A study of Fund Management

01 Apr

The LAPIS WAY vs The Traditional Method

by: Andreas Wueger, CEO, LAPIS Asset Management Ltd.

There is an old adage that says “simplicity is the epitome of effectiveness“. At Lapis we are committed to incorporating this expression in the way we both manage our investment portfolios and arrange our investment strategies. We have eliminated the hype and mystique that often surrounds investment portfolios, are committed to plain English for clarity and understanding by our clients and finally allow the portfolio results to speak for themselves. It must be remembered that there is no harsher judgment of performance than that from the client.

To us a simple but effective investment strategy is key and Lapis’ formula is therefore based on a disciplined five pronged approach:

Lapis Asset Management

1. Four main asset classes globally. Our own research has established that ALL international companies listed on the world’s major stock exchanges fall more or less into one of the following four categories: Equities, Bonds, Real Estate and Commodities. At Lapis the funds available for investment is invested equally in each of these asset classes i.e. 25% in each asset class. This represents LAPIS CORE portfolio which is in essence a growth strategy where 75% of the funds are allocated to ‘equities’ (three of the four asset classes) and 25% to bonds. Our conservative and balance investment strategies includes the LAPIS CORE portfolio except there is a larger bond content and thus the LAPIS CORE portfolio is reduced proportionately. Thus the balance and conservative portfolios will show the LAPIS CORE allocation reduced to 15% and 12.5% respectively.

2. Quarterly rebalancing. All our portfolios are monitored quarterly and, irrespective of performance during the period, rebalanced to reflect the original LAPIS CORE allocation for each strategy. The reason for this is to ensure profits are taken from any performing asset class(es)and reinvested in those asset classes that have underperformed. This is termed the cost average approach. In this way the client benefits in two ways over the longer term, the first by averaging down the price of the shares bought and secondly the advantage of receiving additional shares.

3. Cash flows. It is our view that cash will always flow where the opportunity for better returns are seen to be greatest or seek a safer haven in times of market turbulence. Thus our simple but effective strategy is to ensure our clients are in a position to benefit from this flow of funds AUTOMATICALLY and IMMEDIATELY without the need to reposition the portfolio. As an example; in todays economic climate where cash returns in the major currencies are negative and the quantitative easing (printing money) by governments has created a wall of cash seeking placement, it is unlikely that cash will remain on deposit with banks with interest rates at near enough zero %. Cash will therefore seek better returns consistent with acceptance of risk i.e. volatility.

4. Minimum costs. At Lapis we believe in providing added value for our clients. Costs can represent a drag on performance and therefore we aim to keep these to a minimum. The LAPIS WAY ensures there is no need to buy and sell individual stocks/shares based on an army of researches dictating geographic areas/asset classes of potential benefit all of which add to costs. See the cost comparison below.

5. Consistent returns. There is nothing more debilitating to our or any client when they witness their portfolio values gyrating wildly. Our aim is to reduce this volatility and thereby provide our clients with consistent returns over the medium to long term. The LAPIS WAY has successfully proved this by delivering results exceeding our clients’ expectations even during the global stock market crises. For our clients and potential clients Lapis offers portfolios in the following major reference currencies: USD, EUR, CHF, GBP, SGD, AUD & YEN.

What makes the LAPIS WAY so different from the other fund managers? First let us look at it from an historic point and then explain our raison d’être. Anthony Hilton, a respected City Commentator for the Evening Standard newspaper published daily in London in his recent article put it succinctly;

“Pension consultants have been saying for many years that investment managers add little to no value to funds under management in mature well regulated markets at a high cost. This was proved 10 years ago whether the asset manager was a generalist or a specialist. The main difference being that the specialist charged more for their underperformance in view of their skills. A recent report reconfirmed this same message that the pension funds failed to beat the market and remain costly. No one can beat themselves in a race and it also arithmetically impossible for all fund managers to beat the market because they represent the market.”

This applies as much to the pension funds as it does to portfolios being managed for individuals.

As will be ascertained from the above statement, fund managers rely on the same information data such as Daily Market updates, Strategy overviews, Overweight/Underweight positions and recommendations/conclusions from an army of researchers to determine their portfolio positions. Therefore it should come as no surprise that as a result, underperformance is replicated universally as their assumptions are based on the same information inputs.

At Lapis we like to lead from the front and remain ahead of the competition in providing superior returns at minimum cost for our clients who are after all entrusting their money to us to maximize their wealth. In establishing the LAPIS CORE portfolio concept, we feel we are ahead of our time. We were naturally concerned that, having experienced a number of ‘market-quakes’ over the past 40 years, many of our competitors would have seen the opportunity and jumped at implementing the same investment strategies. We need not have worried as old habits die hard and they remain firmly entrenched in best of class, opportunistic, active management top down, bottom up approach at all levels. Thus underperformance of benchmarks will continue while costs increase yearly for most of the fund managers.

