WealthArch Blog

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WealthArch Investments vs. Typical Mutual Funds


Concentrated investments

What’s the Difference?

A typical active mutual fund has more than 100 holdings, with some having around 300 positions. These types of companies are structured where analysts specialize in about 3 or more industries and cover stocks globally within those industries. These analysts give their recommendations to the portfolio managers and the managers’ act on the analysts’ recommendation.

From my personal experience and speaking with others in the investment community, the typical mutual fund (“buy-side”) analyst doesn’t have time to read companies’ financial disclosures in great depth, because they have too many companies to cover and are inundated with meetings, travels and corporate tasks. Most of the time, these “buy-side” analysts rely on “sell-side” research (from investment banks or brokerage firms) as the foundation of their analysis. 

According to Investopedia, “Sell-side analysts typically perform detailed research of specific industries or sectors that buy-side analysts may use as part of their broader research to make investment decision recommendations.”

As you may surmise, Investopedia’s definition is only partially correct. The sell-side analysts talk to investor relations a lot, ask CEOs and CFOs questions on earnings calls, and merely skim through financial disclosures. They also like to provide stock price targets, which I believe to be absolute rubbish.

Since neither buy-side nor sell-side analysts have time to just sit, read and think, they use shortcuts like, “I think this stock should trade at a 17X earnings multiple, so the price of the stock in 5 years should be $170 if Earnings Per Share was hypothetically $10 in 5 years.”

From the shallow research and recommendations of the buy-side analysts, mutual fund managers pick the ones that make the most sense to them. While buy-side and sell-side analysts at least sometimes skim through the financial disclosures, the typical mutual fund manager doesn’t even look at the financial statements and simply relies on the analysts to do their job.

This is where the strength of WealthArch comes in. We conduct deep investment research by analyzing financial statements cover to cover. Sometimes there is one line in an annual report that would significantly impact one’s understanding of the company. If essential details such as those are missed, mistakes will likely occur more frequently.

When I founded WealthArch, I wanted it to be a firm that was different from the typical mutual fund. In the investment industry, no one wants to stand out from the herd. If you are different, it is harder to attract potential clients because your investment philosophy is uncommon and easier for you to be fired by your current clients when you underperform.

The doctor isn't taking his own medicine.

The Doctors Aren’t Taking Their Own Medicine

Morninstar’s Jeff Ptak ran the numbers for me to see how many portfolio managers invest in their own funds.

Out of the nearly 10,300 mutual funds and ETFs in the United States, there are more than 5,900 where the listed portfolio managers own no shares in the fund they manage. The other 4,300 and change have at least one portfolio manager who owns shares of their own fund.

Of those managers who own shares in their fund, I highly doubt that many, if any, of them have ALL of their money in their funds. If they did, they would invest very differently than what you would commonly see.

I have 100% of my investment portfolio invested the same way as my clients.

Concentrated Portfolios

We believe the biggest risk of losing money doesn’t come from a lack of diversification, but from the lack of understanding of the companies you invest in. This is the reason why we believe in a concentrated approach, only investing in about 5-25 companies.

On the other hand, the typical active mutual fund needs to have 100-300 positions, because they do not know their investments intimately. This large number of holdings is why they are sometimes called “closet indexers”. These funds “pretend” to try to be different from their benchmarks, but because they have too many holdings, they don’t stand out compared to their benchmarks. In fact, they don’t want to stand out from their benchmarks, so they can continue to charge their clients higher fees even though they are not really that different from the indexes.

Portfolio Diversification Myths

The chart above shows you that as you increase the number of stock positions, the volatility of your portfolio also decreases. But as you can see, for every holding you add to your portfolio past 25, the next one barely adds any additional benefit. In our opinion, anything after your 25th largest position only reduces your total potential return. Why would anyone want to add a 26th idea to their portfolio, when they should concentrate on their top 10 investments where the risk/reward proposition should be more favorable?

With WealthArch being long-term investors, we do not define short-term volatility as risk. Pull up any 1-year stock chart and you will see a wide range of trading prices. Stocks go up and down. That’s what they do because the stock price is a reflection of the market’s enthusiasm or pessimism at any given time. The most important thing to protect against a permanent loss is to do in-depth research to minimize the chances that you overpaid for the stock, invested in a declining business, or got fooled by a crooked CEO.

Full Transparency

Another thing that separates WealthArch from the mutual fund industry is the level of transparency that we exhibit. We know of no other mutual fund company that provides: 

  1. Trade updates – We email all our clients what was bought and sold within a few minutes of trading together with the rationale for the trades unless it was already discussed in a prior update.
  2. Earnings updates – These are the bulk of the updates. We analyze the financial disclosures and listen to all earnings conference calls for each of our investments. We promptly email our thoughts and recommendations in a transparent, timely and thorough manner. 
  3. Macro updates – When there is critical macroeconomic data worth sharing, we quickly let you know what’s happening with the markets.

The most I’ve seen from a mutual fund company is a quarterly letter. They aren’t even close to the number of updates we provide our clients.

As you can tell, WealthArch is genuinely unique. We put out money where our mouth is and we make sure you understand and are updated with each investment in your portfolio. 

Please let me know if you have any questions or comments.

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