Found winning active fund manager?

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ALinLI
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Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 10:44 am

I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds. Should i invest a portion of my portfolio with him? He is very smart and seems to have a rigorous and and succesfull methodology for picking undervalued companies like Buffet. Looking for advise and opinions.

Tom_T
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Re: Found winning active fund manager?

Post by Tom_T » Fri Feb 03, 2012 10:52 am

You're not going to get a lot of proponents of active management here. What is the name of his fund?

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bottlecap
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Re: Found winning active fund manager?

Post by bottlecap » Fri Feb 03, 2012 10:59 am

If you're willing to bet money that he's the next Buffett, then why not go for it? Just know that you're not diversified and that 5 years is not a long time period.

JT

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 11:00 am

it's not a listed mutual fund.

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bottlecap
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Re: Found winning active fund manager?

Post by bottlecap » Fri Feb 03, 2012 11:01 am

ALinLI wrote:it's not a listed mutual fund.
How are unlisted mutual funds regulated? How well do you trust this "good" friend? Those are also questions you have to ask yourself.

JT

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 11:02 am

ALinLI wrote:I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds. Should i invest a portion of my portfolio with him? He is very smart and seems to have a rigorous and and succesfull methodology for picking undervalued companies like Buffet. Looking for advise and opinions.
Look up a list of the top mutual funds in 2007 with the best 5-year records.

Find out how many of them are still in top 5% after 10 years.

Past performance does not guarantee future results.

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 11:05 am

ALinLI wrote:it's not a listed mutual fund.
LOL

Yeah you should definitely invest a ton with a friend who is running his own mutual fund out of his basement because his short-term unaudited, unregulated numbers look good :roll: :roll:

kenner
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Re: Found winning active fund manager?

Post by kenner » Fri Feb 03, 2012 11:07 am

ALinLI wrote:it's not a listed mutual fund.
How do you verify the fund's performance? Have you read the prospectus? What are the fund's total expenses (loads, ER, 12b-1, etc)?

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 11:13 am

He has a law degree and MBA from Columbia and is not some kid playing in his basement. He left corporate world for his passion of stock picking. It's all very transparent. All the fund positions are listed in annual report. ER is .5%. I trust him.

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Rob5TCP
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Re: Found winning active fund manager?

Post by Rob5TCP » Fri Feb 03, 2012 11:24 am

Many fund managers ( though a small percentage overall) have winning 5 year records that go on to horrible records the next five years. I was AVERAGING 35% per year (at one point) when I was in several Janus Funds. However, when their "style", plus the market, took a turn, they were among the worst. PAST performance is no guarantee of future performance.

Now if you want to invest a small percentage of truly risk capital, that's one thing. If you put a significant percentage of your assets, then you are "betting" that he continues to outperform the market.

As a sideline, what are his fees. What is his benchmark. Does his investments match his benchmark.
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ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 11:24 am

Just some background here. I believe in the Booglehead philosophy and passive investing and this is where my investments are today.
But let's have an open mind. It is possible for someone to consistenly pick winning stocks. It's just finding this person and coming out ahead after expenses.

But the average equity mutual fund manager primary concern is to stay employed by not underperforming their peers. That is why they have thousands of positions that correlate closely to entire market and rarely beat the market. My friend is self-employed with no such issues and by having a basket of about 30 stocks has done a lot of work to screen each business

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Re: Found winning active fund manager?

Post by Sbashore » Fri Feb 03, 2012 11:25 am

ALinLI wrote:I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds. Should i invest a portion of my portfolio with him? He is very smart and seems to have a rigorous and and succesfull methodology for picking undervalued companies like Buffet. Looking for advise and opinions.
Five years of data is statistically insignificant for my money.
Steve | Semper Fi

kenner
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Re: Found winning active fund manager?

Post by kenner » Fri Feb 03, 2012 11:33 am

ALinLI wrote:Just some background here. I believe in the Booglehead philosophy and passive investing and this is where my investments are today.
But let's have an open mind. It is possible for someone to consistenly pick winning stocks. It's just finding this person and coming out ahead after expenses.

