get. This need not be detrimental to the interests of the investor, provided that he or she understands what the fund’s risks and objectives are.
So how do you get to assess the quality of all the competing service providers out there ?
Beware the conspiracy
The early economist Adam Smith notoriously remarked, in ‘The Wealth of Nations’ (Book I, Chapter X), that
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Now we are as cynical as the next man in terms of how we view the financial services sector. And if anything, Adam Smith understated the risks inherent with engaging with financiers. Financiers don’t necessarily need to conspire with their competitors against their customers; they can do a perfectly good job on their own.
So yes: in the first instance, be distrustful of the motives of those who work in financial services. (For those who haven’t been paying attention, the Global Financial Crisis should have encouraged all of us to do precisely that.) This is not to say that everyone in finance is either crooked, or greedy – but few professions offer the opportunity to generate wealth in the way that financial services do, so it is inevitable that the profession employs some with motives that we might not wish to encounter personally.
We have mentioned David Swensen in the past and we do so again now unashamedly. Swensen was the Chief Investment Officer of the Yale Endowment in the US, and as such enjoyed a reputation as an institutional investor more or less unrivalled. He authored two books, the first of which, ‘Pioneering Portfolio Management’, explains how he managed institutional money. But it is his second that we want to highlight here, namely ‘Unconventional Success: a fundamental approach to personal investment’.
‘Unconventional Success’ is a guidebook for the individual investor, written by one of the most successful fund managers in the world.
And what Swensen essentially says is: forewarned is forearmed.
Ownership matters
Here is what Swensen has to say about the fund management industry.
“The fundamental market failure in the mutual fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers of investment products. The drive for profits on Wall Street and the mutual fund industry overwhelms the concept of fiduciary responsibility, leading to an all too predictable outcome: except in an inconsequential number of cases where individuals succeed through unusual skill or unreliable luck, the powerful financial services industry exploits individual investors.
“The ownership structure of a fund management company plays a role in determining the likelihood of investor success. Mutual fund investors face the greatest challenge with investment management companies that provide returns to public shareholders or that funnel profits to a corporate parent – situations that place the conflict between profit generation and fiduciary responsibility in high relief. When a funds management subsidiary reports to a multiline financial services company, the scope for abuse of investor capital broadens dramatically. In contrast, private for-profit investment management organizations enjoy the role of a benevolent capitalist, mitigating the drive for profits with concern for investor returns..”
To put it more bluntly, the ownership structure of a fund management business plays a key role in determining investor returns. The larger a fund management business becomes, the closer it gets to becoming an asset gathering business instead. The larger a fund management business gets, the more staff it employs, and the more mouths that need to be fed. The more mouths that there are between you and your money, the greater the likelihood that as the long-suffering paying client, you will end up going hungry.
So it should come as no surprise that within our own asset management business, when we look to partner with other specialist fund managers in specific sectors outside our own sphere of expertise, we have a huge preference for dealing with smaller, boutique asset managers, ideally in the form of private partnerships or limited companies. We have little or no enthusiasm for co-investing alongside giant asset gathering businesses which are more concerned with harvesting ever larger amounts of capital from their investors and living off the fees.
In this respect, conventional wealth managers have a lamentable tendency to focus on cost management at the expense of almost everything else. While we, like any other investor, prefer to pay lower rather than higher fund management fees, we also recognise that it is possible to be penny-wise but pound-foolish. It’s all about maximising the net (i.e. after-fee) return. In our experience, the best combination comes from a specialist manager (ideally running his own business, rather than being an employee of somebody else’s) who vows to close his fund to new inflows before it gets too unwieldy, and who then charges a combination of a reasonable ad valorem management fee and a reasonable performance fee, subject to a high water mark and perhaps an annual hurdle rate too (below which no performance fees are due). If a fund manager has no way to grow his own earnings by way of garnering new funds to manage but can only do so by delivering superior performance to a fixed investor base, we have no problem with him ‘sharing’ in that superior performance by means of a performance fee. We are even more comfortable with such an arrangement if the manager in question operates only one fund, or a tiny number of funds – because his interests and ours are completely aligned. Our interests are not remotely aligned with a fund manager who shows no willingness to cut his fees even as his fund gets larger, and who remains open to new inflows irrespective of the size of his fund. And who manages a wide basket of funds, so who will in turn be minded perhaps to close the ‘losers’ eventually, but keep the ‘winners’, with all their attendant fees, rolling along.
