Deutsche Bank set another prime example on how to push dubious investment products in their client portfolios without taking on any risk, but charging absurd commissions.  In 2006 Deutsche Bank promoted a fund in Ferris Wheels called Global View. However, so far not ferris wheel has been built, but nevertheless the fund spend up €208 million for property purchases, banking fees and dubious project development costs. So it looks like the average  investors will incur huge losses, but how about the sponsor and sales arm of the fund Deutsche Bank ?

“For Deutsche Bank, though, the Ferris wheel project turned out to be very good business. The Frankfurt-based bank earned €19.2 million through Global View thanks to its client advisors, who drew in €160 million from the bank’s customers within the space of 10 weeks, primarily from German small investors like Schmidt. The bank itself, however, never invested in the fund. Global View used the bank Delbrück Bethmann Maffei (DBM) instead. Deutsche Bank preferred not to invest its own money in the project, for example through loans. Even when that money was badly needed, the bank declined on the basis of a “market risk” that couldn’t “be assessed and covered by the bank. [...]

The letters and e-mails raise suspicions that Deutsche Bank not only insisted on unusually high commission rates that were meant to be concealed from investors, but even doubted the project’s chance of success. From the beginning, the bank calculated using an “equity commission of 12 percent. The sales brochure was only supposed to show 10 percent, which called for a creative solution. One Deutsche Bank employee suggested in writing that the excess commission simply “no longer be shown in the brochure”.

To me that looks less like a creative but more like a criminal solution !

…what the German football team is to the English: a nimbler, more skilful exemplar serving to highlight the latter’s plodding predictability.”

I am not sure if this quote is more flattering to the Germann football team or to the hedge fund managers. It is from a book review in the Guardian about More Money Than God. Whatever you may think about German and English football, the book is worth a read.

Did you know that about two-thirds of the findings published in the top medical journals are refuted within a few years? It can get even worse: As much as 90% of physicians’ medical knowledge has been found to be substantially  wrong. In fact, there is a 1 in 12 probability that a doctor’s diagnosis will be so wrong that it causes the patient significant harm. These are some findings of the new book WRONG by David H. Freedman.

There are actually some very important implications the research of Freedman has for wealth management and investment strategies. In a recent Time interview he states:

“…there are certain experts who, not only is their advice very resonant, but they themselves are very resonant. Some experts project tremendous confidence. They have marvelous credentials. They can be very charismatic - sometimes their voice just projects it. Some experts get very, very good at this stuff. And what do you know? It really sort of lulls us into accepting what they say. It can take a while to actually think about it and realize their advice makes no sense at all.”

This is exactly what every investor should consider when sitting in his wealth advisers office, sipping a nice cup of coffee, listening to the latest analysis and investment proposals….

In its latest “Investor’s Guide” (only in print)  UBS  pushes heavily the case for gold. In an interview Dirk Faltin, head thematic research at UBS, says:

“Compared to stocks or oil gold is according to our calculations somewhat cheap, at least not extremely expensive… Gold has maintained its value for over 750 years. Naturally the gold price fluctuates, even substantially… But gold offers some protection against inflation.”

As opposed to UBS we have no particular opinion on the future price of gold. But what we know is that, in real terms, gold has had almost no positive return for investors.

Here are the data (from: The Buy and Hold Bible (in German), Prof. Jeremy Siegel comes to the same conclusion):

Average Annual Return of Gold (after inflation)

1889-1908: -0.4%
19909-1928: -3.2%
1929-1948: 1.9%
1949-1968: -1.4%
1969-1988: 6.9%
1989-2008: 0.8%

Compared to other asset classes the picture for gold is bleak (source: J. Siegel):

Even short-term government bonds would have returned more than gold. What sense does it make to recommend gold as its price hase been increasing so much over the last few years? This has probably more to do with all those gold etfs, gold certificates and other structured gold products UBS and many other wealth managers want to push down their clients’ throats than with a sensible investment strategy. Please read also the excellent interview with Rick Bookstaber on The Gold Bubble.

