It clearly and critically discussed the conflict of interest behind mutual funds (aka Unit Trusts in Singapore). Where the investor's aim is to maximise returns, the fund manager's main aim is to maximize asset under management and management fee. It is clearly a "heads i win, tails you lose" type of situation.
However, the book picks on a few true stalwart of capital in this self-serving mutual funds industry, and also gives the lay investor some techniques to pick winning funds ex-ante.
A list of funds provided by Bob Galdfard, the CEO of Sequoia Fund (the fund Warren Buffett recomended to his investors when he liquidated his partnership in 1969), shows investors some clues in choosing winning mutual funds managed for the INVESTOR not the managers/management company.
The funds are:
Clipper Fund
FPA Capital
First Eagle Global
Legg MasonValue
Longleaf Partners
Mutual Beacon
Oak Value
Oakmark Select
Source Capital
Tweedy Browne American Value
If you are as crazy as i am, read through the funds and their very illuminating commentary. Some of the common characteristics of these great funds are;
1. They eat their own cooking.
Oakmark Select and Longleaf Parnters' largest investors are the staff and managers of the funds. This reduces the inherent conflict of interest by re-alinging managers to shareholders.
Longleaf Partners prohibits its employees from investing outside the funds. With shareholders as your employees, analysts and fund managers have their own assets on the line when proposing portfolio ideas or in analysing stock picks.
2. High Concentration
Typically, these funds top 10 holdings goes up to nearly 50% of assets. Compare this to some US Funds such as Fidelity American Funds where top 10 assets is less than 20 % of total assets.
3. Low Portfolio Turnover
This is expressed in TURNOVER RATIO, this is a term i hope ALL local investors will understand. It is expressed in %, and the inverse of it gives rough estimation of numbers of years an average security in the portfolio is held. For example, for Legg Mason Value Trust, the turnover ratio for the past 3 years are 11.1% (07), 12.7% (06), 8.8% (05). Which shows that the average stocks is held for up to 10 years.
Contrast this with most of the funds which has portfolio turnover of about 50% to above 100%!!! Shenton Global Advantage Fund managed by DBS for instance have a turnover ratio of 63%, or a average holding period of about 18 months. IF you think that long term investing is about NOT churning your portfolio, then please look out for this ratio before purchasing a fund next time.
4. Willingness to Hold Cash
Many portfolio managers are not willing to hold cash in his portfolio as it penalises his return if equities rush ahead. And relative underperformance is a big NO NO for managers as huge redemptions normally follows. But sound and responsible managers are willing to take on financial and reputational risk to reduce the risk of permanant capital loss when they see no opportunity to invest in stocks.
FPA Capital is a splendid example of a manager willing to hold cash. As of June 30th, FPA Capital, holds almost 42% of the assets in cash and only 29 securities in its portfolio.
These behaviour is a rarity, as Keynes told us many decades ago,
"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
~The General Theory of Employment, Interest and Money
Will talk more about these unconventional managers over the next few days. And what can we as Singaporean investor, at least for those with limited means, do to capitalise on such findings since MAS prohibits us from directly investing in US mutual funds to protect us from unscrupulous funds salesman and advertisements.
Disclaimer: I am the proud owner of some LeggMason Value Trust (SGD Class) units despite having its NAV fell by over 38% over the last 1 year.
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