Saturday, October 6, 2012

The Magic Words of Money Management Part 3 – “Best Ideas”

The Magic Words of Money Management Part 3 – “Best Ideas”

Whether you are a retail investor or big institution, you’ll probably be enticed to invest in a portfolio of “best ideas.”   You might get a phone call from a stockbroker offering you access to the research department’s “best ideas.”   Some mutual funds or institutional managers offer a specific product that is supposed to consist of the crème de la crème of the firm’s insights.  Who wouldn’t want a “best ideas” portfolio? 

You do have to wonder what other kinds of ideas there are.  If a manager is offering a “best ideas” portfolio, does it mean that some of his other products contain “mediocre ideas” or even bad ones?  Is some unsuspecting client getting the “regular ideas” or reheated leftovers? 
Napkin #10 (1999)

In most instances, “best ideas” is just marketing hype.  The analysts and portfolio managers who put together portfolios aren’t good enough to differentiate between their best investment ideas and their reasonable investment ideas.  If they were able to discriminate, they’d stick to best ideas because those ideas would create outstanding performance.

Once in my career, I witnessed “best ideas” at work, and it was evil.  I was conducting due diligence on a real estate fund.  In the course of investigating the investment manager and the parent company (a large investment bank), it became apparent that the parent wanted the manager’s “best ideas” for its own portfolio in certain Asian markets.  In other words, if the manager unearthed an outstanding real estate opportunity in China, the parent company had the right to make the investment, rather than leaving it for fund’s investors.   It was just one more reason why I’m not keen on investing with money managers owned by big financial companies, like banks (I’ve got tons of reasons, which I’ll get to at some point in the future).

After just three posts, you should be getting the gist of the pitch by now.  If you can recite the following sentence with utter conviction, you have a future in money management: “We offer exclusive access to a customized portfolio of our best ideas generated through proprietary research.” 

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