Are you being ripped off by fund managers?

November 29th, 2006

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Today, we received a Product Disclosure Statement (PDS) for a new issue of a listed managed fund, which will invest in Chinese companies that had been recently released from Chinese government ownership. The sales pitch in the PDS persuasively glowed on the powerful economic potential of China, which forms the compelling basis to get into the bandwagon of money pouring into China. The PDS also highlighted that before this new issue, that fund had produced a return of 60%!

As usual, we are not keen on such investments.

For the uninitiated, investing in a fund whose past return was 60% seems to be a good deal. For us, we doubt such kind of performance can be repeated again. Indeed, if you look carefully, most PDS have disclaimers in fine print that goes something like that: ?Past performance is not indicative of future performance.? One mistake people often make is this: projecting past performances indiscriminately into the future without examining the reasons and conditions that gave rise to such performances in the first place. In the case of this fund, with China in the process of tightening liquidity to rein in the runaway economic growth, the gush of speculative money will dry up. Since early this year, the Chinese stock market had gone down from a high point. We believe there are more falls to come as the Chinese government is in the process of curbing the excesses of the unsustainable asset price inflation.

We are also unsure of the skill and experience of the fund manager. We are in no position to evaluate that in the absence of long-term track record. Furthermore, we ourselves have neither understanding nor experience in the Chinese stock market. We heard from the grapevine that it is a place akin to the Wild West?a melting pot of greed, fear, speculation, corruption and even fraud. We admit we have no proof of that but we would prefer not to put our money into a place that we do not fully understand.

Lastly, we believe that investing in such a managed fund will put us in a highly disadvantageous position with regards to risk and return. Firstly, as with most managed fund, retail investors have to pay a performance fee regardless of the performance of the managed fund. We do not have any problems with that as long as we are confident in the quality, skills and experiences of the fund manager. But in this case, we are not that sure. Secondly, if the managed fund outperform, we will have to fork out additional fees in out-performance fees. But what if the fund underperforms? Does it pay retail investors any under-performance penalty in such an eventuality? Unfortunately, as with most managed funds, there is no such thing. Retail investors will have to pay regardless of the fund?s performance. They will pay more if the fund outperforms. But if the fund under-performs, retail investors bear all the consequences. As for the fund managers, they get all the rewards and none of the risks. Who cares if the fund manager turns out to be a dud or is plain unlucky? They still get paid.

Thus, our advice to you is this: get educated about investments and money yourself because you can trust yourself to act in your own best interest.

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