So who bucks this trend?

Step forward – Lapis’ Asset Management remains unique and exclusive.

Thus ‘herd instinct’ or the Traditional Method remains alive and well. However, a note of caution must be given here as it can be dangerous as we shall see later that pressure to outperform, threat of losing a mandates has its consequences. Once again let us quote Anthony Hilton from his recent article:

“History has shown that those fund managers off the pace and who are likely to lose the mandate if they fail to improve take bigger and bigger risks in the hope of getting back into the game. Should they succeed much of the gain is eaten up by higher fees for performance rather than benefit the fund. The term for this is asymmetric risk – heads the managers take the winnings and tails the client picks up the losses”.

Repositioning of portfolios as future global trends are anticipated, market patterns observed with the use of the ‘Best of Brain’ breed, analysts etc inevitably means costs including transactions costs. These costs must be paid for and are always absorbed by the client. And transaction costs impact on performance. Success of a fund manager remains the preserve of either the very inspired or guru. Despite this, clients are made to feel that their interests are well looked after as detailed explanation of the complex information flow from the mass media is received by the banks and then analyzes for their ultimate benefit. Let us not forget the fund managers represent the market.

Again quoting Anthony Hilton;

“The genius of the fund management industry is its ability to persuade clients to part with their money and to pay them to pursue the impossible dream”

So where can this inspired fund manager or guru be found?

Step forward – Lapis Asset Management provides added value by keeping costs to a minimum

Let us compare a typical cost structure of a discretionary portfolio management service and that for Lapis.

Discretionary Portfolio management service:

(Private Bank)

Custody fees – 0.3 % p.a.

Portfolio Management fees – 1.5 % p.a.

ETF’s

Average Cost of Funds

Money Market – 0.2 % p.a.

Bond Mutual Fund – 0.75 % p.a.

Equity Mutual Fund – 1.5 % p.a.

Hedge Fund 2 % Management Fees

+ 20 %Performance fees p.a.

Fund of Hedge Funds – 6 % all included p.a.

Structured Products – 3 % – 5 % on every issue

General transaction costs 0.5 % – 2.5 % p.a.

*depending on the frequency of trades

On average a client pays every year fees of between 2.5 % – 4 % for the privilege of a discretionary managed portfolio compared to 1.6% pa for a Lapis portfolio. The facts are beyond dispute and the conclusion to be drawn is obvious.

Take as an the example the average return of the US stock market which during the last century has provided a return of between 5 % – 7 % p.a. (say average of 6%). If the client is paying an average 3% for their portfolio management service, how can the fund manager achieve the average return of 6% to ensure the portfolio does not underperform? The way it is done is to increase risk (and therefore volatility) by 50% just to maintain the average return. But it doesn’t stop there. If the banks claim to outperform the market on a consistent basis is correct, it means more risk needs to be taken. During periods of rising markets, this ‘Active Portfolio Management Service’ usually produces below benchmark returns but still positive results. The toxic mix during market correction of expensive services, human emotions and risky assets can produce disastrous results in the short and long term.

So where can a client receive consistent performance with reduced volatility?

Step forward – Lapis Asset Management with targeted volatility

An old African proverb states ‘only a fool tests deep water with both feet’. Thus risk means many things to many people and it is important that risk is understood properly. ‘More Risk does not necessarily mean more return’ and it should be remembered that ALL assets classes (including cash) have risk either at a higher or lower degree. One aspect of risk is performance as measured against a stated index. Underperforming the index on consistent bases has a HUGE negative impact on the value of an asset. Again to quote Anthony Hilton:

“Statisticians mention that in order to determine whether it is a fund managers’ skill or luck that provides outperformance requires a15 year view by which time the client has probably experienced a permanent impairment of assets.”

So where are consistent returns to be obtained?

Step forward – Lapis Asset Management target consistent returns.

Readers may draw the conclusion that having their assets managed is a mugs game and striving for better returns is really pie in the sky. It should be remembered that no person has increased wealth by sitting on cash. However, as one ancient Greek philosopher stated ‘wisdom is the principle thing and in thy getting get understanding’. At Lapis we try to ensure our clients have the wisdom and understanding of how their assets are managed and by handing their assets to Lapis experience the LAPIS WAY and ultimately the superior returns sought after – of course at less cost and risk.

For further information please visit our website: www.lapis-am.com or send an email: info@lapis-am.com

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