The tail wags the dog
There was a point in the early 1990s when the number of mutual funds (roughly 4,300) on the New York Stock Exchange amounted to double the number of stocks listed on that same exchange. London is likely no different today. Open the ‘Managed Funds’ section of the Financial Times and you will find perhaps seven broadsheet pages in all, each of which has eight columns to a page, and perhaps 250 different funds in each column. That works out at something roughly resembling 14,000 separate managed funds.
So how are we supposed to distinguish between all of them ?
It’s really about framing the question differently: should we even be trying to discriminate between them ?
How do we cut through all the noise to find the signal that interests us ?
Though this may seem more than a little perverse in the light of how this week’s commentary began, our advice would be, wherever possible, to ignore the advertising altogether. With all these thousands of funds all clamouring for our attention, any advertising efforts by smaller managers will be drowned out by the cacophony generated by the larger players. So we propose some straightforward solutions:
1) Ignore conventional fund advertising altogether.
2) Favour ‘word of mouth’ and personal recommendations from people you trust.
3) Consider the ‘Managed Funds’ universe only once you’ve identified a market or sector that you find particularly compelling, and not before.
4) Favour smaller, boutique managers over industry giants.
5) If in doubt, favour a low-cost ETF over its actively managed cousin.
The main reason we don’t recommend the ETF world more passionately is quite simple: because in almost all cases it’s completely indiscriminate. That kind of approach will likely work tolerably well or better during the early stages of a bull market cycle. But since we suspect we’re in the early stages of a bear market cycle (for interest rates and perhaps growth stocks too), it seems to us to be utterly nonsensical to favour exclusively passive investments that offer no especial value to an absolute return and capital preservation investment approach.
As Richard Bookstaber puts it, in the context of those now unavoidable FAANG and ‘MAG 7’ stocks:
“With the markets, doing nothing doesn’t mean you’re not doing something. Because while you are sitting on your hands, things are happening around you, and your investment portfolio is changing. The reason is that you are in an index that is market capitalization weighted. The bigger the company, the more of it you are holding. This means you are going to hold more in industries and sectors that by nature have big companies. So more in big banks and insurance companies than in specialty retailers and restaurant chains. And, more important.. increasingly more in companies that are doing well, that is, companies that have rising market capitalization. And on the flip side, you are effectively selling off stocks that are not doing so well.
“If Apple is worth five times as much as XYZ, then you hold five times as much in Apple as in XYZ. And if Apple moves up to be worth ten times as much, you hold ten times as much. This is what will happen with what appears to be a buy-and-hold, passive, do nothing portfolio.
“This is a big concern now because of the run-up in the FAANG (Facebook, Apple, Amazon, Netflix, Google) and related stocks. They have taken a large share of market capitalization as they have risen in value, and there is a momentum dynamic to be unleashed if they start to drop. This has happened time and again when cap weighting has led to extremes in the share of total market capitalization claimed by a popular sector. Consumer discretionary grew to 22% of the index in 1972; Oil 30% in 1980; TMT 34% in 2000; Banking 23% in 2007. In each case it finally got out of hand and dropped back to its earlier level and dropped the market as well. The odds are it will happen with FAANG..”
There are eight attributes or characteristics that we look for when considering investing with other funds and fund managers, and they are all, to a greater or lesser extent, ‘must-haves’:
- An explicit commitment to ‘value’ investing
- Independent, owner-managed businesses
- Management quality and integrity
- Clear, easy-to-articulate process
- Obvious competitive edge
- Performance (not asset) focused
- Explicit limit to capacity – may be close to closing to new money
- Asset managers NOT asset gatherers.
