Thursday, February 11, 2010

Steadyhand Funds Take a Different Approach

I had the pleasure of meeting Tom Bradley and David Toyne of Steadyhand Funds. They are interesting players in the fund industry in that they use active management but are aiming for lower fees that leave more money in the pockets of investors.

Disclosure: There is nothing to disclose other than that David paid for my lunch. I’m writing this post because I found their answers to my questions interesting. Their web site claims that they are simple and direct and aren’t jerks. I agree.

Steadyhand funds charge lower fees than the typical actively-managed mutual fund in Canada. The equity fund charges at most 1.35%, and the global equity and small cap funds charge at most 1.7%. The “at most” part of those statements are explained in the questions and answers below.

The following are my best recollections of my questions and Tom and David’s answers. Let’s start with my toughest question:

Q: Charles Ellis, author of Winning the Loser’s Game (see review here) says that the investment world today is dominated by skilled professionals with up-to-the-second information and that no one professional can beat the others except by luck. What makes you think that Steadyhand can beat the market?

A: Steadyhand gives managers the best possible chance to beat the market. They are permitted to keep their holdings to 20 or 25 equities and they aren’t saddled with a lot of constraints. We believe that there is enough inefficiency in the market to allow small concentrated funds to beat the averages.

Q: Many large funds have trouble matching the gains they had when they were smaller. What will you do if you are wildly successful and the funds grow to the point where it isn’t feasible to have only 20 to 25 holdings?

A: That would be a nice problem to have. We would have to make decisions about how many holdings to permit, but eventually we would have to close the fund to new investors.

Q: The Steadyhand funds have fee rebates for long-time investors and for larger portfolios (starting at about $100,000). Are the reported returns based on the maximum fees or the actual fees taking into account rebates?

A: Reported returns are based on the maximum fees. So, if you take into account the rebates, some investors get higher returns than the reported returns. The rebates are given to investors in the form of extra units of the fund.

I don’t know if it is possible to beat the market averages these days other than by luck, but if it is possible, Steadyhand is giving their managers a fighting chance. Many mutual funds are closet index funds that are afraid to deviate too much from the index. Steadyhand’s equity funds definitely don’t look like index funds. If they do beat the averages, their investors will be happy, but if they don’t, even their lower than typical fees will look large compared to low-cost index funds.

2 comments:

  1. Equity fund charges of 1.35% still sound like a lot to me and will make a significant difference to your total return over a long period once compound interest works its magic.

    I can buy a home equity market ETF here in the UK that tracks the local index for 0.3%. I'm assuming something similar is available in Canada.

    I wonder if Steadyhand Funds would beat a typical index tracker year on year for say 30 years (example used to simulate say saving for retirement) by 1.05%.

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  2. Retirement Investing Today: That's a good question. It's not possible for everyone who tries to beat the market to do so. We can't all be above average. Over the long haul, Steadyhand's fund charges would be somewhat less than 1.35% due to their rebate system that rewards larger investments and long-term investments, but it would still take sustained outperformance to beat an index fund charging lower fees.

    One other point they made was that they believe their funds will have lower volatility than index funds. I guess time will tell whether they achieve this.

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