Singapore American Club Investment losses—true or false?

Charlie Munger has been Warren Buffett’s right hand man for more than 30 years.

And he’d have a predictable response if someone from the Singapore American club called him up and said, “Charlie, our club has been losing a ton of money with our money managers, what do you suggest?”

First, as one of history’s greatest money managers, he has seen plenty in his fifty plus years of money management. And there’s one thing that baffles him: why most people in charge of endowments and institutional money pay high fees for money management.

His advice?

“Save yourself a lot of time, money and worry. Just put your endowments into index funds” (Lowe, Janet, Damn Right, pg.235)

One of the reasons he suggests this is the heavy fees that accompany active management and the fact that very few money managers can outpace a diversified portfolio of indexes over time. According to Yale University’s endowment fund manager, David Swensen, those that do outpace the market, do it by a long term sliver, and the majority that lose to the indexes, lose by a significant long term margin.

I’m not going to suggest that the numbers reported in the Singapore paper Today  are accurate. But according to the article, the American club had $56.54 million in assets during the fiscal year, June 30, 2008 to June 30, 2009. And according to Today, the club paid $325,000 in money management fees. That constitutes a .58% fee. That’s not high. Most individuals pay three times that for their personal portfolios of mutual funds. So the allegedly poor results of the American Club’s investment portfolio probably had nothing to do with their fees.

(If the article is no longer available at the Today newspaper you can read it here)

During the fiscal year, June 30 2009 to June 30, 2010, the club reportedly had $63.5 million in assets. If, as reported, they paid $455,999 in investment fees during their fiscal 2010 year, then they paid 0.7% of their portfolio in fees.

But the losses reported by Today might not be accurately representing such a seemingly low fee account:

“Today has learnt that after losing $16.58 million in bad investments in its 2009 financial year, The American Club has recovered less than $850,000 of the losses on the disposal of its investments a year later.”

Assuming that they lost $16.58 million in fiscal 2009 (as reported) that’s a loss of 30%. If they recouped $850,000 during fiscal 2010, they clawed back less than 2% the following year.

To get their investments back to where they were two years ago (June, 2008) the American club would have to gain more than 41% from June 2010 to June 2011.

When you’re down 30% in one year, it takes 42% the following year, just to break even.

I’m going to assume that the data provided in the article in Today is incorrect. It almost certainly has to be.

(If the article is no longer available at the Today newspaper you can read it here)

If you simply invested in a couple of indexes in June 2008: 40% in a U.S. bond index (Ticker symbol SHY) and 60% in a total world stock index (Ticker symbol VT) in June, 2008, you’d actually be recording a small profit by June 2010.

Your money would be 43% ahead of the reported investment results of the American Club over this short 2 year duration. For the American club’s money to catch the diversified indexed portfolio, it would have to gain $25.2 million in fiscal year 2011, and the indexed portfolio would have to sit still. That’s a tall order.

This is one of the reasons I don’t believe the American club’s investments did this poorly.

That said, endowments and non-profit organizations need to compare their results to a diversified basket of indexes, allocated across stocks and bonds. That should be their benchmark: not whether they made 15% in a given year, or lost 30% in a given year. There has to be a benchmark to compare to.

Again, it’s dangerous to assume that the reported losses for the American club are accurate. But with Vanguard Asia  present in Singapore to invest pensionable money and institutional money—in the manner outlined by Charlie Munger—it’s tough to imagine the American Club going with a different option.

The club, after all, did own Hedge Funds, according to the article. You never know which hedge funds are going to do well ahead of time, and although some do very well, the majority do far worse than most data bases report, after survivorship bias and backfill bias. …read more

The odds are high that—no matter what the historical performance of the American Club’s portfolio—they’d be wise to follow Charlie Munger’s recommendation, and give Vanguard a ring.

So if you were given the reigns of the Singapore American Club’s portfolio, what would you invest it in?  And why?  Be really specific.  There’s always a chance that someone’s going to be listening.

(If the article is no longer available at the Today newspaper you can read it here)

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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11 Responses

  1. DIY Investor says:

    You're right that it wouldn't have been easy losing 30% in 2009 but it would have been possible. The market was down sharply in the first part of the year. I had 26 clients and 2 "freaked out". One couple said they couldn't take anymore and on March 3rd asked me to liquidate their account. I asked them to please wait until the end of March and then we could reevaluate after looking at the statements. They agreed but then called me 2 days later and told me to sell everything. The market bottomed of course on 3/9.

