US broker compliance restricts.
Below is an exchange I recently had with an US Morgan Stanley broker I used to work with. I initially had written him why not do some more direct investing in countries like Thailand, rather then just "top down asset allocation" into the large cap, often the laggards. Here is how he answered and how I rebutted back.
Dear Paul,
I am well aware that finding undervalued, small cap stocks is quite fun, and can be very rewarding. I have several in my own portfolio. The same argument could, (and has!) been made for small cap stocks here in the U.S., as well as in most worldwide markets.
The reality is that we do have large amounts of money to invest. Again, our minimum account is $10 million, and the average is a multiple of that. That isn't a problem, and doesn't condemn them to mediocre returns. On the contrary, if you look at the most successful pools of capital in the U.S., like the Harvard and Yale endowments, or the Weyerhaeuser pension plan, their track records vary from the high teens to low 20's for the last fifteen or twenty years. While they have billions to invest, they divide the funds between a wide variety of asset classes and select "best of breed" managers to invest the money.
That is exactly what we do for our clients as well. Mediocrity doesn't come to play in any of our arena. We have best of breed asset allocation teams, best of breed investment managers by class (we've placed about $50 billion as a firm outside of MS in a variety of managers) including the Weyerhaeuser pension team who now work for us.
We invest in private equity around the world, stocks around the world, real estate around the world, and hedge funds around the world. We do it in a way that allows us to make a meaningful impact on our clients'
portfolios, and measure the portfolio risk on a systematic basis. The results are nothing less than exceptional, and compare quite favorably to the returns that you have posted.
So, my friend, while I understand that you are having fun and finding interesting, exciting and profitable small cap stocks to invest in, based on what I have seen we are certainly not doing our clients a disservice by not doing the same. The great thing about a worldwide market is that there is opportunity for all of us.
Best to you,
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Dear ..
In my days, one main key advantage of having a Morgan Stanley account was that for various wealthy clients it was a way to invest *directly into pure equities, worldwide*. Not through funds, or funds of funds, i.e often high expensed asset managers -with their hands tied due to their very large capital under management.
No, au contraire, these clients got direct & pure equity ownership and this was a huge advantage which I grasped, and my clients benefited first hand.
You saw the clear evidence at my web site, showing how mid and small cap stocks here have outperformed the local index by nearly 5 to 1, over the past half decade.
Back in 1986 after a few months at your great employer, I asked once why the broker floor book shelf racks do not have the various fund prospectuses? "Real men don't buy funds" I was told by Mike Smith. While this is an old and silly saying, it rang a bell with me. Later I much understood the reasons. BTW, in those days MS did not sell any funds because it was rightly believed that wealthy individuals would do better buying individual securities themselves. (For ther brokers as with me that time, it proved right then it does today).
Direct equity ownership *has always had various key advantages*, along with a few (I would say a bit overblown) disadvantages. As you must know, there are a number of very wealthy families whom travel the world regularly and only invest directly, not though any asset managers -nor funds. They refuse and avoid to speak to "private bankers". They have understood that direct ownership often results in superior performance, and I have seen this in action for 25 years! Ha, my very own success here was built on that very truism.
Now you may go on and around the rhetoric of asset managers and asset allocation etc.., but the fact is, your clients hands are tied by your overly fanatic SEC and internal compliance rules. We both know that its nearly impossible for you to find a good stock (outside the US) and position clients in it, without getting a call from your compliance officer :)
Hence, it would be fairer and bit more objective if you just stated that besides your structure, you simple cannot buy individual global securities, mostly due to US imposed compliance reasons. Surely you can still buy stocks on the MS current buy list, but these are, again by very definition the large cap stocks, tailor picked for institutional investors, not high net worth families. :)
US compliance and US regulatory chains are the key reasons you are obliged to operate the way you do; but that is in fact often not the best way to achieve above superior returns. Of course it is not in your interest to admit this to your individual clients -nor to people whom don't know the true insides' of your overly regulated industry.
This does not mean that your funds have not done well, its just that they could have even done better, without those compliance chains dilluting it down.
Like that Yale University endowment manager you surely admire once said: "The best investment returns are often found in some of the darkest corners of the world". Yet those very investment jewels are and remain completely off your radar screens. Again, mostly due to US broker excess compliance... however, some wealthy individual clients are catching on.
Best Regards,
Paul,
www.thaistocks.com
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And here was yet another response I had sent him earlier:
Dear
Thanks for taking the time to respond. Understood.
I been on location for 16 years here and study after study shows that proven talent with *on location experience* is hard to beat, especially if you don't have any conflicts of interest, like most brokers do with their research.
The fact is in Thailand the smaller and mid cap advantage has been huge and well beyond just "having fun". The large cap stocks have immensely underperformed here, no matter what any Harvard study says. :) The up to date evidence is posted as a free article on my site.
My focus has always been "bottom up" and local insights and understanding, not market timing! Most of all my aim is performance and in that -its been well above average. Un-leveraged at 40 to 60% per year, and this for years. Last year was 85% on the advocated model, again with no margin loans. Now I have a hard time believing your returns come near that. :) I also think many wealthy families, whom travel the world, and are starting to understand the evidence, that pooling of funds is not necessarily always to their advantage.
Happy Morgan Stanley Christmas Party!
Best Regards,
Paul Renaud.
www.thaistocks.com
