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Brokers Bet On Basket Cases

Posted on: January 21st, 2008

What sort of advice are you hearing from your broker in the stock market turmoil? Did he tell you to sell your shares? Even to keep your money in cash? Not a chance. If he did, you are unique. Did he bamboozle you with gobbledygook? You bet he did.

Have you been listening to all the usual bull? About how this crash is a “buying opportunity.” Go on, he is pointing out the high yields from Irish bank shares, he is making inane comparisons with our “European peers”, or he is waffling knowledgeably about the Irish economy still being in “a growth phase.” He should be an anaesthetist, not a broker.

Does the mantra have a familiar ring? Like, this time last year when the market was 30 per cent higher? It was a “great buying opportunity.” Today, the cuter brokers are likely to advise you “to spread your risk”. Buy a “basket”, they will cry, nodding wisely.

“Spreading your risk” often means heading for a stockbroker’s own in-house managed fund. This way you buy a “basket” of shares, all picked by an “expert”, who just happens to be your broker. Do not touch the broker’s basket with a barge pole. Well diversified equity funds sound so sensible. A pity that some perform so badly.

Allowing an Irish stockbroker to manage your savings is to tempt cannibals with human flesh.

Last week, I decided to see what protection Goodbody stockbrokers have given clients who invested in the Goodbody Equity fund in these times of turbulence. The blurb on Goodbody’s website is promising. It claims that its Equity Fund “gives you the facility to invest in an expertly chosen portfolio of well-diversified stocks and shares…” It is a global fund. Global in name, at least.

First stop: let’s see how the expert’s selections have been doing. No one expects miracles in falling markets, but let us make fair comparisons. Unfortunately the website was initially only updated to June 2007. Even for that period, the performance was bad enough. The Goodbody blurb in the second quarter’s report pooh-poohs the fund’s failure to match its peers, despite trailing them by 4.6 per cent over these six months.

Could this have anything to do with the managers doubling up as stockbrokers? The brokers are silver-tongued. Last June’s report predicted that this little lapse would “wash through.” On Friday, Goodbody helpfully provided me with the 2007 third-quarter update and an unfinished end-of-year summary.

They make brutal reading. By the end of last September, Goodbody’s poor clients were losing seven per cent year-to-date. Quite an achievement, as the brokers admit that both European and US markets were showing “a positive out turn” at that point. Even Goodbody’s Irish rivals were still in the black. An unhappy outcome: beaten by world markets; pulverised by your Irish peers.

Even unhappier, as shares in this flagship fund are presumably the Goodbody experts’ top global selections. By the year end they were down by 10.6 per cent. This year they have already lost another packet. Could the disastrous result have anything to do with the fund managers doubling as stockbrokers? Most of their so-called “peers” are not stockbrokers.

Time to look at the portfolio. Quite a concoction. Where have Goodbody’s decided to stuff their clients’ money? The claims of a “well diversified” fund suddenly ring hollow. The biggest portion of the fund is sunk into almost the worst performing market in the world, the Irish swamp. The fund failed to put a brass farthing into emerging markets – the star global region. Some diversification.

Goodbody’s has put 25 per cent into a country that makes up less than one per cent of world markets. And it measures performance against a worldwide index! Worse still, sometime in the third quarter of last year the managers decided to dump all the cash in the fund and bet the bank on equities, again mostly in Ireland. The timing was deadly. Ireland tanked.

Worse still, even their choice of Irish shares is suspect. They seem to have a disproportionate weakness for picking companies for whom they also act as corporate brokers.

Goodbody are not brokers to many Irish quoted companies. Just 14, according to their blurb. Yet 10 per cent of the entire Goodbody fund is committed to companies for which they act as brokers. Forty per cent of its Irish investments are also in the shares of Goodbody corporate clients.These include Allied Irish Banks, easily the biggest Irish financial stock in the basket.

Allied Irish Banks, totally coincidentally, own Goodbody. The brokers are stuffing discretionary clients into their parent. The holdings in Bank of Ireland and Anglo are lighter.

Another large holding is the Grafton Group, a share which has tumbled from a high of €12.88 to €4.80. Goodbody are brokers to Grafton. Ditto Kingspan. Last month Kingspan’s stock collapsed, recording a 50 per cent loss for 2007. Goodbody are brokers to Kingspan.

Just a coincidence.

Is the manager conflicted? Is the performance of the fund affected by its allegiance to Ireland and its corporate clients? Goodbody claims an expertise in Irish shares. If so, they should know the time to be out of the market, in cash, or in emerging markets. Far from it. They are addicted to the home-grown product.

Remember this is, theoretically, a global fund. But the final decision – the choice of sector – was fatal. Goodbody plunged into financial stocks. In late September, no less than 31 per cent of the fund was buried in the financial sector. Consumer shares came next with just 16 per cent.

Hardly diversification. A big bet on bank shares. A big bet on Ireland. A big bet on shares with close connections to Goodbody. A triple whammy. God help the poor punters trapped in the “well-diversified” fund.

Goodbody’s are not alone. The Davy in-house fund follows a similar, but less extreme, pattern. The Davy Equity fund held 19 per cent of its clients’ savings in the Irish black hole at the end of September. Two of its top five holdings, poor performers CRH and Ryanair, are Irish stocks. Davy is broker to both. Davy’s fund also underperformed its chosen Morgan Stanley world index on September 30 last year.

At the year’s end it was underwater. The Davy website, wisely, gives few further details about the fund’s holdings. A pity. The choice of Irish shares would make interesting reading.

Irish-managed equity funds are grossly overinvested in Irish shares. In recent years when the market was booming, a unique opportunity arose. Irish brokers and fund managers could have seized the hour to “spread the risk”. At any time they could have reduced their dependence on Irish shares. They declined. While foreign investors were gratefully exiting Ireland with massive profits, Goodbody’s increased their clients’ exposure to the biggest equity black spot in the Western world. Davy’s managed fund remained rooted in Ireland. Both brokers are investing heavily in corporate clients’ shares.

The corporate clients will not be displeased. If Davy and Goodbody had not been so helpful, their share prices would be even lower.

As for the poor punters…