MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

Archive for September, 2010

What Fund Fees Can Do To You

Thursday, September 30th, 2010

There is an interesting article on the fatal impact of fund fees on investment performance in the UK’s Telegraph. Especially the calculation on Buffett’s performance had he taken the usual 2+20 hedge fund fees is awesome. The result is shocking:

As you are aware, Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46 per cent per annum. If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.8m.

“However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the funds as an annual fee plus 20 per cent of any gains, of that $4.8m, $4.4m would belong to him as manager and only $400,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance. Believe me, he or she won’t.

Hat tip to W.G.


Are ETF-Investors At Risk to Lose Everything?

Tuesday, September 28th, 2010

About two weeks ago a small research firm in Boston, Bogan Associates, published a piece titled “Can an ETF Collapse?”. It basically argued that because some (US-based) ETFs are heavily shorted, in a market crisis the fund sponsors may stop redeeming fund shares as there have been many more ETF shares created through short selling than have been actually covered through underlying equities by the sponsor.

CNBC’s Herb Greenberg picked the story up and the report was also published on Seeking Alpha, an influential financial blog. Within hours a storm broke loose in the blogosphere but also mainstream media found themselves in heavy debate whether it was possible that the whole ETF market can face an Armageddon-like meltdown scenario. Morgan Stanley in London voiced that the Bogan report was actually bogus and IndexUniverse, an Internet platform mainly concerned with index investing, also criticized the doomsday scenario. Leading fund research firm Morningstar had to put out a long article that explained the mechanics of creating and shorting an ETF in order to highlight that it was impossible for an ETF to collapse via its short interest.

So what is our take? It seems that heavy short selling of ETFs is mainly a US problem and the severe cases are limited to a few specific funds. Also, given the market mechanics of shorting, that kind of scenario should mainly create problems for the shorters (”short squeeze”) but definitely not for the regular long-only retail investor. Yet, undoubtedly the whole debate shows that the rapid growth in ETFs has created some market practices that should be monitored very closely by market participants and financial authorities. We are convinced that ETF risks are  not in the shorting of an ETF but in various other market developments we have highlighted in a recent report on ETF risks.


Excellent Post on Buy & Hold & Rebalancing

Monday, September 13th, 2010

“But let’s not forget that there are no silver bullets in portfolio management. Instead, success comes only through diligent monitoring and managing of the asset allocation. That starts by diversifying widely and planning on routine rebalancing every, say, year or two, or more frequently if you’re opportunistically inclined. Yes, there’s more, much more to do, if you’re up to the task. But the thousand-mile journey still starts with the first two steps: asset allocation and rebalancing.”

Find the whole article here. Excellent and informative through-out.


The 20 Richest People of All Time Are Listed….

Wednesday, September 8th, 2010

here. Great collection. Interestingly how diverse the wealth sources are/were. Whereas in the 18th/19th century and before trade, oil and transportation seemed to be the most prominent sources, in the 20th century wealth was generated more from retail, technology and investing.


KISS - Keep It Simple, Saver

Friday, September 3rd, 2010

The Wallstreet Journal dispenses some advice which we like a lot:

“Investing is complex rocket science that requires professional help-at least that’s what the professionals usually say. But a strong case can be made for investors following a design principle known as KISS, which in this case stands for: Keep it simple, saver…”

Highly recommended reading - especially for the investor who is seeking peace of mind…