The World Series of Bullshit, Game 3
- Joshua M Brown
- July 30th, 2012
Let’s say you’re in the business of selling asset allocators on the idea of alternatives deserving a permanent place in their portfolios. And let’s say you determine that said asset allocators have an affinity for low-cost index products that more-or-less track the markets over time.
How might you pitch your alternative strategies to this audience?
From Financial Advisor Magazine:
Morgan Creek CEO and CIO Mark Yusko told advisors not to expect any significant upside breakout for equities between now and 2021 and suggested they were brainwashed by a condition he called “Bogle-zation.”
The head of the alternative investment company told attendees at the third annual Innovative Alternative Strategies conference in Denver this morning that without alternatives they would have no chance of achieving the returns clients expect.
Advisors are confronted with the 0%, 2%, 5% conundrum, Yusko said, pointing out that these were the best returns advisors could expect from cash, bonds and stocks, respectively. And he considers a 5% annual rate of return for equities over the next nine years to be highly unlikely. Any way an advisor allocates client funds with returns ranging from 0% to 5% doesn’t get you far beyond 3.8% or 4% a year. Yusko called it the New Abnormal.
“Since 1999, the return on stocks is zero,” Yusko said, adding that he expects the same over the next eight to nine years. “There is a technical term for it. That sucks.”
A few things here:
1. Yusko doesn’t know any better than anyone else what the S&P 500 will do between now and 2021. if he did, he wouldn’t be selling product, he’d be planning retirement.
2. Assuming he is right, a big assumption, isn’t it also possible that a flat market will play havoc with the very alternative strategies he is a proponent of? Have you seen the average hedge fund’s performance for 2011, a flat year for the S&P? To call the aggregate numbers for the entire hedge fund asset class a disaster would be charitable.
3. Morningstar has crunched the numbers based on a treasure trove of data and the only – ONLY – determining factor for gauging how a fund will perform in the future turns out to be whether or not the fees are low. Low fee funds trump high fee funds with more frequency than we can ascribe to any other data point when comparing funds. So in a flat market, wouldn’t it stand to reason that your best bet is to stack the odds in your favor and not chase a hedge fund structure with the highest possible fees on earth?
4. Yusko is making the classic mistake of succumbing to the recency effect, assuming his viewpoint is genuine and not just a pitch. Meaning, extrapolating the performance of the last ten years and overweighting the possibility that the next period ahead will be similar. History shows us that secular bull markets follow secular bear markets. We’ve got a limited sample size, but it’s the only data we’ve got.
I’m not opposed to alternatives, just the scare tactics with which they and other products (principle-protected funds, black swan funds, etc) are sold to financial advisors who are themselves nervous about protecting their clients. The world is frightening enough without feigned clairvoyance in the garb of market strategy.
Beware the sellers of product who speak with certainty about the decade ahead. I call bullshit.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.