“Why do we compare our portfolio’s YTD performance with that of Mutual Funds, UITFS, or even the PSEi“?
Most traders would use that as a benchmark. Admittedly, I am one of them. I always had it in my mind that I should be able to do double PSEi’s performance.
But since I do trading FULL TIME– I realized that this is a BIG mistake.
Here are some of the records of equity funds in the PH scene. Now let’s see how the PSEi performed for the last 5 years.
I got this from the Philequity site, so here’s PSEi’s 5 year performance, if you get the average of 2010-2014 then that will be 19.75%
Mutual funds’ 5 year average is at 18.20% (these are mostly MFs, list is incomplete, if we included UITFs I think the average will be higher.), while the 5-year average of PSEi is pegged at 19.75%… Isn’t that a big hmmmmmm…….?
Only a few of these funds really out-performed the 5-year bull market: Philequity’s two funds, and FAMI.
If you’re really really really busy, then cool leave your money to these funds, but take note, you are not maximizing the potential of your money. You’re just getting something steady. (which is OK for many of the typical average/conservative investor.)
Institutional funds have certain advantages:
1. They are pros — CFAs, MBAs, Foreign business schools, IQ 6666666666+ many geniuses are employed by these institutions. most of em well experienced, 5 years, 10 years, 20 years veterans. I am merely stating the fact that these institutions are indeed composed of people who are SMART and who have all the credentials one can dream of.
2. Access to top-research — These insto’s have solid research teams. They engage into all kinds of activities just to gain info advantage. They have the capability to build relationships with the companies they invest in.
3. They do it full time. — perhaps if you’re really super busy to even check your account once a week, then just leave it to the fund managers. They are experienced, and they are supposed to know the industry.
Now even if these reasons sound SOLID, why do MOST of them under-perform the Index?
Now I’ll tell you why these funds are at a disadvantage. It is because the whole mutual fund system works around several operational limitations that (IN MY OPINION) hinder their potential:
1. Institutional fund managers hold responsibility to trade BILLIONS or hundreds of millions.
When you start handling significant money, you start to feel the importance of liquidity. Yes you can easily swing around 100k to 1m, but the case is different when you’re swinging 10m, then it gets harder when you’re swinging 100m++. Everything is affected by your size, from decision making, trade selection, exposure levels, to timing. Institutions are at a disadvantage / or a challenging position because of their SIZE.
It is a big challenge to handle billions, when the market you are trading is small / illiquid,
2. Insto’s have limitations in stock picking.
Most funds are limited to bluechip names / big caps / small caps that have credibility.
They cannot invest into new names immediately, they have to seek management approval, if the higher management does not agree with the fund manager, then that’s a NO GO on the new name.
Only a few funds / managers have the freedom to invest in a broader range of small caps.
3. They have to explain most of their actions to the stakeholders of the organization (more limitations)
In the insto space since they try to be as legitimate and as smart as they can, every trade/investment should be backed by whatever solid decision making process that they have.
As a fund manager, if you haven’t proven yourself and you’re not the top honcho, you will have to explain every single shit of a move to your BOSSES, CLIENTS, TEAM MATES.
You have to back that with some solid numbers and data—valuations, forecasts, industry analysis, and all kinds of shit to make your call justifiable. This is a normal protocol on most PH funds, the problem is…in reality… a RIGID decision framework does not always equate to good PERFORMANCE.
by the time you’ve arrived with your perfect analysis, the market has already moved against you. Too much thinking is counter-productive.
An example would be $MAXS, $DNL or perhaps $HOUSE, these small-caps have potential, but I’m sure only a few funds hold them, or only a few funds have APPROVAL to even hold these stocks. By the time they get approval, and by the time they’ve finished their perfect analysis they’ve missed bulk of the move already.
Also even if the fund manager has a strong feel that the market will crash or correct, they cannot go 50% cash or 70% cash or something. This is one big disadvantage. whereas, a small fish like me can just go 100% cash anytime I want.
4. Diversification = ITLOG
This is a principle that seems good in theory, but in reality, it is not that effective, if you know what you’re doing.
Diversification is good if you’re exposing yourself to the right kinds of correlations / anti-correlations and if you’re taking advantage of different strategies. The problem is most bluechips are CORRELATED and when you invest into a single fund they will most likely employ one single core strategy.
Unlike us retail traders, insto’s cannot go zero weight slowpokes like TEL and GLO and other crap. Because they’re bench-marking on the index, most of them always have to maintain exposure to at least majority of the components of the index.
Also, as part of their risk management metrics, most funds cannot go more than 20% exposure on a conviction idea. (no matter how good it is). For me this is the biggest disadvantage, because of this limitation they cannot fully take advantage of special stocks / situations
Upon reflection.. I finally found the right benchmark for myself.
Given the disadvantage of these funds, I’ve come to realize that instead of aiming for double the performance of these funds, or the index. I’ll take the challenge of committing myself to achieve QUADRUPLE my benchmarks every year from hereon.
Why QUADRUPLE?
Unlike insto’s, small fishes like you and me can operate without the MF disadvantages that I highlighted:
1. We can go have 30%, 50%, 100% on a single stock or theme when we have a strong conviction call. (this is useful at the right moments.
2. You can trade/invest in any name INSTANTLY, without under-going tedious management/operations related protocols. Your investment list is wider, thus having the capacity to trade some high fliers (given you know how to manage them.)
3. When the market is weak, you can just sell everything and go minimal exposure (0-30%)
These advantages alone warrant a solid premium towards the institutional funds’ limitations.
This is my personal goal as a full-time trader & private fund manager. I think it is attainable if you have the right focus, and mind set.
It won’t be easy, but it will be fun. 🙂
I wrote this article so that we can all CHALLENGE OURSELVES to become better traders. Take responsibility–if you decide to be great, you’re gonna commit yourself to be great.
ImbangKlase 