But the average equity mutual fund manager primary concern is to stay employed by not underperforming their peers. That is why they have thousands of positions that correlate closely to entire market and rarely beat the market. My friend is self-employed with no such issues and by having a basket of about 30 stocks has done a lot of work to screen each business
Yes, it is possible that your friend's methodology may be a winning one. Michael Price (formerly of Mutual Series funds, now running his own investment company) comes to mind. A reasonable allocation to the fund could be worth the gamble with some portion of your money.

I still think you need to read the fine print.

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 11:35 am

I appreciate all the feedback.

It's not trend chasing like Janus growth funds - since style of fund is multi-cap value invests in companies of all sizes mainly large cap which has not been hot past 5yrs. Only management fee, no loads ER is .5%.

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Re: Found winning active fund manager?

Post by momar » Fri Feb 03, 2012 11:35 am

Go for it, just use a small % of money. Lots of people here set aside 5% of their portfolio to play around with. Just don't add to it if you have big gains on paper; give him some cash and let it ride for 10 or 20 years; in the meantime, count it as a loss.

And remember that Madoff used to send around statements with all of the trades he was making for his clients, all of whom trusted him and thought he was a genius.
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Re: Found winning active fund manager?

Post by pkcrafter » Fri Feb 03, 2012 11:37 am

I trust him.
Hmmm. This is a really bad idea, but if you do it anyway, limit to what you are willing to lose 100%, plus lose a friend. Rebalance if it grows to 7.5% of equity value. Who is keeping track of "portfolio" performance? By rebalance I mean sell off some of the "mutual fund" if you can! So, how does this work--you give him your money to invest in his stocks in his personal account or you give him .5% and he tells you what stocks to buy and when to sell? When you need to rebalance or cash out, do you have to go to him and ask him to sell some of his stocks? What is the turnover and will you have this is a tax-deferred account.

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Re: Found winning active fund manager?

Post by trico » Fri Feb 03, 2012 11:39 am

Im putting my gambling money on the NY Giants.

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investor.saver1
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Re: Found winning active fund manager?

Post by investor.saver1 » Fri Feb 03, 2012 11:41 am

Question: Why would an individual that is so very gifted in stock picking choose to have a flock of individual investors follow him around?

Answer: Perhaps it's for the fees?????

Question: Why wouldn't this gifted stock picker just build an enormous multi-billion dollar portfolio for himself? It shouldn't take too long.

Answer: Because no individual can consistently beat the market over a sustained period of time...but fees are ongoing.

Just something to think long and hard about.
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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 11:41 am

momar wrote:Go for it, just use a small % of money. Lots of people here set aside 5% of their portfolio to play around with. Just don't add to it if you have big gains on paper.
This. Don't add to it.

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Rob5TCP
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Re: Found winning active fund manager?

Post by Rob5TCP » Fri Feb 03, 2012 11:42 am

Some interesting issues were raised. Who were the auditors? Are the stocks/funds kept at a clearing hour, an independent bank, or does he hold all assets.

My Sister In Law's cousin invested with a trusted "family FIEND" in Florida. He turned out to be Madoff. From what I understand, they will get most of the money back ultimately. In the meantime, their home is in jeopardy.

I am not implying he is a another Madoff. Just another issue to consider.
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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 11:46 am

investor.saver1 wrote:Question: Why would an individual that is so very gifted in stock picking choose to have a flock of individual investors follow him around?
If he started with $200k (and I'm assuming he had at LEAST this much before he left the corporate world), he's already tripled it in 5 years to $600k...

If he can do it for another 15 years, he'll have $16 million

If he can do it for another 20 years, he'll have $50 million.

What's he need you for?

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Re: Found winning active fund manager?

Post by numbersguy » Fri Feb 03, 2012 11:49 am

5 years tells you nothing. Ask the advisor to provide you a 3F regression of his monthly performance including alpha, r^2, and standard errors (or t-stats)... Just for fun.

Then realize about 25% of all active managers beat their benchmarks (adjusted for size/value) over 5 year periods. Worse yet, reports on persistence find only about 25% of previous "winners" go on to continue their outperformance.

Notice the rub: 25% of all managers "win", but sorting on past performance doesn't improve those odds at all. You are lookin at 1:4 odds no matter how you slice it unless you look to index funds, which deliver top 35% results very persistently.

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 11:51 am

Of course more due diligence is needed on my part before i hand over a check but Madoff he is not. Madoff had no transparency to his positions. If you followed Madof's statements and trades you could not connect it to the performance. My friends' annual report spells out how/when the stock trades were made and ties back to the performance of the fund.

