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  • Martin Sosnoff

Pie Chart Players: Silent Investors, Silent Losers

Never have I seen pie chart investment constructs more entrenched in the money management business. Our major banks and brokerage houses each control trillions in client assets. Portfolio management is a major profit center for banks like JPMorgan Chase, Citigroup, Morgan Stanley and Bank of America, which absorbed Merrill Lynch during the 2008 - ‘09 financial house meltdown.


All-in fees for advisors approximate 1% of assets. The earnings run rate for Bank of America tots up to $1.1 billion quarterly on an advisory asset base of $1.2 trillion. This total puts it close to the $1.6 billion the bank earns from its global banking business. Comparable fee numbers are matched by Citigroup, Morgan Stanley, Goldman Sachs and JPMorgan.


Looking at performance numbers for these operators on a 3 to 5-year basis, several equal or slightly exceed their performance measurement guidelines. Others do underperform by hundreds of basis points. I sit on several investment committees so I hear the talk and review performance numbers.

What’s so striking is major asset managers report to clients using the pie chart format which delineates percentage holdings in investment categories covering everything under the sun, inclusive of equities, fixed-income paper and hard assets like gold and real estate. Emerging market equity and debt are inclusive along with other delineated global market sectors. The subliminal message is we can cover everything under the sun.


But, all such so-called diversification is diluted by heavy concentration in large capitalization domestic equities plus fixed income investments in domestic Treasury bonds and AAA corporates. Pie charts are a scam devised to show the investment house is a savvy world player (and conqueror). Inclusive of sectors like real estate, emerging market equities and mid-capitalization stocks. They do farm out such assets to specialist firms for which they pay out fees for management. All-in, clients’ management fees approximate 1% per annum.


Warren Buffett has often mentioned, advisory fees for hedge fund managers, 2% of assets and 20% of realized gains, can bite into what’s left for the passive investor’s bottom line, annually, particularly if the manager underperforms, more often than not.


Individual investors, families, trust funds, both passive and aggressive investors, can cut through such typical advisor pie chart systems which mostly do not outperform a typical 60/40 investment asset mix. Pie charts are insidious documents that portray the advisor as earning his fees because of his capacity to probe even the most esoteric investments, worldwide, that can be high return asset plays.


Understandably, armchair players can’t do what George Soros or Carl Icahn do. George shorted the pound (for billions) in the face of the Bank of England professing they’d never devalue the currency. Days later, they devalued and George cleaned up. He deserved it.


Carl Icahn, who 40 to 50 years ago was a professional greenmailer, graduated to taking near control investment positions in unpopular stocks in wobbly industrial sectors. Occidental Petroleum, for example. When oil futures took off, Occidental went from what looked like an overleveraged basket case to a viable piece of energy paper. Occidental’s 52-week low was around $21, now ticking over $60. Carl checked out in the high fifties, better early than late. JPMorgan’s analyst sees Occidental earnings at the rate of $2 a share, quarterly. Yes! Maybe $8 a share, annualized, so Occidental sells at 7 times earnings.


Not so adventurous, I did buy Exxon Mobil when it traded doggedly and yielded over 7%. To be sure, the armchair investor shouldn’t play unless he’s got a singular viewpoint that goes against the consensus. Can’t just have a hunch and bet a bunch. That doesn’t mean you can’t challenge consensus thinking or commentary on major issues like inflation, interest rates, GDP momentum and corporate earnings power. Can you put your own price-earnings ratio on the market?


Absent a thorough facility with stock market cycles which covers historic price-earnings multipliers for at least the Standard & Poor’s Index of 500 stocks, no passive investor is entitled to an opinion on the outlook for stocks, at least forward 12 months out.


I do challenge Wall Street’s current point of view which I consider too bullish. Advisers nearly always err on the bullish side. Good for their business. Today, Street punditry is failing to deal with the inflationary setting, still too low interest rate forecasts and a full price-earnings ratio for the market, historically speaking at 20 times earnings. It’s premature to play indices like NASDAQ 100 which is tied to big cap tech plays like Apple, Alphabet and Microsoft. Consider the haircut just given to Netflix, over 30%. Analysts, to a man, missed the contraction in subscriber momentum.


Still happy with my ragamuffins: Banks, MLPs, gaming stocks like Wynn Resorts and besieged airlines like American Airlines Group. Tech is still nearly priced for perfection. Higher interest rates, alone, can crush their price-earnings multipliers. Pie charts, alas, don’t deal with historic valuation trends. They’re pretty pictures, and not much else.

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