The world’s most expensive investment fund? (Probably)
by Doug Brodie
/1. The world’s most expensive investment fund? (Probably).
It’s Vanguard.
This is a tracker fund. They don’t need a research department to run it, they don’t need a team of economists or maths gurus, the remit is to replicate what the US market holds. The missing figure here is $1.7 trillion, that’s the size of this whale of a fund. The reason this is the world’s most expensive fund is because Vanguard charges investors $692,000,000 to run it. It’s just a tracker, and Vanguard is a ‘non-profit’ so how does that work?? Why does it charge that much and where does the money go? Perhaps here is part of the answer from external Vanguard watchers in the US, David Nadig and Jeff DeMaso [riabiz.com]:
Executive compensation, incentives and bonuses, are also not disclosed. DeMaso estimates the new CEO will earn around $26 million a year.
And …
“Vanguard is entirely opaque. [Its] ads all promise me that there’s value in being an owner. So show me!” he [Nadig] writes. "If I’m the owner, how much am I paying people? How profitable am I and what kind of cash reserves do I have? If Vanguard has a surprisingly good year, will I get a dividend?" Nadig asks.
“I don’t know, because Vanguard won’t tell me,” he says.
Indeed, some Vanguard investors think the “ownership” they are assured they possess – far from bestowing privileges – has burdened them with chronic lacklustre service.
Most recently, Vanguard went so far as to caution customers they could be fired if they take liberties with call centres by telephoning too frequently or superfluously. See: Vanguard warns its phone-reliant investors of ‘termination’”
This is, of course, an American registered fund, not UK, where it would have to meet the challenge of proving ‘fair value’ to investors. Circa $700,000,000 to run a passive tracker? Fair value? What do you think?
You might also want to consider that if an investment with Vanguard is to make (your) money grow, then why does Vanguard back stock shorting companies with your money, lending stock which the shorters sell to try to push the value of those stocks down. Those stocks you’re invested in to go up.
“Vanguard’s securities lending programme is grounded in conservative principles and robust risk management controls. We seek to maximise shareholder returns while safeguarding our investors from the associated risks and give them the best chance for investment success. Our policy is to return all securities lending revenue, net of the expenses incurred in running the programme, to our funds and, ultimately, to the fund shareholders. We believe this creates a clear alignment of risk and reward and is in the best interest of investors. Vanguard doesn’t retain any revenues from securities lending.” ‘Net of the expenses’ – quite.
We’re not critics of how Vanguard invests, we think they have some brilliant products and its founder, Jack Bogle, was a brilliant saviour for retail investors, inventing dirt cheap and simple investments for US pensions at a time when our financial leaders were inventing such pension oddities as capital units and ‘box traded unit trusts’ to manufacture hidden commissions.
Our problem with Vanguard is its self-righteous marketing, not its products.
/2. Is this how your pension should look over your lifetime?
Yes or no?
This is pension income for a lifetime, it’s what we do, and – bluntly – if that’s not what you need as income in retirement then we’re probably not the right people to talk to. It’s not a ‘back-tested model’, it’s not asset allocated, top down / bottom up, it’s not ‘growth with a value overlay’. It is liability matching – your monthly expense liability matched by the income paid by the assets in your pension.
There are other ways of investing a pension in retirement, but we don’t know of any with such regularity and reliability of constantly rising income.
/3. The client query: Fancy a dabble in a hedge fund? (Ed: Why?)
There is what we call a ‘hard stop’ at the end of this section as to why we don’t use hedge funds, if you want to skip the detail.
Every newsletter and blog post we write references queries and thoughts from our clients: like you, they’re normal queries that everyone thinks about. You and me are the cannon fodder for 24/7 media, print, digital, TV, radio, all trying to get you and me to invest in their funds and products. We’re often invited to write up ‘money makeovers’ for readers of the Telegraph, or Sunday Times or Investors Chronicle – some we do, most we don’t. I’m afraid we’re a one trick pony – we just do retirement work and income construction for retirees.
So, no surprise about this week’s query about investing part of a portfolio into BH Macro and Amedeo Air Four Plus Limited. Both of these are highly specialised investments, created for specialist funds. They are listed on the stock market – not to make them available to retail investors like you and I, but so that the holdings of shares can be legally classified as ‘publicly listed’. This is important – if you go back to the Woodford saga, those funds got into trouble because they exceeded the % of holdings that were NOT listed, so, for example, a large pension scheme will have written limits on how much private equity it can hold which will be very, very small compared to listed equity (think 5-10% private versus 80-100% listed).
The primary question to ask when considering any investment is “What is my objective?”. Over the age of 50, ‘having a dabble’ is what you might do with £2-5,000 in savings, not a goodly percentage of the portfolio identified for delivering your lifetime income.
BH Macro is a hollow shell, it has never paid un sou in income and serves only to make an investment in the Brevan Howard Macro Fund (Cayman Islands) look like it’s a listed London investment. The assets are far from what the packaging suggests to the layperson, there is no income, there are no reserves and at the latest fund raising the Cayman Island fund tied in the London plc to a 12-month notice period for redemptions, which is probably why its shares are currently c10% below net asset value.
However, we like growth investors and have seen fantastic investment stories like Renaissance and Bridgewater. However, neither of those are of any use for income and they hold investment strategies that are naked bets on derivatives markets that can, and do, simply go to zero at expiry. At least with equity funds collapses are generally recovered, they have assets, balance sheets and reserves that can recover. This means that when a fund loses (say) 20%, it starts the next year having to make 25% just to make up the loss from the prior year, and it has to do that from scratch. So if you see a fund touting a good year you need to check what has just gone before.
