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Sunday, February 13, 2011

Monthly Meeting - AAII/Baltimore-Alternative Investments

Yesterday's presentation on alternative investments at the American Association of Individual Investors/Baltimore was by Stephen Ross, financial advisor with Merrill Lynch. It was the largest attendance I have seen at these meetings in some time, and it clearly evidenced a desire on the part of DIY investors for ideas on how to pick up yield and find opportunities in today's markets. And Mr. Ross covered a lot of bases.

At the beginning of the presentation, Mr. Ross put a plug in for "Merrill Edge," the platform from Bank of America/Merrill Lynch for DIY investors. I will be reviewing it in the near future. It appears to offer a number of free trades as long as you maintain a high enough balance across  Bank America and Merrill accounts.  At first glance, it appears to offer many of the analytics DIY investors need.

Mr. Ross read quite a bit from Merrill's research reports and recommendations. He presented a useful chart in his handout of high quality, high dividend stocks, both U.S. and foreign. Many DIY investors today are attracted to these in lieu of low-yielding bonds. He also recommended Master Limited Partnerships as a source of yield for the taxable portion of the portfolio. Other areas included the usual:  high yield funds, emerging market bond funds, preferreds and REITs. Many of these sectors performed well on a relative basis in 2008 as the stock market plunged.

One participant asked about fees on the funds, and Mr. Ross said that fees ranged as high as 4%, although performance numbers he quoted were net of fees.

One area that made me cringe a bit was hedge funds. He presented a chart that showed hedge funds have done well since 1993 versus stocks and bonds, but I had questions about the data. I'm sure that the data didn't include Long Term Capital Management, the largest hedge fund in the industry that had to be rescued by a Federal Reserve bailout in 1998. In fact, I had to point out that I believe his chart suffered greatly from "survivor bias" in that a lot of hedge funds don't last long.

In any event, I, for one, had to take his recommendation on hedge funds as a potential investment a bit cautiously. I would recommend that investors get professional help and do a considerable amount of research before going down this path. I'm sure Mr. Ross would agree.

He also recommended long/short funds. Again, this is a tricky area. In this sector, he liked the funds managed by Highland Funds. I have to say that I am always skeptical when advisors recommend actively managed funds for the simple reason that they are choosing those that have done well in the recent past. Go back 5 years and their recommendations would have been different. What I'm always asking in the back of my mind is how the funds he recommended 5 years ago have done. I asked if he knew how the long/short fund group had done, and he said the data was available on Morningstar.

For those not familar with the long/short concept, let me offer the following. Let's assume you are a stock picker. I give you a list of 50 stocks and you analyze them. Take the 10 you like the least and short them (i.e., borrow them and sell with the idea of buying back at a lower price). With the proceeds from the sale, purchase the 10 stocks you like best. Clearly, if you have any ability to pick stock, this is a great strategy. In fact, you don't have to put up any money!

When people invest, you actually can buy more of the long position and thereby get leveraged. Sometimes this is promoted as a market neutral strategy - make money no matter which way the market goes.

Suffice it to say that stock pickers aren't as talented as they think, and the market neutral strategy hasn't always been market neutral.

As readers of this blog know, I am not a fan of actively managed funds. In fact, I feel Mr. Ross presented a chart at the beginning of his presentation that should have raised some eyebrows on the whole subject of Wall Street strategists. His chart showed that in 2008 the Dow Jones Industrial Average dropped 38.5% and the average "strategist" predicted a change of +12.5%. Yikes!

At the bottom of the chart is the following quote: "Economic forecasts are like cross-eyed javelin throwers; they don't win many accuracy contests, but they certainly keep the crowd's attention."-Anonymous.


  1. This meeting sounds quite interesting indeed! With respect to the common vehicles to get yields from your portfolio, what role (allocation) would they have for a young income investor versus an old income investor?

  2. Of course, you're too much of a gentleman to do this Robert, but this would have been fun.

    If you could have asked this guy to bring his personal account brokerage statements over the past 15 years, and then project his overall returns compared to your personal overall returns, it likely would have ensured heavy laughter...and the audience wouldn't have been laughing at you.

    Here's the strange part. If, by the remotest chance in the world, he had beaten you, it would have meant, very ironically, that he had done something silly with his money--and it had luckily paid off for him.

    But I'd wager a year's salary that your account has trounced his over the past 15 years. If only the attendees really knew.

  3. @Shawn It was interesting. He didn't say anything as far as I remember about asset allocation. When questioned one time about some particular vehicle he did say he "wouldn't put a big percentage of assets in that particular instrument".
    @Andrew As I recall (you'll this) he had been with Merrill for 7 years. Before that he had sold insurance. So I doubt he has even been investing his own money for 15 years. Come to think of it he was with Merrill when they had to be bought out because they were in the verge of going under, Hmmmm.

  4. Just another sign Merrill has not changed it act. They can always find the shortest angel to pick at your pickets. Now that investors are misguidedly interested in yields, see how much time he has devoted to that? Curiously enough, investors continue to fall for them. I would have thought AAII investors are smarter and more educated.