Singapore American Club Investment Losses

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.

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 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.

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.