Telling the truth attractively

Telling the truth attractively is placing a bit of a bend in the facts to suit one’s own ends. Are we on the same page?

It seems like everyone does it. Even the author of a book — he shall remain nameless here — that takes Wall Street to task is capable of telling less than the whole truth. For example, in a current rant, he attacks — among other Wall Street chieftains — Gregory Johnson, the head of Franklin Templeton, for earning $5.3 million in 2008, despite the fact that his funds “lost 16% in the same year.” He doesn’t mention that the Johnson family owns Franklin Templeton. He certainly does not mention that Barron’s estimated, in 2009, that if a fund lost 25%, it was in the top 5% of performers. If his 16% argument is valid, it would mean, in the face of a horrible year, FT really did quite well. He also did not mention that, after 2008, many funds came roaring back in 2009. Why? Because it does not suit his purpose, that’s why. So, he tells the truth, but a very incomplete truth. He doesn’t even bother to mention that Johnson almost certainly, like the mass of people, gets paid bi-monthly, and any 2008 bonuses, if there were bonuses, were almost certainly based on 2007 results. (Besides, did I mention that his family owns a significant piece of the company’s stock, having founded Franklin and acquired Templeton?)

Another thing is this: the author didn’t mention one fund I particularly like. Templeton Global Bond — I like its managers’ ability to use bonds like currency plays, which, in a sense, they are — was up in 2008, around 6% or so.

This author is not alone. It’s almost pleasant to cheat a bit on the truth. When you are checking the performance, say, of a third-party manager (SMA, or separately managed account), reading the literature and checking the website, it is apparent that the manager is incredibly skilled and, indeed, at least a god of the investing world. However, when the returns are actually examined, the result is not so great. (Witness: Chart 1 below.)

That’s not terrible. However, the way the material on the Web is presented, one would hope for a lot more, since this is a tactical manager that brags about knowing when to get in and out of investments and when to go to cash.

Compare those results with Templeton Global Bond (TPINX), a mutual fund, as seen in Chart 2.

I know a few tactical managers who have averaged above 14%, as has First Trust Target Global Dividend Leaders, mentioned in May’s column.

Some of these tactical folks do well, with returns of 18% to 22%, on average. The two I’m thinking of have only eight-year records, but those records include the credit debacle year, a.k.a., the Great Carbuncle of 2008.

Tactical

I’m beginning to like tactical more and more. In the 1990s, a fellow named Jim Huguet wrote a book, “Great Companies, Great Returns,” that postulated a philosophy of buying and holding the best of the blue-chip companies. I liked and reviewed the book. Looking backwards, though, his list of 14 companies included AIG, Merrill Lynch and Citi. AIG lost something like 363% due to the Carbuncle, and it’s too much work to figure out Merrill’s decline and then partial pump-and-dump for the bank purchase fantasy. (80% or more? Pick a percentage.) Citi, among many others, needed TARP. I’m curious about the total returns of the 11 other companies during the 11-plus years since 2000. Huguet managed a mutual fund for a time, but I can no longer find its sponsor or the fund. I might work up enough energy for the next column to track the 11 stocks that didn’t cause heartache and pain.

Buy-and-hold does work. Consider Berkshire or funds that make it a point to buy household-name companies, much like the ones in “Great Companies, Great Returns.” Funds like Yacktman or Yacktman Focused (with 10-year averages of 12.56% and 13.3% respectively) do this. However, Yacktman went down 26% in 2008, and Yacktman Focused was only a bit better. And there’s the problem: those nasty down years drive our customers nuts.

The mutual fund industry itself (and ETFs and ETNs, too) is beginning to get tactical. Consider Invesco Balanced Risk Allocation, which slices and dices risk based on what’s happening and allocates according to risk budgets. Also, think about exchange-traded notes like the RBS TrendPilot (TBAR) for gold, which dances to the tune of the 200-day moving average for the eponymous metal. If it’s up five days, the note goes to gold. Down for five days? It moves to cash. The idea is to capture most of the upside with only perhaps 25% of the downside.

Maybe, just maybe, new wisdom will be a blending of tactical, strategic and buy and hold. One certainly can’t argue with the success of funds like Yacktman and Templeton, and maybe risk budgeting and tactical managers can mitigate the tough years with decent returns. Investment life is complex, isn’t it?

This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, one may receive more or less than originally invested.