Don't Be Fooled by a Pie Chart

For some 60 years, I’ve made it a practice never to criticize other money managers. So, I’m about to commit heresy herein. Still surprised by intraday volatility in financial markets, I like that my equity holdings can be liquidated in a couple of minutes trading. I’m no Buffett who holds on till the end of time. Yes! Buffett has more money, but I’m happy in my work, too.

Meanwhile, our major banks and brokerage houses say, JPMorgan Chase and Goldman Sachs, do manage trillions of assets for institutions and wealthy family, clients who need to sleep tight, at least participate in bull markets and not get destroyed in hard times.

This pie chart of JPMorgan’s investment asset schemata for client portfolios is what the country’s major institutional money managers abide by. It adumbrates a picture of thoughtful and thorough care, but it ain’t necessarily so. Big gobs of capital get allocated to outside specialist managers, to index funds and ETFs.

Clients can end up in a double fee construct. Their fees bottom-line around 1% of assets. Nobody complains. After all, hedge fund operators get 20% of client profits and charge a 2% management fee. This is a lot of money if your honcho doesn’t handily beat his benchmark.

Sitting on investment committees for several endowment funds, I’m involved, and I’ve witnessed management underperformance, particularly past 3 years, a chaotic setting in both equity and fixed income markets. Consider, after bottoming in March of 2020, the S&P 500 Index more than doubled. NASDAQ 100 Index, too, a proxy for growth stocks, particularly technology.

These polite investors disregard NASDAQ 100 as a vulgar index. I’ve never seen advisors embrace this sector, particularly at a market bottom when you want to buy into volatility.

Investment committees tacitly buy into their advisor’s line-up of specialist managers covering esoteric plays inclusive of bitcoin and third world debt instruments. Counseling firms readily plunge clients into a funk with page after page of statistical comparisons that make your eyes cross, impossible to readily absorb.

No wonder, investment committees and their counselors turn race horses into camels. Past 3 years, JPMorgan has underperformed its benchmark index for clients. All this gets expressed in formulaic pie charts. Clients both huge and small, receive fat quarterly reports from their investment counselors, namely the country’s largest banks, starting with JPMorgan. Money management for banks is normally their third largest profit center.

Looking at Morgan’s midyear earnings, approximately $12 billion, asset and wealth management ran close to a $5 billion annualized rate with assets under management of $3 trillion, a serious number. In terms of profit projections, wealth management is equivalent to commercial banking as a profit center this year. As the bull market kicked in, year-over-year revenues rose over 20% and most of it hit on the bottom line.

Even though Morgan’s results for clients trailed the market, past 3 years, their client base remained largely intact. Unless money managers grossly underperform benchmarks, investment committees seem reluctant to undertake new searches for a money manager replacement. This is an exacting, time consuming undertaking.

In short, pie chart investing is designed to keep the money management profit center largely intact for banks. Investment performance can lag by a percentage or 2 per annum but doesn’t get destroyed. The client base remains in place and the profit center for the advisor participates in bull markets through investment asset growth. The advisor goes through all the motions of precise asset allocation changes but never makes too bold a statement.

I’m seeing, still, big commitments in long term Treasuries and AAA corporate bonds. No weighting in the high yield bond market, the great sector of outperformance in the fixed income category.

All in, wealthy, passive investors lose no sleep, but they’re bought into mediocre investment results. No moon shots provided here.

Martin Sosnoff and his managed accounts own: JPMorgan Chase and Goldman Sachs.