Wednesday, October 20, 2004
ISIS: a logical investment strategy?
Of the astronomical number of trades executed on the stock exchanges each day, small potatoes chancers like myself initiate only a tiny proportion. The rump of the volume comes from institutional investors: professionals managing millions and billions of the public's money, usually through investment vehicles such as unit trusts, pension funds or investment trusts.
Fund managers are richly remunerated, typically receiving a six-figure basic salary. Each fund manager will have access to an in-house research team and a panoply of research and opinion from investment bankers. This safety harness doesn't come cheap, significant (and often opaque) administrative expenses are incurred by the investor and the effect on returns pulls and constrains performance like Jupiter influences a passing projectile.
The size of funds in place limits the opportunities managers can capitalise on - often there is simply insufficient supply of stock either in the market or in existence for capital to be ideally allocated. Options for investment are thus limited and an industry-wide aversion to stock specific risk results in a high correlation with the market portfolio itself. The managed funds can thus only significantly outperform by taking high risks or via prescient stock-picking approaching the theanthropic.
Further, an increasing amount of evidence and opinion tells us fund managers do not produce the returns to justify their salaries.
This article from Scotland on Sunday compounded my scepticism of the fund management industry and confounded my confidence in the knowledge and professionalism of the managers. I sat, as bewildered as a pygmy at a bar mitzvah, reading this twaddle involving ISIS fund management's Derek Mitchell:
ISIS Asset Management has been selling its stake in Cairn Energy due to fears that the market has become over-excited by the Edinburgh firm’s huge finds in Rajasthan. Where the firm once owned around 4.5% of Cairn’s issued capital, this has been reduced to 2.75% - raking huge profits for the firm.
But Derek Mitchell, manager of the Isis UK Select trust, warned: "We place the core asset value at about £10.50 to £11. The shares are currently at about £15.40. You’ve got £4 to make up there.
There's a yawning chasm of a logic gap in Mitchell's modus operandi - what is the strategy with his fund's huge Cairn stake and who did he think he would impress with this laissez-faire approach to investment?
Anyone who has been paying attention will recall my philosophy on stock investment: buy it cheap, sell it fair. Mitchell's strategy appears confused, lackadaisical and ill-disciplined. Admittedly, Mitchell is operating at a disadvantage to private investors, his 4% stake in Cairn would be impossible to offload in a single trade. This would be dribbled out in such a way that the price was carefully preserved for later trades - news that a large seller existed in the market would raise the spectre of an overhang, deterring buyers and reducing the chances of the stake being unwound at a favourable price. But this is exactly what Mr Mitchell has done by publicly stating he believes the prevailing share price is exaggerated by over-excitement with Cairn's recent oil finds. Mr Mitchell is undermining the performance of policy holders' investment, talking down the prospects for one of the funds largest holdings!
But Mitchell's capacity to befuddle does not end there. He quantifies the level of over-excitement and price dislocation as £4 per share, 40% above his company's appraisal of core asset value at about £10.50 to £11. This begs the question, why was only a fraction of ISIS' Cairn stake sold in the market when the fund manager reckons the company 40% overhyped? Does Mitchell draw no conviction from ISIS' research, if a such a huge advance beyond fair value would not push him into selling, what would?
I'm guessing Mitchell is hedging his bets. His investment in Cairn is already showing a huge profit, he is locking in a portion of this and letting the rest 'run free'. This is an easy decision to make, even if Cairn's shareprice were to take a dramatic turn south from here, the combined position would show a positive return on the initial investment. There's a certain appeal in this logic but to my mind it's a manifestation of a psychological flaw common amongst investors. Whitney Tilson refers to this as "mental accounting" and remarks how there is no such thing as house money.
By taking profits and leaving the rest of his position open Mr Mitchell is labouring under the delusion his Cairn shares represent 'free' or 'house' money i.e. he cannot lose from here. House money is a fallacy, there is only policy holders' money and any good fund manager should know this should be put to use where it will generate best returns. At 40% over fair value, how could this be with Cairn?
