Silent Investors, Silent Losers
For the last several years, ultra-rich families and institutional investors stand short-changed by their investment managers. Major banks like JPMorgan Chase manage trillions of these assets. For them, wealth management is a major profit center, but in recent years they’ve underperformed their benchmark indices, mainly a 60/40 ratio of equities and fixed income holdings.
For 2020, many clients underperformed their benchmarks. This is a disappointment. The S&P 500 Index advanced 18% while intermediate term bonds rose 6%. A composite account in both sectors advanced 14.3%. This is the common measurement number, but few banks got even close.
Be mindful that Morgan doesn’t buy specific stocks and bonds for its clientele. They retain at least a couple of dozen money management firms that put them in everything under the sun inclusive of real estate, gold and commodities. Nowhere do I see capital allocated to outperforming the NASDAQ 100 Index or to high yield bonds. Some 30% of assets are allocated to the fixed income sector. If I had to monitor a couple of dozen money management firms, my eyes would cross while my head spun in circles. Money managers should incorporate a cover page showing year to date performance as well as 1, 3 and 5 years’ numbers. Then, gain or loss since inception. Also, what was done that showed value added or subtracted from the numbers? The conceptual basis for the make-up of sector weightings as well as classes of fixed income securities should be summarized in 1 or 2 sentences.
Be cogent! We’re postured for reflation, with rising interest rates and accelerating GDP. This is captured with overconcentration in the financial sector, materials and technology. In bonds, treasuries are unattractive along with investment grade corporates. Our duration is under 5 years, mainly in BB grade bonds. The constant is simply stated in the cover page.
The typical client report from Morgan and others ranges over several dozen pages liberally sprinkled with charts, graphs and tables. The client soon drowns in such gobbledygook. Nowhere do I see a simple explanation of relative performance, but rather pages of bewildering tables, graphs and statistics. Morgan’s report ran over 40 pages designed not to be read (gimme a break!).
How does an 80-year-old widow deal with her bank or investment advisor? I don't know. Actually, should we care that the wealthy may be badly served? To the extent that discretionary spending may be reduced or charitable contributions lessened, the country is worse off.
Consider, too, the median size of 401k plans for those already in their sixties runs around $230,000 in assets. If this money is poorly managed, beneficiaries’ standard of living becomes endangered.
Poor money management reduces annualized giving disbursed by endowment funds for medical research, the performing arts and grants to schools and universities. Not a good scenario. Taxes on individuals’ capital gains can be pared, as well, and impact charitable giving. Wealth management is a major profit center for out reserve city banks. Quarterly net revenues for Morgan run at a $3.6 billion clip. Earnings power in a good year is over $3 billion on a $2.2 trillion asset base. Everyone’s portfolio is analogous, largely duplicated with the money managed by proxy. There are no stock pickers like Warren Buffett, concentrating 23% of his assets in Apple.
The last thing that institutional wealth managers would choose to do is overweight directly in trillion-dollar plus market capitalizations like Apple, Microsoft and Amazon. But, that’s where serious money was made past 5 years. I’m talking about 300% plus gains in asset value. How do you fight the battle for investment survival whether a big fish or small fry? Avoid the bewildering mish-mash of pie chart investing. Biggest decision shouldn’t be which bank or investment house you go with but portfolio structure. Looking ahead, the traditional 60/40 construct is challengeable.
If you think reflation is in the cards, forget about bonds with more than a couple of years’ duration. Pick the NASDAQ 100 rather than the S&P 500. Some 30% of NASDAQ is comprised of 3 stocks: Apple, Microsoft and Amazon. In periods of rising interest rates overweight the financial sector next couple of years.
The investment advisory business is a swampland of technocratic overkill filled with complexity, and a bewildering make-up of asset managers in every class of security. It looks proper on paper but doesn’t bring home the bacon. Strong-minded individuals, not committees, should manage money. Committees turn race horses into camels.
Martin Sosnoff and/or his managed accounts own: JPMorgan Chase, Microsoft and Amazon.
Disclosure: I am/we are long JPM. Additional disclosure: Martin Sosnoff and/or his managed accounts own: JPMorgan Chase, Microsoft and Amazon.