It’s been 20 days since the Dow peaked at 26,400. After a wild ride, the index is back within a few percentage points of that level. While very little has changed in the diversified portfolio of long-term investors, some casualties of the market flip-flops have floated to the surface. One is LJMIX. Here’s the story of a fund that took a few bad days and turned it into a bona fide disaster. What can we learn from its mistakes?
Monday, February 5th
The LJM Preservation & Growth fund has a name that denotes safety and discipline, but you’d never know it based on recent results. Monday, February 5th was the day of destruction for LJMIX. The Dow sank 1100 points. More to the point, the VIX, a volatility measure, sprinted from 14 to 38. LJMIX was shorting the VIX, betting that it would go down. Instead, the VIX went up enough to erase $400 million or 80% from the investors in LJMIX. So much for Preservation and Growth. After the fall, LJM founder and chairman Tony Caine said “our goal is to preserve as much capital as possible.” But that horse had left the barn. Lawsuits against LJM are now in progress.
How to avoid the next LJMIX
For years LJMIX had flown more red flags than the former Soviet Union. Any reasonable person who spent the time and energy to investigate could see that LJMIX was an accident waiting to happen. Here’s what to look for:
First and foremost, know the risk and return profile of the investment. Can the investment go to $0 or close to it? You have to understand what is under the hood to answer this question – it’s not as obvious as it may seem.
Next, identify allowable derivatives. This fund was shorting volatility, a derivate trading strategy. Derivatives can act like leverage, accelerating losses when markets are tested.
Finally, know the rules surrounding investment strategy. If it’s an actively managed fund, what are the guidelines for its manager? Don’t just trust the name. Even self-described “passive,” “growth,” or “value” funds are often mislabeled.
We’ve seen this episode before
If you have been investing for 20 years or more you may remember other misleading fund names like Long-Term Capital Management which was wiped out with a $4.4B loss on $4.7B in 1998, because it was leveraged 100 to 1. Or the Ruane, Cunniff Sequoia Fund (SEQUX) debacle where — despite a brand and reputation centered on value investing — a third of its assets were invested in Valeant shortly before that stock tanked. (See chart above). Both funds strayed wildly from their investment charters, broke their own rules and paid a steep price. So did their investors.
The point I am making here is to remain ever-vigilant about where your money is actually invested. You or your advisor can perform the task. Don’t stop with fund names, performance history or the pedigree of fund managers. Do the research and get into the weeds. There’s a lot to be gained in investing by avoiding mistakes that don’t need to happen.
Where to go from here
It is possible to navigate successfully through volatile markets like the ones we are experiencing now. For starters, realize that volatility does not necessarily mean loss nor gain. US stock market investors are back to flat for the year 2018. Furthermore, diversifying your assets to include allocations to bonds, commodities, real estate and others generally reduces swings in portfolio value.
Here’s the best news: Recent events provide a great opportunity to understand what you own. Have your advisor do some homework on your portfolio since the beginning of the year. Did your portfolio go up or down by more than 10%? If it did, why? Are you holding assets that accelerate your risk in turbulent times?
If you would like to know what Osbon Capital has done in 2018 please email us.
delivered to your inbox
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.