This last attribute can be identified pretty easily. If they pay to advertise conventionally, they can almost certainly be regarded as asset gathering businesses.
John Wanamaker, the US department store magnate, once remarked:
“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
We suspect that when it comes to fund marketing, comfortably more than half of the advertising spent by fund management companies is wasted. There are cases when simple word of mouth is almost infinitely more important – and successful investment management, we submit, happens to be one of them.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“Nobody reads ads. People read what interests them. Sometimes, it’s an ad.”
Get your Free
financial review
Insurance, it is often said, is not so much bought as sold. Does the same hold with regard to asset management ?
One of the most famous names in advertising is that of David Ogilvy. After studying at Oxford, his career was, how shall we say it, somewhat haphazard. It involved working in hotel kitchens, selling cookers, emigrating to the US, working with the Intelligence Service in Washington, and ultimately founding the New York ad agency that became Ogilvy and Mather, one of the largest advertising companies in the world.
Specifically, David Ogilvy wrote the book on advertising, ‘Confessions of an Advertising Man’. Just some of its many highlights:
“The consumer is not a moron. She is your wife. Don’t insult her intelligence.”
and
“Search all the parks in all your cities; you’ll find no statues of committees.”
and perhaps our favourite,
“Only First Class business, and that in a First Class way.”
But Ogilvy was writing, and working, in what now looks like a different age. George Orwell saw nothing to celebrate in advertising, which he contemptuously called “the rattling of a stick in the swill bucket of society”. If that wasn’t true in the golden era of Ogilvy and Mather, it is certainly true now. Big Media colluded with Big Tech during Covid, to the detriment of all. There are now big questions hanging over digital media and its reliance on consumers effectively pimping out their own data amid the illusion that the services they receive are free. It’s all a long way from “First Class business, and that in a First Class way.”
The world of advertising is changing, seemingly at light speed, in ways that many of us can barely understand.
Wherever you sit on the political spectrum, it’s difficult to argue that advertising or marketing don’t have a legitimate role to play in business. You may consider that all advertising is the devil’s work, but in a world of almost limitless consumer choice, how is the consumer to hack their way through these increasingly crowded jungles of competing product ? One answer is that good advertising can enable us to remain informed of things that might genuinely improve the quality of our lives. (One observation that Ogilvy made is that the idea that all advertising is pernicious, all-powerful persuasion is completely untrue. However, very good advertising is more than capable of destroying a very bad product.)
Now let’s consider how investors can be apprised of products and services that might be of genuine benefit.
There are, we would suggest, three broad types of product or service provider to the individual investor.
The first is the financial adviser / financial planner. This is primarily a ‘structural’ service. Are your financial affairs appropriately structured to benefit both you and your dependents in a tax-efficient way ? Have you made full use of your tax-free allowance and any tax-advantaged wrappers such as ISAs (Individual Savings Accounts) or SIPPs (Self-invested Personal Pensions) ? Have you conducted any inheritance planning ? Perhaps most importantly to start the process, have you made a will ?
The second is the wealth manager / private banker. This is arguably a more investment-focused service, crucially dependent on appropriate asset and capital allocation. Is your portfolio appropriately arrayed according to your investment and income needs and objectives ? Have you made provision for certain specific capital needs in the future (a pension; school or university fees; a new house) ? Have you deployed your investments in such a way that they are appropriately diversified by asset class, by geography and by type of risk ?
The third is the fund manager. This is inevitably a more product-specific role. Whereas a wealth management portfolio will (or at least should, in our view) be typically bespoke according to the specific needs and objectives of the client, a fund investment is inevitably a standalone product. What you see is what you get. This need not be detrimental to the interests of the investor, provided that he or she understands what the fund’s risks and objectives are.
So how do you get to assess the quality of all the competing service providers out there ?
