Why is it that the large funds with all their information and resorces can not outperform the S&P? Because they have too much $$$ and when they place orders they move the market and have to take the price that the specialist "NYSE" will give them. Case in point: Value line has had an outstanding record with their rankings "1 to 5" over the years, but their funds have never performed that well. Can we find out what the institutions are doing and be on the other side of the order or is this a specialist's opportunity only? JJ
Specialists do not know the identify to the buyer/seller (unless it is leaked to them). They just know the name of the broker and the type of order (i.e., Goldman is a buyer of 250,000 market go along or CSFB is a short seller of 100,00o with a 80.25 low).
I think that the specialists should have a pretty good idea of the brokers who represent the different funds. If not, they still must sock it to the large block traders as per the Value Line case. Any ideas as to when and what the Institutions are doing? JJ
One thing's for sure, expenses certainly don't help. Compare Vanguard's Index 500 with the Value Line Fund assuming a $10k investment and 5% annual return. Your hypothetical expenses for five years would be around $100 for the Index 500 and about $550 for VL. Hypothetical expenses at the end of a 10-year period would be circa $250 for the Index 500 and over $1200 for VL. So, it basically takes over a year to break even assuming a 5% return if you hold the VL Fund for 5 years (20% of the holding period to cover expenses?). And, yeah, I realize that you end up with around $12.7k after five years but you still paid 5.5% of your =initial= investment in expenses. Or is my math whacked here?
This is something we love to cover in the college courses and the radio show (geared to the general public, not pro's like on this board). Institutions are simply in the business of gathering money, and finding a place to put it. Most pay full retail for every share traded (can you imagine paying 6 cents per share...at their volume levels?), most have high fees involved in the fund for advertising (to raise money to compete with yours), and to pay themselves. For the most part, Mutual funds and other similar fund groups underperform the market in general, so your money is better off in ETF's (obviously). I always ask this: "Why don't these big funds simply buy a seat on an exchange and hire a broker to execute for them (saving $millions in fees)...why? because of "soft dollars" is what I've been told. It is the only reason that makes sense to me.
fund pays big bucks to broker, fund gets access to ipo's, research, etc. A mutual back scratching relationship.
Soft dolalrs are simply reciprocal monies that may be given back to fund managers or others involved in the process. Although not illegal, it is always a questionable practice at best. i.e. I can pay $20,000 month to broker X, or I can pay $30,000 month to broker Y and get a free trip to the Bahamas for "educational purposes.' Pretty commonplace, unfortunately.
Quote: I think that the specialists should have a pretty good idea of the brokers who represent the different funds. If not, they still must sock it to the large block traders as per the Value Line case. Any ideas as to when and what the Institutions are doing? JJ ____________ The specialists do not have a clue to the identity of the buyer, just the broker. They may know that Goldman is buying a stock and has been a buyer for weeks. That's all. A big institutional investor (like Fidelity, Alliance, Putnam, Soros) will have relationships with a lot of brokerage houses. Thus, just because Fidelity buys XYZ stock from Goldman does not mean that he will sell it through Goldman. The big institutional investors will tend to go to the broker that is representing "natural" merchandise. "Natural" merchandise is the other side to the trade (i.e., a block for sale if I am a buyer and vice versa). The beauty of "natural" merchandise is that it represents the best of block trading when the block is negotiated upstairs before it hits the tape. Essentially, the only way you will get knowledge of what and when the institutions are buying/selling a stock is by having a mole at a brokerage house and having him tell you that Fidelity is buying XYZ and selling ABC. Of course, if his happens, the mole will probably get caught and kicked out of the industry.
Soft dollars don't appear to be too problematic provided proper disclosure is made and, generally, the primary purpose is research. What these people consider "research" is another matter (as well as where the research is done which probably too often, as Don intimated, is in a tropical resort area). Regardless, I can't help but wonder why really large funds, which presumably do their own research, would have any need for someone else's research (what, they need a second opinion to dump, for example, Enron?).