One of the funny things about running an asset management shop is that you get to see how other firms assemble portfolios. They range from good to bad to terrible. If they were all that good, we probably are not seeing much of them, for those clients are happy to stay where they are.
Hence, what we do see is therefore self-selected towards the terrible.
Amongst the bad we see are a broad range of questionable decision making. Some portfolios must have been assembled in the heat of emotions; some make classic investing errors, while others are built around predictions (that have not come true). We see a lack of any sell discipline, as folks have rode the Blackberries and the Dells of the world down to near nothingness.
Then there are the Muppet portfolios.
These are not alternative approaches to reducing risk, improving performance, lowering drawdowns or reducing volatility. Rather, these are portfolios that seem to be assembled for the sole purpose of maximizing commissions to the retail broker. Period.
If you read Josh’s book, Backstage Wall Street, you are familiar with the myriad ways that financial predators take advantage of unsuspecting investors. While we don’t get to hear those telephone conversations, we do know what occurred in Ye Olde Wall Streete, a place that supposedly no longer exist, but based on these portfolios, still does.
While we cannot eavesdrop on the calls, we do get to see the net results of that sales nonsense — the portfolios that get assembled in that sausage factory. Lemme tell you, the Head Cheese of investing is pretty ugly.
When new accounts come into our office, @michaelbatnick is the person in our office who deals with these old holdings. He works in the front lines of finance, and has the responsibility of liquidating the positions as cheaply as possible (TD allows a new portfolio liquidation at no cost to the client). But Mike also sees all of the junk that comes in. Lately, it is some rather ugly assemblages of futility, bordering on theft.
We were discussing yesterday how 1 in 10 of our new accounts come in with portfolios holding literally 100s of positions. Mind you, this is not a family office with $150 million dollars, but rather a portfolio 1% of that size. There is no rational reason for these sorts of assemblages to be holding 100+ positions.
How do these happen? Simple: A broker gets invited to lunch by some wholesaler, where they hear a presentation about some new or old product/fund/private. They get back to the office, see what cash is lying around, and proceed to sell this turd to every client in their book. Over the course of 5 or so years, with a “free lunch” once or twice a month, you get portfolios like these. For the cost of rubber chicken, plus a 5% commission, the customer is sold down the river.
I don’t want to paint with too broad a brush, and as I mentioned earlier, if the portfolios are doing well or are rational or have some intelligence behind them, we are much less likely to see them. People typically don’t say to their advisers “You are managing my risk and have decent returns and a real thought process behind my investments. You’re fired!” So what we see are portfolios that lack those elements.
Mike sent me this last night:
“What is the purpose of an account holding GLD and a Gold miners fund? Not to pick on the gold bugs, but are these two instruments not representing the same exact asset class? I suppose one can make the argument that GLD is levered to the price of Gold, while the miners seemed to be levered to gravity. The Australian dollar? Aside from the fact that it has been a terrible investment, who needs to own the Aussie in their portfolio? Even if the Aussie doubles, which is highly unlikely, that would add 40 bps to this particular portfolio, seems like rewardless risk.”
Returnless risk is not how you manage to assemble a decent retirement.
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