An interesting story concerning the manager of the TFS Market Neutral Fund, which I am invested in. Marketers and managers of funds can belong to separate companies sometimes for purely financial/legal reasons and sometimes to bring in specialist outside managers to enhance a marketer's offerings. The company marketing the fund gets to choose the management. The interesting point in this article, is that though in the US mutual fund investors are called "shareholders" (in Australia, unitholders) they don't seem to get any say in choosing the manager. At regular companies, private or public, the shareholders can vote to change board members (in theory - in practice it's rare for stockholders of listed companies to vote out a boardmember nominated by other boardmembers) - who get to hire the manager. Another possibility is for the company to be taken over or for an "activist investor" like Carl Icahn to buy a stake in the company, get himself or a representative elected to the board, and then attempt to change things.
None of these options are open to mutual fund shareholders. It is true that the management or marketing company can be taken over and transactions of this sort are common. But it's not possible to target a single fund. Closed end funds which trade on stock exchanges are another matter. Activist investors have been known to demand that a closed end fund convert itself to an open end fund (regular unlisted mutual fund). The reason for this is that closed end funds often trade at a discount to net asset value (NAV). By converting to the open end format the price will jump to exactly NAV and then the activist investor will get out for a profit (some time I should do a post on premia and discounts for closed end funds).
Anyway, after this long preamble, TFS Capital wrote to Phoenix Investment Counsel who run the Phoenix Market Neutral Fund (EMNAX) and proposed that TFS take over its management. EMNAX has negative alpha and beta and has lost money over its history. Amazingly enough somebody still has $53million invested in it. TFSMX has positive alpha and beta and has made good returns and has around $140million now in assets. Anyway, the fund is not going to take TFS up on its offer, though its good publicity for TFS I guess ;) And it gets me to think about the best ways to structure managed investments and reward or punish managers.
P.S. the letter.
3 comments:
In addition to thinking of ways to structure investments and reward or punish managers, you may also consider thinking about ways to get on a board of directors for a big fund complex! Many of them make over $100,000/year.
I do not think it is even a prerequisite to be able to define 'alpha' or 'beta.' :)
There are some econ profs on the TIAA-CREF board but I presume they are there because of their finance knowledge! There are also other "representatives" of client interest groups.
The industry is full of scoundrels who will say anything they can to increase their assets under management. After that, they're happy to take their cut every quarter, whether or not they've actually earned any money for their client. It's refreshing to see the guys at TFS take a stand.
It looks like their fund is doing pretty well!
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