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Mutual Fund Disasters: David Tice and His Prudent Bear Fund

Previously, I discussed how Legg Mason’s Chief Investment Officer and fund manager of the Legg Mason Value Trust Bill Miller, went from top to bottom in just a few short years.

See here for the article on Miller.

However, I don’t want you to get the idea that Miller is a disaster. Despite his rapid fall from grace, Miller is a good fund manager and certainly a wise investor.
In fact, Miller is one of the better fund managers around, although I personally wouldn't invest in his fund. He just happened to have made some really bad decisions at the worst possible time.
You shouldn’t assume that it was chance that Miller made these terrible calls. His calls were based on his investment philosophy.
Everyone makes mistakes, especially with investing. But once a fund manager has developed his investment philosophy, he is highly unlikely to go back to the drawing board and change it. This is especially true if the fund manager spend decades developing it, as was the case of Miller.
The plight of Miller stresses the need for investors to truly understand whether their chosen fund managers remain ahead of the curve.
Part of the blame for Miller’s poor decisions points to the fundamental flaw of equity mutual funds and other managed accounts that must remain largely invested in the stock market at all times. This is a critical consideration that you are unlikely to hear being discussed in the financial media due to the misaligned agendas of the media.
I discussed these critical issues in previous articles. See here and here.
It’s important to understand that equities mutual fund managers adopt a perma-bull market mentality, not because they are delusional, but because it makes perfect sense given the time horizon of their fund, which is ideally forever. Therefore, they view all market corrections as buying opportunities.
Never mind that none of the shareholders of the fund will live forever and thus have a finite investment horizon. Mutual funds are not designed to factor in investment horizons.
The inherent flaws behind the equity mutual fund investment approach were exposed during the aftermath of the dotcom recession, which resulted in thousands of funds going under or merging with other funds due to their extremely poor performance.
In short, these funds blew up by such a large amount that the net asset value was too low to permit the fund to be managed reasonably well.
After the dotcom disaster, the mutual fund industry was devastated. Once previously heralded fund managers like Miller were quickly forgotten. And the silly advertising campaigns of these funds, whose purpose was to impart to their audience that they had special insights, were abandoned.
The important thing to understand here is that mutual funds are held to certain guidelines which are intended to minimize losses. They can be thought of as virtual savings accounts tied to the overall stock market performance. Funds have the ability to deviate from the overall stock market performance based on the fund style, asset allocation and portfolio rebalancing decisions, and stock selection.
Hedge Funds are Much Different
In contrast to the restrictions seen in mutual funds, hedge funds are provided with complete flexibility. They can be designed to operate like a low-risk modified S&P 500 Index, a high-risk vehicle to take advantage of shorting opportunities, or anything in between. The higher the risk of the fund, the higher the possible returns and losses.
Most hedge funds are designed to take huge risks because of the compensation structure. That is, you won’t find many hedge funds that are structured as a modified form of the S&P 500 Index because funds use this index as a benchmark to determine the amount of fund outperformance. And even in the best case scenario, a hedge fund modeled after the S&P 500 isn’t likely to beat the index by a huge amount.
Why is this important? Because hedge fund managers don’t live for 2% or 3% management fees. Their motivation is the 20% carry. That is, they receive 20% of the profits earned by the fund above the performance of the S&P 500 Index or whatever the benchmark is. The high compensation seen in the hedge fund industry is part of the reason for so much insider trading in this industry.
How Bond Fund Managers Differ
Unlike equity mutual fund managers, bond fund managers take a very different approach. They are focused on interest rate changes and changes to credit risk. But they also look at the health of the stock market because it factors into the equity risk premium that dictates basic asset allocation strategies of institutional investors.
Moreover, when market risk is high, this too factors into considerations of bond fund managers. However, they typically do not make investment decisions based on the stock market, unless they are managing corporate bonds. 
In short, without going into more details, interest rates and inflation dictate the focus of bond fund managers.But if you think the same types of charlatans are not found in bond funds, you have no idea how the game works. A perfect example is Bill Gross.

How Bond Fund Managers are the Same
As previously detailed not only did Gross receive a bailout for his useless bond fund at the expense of taxpayers (see here and here), he has been trying to bash the stock market by calling it a Ponzi scheme because he has been buying and selling U.S. Treasuries at the WRONG times over the past few years, so he wants to distract attention from this fact.
In addition, Gross realizes that inflation is coming. This is going to destroy bonds. So he wants to create the perception that stocks are just terrible, hoping investors will buy his fund.
But if you are considering purchasing this fund, I strongly suggest you read this article first. It could save you thousands of dollars. 
I previously discussed how his fund is ripping investors off, charging upwards of 35% of the gross returns in fees, while the potential upside is fairly fixed since the fund is mainly U.S. Treasuries.
Of course you will never hear anyone in the media mention these facts because his fund company, PIMCO spends a huge amount of money on advertisements.
Finally, as you might have suspected, Gross is Jewish, which is why the media always refers to him as some great investor. The facts paint a different picture.

