Here’s why the stock market is so hard. This chart comes from the cover of the New York Times survey of Mutual Funds and E.T.F.s in the second quarter of 2016.
Natural resources did best? Go figure.
Fairness and Wall Street.
You’d think if Wall Street did lousy managing your money and they made more money than you did, you’d think they’d refund some or all of your fees. No way. That’s not their morality. Add this to my list of reasons why I hate funds. Item from Naked Capitalism.
CalPERS Reported That It Made Less in Private Equity Than Its General Partners Did, posted by Yves Smith.
CalPERS is a prototypical example of the Wall Street cliche, “Where are the customers’ yachts?,” except in the case of private equity, that saying needed to be updated to “megayachts”.
As we mentioned earlier this week, CalPERS reported preliminary investment results for its fiscal year ended June, 30, 2016 of 0.6%.. Its press release stated that its private equity returns were 1.7% based on data through March 31.
While CalPERS is likely to report somewhat better final results from private equity, given that US stock indices were higher at the end of June than the end of March, it’s a given that the private equity firms did better than they did.
Just consider management fees alone. Even though these are stated at the prototypical 2% of the “2 and 20” formula, most observers fail to understand that that 2% is not 2% of assets under management. For the first 5 years of the fund, it is 2% of the commitment amount. Remember that the general partner is in the process of buying companies and calls the capital from investors like CalPERS only when it needs it. After the investment period, the management fee level typically steps down. Most often it to a percentage of invested capital.
The net result is that the management fees as a percent of assets under management are much higher than 2%. Oxford Professor Ludovic Phaillpou has estimated them at 4%, based on typical patterns of capital calls and distributions. And don’t forget that the management fees are paid in full whether they are paid directly by the limited partners or shifted onto the portfolio companies via management fee offsets.
In recent years, CalPERS has been able to lower its management fees on new investments due to the size of its commitments. General partners have what amount to fee schedules, and investors that make commitments over certain size levels get breaks on fees. Mega funds also have lower management fees than smaller funds. And general partners also sometimes offer fee breaks for limited partners that make early commitments.
We checked in with Professor Phalippou to see if he thought his estimate applied to CalPERS. His comment by e-mail:
My best guess for fixed fees (management fees, organizational expenses etc.) for most funds CalPERS has invested in are about 4% of invested capital. It may be less for the new contracts they have signed; and it is less as a fraction of AUM when returns are positive. This total applies regardless of whether the fees are paid by the LPs or shifted to the portfolio companies.
Note that in its investment cost report in 2015, which was for fiscal year 2014, CalPERS claimed its private equity management fees were a mere 140 basis points of assets under management. Despite presenting a new, and supposedly improved investment cost report in 2016, it stopped breaking out private equity costs separately. CalPERS staff maintained in the 2016 report that this report included gross fees, not net fees.
We’ll return to this topic with a more detailed analysis in a future post, but we spoke to Phalippou last month about this claim. He found it to be “extremely unlikely”. First, CalPERS would have to be invested almost entirely very old funds to have such low fees. Second, it’s computationally difficult to figure out what the gross fees ought to be after the investment period. And on top of that, CalPERS would probably want to make sure its calculation of the gross management fee tallied with what the general partner actually charged, making the exercise even more laborious.
So to put it another way, Phalippou has considered CalPERS’ official stance on this issue and he does not buy it.
And let us not forget that the management fees are far from the sum total of fees charged. Private equity funds impose a raft of fees on portfolio companies, and in many cases, those fees are not fully offset against the management fees. Moreover, as the SEC and media have revealed, private equity firms also charge fees to portfolio companies that are not subject to management fee offsets, meaning those costs come fully at investors’ expense. Finally, despite last year being an overall crappy year for private equity, there still were no doubt some companies sold at high enough profits so as to have resulted in CalPERS paying some carry fees. That means that CalPERS’ general partners as as whole unquestionably profited more than the giant pension fund did last year. And this result gives a more vivd illustration than usual of the “heads I win, tails you lose” nature of investing in private equity.
You’re about to get scr*wed by Citibank.
The company is swapping your Citi Visa to a Citi MasterCard. You’ll get a new number, a new expiration date and a new security code.
That will totally mess up all your auto-pays. It has mine. You’ll have to spend hours calling the electricity company, the parking garage, etc. (Hint: keep a list.)
Citi’s explanation: “Visa and MasterCard collaborated to make this change. And there’s nothing we can do.” Go pound sand, dear Citibank customer.
There is one thing you can do: Call the number on the back of your card, ask for the president’s office in Sioux Falls and demand they give you 10,000 free miles — which they will.
But you have to be firm. And there’s nowhere in their correspondence about the free miles.
Kickstarter is a joy. I’ve paid money for two upcoming products. One is a bicycle mount for your iPhone that gives you GPS, road directions and video recording on your iPhone. The other is a helmet that does that and turn signals, brake light, etc. One is called Bycle and the other is called Classon. You can find more on both on Kickstarter.com.
Both will video my entire trip. That’s critical because if something happens I have a record. A friend got hit by a driver who turned suddenly. Her lawyer denied everything — until my friend produced his GoPro. The lawyer opened his desk and wrote a check for $75,000 — just enough to cover my friend’s hospital bills as a result of the accident.
You are master of your own body.
I now have several stories of people who were told by their primary care physician that they were “fine” — when they weren’t.
One died from melanoma. The other now has Stage Four prostate cancer, but is being treated for it by specialists. He’s still alive. Thank God.
The moral: It’s your body. You’re in charge of managing it. And you’d better be super aggressive about managing it. Don’t take “It’s fine” for an answer.
Australian joy.
My friend Rob Douglass retired to Bryon Bay, the most easterly point in Australia. Look what he spied in his driveway this morning:
The bear looks pregnant. I hope for Rob’s sake, she is. Fun to nurse little baby koala bears.
New Trump entrepreneurship. (I think it’s funny.)
Tell your kids to be careful with Pokemon Go.
+ A Frenchman arrested for trespassing on an Indonesian military base has told police he was playing Pokemon Go when he accidentally strayed off course.
+ Two kids got shot at by a frightened homeowner. They were in a car outside his house at 1:30 AM playing Pokemon Go.He thought they were going to rob him.
Harry Newton. Hats off to Amazon for issuing their own credit card — with great benefits, no expiration date, and an easy way of paying it each month. I continue to be amazed at Amazon’s constant innovation. My family never shops anywhere else. Amazon is always their first choice and always sells what they’re looking for. Amazon’s stock does well. Here’s it over the last five years:
You’ll notice I occasionally put an asterisk in the middle of a a naughty word like “screw*d.” I have to do this, otherwise corporate IT departments block my brilliance (?). Hence I can write scr*wed as much as I want. Which is stupid, since everyone still gets the message.