Beware the conspiracy
The early economist Adam Smith notoriously remarked, in ‘The Wealth of Nations’ (Book I, Chapter X), that
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Now we are as cynical as the next man in terms of how we view the financial services sector. And if anything, Adam Smith understated the risks inherent with engaging with financiers. Financiers don’t necessarily need to conspire with their competitors against their customers; they can do a perfectly good job on their own.
So yes: in the first instance, be distrustful of the motives of those who work in financial services. (For those who haven’t been paying attention, the Global Financial Crisis should have encouraged all of us to do precisely that.) This is not to say that everyone in finance is either crooked, or greedy – but few professions offer the opportunity to generate wealth in the way that financial services do, so it is inevitable that the profession employs some with motives that we might not wish to encounter personally.
We have mentioned David Swensen in the past and we do so again now unashamedly. Swensen was the Chief Investment Officer of the Yale Endowment in the US, and as such enjoyed a reputation as an institutional investor more or less unrivalled. He authored two books, the first of which, ‘Pioneering Portfolio Management’, explains how he managed institutional money. But it is his second that we want to highlight here, namely ‘Unconventional Success: a fundamental approach to personal investment’.
‘Unconventional Success’ is a guidebook for the individual investor, written by one of the most successful fund managers in the world.
And what Swensen essentially says is: forewarned is forearmed.
Ownership matters
Here is what Swensen has to say about the fund management industry.
“The fundamental market failure in the mutual fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers of investment products. The drive for profits on Wall Street and the mutual fund industry overwhelms the concept of fiduciary responsibility, leading to an all too predictable outcome: except in an inconsequential number of cases where individuals succeed through unusual skill or unreliable luck, the powerful financial services industry exploits individual investors.
“The ownership structure of a fund management company plays a role in determining the likelihood of investor success. Mutual fund investors face the greatest challenge with investment management companies that provide returns to public shareholders or that funnel profits to a corporate parent – situations that place the conflict between profit generation and fiduciary responsibility in high relief. When a funds management subsidiary reports to a multiline financial services company, the scope for abuse of investor capital broadens dramatically. In contrast, private for-profit investment management organizations enjoy the role of a benevolent capitalist, mitigating the drive for profits with concern for investor returns..”
To put it more bluntly, the ownership structure of a fund management business plays a key role in determining investor returns. The larger a fund management business becomes, the closer it gets to becoming an asset gathering business instead. The larger a fund management business gets, the more staff it employs, and the more mouths that need to be fed. The more mouths that there are between you and your money, the greater the likelihood that as the long-suffering paying client, you will end up going hungry.
So it should come as no surprise that within our own asset management business, when we look to partner with other specialist fund managers in specific sectors outside our own sphere of expertise, we have a huge preference for dealing with smaller, boutique asset managers, ideally in the form of private partnerships or limited companies. We have little or no enthusiasm for co-investing alongside giant asset gathering businesses which are more concerned with harvesting ever larger amounts of capital from their investors and living off the fees.
In this respect, conventional wealth managers have a lamentable tendency to focus on cost management at the expense of almost everything else. While we, like any other investor, prefer to pay lower rather than higher fund management fees, we also recognise that it is possible to be penny-wise but pound-foolish. It’s all about maximising the net (i.e. after-fee) return. In our experience, the best combination comes from a specialist manager (ideally running his own business, rather than being an employee of somebody else’s) who vows to close his fund to new inflows before it gets too unwieldy, and who then charges a combination of a reasonable ad valorem management fee and a reasonable performance fee, subject to a high water mark and perhaps an annual hurdle rate too (below which no performance fees are due). If a fund manager has no way to grow his own earnings by way of garnering new funds to manage but can only do so by delivering superior performance to a fixed investor base, we have no problem with him ‘sharing’ in that superior performance by means of a performance fee. We are even more comfortable with such an arrangement if the manager in question operates only one fund, or a tiny number of funds – because his interests and ours are completely aligned. Our interests are not remotely aligned with a fund manager who shows no willingness to cut his fees even as his fund gets larger, and who remains open to new inflows irrespective of the size of his fund. And who manages a wide basket of funds, so who will in turn be minded perhaps to close the ‘losers’ eventually, but keep the ‘winners’, with all their attendant fees, rolling along.