The Mutual Fund Industry’s Solution
After seeing their funds take hits of 40%, 50% and even 90%, many investors began to question the merits of mutual funds. Mutual fund companies sought to correct the flawed strategy of perpetual investment horizons. So the industry came up with an answer meant to address this shortfall. The solution they came up with was target-dated funds. However, these too are filled with numerous flaws. 
As you might recall, I discussed the realities of these funds in the past. See here.
Basically, the idea behind target-dated funds is that each investor can select funds that are designed to match their investment horizon. In this manner, as an investor approaches retirement age, the fund will become more conservative. But this is more of a pipe dream than anything due to the complexity of navigating volatile markets.   
Similar to Wall Street, fund companies know that the investment public is controlled by the media. Therefore, they focus on crafty sales pitches rather than highlighting their performance.
And when they do discuss the fund performance, you can bet you aren’t getting the full truth. Unfortunately, it often takes an experienced and sophisticated (and the two don’t go hand in hand) financial professional to spot the bull. 
Sadly, most investors fall for marketing gimmicks rather than examining the fine details of the product they are being pitched. The reason for this is because the financial media promotes fund managers as great investors, pointing their audience to “easy ways to make money.”  So there doesn’t seem to be any need to doubt what they say, right?
And those that do try their hand at due diligence often lack the understanding required to see through the smoke-and-mirrors.
Unfortunately, many financial professionals do not want to bite the hand that feeds them, so they never point out the weakness of mutual funds. They only point to the advantages of mutual funds. 
Don't get me wrong. Mutual funds do have some advantages. The problem is one of perception; the perception by Main Street that mutual funds have very few disadvantages.

David Tice Makes Fortune from Sheep

Right about the same time as the mutual fund industry was in dire straits, David Tice, manager of the Prudent Bear Fund (at the time) was attracting a good deal of investors. Tice’s fund was designed to take advantage of a declining stock market.

Tice knew that the best way to lure in the sheep was to become a whore for CNBC. But he couldn’t play the typical Wall Street bull market guy because this would go against everything his fund stood for.

By the time Enron and WorldCom collapsed, CNBC was ready to air a contrarian, and Tice rose to the occasion with drama, making claims that Tyco was involved in accounting fraud.

Although Tice began these rumors in 1999, CNBC wasn’t interested in hearing about it because the stock market was flying high.

But as always, after the bottom fell out, CNBC was there playing the role of investor advocate, fooling Main Street once again. See here and here.

Never mind that Tice was involved in what could be argued as stock manipulation by spreading false rumors and profiting from shorting shares of Tyco. After all, CNBC specializes in securities manipulation while hiding behind First Amendment rights as its cover. 

Soon, Tice became the media whore CNBC wanted, as investors were hungry to hear a guy diss the stock market after investors suffered losses of trillions of dollars when the dotcom bubble popped. He played on basic human emotions and psychology.

Tice Passes the Torch to His Friend

However, Tice’s position as numero uno CNBC whore didn’t last too long because he was faced with an onslaught of new money from CNBC sheep.

As is always the case with the financial “experts” on CNBC, once Tice managed to drum up enough business via his marketing activities on the network, he simply became too busy for regular appearances. He was rolling in the dough, so he didn’t care to bother rescheduling his vacations to the French Rivera for interviews.

This gave his friend Peter Schiff room for entry. Schiff saw how easy it was to make a huge fortune pitching to the sheep who watched CNBC after seeing how Tice made out, despite the fact that his fund was a disaster.

Interestingly, Tice is a very Jewish name, as is Schiff. This was specifically why he was inducted as a media celebrity by the Jewish-run financial media.

And you wonder why the Jewish media selects its “experts?”  

They are enriching members of their own tribe, ultimately at the expense of Main Street. This is a very worrisome reality that no one dares mention for fear of being labeled a “racist.”

The Performance of Tice’s Fund

So let’s take a look at Tice’s Prudent Bear Fund. But before you continue, I'd like to refresh your memory on a piece I wrote on Tice in 2009. See here.

Below is a chart showing the performance of A shares since inception.

 

 

So how does this compare with the Dow Jones Industrial Average (the results are similar when compared to the S&P 500 Index)?

 

 

As you can see, even with the collapse of the stock market in 2009, the Prudent Bear fund didn't do so great. As shown in the above chart, if you had invested in the Prudent Bear fund in 1996, you would be down by 60% as of August 19, 2012. In contrast, if you had just stuck with the Dow Jones Industrial Average or S&P 500 Index, you would be up by nearly 120%.

Remember that part of the losses in the Prudent Bear fund are due to the effect of compounding fees, which add up to a huge amount over time.

 

 

 

Now I will show you the results of what you would have made if you had invested in C shares of the fund at the best possible time; 1999, right when the fund was formed and just months before the Nasdaq began to collapse.

I won’t even adjust this to inflation as it would be much worse. 

 

 

 

 

 

Despite the miserable performance of the Prudent Bear fund, Tice doesn’t need to worry about a thing. His fund was purchased by Federated in 2008 for a reported $250 million.

I suppose the only thing is takes in this world to become rich and “successful” is to live a lie and have no conscious.

And with the help of the media, you will lure thousands of suckers who fall in love with a sales pitch rather than the merits of an investment proposal.

Federated kept Tice on as an adviser since purchasing his disastrous fund for one reason and one reason only. Because the clueless investors who originally bought the fund feel for Tice, not the fund. Thus, without Tice as the spokesperson for the fund, the sheep might start to pay more attention to the fund’s performance.

Making money from stupid people has never been easier. And Tice proved this.

I knew the Prudent Bear Fund was a terrible investment choice many years ago. Yet, after watching how assets of the fund soared year after year while the performance lingered, it was then I realized just how naïve most investors are. 

Instead of taking 10 minutes to review the most basic information on Tice’s fund which is shown on every financial site, sheep get sucked into the BS presented by the media. This is why they get their asses handed to them.



 

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Mutual Fund Disasters (Part 3)

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