On another point, some people are about more than just making money - impressing friends and accomplishment are goals for some people as well.

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Re: Found winning active fund manager?

Post by beammeupscotty » Fri Feb 03, 2012 11:57 am

rrosenkoetter wrote:If he started with $200k (and I'm assuming he had at LEAST this much before he left the corporate world), he's already tripled it in 5 years to $600k...
The OP stated "cumulative 5yr return of 24.7%". That works out to less than 5% CAGR. Better than 100% TSM, but similar to a tilted 60/40 portfolio, so I'm not very impressed.

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Re: Found winning active fund manager?

Post by FafnerMorell » Fri Feb 03, 2012 11:59 am

rrosenkoetter wrote:
momar wrote:Go for it, just use a small % of money. Lots of people here set aside 5% of their portfolio to play around with. Just don't add to it if you have big gains on paper.
This. Don't add to it.
Yeah, this seems a good approach. I'd also see try making a withdrawl at some point, just to see what happens. If it suddenly becomes "Well, I need to lock your money in for several years", then it's probably fraud.

If it's fraud, you could always hope to get a book or movie deal out of it - just make sure it devastates your life in an emotionally gripping way that makes for good drama.

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Re: Found winning active fund manager?

Post by RPS » Fri Feb 03, 2012 12:02 pm

numbersguy wrote:5 years tells you nothing. Ask the advisor to provide you a 3F regression of his monthly performance including alpha, r^2, and standard errors (or t-stats)... Just for fun.

Then realize about 25% of all active managers beat their benchmarks (adjusted for size/value) over 5 year periods. Worse yet, reports on persistence find only about 25% of previous "winners" go on to continue their outperformance.

Notice the rub: 25% of all managers "win", but sorting on past performance doesn't improve those odds at all. You are lookin at 1:4 odds no matter how you slice it unless you look to index funds, which deliver top 35% results very persistently.
Since the vast majority of so-called "active" managers are actually closet indexers because of diversification, the numbers aren't nearly so bad as you say. Truly active management can outperform. So can/does momentum, value, small cap and ex-U.S. Thus a concentrated value portfolio has a decent chance to outperform if it is managed well. But it's still crazy hard to find and even harder to continue (success draws a crowd, making continuing, ongoing success much more difficult still). Assuming all is above-board (an assumption our OP should not make without considerable due diligence), a small allocation to the friend wouldn't be a problem for me if it can be lost without financial hardship.

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Re: Found winning active fund manager?

Post by livesoft » Fri Feb 03, 2012 12:11 pm

This just seems ridiculous to me and no need to mess with this at all. If you didn't have any doubts, you would not have come here to ask for our blessing. You ain't gettin' no blessing.
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Re: Found winning active fund manager?

Post by xerty24 » Fri Feb 03, 2012 12:12 pm

rrosenkoetter wrote:If he started with $200k (and I'm assuming he had at LEAST this much before he left the corporate world), he's already tripled it in 5 years to $600k...

If he can do it for another 15 years, he'll have $16 million

What's he need you for?
Maybe he wants to retire in less than 15 years?
No excuses, no regrets.

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Re: Found winning active fund manager?

Post by dratkinson » Fri Feb 03, 2012 12:30 pm

If you really must scratch this itch and feel *lucky, then you can give him part or all of your 5% play money. If he does well, then you'll have something to brag about. I've read that the people who invested $10K with Buffett in his beginning did very well for themselves.

If, on the other hand, he is the next Madoff (faked statements and all), then you won't lose that much money, can deduct him on your taxes at $3K/year and will have an interesting war story. My stock picking genius ended up in Leavenworth. Wanna hear about it? I was sucked in by my greed and his claim that he was doing great because he knew more than other market stock pickers.

Bottom line. Don't invest more than you can afford to lose in XX years. (Fill in the XX with Madoff's run.)

Let us know how it goes. :)



*Luck is never a good plan for anything.
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Liquid
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Re: Found winning active fund manager?

Post by Liquid » Fri Feb 03, 2012 12:31 pm

ALinLI wrote:I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds. Should i invest a portion of my portfolio with him? He is very smart and seems to have a rigorous and and succesfull methodology for picking undervalued companies like Buffet. Looking for advise and opinions.
No you should not.