The (almost) last word on BH Macro that we have is that its performance is not good – not least because it’s actually a dollar trading fund that is simply repriced into GBP for the London listing.
This is an annually discrete bar chart of the old & conservative F&C versus BH Macro. The basic idea of a hedge fund is that instead of buying actual assets it buys or sells bets on how an asset will move. Those bets are all very short term and can expire without value – so you can lose all your money, irrespective of the perceived quality of the firm/fund, because they use derivatives instead of ‘real assets’ so investors do lose big money as this report from Institutional Investor showed in 2023.
The note on BH Macro in the recent Investors Chronicle included the clear statement “Since launch in 2007, there have only been three calendar years in which the NAV has fallen, the worst of which was a 4.4 per cent drop.” Trouble is – and as the writer of that knew – you can’t buy the NAV, so for an investor that’s of no interest. If you want to purchase the NAV you have to buy an open ended fund like an OEIC. The share price fell in 7 out of the last 16 years, that’s 44% of the time; for reference, the FTSE fell 5 out of 16 and F&C 4 of the 16.
Institutional managers use these funds because they are seeking diversification away from the main asset classes, generally so that in a market collapse the agile hedge fund managers can fall less than the equity markets and BH did this in 2008 and 2020 as you can see. It’s a trading fund, it is not intended to be a ‘buy & hold’ as charts succinctly show:
Amedeo Air Four is an aircraft leasing company that is listed as an investment trust for the same reason as BH Macro. It buys aircraft and leases them to airlines. It has a problem – it owns giant A380 double-deckers that no one wants to use, and of the two airline customers it has, one of them, Thai Airways, has still not been fully released from being placed into administration in 2020. Amedeo does, however, pay a dividend and that is the reason for being recently covered by Investors Chronicle. The two risks it has are that the lessee airlines stop paying for the leases (as happened in 2020), and that the value at the end of the lease is lower than expected (think of leasing a car that you have to sell at the end of the term). The fund raiser, Nimrod, has done several of these and the information is very scant - so hard to do relevant due diligence. The companies are listed in Guernsey and so not available on Companies House.
The first version of this (as far as we can trace) was Doric Air One; the tenant was Emirates so probably good for the lease, however, the interim valuations show how quickly values can go awry with big aircraft:
It eventually sold the A380 it bought in 2022 for £25.3 million.
Professionally speaking it’s interesting to see Amedeo being suggested – it’s very, very speculative. If anyone remembers the markets back in 2008, the AAA-rated insurer had to receive a $180 billion bailout because several businesses it owned collapsed, including International Lease Finance Corporation, which had revenues of c$5bn from buying and leasing big planes to airlines. (What you probably don’t know is that it was eventually sold off to a company called AerCap Holdings that started life as Guinness Peat Aviation which itself was essentially busted in 1992, being bought out by GE and Texas Pacific).
Looking up the recent coverage in the Investors Chronicle report, it’s interesting to see that the fund manager who suggested it (who shall remain nameless) only holds 1.2% of his fund the Amedeo shares. It is promoted because it has a current yield of c11% - that’s not unusual though, and it should always make you ask why Goldman Sachs, JP Morgan, Barclays Capital and all the hedge fund operators would leave a yield that size open to the elements (like you and I)?
In short, memory teaches us this model can go very wrong, very quickly.
The hard stop: all our clients are classified by the FCA as ‘retail advisory’ which means it is our professional responsibility to ensure suitability. The FCA, FOS, FSCS and our PI insurers all take the firm view that such assets are rarely (if ever) suitable for a retail advisory client.
Of those regulatory bodies, it’s the Professional Indemnity insurers who hold the whip hand, and they say no. The reason they say no is quite simple – retail investors with appalling investment decisions who lose their money can complain to the regulator for free, nothing to lose so why not try it? The regulator, specifically the Ombudsmen, (Ombudspeople?), take the view that professionals must do more than steer away investors from unsuitable assets:
The Ombudsman concluded that XXXX Limited was at fault as it was listed as a joint trustee on the SSAS, meaning it had responsibilities in relation to the investment. Pensions Ombudsman, Dominic Harris, said the trustee breached requirements by letting the scheme invest most of its assets in the high-risk investment showing a lack of regards to Mr N’s financial interests. I find that the investment was one which no reasonable trustee would have made…
The regulator gets to define ‘reasonable’ and ‘suitable’ so we just don’t go there.
/4. Physically backed crypto?
WisdomTree has an ETP (Exchange Traded Product) that invests in Bitcoin. That crypto, according to PWC, is “a medium of exchange, has no intrinsic value in that it is not redeemable for another commodity such gold, it has no physical form and only exists in the network, its supply is determined by the protocol, not a central bank, and the network is completely decentralized”.
WisdomTree describe their product as “WisdomTree Physical Bitcoin is a physically backed Exchange Traded Product”. Hmm, it appears that the term ‘physical’ may be more marketing speak than ‘physical’ in the way that you and I might understand. As it then goes on to say:
This ETP is structured as a debt security and not as shares (equity) and can be created and redeemed on demand by authorised participants and traded on exchange just like shares in a company. This ETP is not a UCITS product.
Here’s a rule of thumb: if you can’t explain to your Mum then don’t touch it.