Big Money Managers, Big Liquidity, Little Flexibility

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INVESTMENT MANAGEMENT AND INDEXES... We have explored the hidden issues that lurk beneath in the world of the exchange traded fund (ETF), but there is now a glaring corrolary to the whole auto pilot investing process that is so popular today. That is, the liquidity and benchmark obsession can badly compromise traditional, large money management and put it in a corner.

STOCKPICKERS ARE STILL ALIVE....AMEN....One of the beacons of thoughtful analysis on the subject is Tom Bradley of Steadyhand Investment Funds, a boutique investment manager. Tom writes in the Saturday Globe and Mail Report on Business section and in a recent article he highlighted the major deficiencies of the big investment managers who have no choice but to gravitate to the largest companies that are represented in our Canadian index. Not only do big funds need to commit big positions in big stocks, but those stocks can be overly correlated and victimized by indexing activities and the ETF stampede. (see link to article) In our Canadian case - where the usual reference is the S&P/TSX 60 - it's an even bigger problem as it amounts to a universe of just 60 companies whose dominant sector representation is in the Financials, Energy, and Materials components. That's not a very elaborate menu and it usually amounts to an investment strategy that highly emulates a big passive index strategy. So what true value are you getting in a large cap professional managment strategy in Canada? 

http://www.theglobeandmail.com/globe-investor/dont-believe-the-skeptics-stock-picking-is-alive-and-well/article4703702/

(BTW, In Bradley's most recent article in the Globe, he cites a beautiful quote from John Maynard Keynes: ...'it is better for the reputation to fail conventionally than to succeed unconventionally')

IN SEARCH OF ALPHA IN THE LESS OBVIOUS PLACES...In the active investment manager world, we seek out something called ALPHA. Portfolio ALPHA is found when you invest in a great company that dramatically outperforms its sector peers and the overall index at large. ALPHA can bring what we call NON-CORRELATION in your portfolio to the index benchmarks, and that means true diversification. ALPHA is more easily attainable with a small emerging investment manager, a curious and pro active individual investment advisor, and most of all with YOU the individual retail investor. You don't need liquidity like a large institution does and you certainly are not limited in your investment MENU like a large liquidity driven investor is. ALPHA is your edge and it is much more accessible to you when you hand pick your own investments of various sizes, industries, and even various parts of the world.

THE PUNCHLINE: GOODIES IN THE "ALPHA BOX"....Would you rather choose between 500 equity candidates to invest in, or 60? As it turns out, if you have an approach that is accomodating to the search of almost any possible stockmarket candidate in just Canada alone, then your selection on the menu is just shy of 4000 stocks, almost 3000 of them have a market cap of under $250 million, 500 of which are already EBITDA positive. This came out of a recent presentation from Calgary-based NORREP Funds manager Don Walker, who focuses on the micro cap orphans and sees his fund as a vehicle for "building a track record". Don't be shy to explore and think a bit out of the box. It's a big beautiful investment universe out there: Let's call it The ALPHABOX.