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momar
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Re: Found winning active fund manager?

Post by momar » Fri Feb 03, 2012 12:35 pm

ALinLI wrote:Of course more due diligence is needed on my part before i hand over a check but Madoff he is not. Madoff had no transparency to his positions. If you followed Madof's statements and trades you could not connect it to the performance. My friends' annual report spells out how/when the stock trades were made and ties back to the performance of the fund.

On another point, some people are about more than just making money - impressing friends and accomplishment are goals for some people as well.
So he is able to write an annual report of all the trades he made to earn money over the previous year?

Why is that transparency?

I can certainly "earn" better returns than your friend if I was allowed to make them after the year is over and all of the daily prices are available!
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Re: Found winning active fund manager?

Post by eddiejov55 » Fri Feb 03, 2012 12:48 pm

ALinLI wrote:I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds.
Why don't you just find the 5% of equity mutual funds that he didn't beat and invest in them? Then you should ask him to invest in your ability to pick em'.

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 1:15 pm

Thank you to all the experienced members for a lot of food for thought. I am truly fortunate to have found this community of so many people with great investments knowledege.

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Re: Found winning active fund manager?

Post by l2ridehd » Fri Feb 03, 2012 1:23 pm

Hummmmm. Fund not registered. Claims to beat 95% of all active funds. I had a friend who invested in something like this. The fund manager was uh, Bernie something, maybe Madoff?

Run as fast as you can in the other direction.

ALinLI
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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 1:28 pm

Just found out It's registered and structured as an LLC partnership with mark to market like a hedge fund, there's member units vs shares.

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Re: Found winning active fund manager?

Post by Buffetologist » Fri Feb 03, 2012 1:35 pm

I would say that if you understand his methodology and why it's successful, and you trust him, then maybe you should go for it. If it's some crazy scheme, then I'd be leary, but if it's fundamental stock picking, then it could be really good in the hands of someone talented.

I've read Bogle, Ben Graham and countless books about Warren Buffet's style of investing.

Bogle's approach is more for the average investor and how through indexing, you avoid the problem that the average stock picking mutual fund must underperform the average because of the fees. This is basically efficient market theory reduced to practice.

Ben Graham's approach is that to outperform the average, the "enterprising" investor must do a great deal of due diligence and spend a lot of time looking for bargains with a large "margin of safety".

Warren Buffet's approach is to find exceptional business that you want to own, and patiently wait until fear and crowd mentality make them available to you at such an attractive price that they are very safe. His improvement over Graham, IMHO, is his emphasis on exceptional franchise businesses. Some business will never be more than commodity businesses and thus will never be exceptional. Some exceptional business never trade at an attractive price. Graham didn't quite emphasize this as much, and just looked for cheap businesses. Buffet reasons that a business's intrinsic value does not fluctuate as rapidly as it's publicly traded stock price would indicate. As a result, it's sometimes possible for patient investors to get exceptional companies at real bargains. However, by it's very nature, it's not possible to execute this strategy without being small enough to have negligible impact on the market. If everybody did this, there would never be a bargain.

Essentially, Buffet's method works BECAUSE of deviations to efficient market theory. If your friend is spending his time executing a strategy like this with a small amount of money, and is really good and not too expensive, then perhaps you can get above average returns. All big ifs, but only you can answer these questions.

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 1:36 pm

eddiejov55 wrote:
ALinLI wrote:I have a good friend who runs a value equity fund of about 30 stocks who is very succesfull has been able to beat the market over past 5yrs, cumulative 5yr return of 24.7% after fees beating 95% of all equity mutual funds.
Why don't you just find the 5% of equity mutual funds that he didn't beat and invest in them? Then you should ask him to invest in your ability to pick em'.
Heh, this is an excellent point...

If 5-year returns actually matter, then just find the mutual fund with the highest 5-year return and invest in it.

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 1:37 pm

kalons wrote:
rrosenkoetter wrote:If he started with $200k (and I'm assuming he had at LEAST this much before he left the corporate world), he's already tripled it in 5 years to $600k...
The OP stated "cumulative 5yr return of 24.7%". That works out to less than 5% CAGR. Better than 100% TSM, but similar to a tilted 60/40 portfolio, so I'm not very impressed.
Wait, did he make 24.7% a year or 24.7% total over 5 years?

