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Over the Hedge

Discussion in 'Shares' started by Tropo, 14th Jul, 2009.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Tate on Trading - Over the Hedge

    I want to revisit a topic I wrote about a few months ago – the notion of hedging. My desire to look again at this topic was prompted by something I saw on the idiot box.
    There I was enjoying the brilliance of commercial television when it dawned on me that for all these years I had been pronouncing both 'Australia' and 'millionaire' incorrectly.
    Apparently both words actually have the letter “Y” in them....Straya and millyonaire is apparently the correct pronunciation.
    So there I was watching 'Who Wants To Be A Bogan', or was it 'Bogan Mothers Banged Up Abroad'.....I can’t really remember since I could feel my brain cells running out my ears under the unrelenting waves of idiocy that I was enduring.

    However, before my IQ dropped to the level of your average stockbroker and the associated dribbling short circuited the remote and switched the tube off, I caught sight of a capital guaranteed product offered by AXA.
    For those who are a bit older you will remember AXA as being the former National Mutual.
    Capital guaranteed products are not new – they enjoyed quite a wave of popularity in the 1980’s. However, their popularity has declined somewhat due to the costs associated with offering a capital guarantee.
    Intrigued by this return to the past and an obvious attempt by AXA to cash in on the nervousness of investors, I did a quick bit of research on this product and it follows the traditional pattern of such products.
    For a fee your capital base is guaranteed and any positive market balance is protected. In effect a high watermark for your equity is set and the mark acts as a floor for your equity.
    This sounds like a pretty good idea since investors by and large are a pretty poorly educated bunch as they don’t really understand the risks they run in investing.
    Witness the burning of the Pakistani stock exchange as local investors were mortified by the fact that the market could actually go down and the less severe but equal stupid notion of banning short selling.
    However, things are never as simple as they seem and with this in mind I wanted to see what I was actually being charged for and whether my equity would ever hit a new high watermark.
    So I had a look at AXA’s superannuation funds and their relative performance courtesy of Morningstar.
    Long term performance in Australian funds can be difficult to gauge because of a paucity of data, however I did find some that made for interesting reading.
    The seven year returns for AXA’s superannuation funds was on average 0.32% per annum.
    This data was somewhat weak so I dug up the five year returns and was somewhat surprised (read friggen stunned) to realise that the average return was -0.19% per annum.
    Now this needs to be put into context.
    In the same period the All Ordinaries index gained a staggering 1.8% per annum. So whilst the performance of the index was woeful, the performance of people who are paid to manage money was even worse.
    Putting your money into the bank would probably have yielded a better performance and at least with the bank you know you are going to take an absolute rodgering on fees.

    Capital Guaranteed?

    However, back to the notion of a capital guaranteed product. This presents us with a philosophical dilemma.
    Do we want to pay for a hedge for the luxury of poor performance? In a rational world the answer would be no but investors are not rational and this is not a rational decision – it is an emotional one as are most investment decisions.
    As such I can see AXA being run off their feet for this product because it strikes a particular chord with people and from that perspective it is an excellent business model for AXA.
    It is probably a poor choice for investors since hedging imposes a cost on the investor and as such is a performance burden. Hedging itself is of questionable intellectual value when compared to simple strategies such as using a long term filter or a damned stop.
    These tools cost nothing nor does using a blended trading system that is diversified on the basis of systems used, markets traded and time frames explored.
    This cuts to the core of the issue.
    If Australian fund managers would actually take some time to evolve in their thinking, investors would not be belted from sunrise to sunset.

    Unfortunately, the professional money management industry is moribund with ideas such as time in the market, dollar cost averaging and the old chestnut the efficient market hypothesis.

    Until these ideas change then investors will always be the ones to bear the burden of downturns as evidenced by the remarkable statistic out of the US which recently showed that in the past ten years the ten largest US mutual funds had delivered zero return to their investors but had stripped some 20 billion in fees out of the funds.
    Hell – I’m certain anyone of us could be twice as incompetent for half the money.

    - Chris Tate