I’m no artist. That was clear to me in first grade. I struggled through most artistic endeavors. I was even instructed during our fifth grade Holiday music presentation to hold my instrument – a Yamaha Recorder – to my mouth, but don’t dare try to play the thing.
So I may not be the best person to opine about the finer aspects of the art world. However, sometimes things are so obvious that even I can spot when the emperor has no clothes.
Christie’s and Sotheby’s – the dynamic duo that make up the global art auction oligopoly – held contemporary art auctions last month that pulled in a record haul for the sellers. Art for me is like wine, another area where I’m no expert. I taste wine and either like it or not. Same for art, I see it, I like it. Or not. My tastes lean toward the old Masters. Call me a fuddy-duddy. I have no interest in contemporary art. I dare say it’s not art in many cases.
Granted, beauty is in the eye of the beholder. That must have been the case with these recent auctions. Artist Mark Rothko (1903-1970) was a big seller at both auctions. He painted with a certain style and quality that reminds me of, well, a fifth-grader’s best work. Actually, a good first-grader could do this. Untitled (Yellow and Blue) sold for $46.5 million while No. 10 (1958) pulled in a cool $82 million. It was thought No. 10 was prized because the somber colors matched Rothko’s mood at that point in his career. Uh huh. Right.
Mona Lisa and No. 10 (1958)
What can we learn from these seemingly absurd auction prices? Clearly there is plenty of spare change floating around among the billionaire jet-set. And opinions about artistic merit are just that: opinions. I wouldn’t pay fifty bucks for a Rothko. To me they’re a far cry from Rembrandt, Monet, Da Vinci or Van Gogh. I’d even venture that most people would pick an old Masters painting over Mr. Rothko’s first-grade finger painting. But some poor soul – oops, rich soul – forked over $82 million for a Rothko finger-painting.
Could it be that we are witnessing a contemporary canvas bubble? Or are the buyers playing the greater fool game, hoping to peddle these works to another fool down the road? Does the high price authenticate the artwork as intrinsically valuable? Or is it the scarcity factor, that each piece is an original?
As you might guess, I don’t have any answers. In fact, I’m puzzled. But while I can’t calculate the value of any particular artwork, it is possible to value a business. Far less subjectivity is involved, and while a range of values is usually the result, it’s a lot narrower than the $82 million paid for a Rothko versus the fifty bucks that I might pay.
Our valuation efforts rely more on facts and less on fashion. That’s fortunate for us, because I would be lost in an art auction, trying to make sense of the prices – not to be confused with values – that collectors put on this stuff. Because it really makes no sense. It’s much easier to analyze a company’s future prospects for products, markets, competition, and the resulting sales, earnings and cash-flow.
Investing in the stock market is no different than investing in a private business. Imagine buying a gas station, dry cleaner, hardware or convenience store or a widget maker. You’d review the sales, earnings and cash-flow the business generates. You’d calculate a fair price for the cash-flow that can be taken out of the business from here to eternity. And you’d pay no more than that. That’s essentially what we do, only it’s done in the public markets.
So we won’t be spending any time perusing art auction catalogues or trying to fathom the value of contemporary “art.” We’ll stick to more prosaic pursuits where beauty is less in the eye of the beholder, and more in the objective facts and numbers.
I’m guessing I might not get invited to the next Christie’s or Sotheby’s auction. But that’s OK, as watching a group of Emperors without clothing isn’t my idea of a good time.
The above commentary is taken from The Misbehaving Investor, provided by Triad Investment Management.
An article was published recently on the “Morningstar” website. It asks whether investment funds in which the fund manager has invested a significant amount of his own money perform better than those without this exposure. In the case of Braun, von Wyss & Müller, not merely the three founding partners but also the team have invested practically all of their financial assets in the Classic funds. This analysis consequently attracted our keen attention.
The article and the study were authored by Russel Kinnel, the Director of Mutual Fund Research at “Morningstar”. “Morningstar” is a high-profile listed U.S. financial information company. Amongst other things, it is a leading investment fund analyst.