Derek Mitchell of ISIS Asset Management - you're having a laugh.
The Artful Dodger
Fund managers are richly remunerated, typically receiving a six-figure basic salary. Each fund manager will have access to an in-house research team and a panoply of research and opinion from investment bankers. This safety harness doesn't come cheap, significant (and often opaque) administrative expenses are incurred by the investor and the effect on returns pulls and constrains performance like Jupiter influences a passing projectile.
The size of funds in place limits the opportunities managers can capitalise on - often there is simply insufficient supply of stock either in the market or in existence for capital to be ideally allocated. Options for investment are thus limited and an industry-wide aversion to stock specific risk results in a high correlation with the market portfolio itself. The managed funds can thus only significantly outperform by taking high risks or via prescient stock-picking approaching the theanthropic.
Further, an increasing amount of evidence and opinion tells us fund managers do not produce the returns to justify their salaries.
This article from Scotland on Sunday compounded my scepticism of the fund management industry and confounded my confidence in the knowledge and professionalism of the managers. I sat, as bewildered as a pygmy at a bar mitzvah, reading this twaddle involving ISIS fund management's Derek Mitchell:
ISIS Asset Management has been selling its stake in Cairn Energy due to fears that the market has become over-excited by the Edinburgh firm’s huge finds in Rajasthan. Where the firm once owned around 4.5% of Cairn’s issued capital, this has been reduced to 2.75% - raking huge profits for the firm.
But Derek Mitchell, manager of the Isis UK Select trust, warned: "We place the core asset value at about £10.50 to £11. The shares are currently at about £15.40. You’ve got £4 to make up there.
There's a yawning chasm of a logic gap in Mitchell's modus operandi - what is the strategy with his fund's huge Cairn stake and who did he think he would impress with this laissez-faire approach to investment?
Anyone who has been paying attention will recall my philosophy on stock investment: buy it cheap, sell it fair. Mitchell's strategy appears confused, lackadaisical and ill-disciplined. Admittedly, Mitchell is operating at a disadvantage to private investors, his 4% stake in Cairn would be impossible to offload in a single trade. This would be dribbled out in such a way that the price was carefully preserved for later trades - news that a large seller existed in the market would raise the spectre of an overhang, deterring buyers and reducing the chances of the stake being unwound at a favourable price. But this is exactly what Mr Mitchell has done by publicly stating he believes the prevailing share price is exaggerated by over-excitement with Cairn's recent oil finds. Mr Mitchell is undermining the performance of policy holders' investment, talking down the prospects for one of the funds largest holdings!
But Mitchell's capacity to befuddle does not end there. He quantifies the level of over-excitement and price dislocation as £4 per share, 40% above his company's appraisal of core asset value at about £10.50 to £11. This begs the question, why was only a fraction of ISIS' Cairn stake sold in the market when the fund manager reckons the company 40% overhyped? Does Mitchell draw no conviction from ISIS' research, if a such a huge advance beyond fair value would not push him into selling, what would?
I'm guessing Mitchell is hedging his bets. His investment in Cairn is already showing a huge profit, he is locking in a portion of this and letting the rest 'run free'. This is an easy decision to make, even if Cairn's shareprice were to take a dramatic turn south from here, the combined position would show a positive return on the initial investment. There's a certain appeal in this logic but to my mind it's a manifestation of a psychological flaw common amongst investors. Whitney Tilson refers to this as "mental accounting" and remarks how there is no such thing as house money.
By taking profits and leaving the rest of his position open Mr Mitchell is labouring under the delusion his Cairn shares represent 'free' or 'house' money i.e. he cannot lose from here. House money is a fallacy, there is only policy holders' money and any good fund manager should know this should be put to use where it will generate best returns. At 40% over fair value, how could this be with Cairn?
Derek Mitchell of ISIS Asset Management - you're having a laugh.
The Artful Dodger
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