How Do They Live With Themselves?

Every once in a while, you see some odd stuff in this business. Thanks to the internet, and my being a member or participant in investment industry forums and groups, I get spammed with investment ideas, all of them awful. Yes, ALL of them.

I have yet to see an idea pitched to me, sent by these groups, that actually performs.

This particular idea came my way today, complete with a warm and fuzzy interview with the fund manager embedded on video, and it's the flavor of the day on Wall Street: an actively managed ETF. It's supposed to “take advantage” of over valued stocks and short them. You know: “Opportunistic.”

Returns are as follows:

2012: -26.94%

2013: -30.29%

2014: -10.18%

2015: -6.28%

2016: -13.93%

The S&P was positive for each of those years. Which isn't really the issue here, since aside from the awful performance, there were stocks a sharp manager could have shorted, like Valeant or Chipotle, that could have made for some juicy returns, but the manager picked odd choices like AutoNation, even though car sales were going through the roof. But what's really strange is that the fund began it's life in early 2011, which, given modern history, is a particularly odd time to launch a fund to start looking for things to short.

For this, the fund manager charges a 1.50% fee, along with other management expenses, bringing the cost of ownership to 2.80% per annum. That's on the wrong side of outrageous for an ETF, actively managed or not. Despite the losing performance, it still holds over $170 million in assets under management. That's a $2.5 million a year rake-off for the manager. That's galling enough. But the real kicker is the manager has 20% of the fund's assets allocated to a Fidelity Government Money Market fund that has yielded 0.32% over the last 10 years, and 38% in an "Ultrashort" bond fund that has yielded 1.17%. And the manager STILL takes his 1.50% off that. What this means is that over half the fund's assets are simply "parked."

And the manager's credentials? Blue chip: BS in Finance, Summa Cum Laude, and a Chartered Financial Analyst to boot. And here's what happened to the clients' money.

Now don't get me wrong. This is a humbling business. You can do all of the research on an investment until the sun comes up, check and re-check your ideas to validate them, and still get it frightfully wrong. You can get wracked with anxiety and self doubt, even when you're doing the right things. You can't allow yourself to get overconfident, or too down on yourself at any time. And one of the worst parts is, and the psychology bears this out, is that the joy of doubling money on an investment doesn't overcome the mental hurt of losing 25% on another. It's just the way human beings are made.

The trick with this business is that you have to get it mostly right, because no one in history has ever gotten it ALL right. And never will. But I believe it is my devotion to process, that is, the reliance on income, and the endless search for value, that has delivered for my clients over the long haul.

If I had a track record like this after six years of work, not to mention the nerve to charge customers for holding half of their assets in cash equivalents, I would really have to start questioning what my purpose in this industry is. And take a moment to examine my conscience.