The tail wags the dog
There was a point in the early 1990s when the number of mutual funds (roughly 4,300) on the New York Stock Exchange amounted to double the number of stocks listed on that same exchange. London is likely no different today. Open the ‘Managed Funds’ section of the Financial Times and you will find perhaps seven broadsheet pages in all, each of which has eight columns to a page, and perhaps 250 different funds in each column. That works out at something roughly resembling 14,000 separate managed funds.
So how are we supposed to distinguish between all of them ?
It’s really about framing the question differently: should we even be trying to discriminate between them ?
How do we cut through all the noise to find the signal that interests us ?
Though this may seem more than a little perverse in the light of how this week’s commentary began, our advice would be, wherever possible, to ignore the advertising altogether. With all these thousands of funds all clamouring for our attention, any advertising efforts by smaller managers will be drowned out by the cacophony generated by the larger players. So we propose some straightforward solutions:
1) Ignore conventional fund advertising altogether.
2) Favour ‘word of mouth’ and personal recommendations from people you trust.
3) Consider the ‘Managed Funds’ universe only once you’ve identified a market or sector that you find particularly compelling, and not before.
4) Favour smaller, boutique managers over industry giants.
5) If in doubt, favour a low-cost ETF over its actively managed cousin.
The main reason we don’t recommend the ETF world more passionately is quite simple: because in almost all cases it’s completely indiscriminate. That kind of approach will likely work tolerably well or better during the early stages of a bull market cycle. But since we suspect we’re in the early stages of a bear market cycle (for interest rates and perhaps growth stocks too), it seems to us to be utterly nonsensical to favour exclusively passive investments that offer no especial value to an absolute return and capital preservation investment approach.
As Richard Bookstaber puts it, in the context of those now unavoidable FAANG and ‘MAG 7’ stocks:
“With the markets, doing nothing doesn’t mean you’re not doing something. Because while you are sitting on your hands, things are happening around you, and your investment portfolio is changing. The reason is that you are in an index that is market capitalization weighted. The bigger the company, the more of it you are holding. This means you are going to hold more in industries and sectors that by nature have big companies. So more in big banks and insurance companies than in specialty retailers and restaurant chains. And, more important.. increasingly more in companies that are doing well, that is, companies that have rising market capitalization. And on the flip side, you are effectively selling off stocks that are not doing so well.
“If Apple is worth five times as much as XYZ, then you hold five times as much in Apple as in XYZ. And if Apple moves up to be worth ten times as much, you hold ten times as much. This is what will happen with what appears to be a buy-and-hold, passive, do nothing portfolio.
“This is a big concern now because of the run-up in the FAANG (Facebook, Apple, Amazon, Netflix, Google) and related stocks. They have taken a large share of market capitalization as they have risen in value, and there is a momentum dynamic to be unleashed if they start to drop. This has happened time and again when cap weighting has led to extremes in the share of total market capitalization claimed by a popular sector. Consumer discretionary grew to 22% of the index in 1972; Oil 30% in 1980; TMT 34% in 2000; Banking 23% in 2007. In each case it finally got out of hand and dropped back to its earlier level and dropped the market as well. The odds are it will happen with FAANG..”
There are eight attributes or characteristics that we look for when considering investing with other funds and fund managers, and they are all, to a greater or lesser extent, ‘must-haves’:
This last attribute can be identified pretty easily. If they pay to advertise conventionally, they can almost certainly be regarded as asset gathering businesses.
John Wanamaker, the US department store magnate, once remarked:
“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
We suspect that when it comes to fund marketing, comfortably more than half of the advertising spent by fund management companies is wasted. There are cases when simple word of mouth is almost infinitely more important – and successful investment management, we submit, happens to be one of them.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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