I'll preface this rant by saying that I could totally be missing something, so correct me if this thought process is bullshit. Anyway...
I've always made it a point to follow the smartest fund managers just to see what their thought processes were in making the investments they did, and particularly their positions that were "out there" by market standards. So naturally, I figured if anyone was going to have plenty of these it would be my boy Will Danoff and his Fidelity Contrafund, right? The more I look at the damn thing, the more it looks like the broader market. This post is going to be pretty brief, but I just wanted to start some dialogue and see if I'm crazy or what... because this thing seems like a classic case of "too big to succeed" now. So let's take a look really quickly...
Nothing about the top 10 holdings feels too "contra" to me, ergo I don't think many in the market would disagree with you if you bought these guys:
APPLE INC
GOOGLE INC A
BERKSHIRE HATHAWAY INC CL A
COCA COLA CO
WELLS FARGO & CO
DISNEY (WALT) CO
MCDONALDS CORP
NOBLE ENERGY INC
TJX COMPANIES INC NEW
AMAZON.COM INC
A quick breakdown of the Contrafund courtesy of Morningstar, including its returns over the past several years and its geographic/sector investment allocation: http://performance.morningstar.com/fund/performance-return.action?t=FCN…
It seems to have been in line with the S&P (actually a little bit of underperformance) and only generates alpha in its 5-year annualized (0.76% above benchmark), 10-year (2.39% above), and 15-year (2.90% above). All that outperformance, I suppose, came when they weren't so huge. Anything shorter than a 5-year underperforms the market.
This brings up a different question that maybe some people in the AM business on here will know more about. Is the incentive to build AUM even at the expense of returns (or compromising investment philosophy) too skewed? Could mutual funds operate on a small performance fee to alleviate that (say, 3-5%), and why don't they... or is it not allowed? It just seems to me there's a ton of fantastic managers on the mutual fund side who would be killing it with a hedge fund-like fee structure but instead are starting to "sell out" by collecting their 1% on hundreds of billions... and eventually they become the market. I'd hate to see that happen not just at the huge asset managers, but at the Fairholme/Sequoia/Third Avenue/Yacktman level where managers still routinely stop accepting new investments to preserve their investment styles.
Yes. In my experience, people I've worked with that were in charge of deciding what mutual funds to invest clients money in were basically backwards looking. While it is good if you can have a few good years of out-performance, as soon as you have one bad period you loose investors fast as they typically aren't restricted at all. As an example, where I worked, we had bought the Janus Overseas fund because it had good past performance. They actually tried to take very active strategies and outperform, then right after we bought them they started doing horribly. Sold them within a year of buying them, they could have came back and their investment thesis could have been proven right, but that wasn't the point. The main reason was when the financial advisers had to meet with uneducated clients it sucked having to explain why the Janus Overseas fund was so shitty. Clients are typically too ignorant to understand that bad periods of performance can happen, they just know they hate seeing negative numbers. Remember many of these (sometimes pretty wealthy) clients don't know what the difference between a stock and a bond is.
I believe it's because there are restrictions that if you advertise you can't charge performance fees. That is one of the reasons why hedge funds can't advertise. I don't know if a mutual fund could be structured in a way that charges fees if they don't advertise, maybe someone else knows of an example. Also look at the incentives again. Even if there is no hurdle rate it still won't provide the performance incentive. Even if you have 20% performance and you get 5% of that, that's only 1% of AUM. But if you have a bad year, you lose 70% of AUM when you could be charging 1-2% of AUM. The incentives just aren't there for mutual funds to perform over easy growth, that's why god invented hedge funds.
I would think just trying to be close to matching an index would be much less stressful than trying to outperform it. Once you get to a certain age you can become risk averse. If you have a relatively easy job that provides you with a lavish lifestyle it isn't worth the risk to try to become a hedge fund billionaire.
^^ Bigswingin Dave your last comment proves you don't quite understand the strategy of those funds (Fairholme, Third Ave, etc). They are mostly deep value but none of them actively benchmark. They are too active/contrarian/don't care to benchmark like your Vanguard Large Cap Equity fund.
I wasn't referring to those funds specifically, and I do not know much about them. I'm just saying that it's easy to understand why at a certain point if you had enough AUM, your incentive would be to keep that rather than take risk and get good performance. I wasn't implying that those funds are doing that, but that I understand why Whitehat is worried that they might want to do that someday.
It's all about what kind of capital you have dude. Fairholme and Sequoia have really long term capital locked up so they don't have to tape their balls to the market and make sure they're not too far away from it. Those guys could care less about AUM because their actively managed accounts (not advertised) are their breadwinners. Contrafund doesn't have those. Fidelity does somewhere I'm sure but not the way someone like Sequoia or Fairholme or Harris or Yacktman or any of the other "small but big" asset managers do. I don't know what it works like on the managed accounts in terms of fees but I think they do get some. So that's why there's a disparity there. But I definitely agree that Contrafund just looks like it might as well be Vanguard Total Market or something... they lost themselves when they turned into such a behemoth. Same thing happened to Magellan though, it's not new and no need to single out Danoff, haha, they all do it.
The question is who you would target with performance fees. Definitely not retail (imo in retail performance doesn't matter as much) and not pension funds(you're too small). If you're country/sector specific, you will have many wealth managers cut off as they do not have fund analysts focusing on that.
I do not know if everyone agrees, but "equity mutual fund" concept has been stigmatized.
Rerum consequatur consequatur sed vero tempore. Ad tempora sunt doloremque aperiam sunt aut ullam.
Enim quibusdam id quae laboriosam. Dolores impedit deleniti vel dolores explicabo consequatur dicta id. Sunt hic dolores officia praesentium voluptas debitis et. Rerum sed inventore nesciunt aut fugit id. Explicabo non quia asperiores. Mollitia sed unde sint et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...