For some time, Kinnel has addressed the question of whether investors are wise to invest in funds in which the responsible portfolio manager has invested a significant proportion of his own money. The basis for the latest study on this topic was data obtained from the U.S. Securities and Exchange Commission. This regulator requires the portfolio managers of all investment funds licensed for sale in the U.S.A. to report how much of their own money they have invested in “their own” funds. The Commission does not demand the precise sum, but instead the respective bandwidth of the exposure. The seven groups are: USD zero, USD 1-10,000, USD 10,001-50,000, USD 50,001-100,000, USD 100,001-500,000, USD500,001-1,000,000 as well as over one million dollars.
Kinnel chose the five-year period beginning in the year 2009 for his study. For the performance criterion, he selected the so-called “success rate”. This divides the number of funds that achieved a higher return than the average of the competition, after deduction of administrative costs, by the number of all funds that survived the five-year reference period – which only around two thirds managed to do. Kinnel then categorized the funds according to the extent to which portfolio managers were invested in their own funds, in line with the seven categories that the SEC requires to be disclosed, and measured their respective success rate. When it came to the investment funds, Kinnel distinguished between U.S. equity funds, global equity funds, mixed funds (equities and bonds), U.S. bond funds as well as all funds. Index funds were not taken into account for obvious reasons.
As a provider of global equity funds, we are of course particularly interested in this category (table below; for all categories, see appendix). While those funds in which fund managers had not invested any of their own money achieved a success rate of only 31.5%, the success rate of funds with the highest proportion of own investments achieved a figure of 67.9% – i.e. more than twice as high. Between this, results swung from 52.2% in the category USD 1-10,000 and 34.7% in the category USD 10,001-50,000.
Funds in which fund managers are heavily invested perform better – for example Global Equities
Why do investment funds with high personal capital exposure by their fund managers (over USD 1 million) significantly outperform those in which fund managers are not invested at all? Kinnel correctly points out that no one knows a fund, the quality of the persons involved, the analytical and decision-making processes as well as the internal incentive system better than the responsible fund manager (while the incentive system can promote out-performance, it mostly tends to encourage mediocrity, see blog entry of December 20, 2013 http://www.60rappen.ch/2013/12/20/cognitive-biases-and-managing-ones-career-why-value-investing-works/?lang=en . If the fund manager realizes that “his” fund is run-of-the-mill or even of poor quality, then he will not invest any of his own money in it. On the other hand: if a fund manager has confidence in his product and therefore sees an opportunity to achieve above-average investment success, then as a rule he will also invest heavily in his fund. In such cases, his exposure will often exceed the USD 1 million threshold. Kinnel also mentions cost considerations: If a fund is very pricey, then the fund manager might not invest in the fund but instead directly in the shares held by the fund. The track record is also likely to play a role. If a fund was successful, then its manager would be likely to invest more in it for this reason alone. In addition: the more successful a fund is, the higher the income of its manager – and the more money this manager will have available to invest in the fund. Of course the same mechanism also operates in the reverse direction. If the performance is weak, then even its own manager will not invest in it, and the resources that are available to him for this purpose will be reduced because he is not a successful fund manager.
The results of the study chime with our own experience. All BWM team members are firm believers in the value investment style and our implementation thereof. The two Classic Fund investment fund managers, Thomas Braun and Georg von Wyss, have invested practically their entire available assets in “their” investment funds. The same applies to the third founding partner, Erich Müller, who knows his colleagues as well as the investment process. The other team members have likewise invested the majority or practically all of their financial assets in the Classic funds. Because we are in the same boat as our investors, most of the usual conflicts of interest have been defused. We automatically focus on achieving the highest possible long-term returns for the fund. We have not regretted adhering to this fundamental principle.
Funds in which fund managers are heavily invested perform better
Own money invested by the fund manager, USD
The above post was originally published on the blog of Braun, von Wyss & Müller.