Why Do We Bother?

Overheard:

Oh, yeah, they have model asset allocations at that firm. But the models are all overweight international equity so no one actually uses them.

I’d like to have this framed for my office. Someone I work with said his mom cross-stitches. I told him I’d pay for her to cross-stitch this quote so I could frame it for my office. I wasn’t kidding. I don’t think there’s a more perfect illustration of the behavioral investment issues at the heart of the investment advice complex.

Great quantities of money and effort are expended to produce research, models and recommendations.

A great show is made of customized financial advice. We make a fetish of independent thinking. Of “not being afraid to stand apart from the crowd.” Of “sticking to our process.”

But in the end, it’s usually the sales process that drives investment decisions.

Permanent capital is probably the greatest edge you can have as an investment professional. If I could choose between being 50 IQ points smarter, having a massive research budget or a modest amount of permanent capital to manage I would take a modest amount of permanent capital every time.

Every. Single. Time.

I Would Like To Be Reincarnated As An Italian Mutual Fund Manager

I met with a UK-based portfolio manager yesterday and our conversation eventually led to a fascinating discussion of the differences in distribution and compensation structures in the US versus Europe.

In the US, for example, we have well-developed retail distribution channels for financial products (wirehouses, RIAs, broker-dealers, banks).

In continental Europe, distribution is dominated by the banks. For many reasons, there is simply not much of a retail investing culture in Europe. The end users of UCITS (European mutual funds) tend to be very wealthy families with multi-generational wealth management needs.

While here in the US we are preoccupied with what a fiduciary standard for investment advisor conduct and compensation should look like, the discussion in Europe is much different (to the extent there is any discussion at all).

Which leads me back to the title of this post, and why I want to be reincarnated as an Italian mutual fund manager…

In Italy, the standard compensation structure for an equity manager is apparently a 2% management fee with a performance fee assessed monthly, but with no high watermark or preferred return hurdle (!!!)

That is to say, if you are an Italian fund manager operating under this scheme, you get a cut of the profits every month you post a positive return. Even if your clients are underwater on their original investments. It is a hedge fund manager’s dream!

(I know, I know, #notallhedgefundmanagers…)

I will close with this chart from Deloitte:

Italian_Fund_Expenses
Source: Morningstar via Deloitte

Your Morning WTF

WTF_Snap.PNG
Source: http://www.ft.com

From the article:

Online pornography is an immense enterprise. Almost 92bn porn videos were viewed on Pornhub, the world’s largest free internet porn site, in 2016 — more than 12 videos for every person on earth. Nearly half of Pornhub viewers visit the site between 9am-6pm.

The US is the biggest consumer of online pornography per capita, and the UK is the third (Iceland, perhaps surprisingly, is number two). Increasingly, porn is viewed on mobile devices. In the US last year, mobile accounted for 70 per cent of hits on online pornography. “I don’t know a single guy who hasn’t looked at porn at work,” says one man who worked in the City of London, describing colleagues taking their phones on periodic “bathroom breaks” during the working day.