    The other client kept comparing her results with the peak in October 2007. She was down 22% and said she needed to get all in Treasury bills!

    Neither of these clients should have been in stocks but this is what a volatile market will find.

    In terms of the "American Club" the 4% – 8% management fees are outrageous. They should pay in total less than 75 basis points. This includes advisor fee, fund fee, commissions, impact fee, and bid-ask spread.

    They would have a solid portfolio with 24% in IWD (Russell 1000 Value), 24% in IWF (Russell 1000 Growth), 11% in EFA (Europe, Asia, Far East Index), 30% in AGG (U.S. Bond Market).

    This portfolio is low fee at .21%, low turnover, low commission. It has achieved a year-to-date return of 5.47% as detailed at

    http://rwinvesting.blogspot.com/2010/10/ytd-perfo

    In 2009 it achieved a return of 20.8%.

    My preference would be to substitute a healthy portion of CSJ for AGG. I'm concerned about the bond bubble and CSJ provides a yield in excess of 3% but will perform much better in a rising interest rate environment. Also the American club may want to increase the exposure to the Far East by increasing EFA or similar funds. They/you would have a much better feel than I for economic activity in that part of the world.

  2. Davo says:

    Hey Andrew… keeping the KISS principle in mind & using Vanguard Singapore and rebalance accordingly every 12 months

    1/3 in the Singapore Bond index (A35)

    1/3 in the Singapore Stock index (ES3)

    1/3 in the World Stock index (VT)

    However, maybe the SAC members would prefer a more US based investment, say…

    1/3 in the US Bond index

    1/3 in the US Stock index

    1/3 in the World Stock index

    Q… Which would be better option and other implications, when taxes & fees and when the exchange rate US dollar / SG dollar are taken into consideration??

    And, how would they go about implementing the second option from Singapore?

  3. @DIY Investor

    Robert,

    Thanks for posting such a detailed suggestion. Considering that you've been in the business 30 years (investing for individuals and institutions) I greatly value your participation.

    Your portfolio suggestion is excellent. And I'm not saying that just because you recommended indexes as well!

    I re-read the article post I originally wrote and realized that I misplaced a decimal point. Fees were only 0.58% and 0.7% respectively. But I doubt that included management fees for their mutual funds and Hedge Funds. Do you think it would?

    I also noted that their reported fiscal year was June 30, 2008 to June 30, 2009. During this period, they dropped 30% and during the following fiscal year, they gained just 2%.

    Based on an ultra simple portfolio, I found that just going with 60% in a world stock index and 40% in a bond index would have beaten the American Club's portfolio by more than 40% over just two years.

    As you know, this isn't "looking in the rearview mirror" kind of investing—it's a suitable benchmark for endowments and pensions. By this yardstick, if the American Club's money really did as poorly as reported then the fund managers have given themselves a fairly unsurmountable liability.

    Do you think they got scared, like your client who bailed at exactly the wrong time?

    In the newspaper article itself, it was reported that the manager suggested that they Hedge Funds they were in actually reduced risk. Hmmmm.

    I think the results of the account you proposed have had very similar historical to the results to the account I proposed.

    And for kicks, I looked at my investment club's performance from June 30, 2008 to June 30, 2010. It's a 100% equity portfolio, so it should have been hairy-raisingly scary compared to a pension fund or endowment fund's stability over this rocky period. But it made 5.8% annually during this time period. That puts it more than 50% ahead of the reported results of the American club's portfolio during the same time duration.

    I think you're right to be concerned about the bond bubble, but how far can it fall in your opinion? It sure won't be an equity like drop (ala 2008/2009) will it? What do you think?

    Again, I really enjoy reading your comments Robert.

  4. @Davo

    Hey Davo,

    Based on their Singapore location, it would be easy to invest using option B and a local discount brokerage, like DBS Vickers. And it would make some sense too.

    Not only that, but the second option you gave would have outperformed the proposal that Robert and I gave because the Singapore dollar has strengthened so much relative to the greenback over the past two years.

    That said, I don't think this is "rearview mirror" investing either. It's also a responsible benchmark of international equities and bonds.

    And the rebalancing annually would have really juiced the returns.

    When the anniversary of the account, on June 30, 2009, revealed a lower stock percentage than what the club started with, the manager would rebalance the account by selling some bonds and buying some stocks at the lower price. But like one of Robert's clients (see his comment above) the managers of the American Funds money might have been to scared to do that.

    It would take just a few minutes a year–and not a heck of a lot of courage.

