Friday, August 04, 2006

Managing other people's money (OPM) 3 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Have any of you managed other people's money (OPM)? I'm not talking about fund managers and all that of course (obviously as retail investors you don't do that), but rather money that friends or relatives might have entrusted with you due to their trust in your "investing skills", self-proclaimed or otherwise.

Generally, this stems from an unwillingness to put their money in the hands of unknown strangers (the professional fund managers) to manage their hard-earned savings, and having to pay management expenses, typically amounting to 1-2% of funds annually plus front-end and back-end load sales charges, to have that "privilege". Many have had bad experiences when they rushed madly into technology-linked unit trusts during the 1999-2000 dot-com boom, only to end up with bloodied noses when the market crashed. Smarting from the bad experience, some figure that they would rather let their close ones lose the money for them. :-)

For those entrusted with the funds, of course it is great because your kitty is expanded and even if you're not receiving a cut of any profits and are just doing this out of goodwill, it imbues you with a sense of importance. But from personal experience, I believe there are a few issues to take note that now make me think managing OPM is sometimes a thankless task:
(1)No sense of ownership: This to me is the greatest problem. For those who actively manage their own money, they are typically more driven to secure their financial freedom than the average person, which is a euphemistic way of saying that they are more greedy (greed is good!). Placed between a personal portfolio which directly flows as personal gains/losses and a second OPM portfolio whose profits technically flow to others (even though they're close ones), who do you think they would place their focus on? I have always believed in having a sense of focus in your investment approach (see "Investing as a Hobby"), not just by limiting portfolio stocks but also in structuring a minimalist and integrated investment approach in stock-screening/stock-monitoring to make best use of the one most limited resource -- time. So in managing two stock portfolios, one either diversifies focus or ends up neglecting the OPM portfolio. The rational investor would not neglect his personal portfolio (the third possibility). One solution is to lump the OPM portfolio money together with one's personal portfolio stock picks --- creating a sense of common purpose (same stocks), but personally, as one who does not sell a line of stock at one go but rather in batches, it is difficult to reconcile whether to classify an earlier line or a later line of stock sold as under the OPM portfolio or under my personal portfolio. That is especially so if the timing difference in selling the entire line had resulted in a wide range of selling prices.

(2)A sense of guilt:
When one does not make the same kind of returns for the OPM portfolio that he had been making previously for his personal portfolio, a highly likely scenario given the earlier reasons above plus the fact that larger portfolios tend to create drag, he will feel bad. That emotional guilt may be a bad thing in itself and may yet exacerbate the situation because he takes greater risks to try to do justice to his reputation.

(3)Differing risk appetites/expectations:
That sense of guilt partly emanates from the other people (OP) who will have come in with a certain level of expectations and are disappointed by the results. It is a given that different people have different risk appetites that are a function of their character, past experiences, financial requirements and tendencies and their investment knowledge. That is why professional fund managers have such a wide and varied range of funds for investors to choose from, from style (growth/value/balanced), sector, geographical(global/regional/country) etc which can be classified continuously along the risk spectrum. The individual investor of course doesn't come with such options, and there might be a clear mismatch between he and the OP whose risk appetites and expectations are different. There is a clear direct relationship between return and risk. If things go well, obviously the OP won't complain about positive surprises; if things go badly, relationships could turn sour .... something that won't happen with professional fund managers because there wasn't a personal relationship to begin with in the first place.

Of course, managing OPM may not be such a bad thing, especially if the individual investor managing the OPM does not see it as a chore in the first place, and preferably the OPM forms a small portion of his overall personal portfolio (if he had been managing a large personal portfolio well, he would know how to handle the smaller amount of OPM). Furthermore, from the OP's point of view, it makes sense to outsource management of their funds to close friends/relatives they can trust, and are temperamentally/intellectually better-suited to asset management, by virtue of their track record (which they will know first-hand --- another advantage). The key, to me, is communication --- of the risks involved, of the expectation levels.




Anonymous Anonymous said...

Great points about OPM, but from my understanding of the subject, don't you have to pass some exams and register with the SEC before you're able to invest OPM?

11/30/2006 8:49 PM  
Blogger DanielXX said...

True, that's if you're a professional fund manager for OPM. Down here in Singapore, the necessary registration would be with our monetary authority, Monetary Authority of Singapore. However, I was speaking more generically of informal arrangements as well, such as managing funds for relatives and friends.

12/01/2006 4:57 AM  

I will take a pass on that.

1/14/2014 10:39 AM  

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