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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 1:43 pm

Buffetologist - this is exactly his strategy modeled after Ben Graham

24.7% is his fund cumulative return after last 5yrs.

so here are the fund returns from past 5yrs

2011 +9.0%
2010 +15.0%
2009 +41.8%
2008 -19.6%
2007 -12.8%

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 1:47 pm

ALinLI wrote:Buffetologist - this is exactly his strategy modeled after Ben Graham

24.7% is his fund cumulative return after last 5yrs.

so here are the fund returns from past 5yrs

2011 +9.0%
2010 +15.0%
2009 +41.8%
2008 -19.6%
2007 -12.8%
Well, that's not THAT great... I probably got returns nearly that good just from re-balancing over the last 5 years.

Did he really beat 95% of mutual funds? 95% of mutual funds have returned less than an average 5% a year for the last 5 years?

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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 1:52 pm

He lost about 12% in 2007 i think most equity funds lost a lot more than that

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Re: Found winning active fund manager?

Post by billjohnson » Fri Feb 03, 2012 1:57 pm

ALinLI wrote:He has a law degree and MBA from Columbia. It's all very transparent. All the fund positions are listed in annual report. ER is .5%. I trust him.
Why not give him a couple grand and see what happens. Plus, if it turns out to be some sort of ponzi, it's always better if you get in at the start!
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Re: Found winning active fund manager?

Post by RPS » Fri Feb 03, 2012 1:58 pm

rrosenkoetter wrote:Well, that's not THAT great... I probably got returns nearly that good just from re-balancing over the last 5 years.
That's comparing apples and oranges because your portfolio returns were (presumably, as a Boglehead) advantaged greatly by the long-term rally in bonds.

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Re: Found winning active fund manager?

Post by PreserveCapital » Fri Feb 03, 2012 1:58 pm

You're taking on too much risk in so many ways by putting any money with your buddy.

If Bill Gross has a heart attack and drops dead you know there are other people at PIMCO who will continue managing your money.

If your buddy drops dead then what?

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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 1:59 pm

RPS wrote:
rrosenkoetter wrote:Well, that's not THAT great... I probably got returns nearly that good just from re-balancing over the last 5 years.
That's comparing apples and oranges because your portfolio returns were (presumably, as a Boglehead) advantaged greatly by the long-term rally in bonds.
Ah good point...

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Re: Found winning active fund manager?

Post by livesoft » Fri Feb 03, 2012 2:45 pm

Since this is a good friend, presumably you will want to remain a good friend. It is pretty simple to say, "I value our friendship, so I can never give you money to invest for me; it would not be good for our friendship."
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HomerJ
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Re: Found winning active fund manager?

Post by HomerJ » Fri Feb 03, 2012 2:54 pm

By the way, I'm curious... how is your friend paying his bills?

Does he really have $10-$20 million or more under management? 0.5% fee is pretty decent for you, but that doesn't generate much for himself. $10 million would only generate $50,000 a year in fees.

Who are all his other investors?

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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 2:55 pm

Point of clarification ,my friend has never asked me to invest with him, i'm not even sure he would take my money. His fund just comes up in conversation and he sends me the fund's reports periodically because he knows i'm into investments and we discuss investing socially

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Re: Found winning active fund manager?

Post by ALinLI » Fri Feb 03, 2012 2:58 pm

His family is wealthy, so i doubt paying bills is a priority.

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Re: Found winning active fund manager?

Post by DSInvestor » Fri Feb 03, 2012 3:19 pm

ALinLI wrote:Buffetologist - this is exactly his strategy modeled after Ben Graham

24.7% is his fund cumulative return after last 5yrs.

so here are the fund returns from past 5yrs

2011 +9.0%
2010 +15.0%
2009 +41.8%
2008 -19.6%
2007 -12.8%
Wellesley Income has 5 yr cumulative return of 36.07% and you wouldn't need to put your friendship at risk. Minimum investment of 3K.
AlinLI wrote:Just found out It's registered and structured as an LLC partnership with mark to market like a hedge fund, there's member units vs shares.
If his fund isn't a mutual fund, he may have a limit on the number of investors he can accept. This may impact the minimum investment the will accept. Would you invest in his fund if he had a $1M minimum? 500K, 250K? You can get into just about any mutual fund for 3-10K.
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