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Wednesday, 11 June 2008

Should you trust them to invest your money?

COULD you use a wealth manager? This story is about the granddaddy of them all, Swiss bank, UBS.

It is the world's biggest and possibly best, with $3 trillion under management. That would be equivalent to a whopping $3 million per Singapore household.

But can wealth managers really make you money?

It is hard to say since wealth managers don't disclose the average returns of clients.

They also don't publish returns on their own investments. These benefit the shareholders and are separate from clients' money.

Now, because of unprecedented losses, the rules have changed.

Suddenly, banks have no choice but to disclose their investment performance. For many, it has been a disaster. Some even needed fresh cash injections to replace money lost.

It happened to Citibank a few weeks ago. Riding to the rescue was the government of Abu Dhabi, which invested $11b.

Last week, it happened again at UBS. The bank disclosed huge investment losses and went looking for new capital.

UBS approached the Government of Singapore Investment Corporation (GIC) for a $14b cash infusion. GIC accepted. It is likely to be a good investment for GIC.

An unspoken irony is this: If these guys are so smart, why did they lose all that money?

More pointedly: Can you trust wealth managers with your money when they have so much trouble managing their own?

It goes beyond UBS.

BILLION DOLLAR LOSSES

Multi-billion dollar losses have been reported at Citibank, Merrill Lynch, Bear Stearns, Morgan Stanley, HSBC, Barclays and others. Most are the result of the credit crisis stemming from US home loans.

How could it happen? The answer may lie within the random walk theory. It says all good and bad news is already included in a stock's price.

So it doesn't matter if you buy companies that are doing well or poorly. Poor performers are cheap, while good stocks are expensive. But all are fairly priced.

Because the price is fair, it is difficult for wealth managers or anyone else to pick the under-priced counters and make a quick fortune.

So why pay wealth managers to select shares for you? It works better to simply buy a little bit of everything. Or buy an index fund, which is the same thing.

In academia, this surprising result has been known since the 1960s. Dozens of studies support it. (See Fama and French, 1992.)

Caveat 1: This is not to say that wealth managers don't add value.

Besides investments, they offer useful consulting services on legal secret bank accounts, legal tax avoidance and donations to charity.

But these services can be purchased separately and cheaply. To justify the high fees, you need superior investment returns - and the evidence is that these are not achieved.

Caveat 2: Even if you don't need a wealth manager, it may not matter to a bank's profits.

Wealth managers can sell their services as long as people think they have this ability.

In the case of UBS, it reported huge losses in October. But surprisingly, its wealthy clients invested a record-setting $38b in October and November. Salesmanship counts.



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GIC bails out UBS


PAST: UBS announces $6.4billion losses in October, large part in subprime US home loans. Losses absorbed.


PRESENT: UBS says it lost additional $14.5b last Monday. It also announces it has found investors to replace lost money.

Government of Singapore Investment Corporation to invest $14b. Others invest another $10.6b.

Total investments of $24.6b exceed total loss of $21b.


FUTURE: UBS still holds $42b in subprime exposure, but because of last week's investments, it is unlikely to require another bail out.

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