    Or, as fresh money arrived via club membership fees, the manager would buy the laggard (whether it be bonds or equities) to bring the portfolio allocation back to its original starting point.

    Maybe the American Club should hire you Davo!

  5. Davo says:

    Ha ha Andrew!

    I cheated a bit… I just borrowed what you said elsewhere in your blog — how simple was that!

    They should just read this blog and they could do it themselves and save all their fees (or simply hire you on a fixed fee… does $50K/year sound ok??:)

    My input was that you mentioned (somewhere) that as you get closer to retirement you should rebalance your portfolio so, more or less, so, if you're aged 50, 50% should be in bonds….

    Considering the American club wants to be in existence many years in the future 1/3 'seemed' appropriate to me. (… & having said that, if they keep investing the way they do they might not be around in future.)

    However, one of the things I found troubling in the report was this comment:

    "According to the club's minutes, Morgan Stanley Asia (Singapore), who are the club's investment advisers, explained that the use of hedge funds was to reduce risk."

    Hedge funds… reduce risk??? Surely not??
    https://andrewhallam.com/?s=Hedge+Funds

    Question…. out of curiosity, if they did do as I suggested… what would their portfolio be worth if they invested the $56M — as stated by one irate member. (I assume that's the FY 2008-2009 not 2009-2010 and if it was 2008-09, what's in store for the American Club this year FY 2009-10 ??)

  6. @Andrew Hallam

    Hey Davo,

    I don't know what that proposed portfolio would do ahead of time, but there's one thing we do know: it would beat the vast majority of active managers after all its fees and expenses.

    And choosing 33% for the bond allocation is a good idea. Like an endowment, it needs to be able to grow, and it also needs to be "used", so a degree of stability is important.

    If that $56 million was invested in June 2008, using your prososed allocation, it would have grown about 5% since then. When reading that article, it suggests that the fund is bigger than it was—but one reason for that is the income generated by the American Club, via fees to members etc. Again, I'm really not sure that those results were accurately reported though. If they were, they might want to tar and feather the managers–then fire them.

  7. Jean says:

    Hi Andrew, not sure if you've seen the follow up in today's paper from the President of the ACS and the Investment Sub-committee Chair. Have a look, .

    According to them, there were several inaccuracies in the Today Paper's article, and the Club selected its new investment advisers this past July. No mention of who they are.

  8. @Jean

    Thanks Jean,

    It would have been really tough to lose the kind of money that they reported losing. I am curious, of course, to know how much they really did lose. It's none of my business, but it's fascinating.

  9. Scott says:

    Andrew,

    First, newspapers are required to fact check what they report…that doesn't mean that they always get the facts right, but checking the $16 M loss figure wouldn't be hard since that figure is openly available to any American club member (I am not one) upon request. So it's highly likely that they did lose 30% in 2009. If the quoted figure was erroneous, the American club would have refuted it in a response letter.

    Second, while capital preservation and conservative growth should clearly be the focus of the American club's capital (in SGD obviously, the reference one commentator made to USD doesn't make sense), the problem seems apparent – they hired Morgan Stanley as an advisor and then use industry professionals to oversee the investments. That means a) they were probably paying much more than they should have for advice, and b) they almost certainly had investment committee members who pushed them into overly risk products, e.g. hedge fund employees who pushed them into hedge funds, etc. That makes no sense, but of course would be par for the course for people who think only about their own self-interest (more $ into hedge funds is better) or who have already "drank the koolaid" and really believe the stuff they spout to potential investors about the value of investing in hedge funds. Re-read the article, there is a passing reference to alternative investments…crazy, sad, but true.

    A capital account like that of the American club should be in very risk averse investments to maintain it's value, it should be about 60% SGS and the rest in Singapore or world shares. Hopefully the American club has learned its lesson and will overhaul its asset allocation guidelines and save $ by choosing lower fee (and better) investment management.

  10. Scott says:

    I JUST READ THE AMERICAN CLUB LETTER – didn't see that previously – that letter makes it pretty clear that they DID lose as much as was reported. The only inaccuracies that they cite as 1) the total assets under mgmt, and 2) the gains this year after the fall in 2008-2009.

    Overall, their letter was about the weakest rebuttal possible, says "yes, we got killed, but so did others."

  11. That's interesting Scott,

    My guess is that they also paid far higher fees than I intitially calculated. If they paid someone to buy mutual funds and hedge funds, then there are two layers of fees there. It likely cost them a total of 2% on assets a year. In that case, if they can make 6% annually, they'll give away 33% of their gains to the industry's "Helpers"

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