What You Can Learn from Fundies

investment fund manager holding piggy bank

It doesn’t take much to bring out the inner bear in everyone.

Debt levels, cheap cash and political tensions. They all put fuel on the fire for market bears. The latter is the latest to see fund managers turn sour.

According to a Bank of America Merrill Lynch survey, ‘Investor sentiment is bearish this month…’.

What’s the biggest risk on the horizon? Trade tensions, according to fundies. Many believe profits will not improve in the next 12 months.

So, where is the big money going to hide? Many have already bought large tech firms.

Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, along with Baidu, Alibaba and Tencent, are some of the most crowed trades among fund managers.

MoneyMorning 20-07-18

Source: Australian Financial Review
[Click to open new window]

But let me explain why this should mean nothing to you.

What is a ‘Fundie’?

Fundies are not like you or me.

They are ‘experts’ managing other people’s money. That’s not to say they’re not careful with the capital intrusted to them.

But it does mean they have certain pressure which you or I don’t have to deal with on a weekly or monthly basis.

How does a fundie make money? Usually they’ll have a management fee (assets under management).

For example, if that fee was 1% and they had $1 billion in client assets, then they’d earn $10 million. They might also have a performance fee on top of that — say a 10% fee when they earn an annual return of 15% or more.

So, ask yourself, what is the fundie incentivised to do? They’re incentivised to bring in as much money to the fund as possible and make sure short-term returns (12 months) are stellar.

If returns don’t at least match a benchmark, then they run the risk of investors taking their money and investing it somewhere else.

Another difference between fundies and you is your portfolio size. Right now you’ve probably got a couple of stocks you’re watching. Maybe five or seven.

Some fund managers hold hundreds of stocks. The reason why is to again stratify short-term returns. With such diversification, fund managers’ portfolios usually reflect the performance of ‘the market’.

The idea then is to optimise as much of each stock they hold. They’d like to overweight the stock they think will rise significantly and underweight the losers over a 12-month period.

With such a strategy it’s extremely rare to see gains of 50% or 100%. But that doesn’t matter. The fund manager just needs to do better than his or her benchmark to make sure investors don’t take their money elsewhere.

So, when fund managers are bearish, it’s because small market movements down (1–5%) affect their portfolio. Yet as long as they tread water, keeping their head slightly above the waves, they’ll continue to rake in millions in fees.

You, on the other hand, have the luxury of forgetting whether the market is up or down. You don’t have to read the news or know index quotes.

In fact, if you got the news delayed three weeks your portfolio wouldn’t even notice. And that’s because many of you have a small concentrated portfolio. These are stocks you believe could double or quintuple over the long-term.

And this is your greatest advantage. You have the luxury of waiting. You don’t need to guess if a stock will rise in 12 months’ time. You have the easier task of asking whether this is a good business and if it trades at an attractive price.

Ok, maybe it’s not easy. But it’s far simpler than guessing what stock prices will do month to month.

What has a fund manager got that you don’t?

So, while fundies are bearish this month, you can be bullish (long-term) at the same time. There are always opportunities in the market. Many of which fundies can’t buy either because of size, liquidity or it doesn’t fit with their investment mandate.

While fundies might have experience and education, they essentially handicap themselves by focusing on short-term gains and incentives.

It’s why you, even if you have no business training, can outperform many of these funds. Sometimes all you have to do is buy one or two stocks and hold them.

Time will take care of the rest.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: If you’ve got an interest in the share market, but completely new to the whole deal and don’t know where to start…this report is for you. Get started now.

Harje Ronngard

Harje Ronngard

Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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