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| Study Shows Lack of Confidence by Fund Managers |
| Tuesday, 01 December 2009 00:00 | |
December 1, 2009Study Shows Lack of Confidence by Fund ManagersThe Oct 16th issue of InvestmentNews had an article discussing the number of mutual funds whose managers owned shares in their own fund. Morningstar data showed, of the 4,383 funds studied, less than 3 of 10 fund managers had a significant investment (over $100,000) in their own funds. Only 9% of fund managers had more than $1 million and, shockingly, 51% had no investment in their own fund.
If I were placing my money long term with a manager, I'd want the assurance that the manager had enough "skin" in the game to really hold their attention and make their efforts more than just a job.  A simple way to do this might be to require fund managers to take a large portion of their management fees in fund shares that they were required to hold long term. That would certainly align their interests with their shareholders' better than the current system. It is a sad statement when a fund manager does not have enough confidence to voluntarily invest in the funds he offers to the public. Perhaps the managers understand the limitations of investing long term in funds that often have rigid investment parameters. Mutual funds can only invest as their prospectus says. If the fund has a policy to stay fully invested in a specific category of investment, the manager literally cannot get your money out of harm's way even if he sees a major market decline coming. Most investors expect the fund manager to fully manage their investment, without understanding the limitations that prospectus restrictions can create. The fund managers expect you to sell out if you want to move to cash. They won't do it for you. The ability to move completely out of a market in decline to preserve account values is hard to find in the mutual fund world. And it is precisely this function where Hepburn Capital has built its niche. If markets begin what appears to be a significant decline, I don't just wring my hands and hope things get better, I do something about it. And importantly, most of my savings is managed the same way yours is. At Hepburn Capital, I eat what I cook.
My Favorite Event of the YearI just love Acker Night when the Courthouse Plaza and the blocks around are filled with music from over 100 musicians and groups filling the businesses and venues on downtown Prescott. Streets are blocked off, and the sidewalks runneth over with folks taking it all in.
I consider it the social event of the year in Prescott.
And my wife Cathleen was there at the beginning, in 1988, when Lavon Anderson, a longtime supporter of music education, birthed the idea and became the driving force behind this terrific event. Over the years Cathleen has sung at Raskin's Jewlers, Lamerson's Jewelry, and for the last 10 years in City Council Chamber with the world renowned Angelorum choir from Yavapai College. The 18 women of Angelorum are led by Dr. Will Fisher, and they sound like Angels singing. The precision and vocal finesse is like nothing else in Prescott. Angelorum is also in the running to represent the United States in an international chorale competition in France in June of next year. This is a really special group of singers and you can hear them perform at Acker Night. Acker night is Friday December 11th from 5:30 to 8:30 p.m. I'll look for you around the Plaza.
How's the market doing?A few years back, photos were circulating on the Internet of incredible building projects in the United Arab Emirates (UAE) state of Dubai.
Perhaps you saw the reports of their indoor downhill ski facility or the world's largest man-made island shaped like a palm tree or one of the world's tallest buildings, the spinnaker-looking Burj hotel, with tennis courts a quarter of a mile up.  Several times, as the emails arrived, I responded, "but what if no one wants to live there?" After all, Dubai, has virtually no oil. Its economy is based upon real estate development, tourism and financial services.
Last week, as we all ate turkey, Dubai ate crow as the main developer, Dubai World, teetered on the brink of bankruptcy, defaulting on $60 billion in loans. I doubt if this specific default will create lasting damage to the world's financial markets, Dubai World will be no Lehmann Brothers since the UAE is sitting on $500 billion in reserves and has pledged to bail out Dubai, but the failure has shaken the foundations of the world's financial systems. The concern is that if the Middle East, with perhaps the soundest finances in the world can have devastating economic problems, is there any place that one's money is really safe right now? Sadly, not. This incident will cause investors world-wide to reassess how much risk they really have in their portfolios, and for that reason it has the potential to throw a wet blanket on the world markets. Accounts at HCM are well positioned to withstand a shift in world markets, so this need not be a cause for concern for you. But it sure makes for interesting times.
What We Were Saying A Year AgoA year ago this week, I was quoted in both CNN Money and Fortune .
Fortune wrote: "[in this economic environment] everyone is going to lose something," said Will Hepburn, president and chief investment officer of Hepburn Capital Management in Prescott, Ariz. "The winners will be those who end up losing the least." That is true. Last winter, investors lost money in virtually all asset classes. And, savers found themselves reaping much lower interest wherever they went. Those who did best were able to switch from growth investments to capital preservation l ast winter, and then back into growth after the market bottomed in March. Flexibility is the key to investment success in these fast changing markets.
 Riddle of the WeekQ: A certain crime is punishable if attempted but not punishable if committed. What is it? A: Suicide
What's Going On In Your Portfolio?There have been no changes in our portfolios since our last newsletter.
Our Flexible Income* model remains fully invested in high yield bond funds. High yield prices have gone flat during the past month, but we still collect nice dividends, so it is worth being patient with these investments while the market sorts itself out. HCM's Careful Growth* model still holds 40% in foreign or gold mining stocks, 30% high yield bond funds and 30% cash. This remains a very high risk time in the stock market, with signs of possible problems cropping up every day. I am being cautious right now and waiting for some of the risk to subside. Hopefully the next couple of weeks will allow us to see what direction the market wants to go. I get occasional inquiries about buying gold in the growth portfolios. I like to own things in up trends and gold clearly qualifies in that regard, but ever since October when the government of India jumped in as a big buyer of gold, it has been ridiculously high, making this a very risky entry point. History suggests that we will get a lower price before long, so I am waiting for the price to come down before buying.
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* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
Municipal Income Strategy Description and Performance Information
Socially Screened Investments Description and Performance Information
Socially Screened Investments Description and Performance Information
Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold. Therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned on this site may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Investments made are not insured by the FDIC and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, a Registered Investment Adviser. Adviser will not transact business unless properly registered and licensed in the potential client's state of residence.