Do you think you have based your investment decisions on years of cool rational analysis and experience? Well, you might be in for a surprise. Following up on our last blog post about behavioral finance, read this great post on confirmation bias.

“Half-a-century of research has placed confirmation bias among the most dependable of mental stumbling blocks.”

As a private investor, should you hire a good shrink or a good financial adviser? According to behavioural finance research the psychologist is  more valuable.   Forbes just published a good overview article on the most important findings of behavioral finance:

“…the burgeoning field of behavioral finance, which, over the past three decades, has blended elements of neurology, psychology and economics. It has revealed that, contrary to the preachings of classical economics, individual investors tend to be anything but rational, self-interested profit maximizers. Their own worst enemies would be a more apt description.”

An anonymous person bid a record $2.6 million to have lunch with Warren Buffett, the billionaire investor who runs Berkshire Hathaway (BRKA). That is up from last year’s $1.7 million and the previous high water mark of $2.1 million, set in 2008.

I am not sure if this investment will bring a large enough return as Warren Buffett never hands out any stock market tipps. But the steaks should be excellent at Smith & Wollensky in Manhattan, where Buffett will host the bidder and seven of his friends. The proceeds of the auction go to the Glide foundation, a charity in San Francisco.

A few days ago the German high court (Bundesgerichtshof, the news is here but only in German) has made a landmark decision on transparency of commissions. The court came to the conclusion that only banks have an obligation to make all fees and commissions transparent to their clients. However, in the case of so-called independent advisers the court requires no mandatory disclosure.

In effect, this decision is a big step back for private clients in Germany. Financial product distributors like MLP or AWD have millions of clients in Germany but also in other countries like Switzerland. With this court decision they are encouraged to keep secret the kick backs they receive when they push certain products into the portfolios of their clients. The consequence of this decision is that the term “independent financial adviser” is probably as misleading as it gets.

The only good part is that the court has re-affirmed its older decisions that banks (as opposed to independent advisers) are required to be transparent to their clients. The financial industry is terrified about more transparency when it comes to investing their clients’ money. This explains the make-no-prisoners-resistance against any step of more transparency. But the industry should make no mistake. Clients become more and more aware of this conflict of interest and are increasingly ready to switch their providers. It is not too late yet for voluntary transparency yet.

After some dispute within the German federal government on the legality the German state Lower-Saxony finally bought another CD containing data from about 20.000 German holders of Swiss bank account. This time supposley Euro 185.000 were paid to an unidentified seller.

The new business model for private bank employees is still intact and banks and clients may like it or not: Offshore-banking has no future. Pressured by “data leaks”, tougher regulations for tax havens and stricter law enforcement at home less and less clients will take the risk of bringing untaxed money across borders.  Banks with a lot of offshore-clients better adopt their strategy now!

Morningstar carries a report that long-short-funds are becoming a red hot product for fund companies as many have launched long-short products.  In simple words, a long-short-fund is a financial product that can bet on falling or increasing asset prices. Particularly during falling markets such products become popular as they can make a profit or limit the losses. Long-short-strategies used to be typical for unregulated hedgefunds but regular mutual funds are more and more using these strategies.

The success of long-short-funds rests largely on the right timing and stock-picking decisions of the fund manager (even more than for long-only funds). As markets increase the fund manager has to go long. When they fall the funds short positions must increase.

Yet, study after study has shown that about 80% of fund managers will not beat their market benchmark in any given year. Plus, those that beat the market are usually not the same fund managers over a period of several years.

So, why then are long-short-funds becoming so popular with fund sponsors?

“In 2009, long-short funds took in a record $10.3 billion last year and they are on track to break that record this year. Through April 2010, they took in $6.3 billion, which makes it the seventh most popular fund category in 2010.”

It seems to me that this flow of new money  is the real reason behind the boom of long-short. 10 years from now most of these funds will have gone to the same place where all the Internet and technology funds have gone a few years ago. Not to mention all the other fund fads that didn’t make money for investors (but a lot for the fund industry). In this sense the present wave of long-short funds should be seen by the rational investor as a contrarian indicator. Especially as these funds often carry higher fees compared to regular mutual funds (not to speak about index funds).