Archive for August 2024
This morning, I did a portfolio review for a 2nd Opinion Review customer. It is a portfolio worth just under $4mm and I found $56k of hidden costs per year.
Load is the least hidden of all hidden costs, it is a one-time charge that happens when the broker (“financial advisor”) puts your money in a mutual fund. The mutual fund immediately takes a percentage of your money and gives it to the broker as commission. Since this is too obvious, few brokers are that blatant these days.
Expense ratio is the percentage the fund deducts from your investment, and part of this deduction is given to the broker as a kickback. It is even more costly since it occurs every year. It creates an adverse incentive, since the broker is more inclined to put your money in funds that give them a higher kickback. The gold standard of expense ratio is 0.05%. Note that many funds in this analysis have an expense ratio over 1%, over twenty times more expensive than the gold standard.
Turnover measures how frequently the fund manager churns your investments. The more frequent the churn, the more money you lose and the more money the brokerage that handles the trades makes. The gold standard of turnover is less than 10%. If a fund has more than 100% turnover, it belongs in the category of horrible, since 100% equates about 1.2% loss of return.
See below the result of the portfolio review. Numbers in yellow are bad, numbers in red are outright horrible. Compare these numbers to the numbers in green, which is our gold standard.
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What has happened in the last few days was a mad dash out of the door of all US dollar-dominated assets to buy back Japanese Yen. Why so? I have to start by explaining the Yen carry trade.
For a long time, Japan’s Central Bank has maintained an extremely low interest rate policy of between 0% and 0.1%. If you were smart money with the right access, what would you have done to earn effortless money? You would borrow Japanese Yen and convert it to US dollars. By just investing the money in US treasuries, you could immediately earn more than 5%. This is called the Yen carry trade, essentially an arbitrage of the interest rate differentials of the US and the Japanese Central banks.
In any event, the result of the Yen carry trade has been the almost endless depreciation of the Japanese Yen, the appreciation of the US dollar, and an endless supply of additional liquidity to the US stock market despite the Fed’s tight money policy. This additional liquidity pushed up all manner of asset prices. But alas, all good trade has to come to an end.
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The Investment Scientist 