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10 Questions You Should Be Asking Your Investment Manager

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10 Questions You Should Be Asking Your Investment Manager
  1. Why isn’t more of my money in low-cost ETFs?

This is at the core of what is plaguing our industry. It’s not a lack of investment knowledge or understanding about markets and how to build effective tools for investors. The problem is the conflict of interest that exists between you and your service provider. The truth is that, when it comes to developed markets, ETFs are an excellent and inexpensive way to get exposure. If your investment manager isn’t talking to you about ETFs, they are doing you a disservice and may not be focused on your net-of-fee performance.

  1. Are high fees correlated with better investment outcomes?

No. It’s empirically proven that there is no positive correlation between the price of a product and the outcome it’s likely to create. All too often, high fees and exclusivity are used as a marketing tool to boost the perceived prestige of a portfolio and do not reflect its future performance.  By the same token, one shouldn’t assume a more affordable product will perform worse. In fact, lower fees mean the portfolio already has a head start in terms of net-of-fee performance.

  1. Would I be better off without a professional investor?

There are many things we need to do better as an industry. However, the answer to this question is still usually “No”. The portfolios of investors who do not work with an advisor perform, on average, about 6% per annum worse than those who do.

  1. Do institutional portfolios perform better than private client portfolios?

The reason for this distinction is that institutional clients are focused on long-term evidence-based investing. They want to understand how a particular strategy operates, the environments in which it will perform, and the associated risks. Generally speaking, institutional quality solutions behave as they are designed to because they are underpinned in-depth research. Retail solutions tend to be less robust, and they are often based on a manager’s instinct rather than empirical evidence. It is often challenging to obtain an adequate explanation of the research underlying retail products, and some retail funds expressly refuse to disclose their strategies. No institution would invest money into these types of strategies, which might occasionally perform well, but for which performance cannot be adequately explained, replicated, or predicted with any degree of certainty. All in all, institutional quality solutions “perform better” because they’re more likely to perform as expected, even if certain retail strategies may randomly outperform over certain short-term time horizons due to luck or circumstance.

  1. Can I achieve good portfolio performance by picking top-rated funds?

This approach doesn’t work. In fact, five-star funds are known to perform slightly worse than three-star funds. Research shows that funds on consultants’ “buy lists” do worse in the next three years than those on consultants’ “sell lists”.

  1. How can investors distinguish good from bad products?

There’s no single way to make this distinction – but there are a few helpful proxies. One area that we have already discussed is fees. Any product with high fees warrants extra scrutiny. Even a top-performing product will be bad if its returns are consumed by excessive fees. Another common proxy for a bad product is its complexity. Why is it so complex? Each layer of complexity usually represents an additional person getting paid. The top-level fees for complex products might seem reasonable at first, but their upside rarely materializes … at least not for the investor. A final proxy is to understand the sales commissions associated with a product. Investment products that are associated with high commission payouts – like investment-linked life insurance policies – are very good for the people selling them. But they are usually very bad for the people buying them.

  1. Does acting on news and forecasts result in better performance?

There is an intuition that, if an investor closely monitors news and forecasts, they can use this information to achieve better performance. But in developed markets, this idea is mostly a fallacy. Academic research shows that even with perfect knowledge of, for example, where GDP growth will be at the end of the year, there is no correlation between that knowledge and the stock market. This is because what we don’t know is already known to some other industry participants. So even if you listen to a forecast immediately when it’s released, it has almost certainly been incorporated into securities prices.

  1. Do successful business people make good investors?

The average high-net worth client tends to invest poorly – this is an empirical fact. As a successful entrepreneur, you would probably be best served by doing the exact opposite of your instincts when it comes to investing. Anytime you have intuitions that markets are likely to go down, or you feel uncertainty and fear …. don’t act on it! This is because research shows that if you feel a certain way, other people probably feel the same. If you’re reacting to news then you’re already too late, and other people have already overreacted to it anyway. To take this scenario a bit further, you might even want to buy if you’re inclined to sell, and vice versa.

  1. Are there investment products that have no downside?

Even when we look at very successful managers, like Warren Buffett, there’s volatility, which means they experience downturns just like the rest of us.  Our research did uncover a few funds that reliably went up over time, with little to no volatility. The best performing of these was the Madoff Fund, which climbed 1% per month…until in one month it dropped by 100% and its investors lost everything. There’s a lesson here: as a practical matter, funds with relentlessly positive performance over time are probably Ponzi schemes. The most important part of investing is to understand the risks. If you can invest only if you have certainty your investment will go up forever, then either don’t invest or be extraordinarily vigilant regarding false promises. The way capital markets work is that you get long-term rewards because some people are afraid of short-term volatility. Most people know that if they hold an investment, then it will go back up. Global growth has always resulted in growth reflected in asset prices.  However, there will be lots of people who can’t stomach a 15% decline in any period of time. Those are the people that give the growth opportunity to others at a discount. That’s the trade-off, the risk and the reward. If you don’t want that trade-off, then you can’t participate in long-term growth.

  1. What separates good retail investors from bad retail investors?

Based on our experience, there is no correlation between investment results and wealth, social status, or education. Surprisingly, research shows that medical doctors are the worst when it comes to investing. Generalising a bit more, men are much worse investors than women. Apparently, testosterone levels are negatively correlated with investment outcomes. Men are more likely to have extremely high conviction in a small number of stocks, building highly concentrated portfolios – even though that’s almost never effective.   Unfortunately, this tendency can also translate to investment professionals, with over-concentration being one of the biggest mistakes in retail investing. Fascinatingly, people who have lost their 401k or trading logins seem to outperform the broader retail market over time. Having bought a sensible basket of stocks, they couldn’t access their account when they were fearful and wanted to trade. This may be among the most important lessons of investing: maintaining discipline in the face of short-term noise will do you a world of good.

Contributed by  Henderson Rowe

Investing

Not company earnings, not data but vaccines now steering investor sentiment

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Not company earnings, not data but vaccines now steering investor sentiment 1

By Marc Jones and Dhara Ranasinghe

LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.

Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.

Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.

“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.

“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”

The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.

Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.

But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.

(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)

SHOT IN THE ARM

Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.

Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.

Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.

“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.

The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.

Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.

“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”

The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.

Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.

Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.

Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.

“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”

(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)

(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)

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BlackRock to add bitcoin as eligible investment to two funds

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BlackRock to add bitcoin as eligible investment to two funds 2

By David Randall

(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.

The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.

The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.

A BlackRock representative declined to comment beyond the filings when contacted by Reuters.

Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.

Bitcoin tumbled 10.6% in midday U.S. trading Thursday.

Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.

“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”

There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.

BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)

(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)

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Bitcoin slumps 10% as pullback from record continues

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Bitcoin slumps 10% as pullback from record continues 3

LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.

The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.

Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.

(Reporting by Julien Ponthus; editing by Tom Wilson)

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