Past performance is no guarantee of future results. How many times have you either heard this or read this line when looking at or into an investment opportunity?
The reality is every financial institution must provide this statement, or some resemblance of it, in order to cover themselves. But how many investors continue reading after that statement? I ask because my firm, LCM Capital Management, actually does and after reading them, it only helps to reiterate why it is our prevailing approach to avoid placing into our clients’ portfolios the "innovative" financial products that our industry is continuously coming up with.
The excerpt below comes from a well-known Wall St firm. I’m here to tell you, it does not matter the firm’s name since they all contain basically the same language.
This particular one is in regards to their private Real Estate Investment Trust (REIT). If you have read any of our previous posts regarding these private investments then you know our view on them and if you have not, then please read.
I intentionally bolded a few words and lines for emphasis……….
"Performance is measured by total return, which includes income and appreciation. Total return represents the compound rate of return assuming reinvestment of all distributions…… Performance would be lower if calculated assuming that distributions are not reinvested….. The returns have been prepared using unaudited data and valuations of the underlying investments in XYZ’s portfolio, which are estimates of fair value and form the basis for XYZ’s NAV (Net Asset Value)." NAV is basically the net worth of a mutual fund, or a Real Estate Investment Trust (REIT). It tells you exactly how much one share of that fund is actually worth based on the underlying assets.
It continues……"Valuations based upon unaudited or estimated reports from the underlying investments may be subject to later adjustments or revisions, may not correspond to realized value and may not accurately reflect the price at which assets could be liquidated on any given day." We believe that they are saying here is we are guessing what our fund is worth. "Performance data quoted is historical. Current performance may be higher or lower than the performance data quoted."
And the grand finale………"Calculations based on net asset value (“NAV”) involve significant professional judgments and the calculated value of our assets and liabilities may differ from our actual realizable value or future value. An incorrect judgment will affect the NAV as well as any returns derived from that NAV, and ultimately the value of your investment. As return information is calculated based on NAV, return information presented will be impacted should the assumptions on which NAV was determined prove to be incorrect."
So let me paraphrase this with help from Claude…… “Our NAV is basically a very confident guess. We hire smart people to guess what our stuff is worth, and if their guess is wrong, well, so is everything you thought you knew about your returns. Also — plot twist — we calculate your returns using that same guess. So, if the guess was bad, the ‘performance’ we reported to you was, at the end of the day incorrect. Don’t say we didn’t warn you.”
Now, how many investors would actually buy these investments if this paraphrased summary was bolded and on the top of the disclaimer and not buried deep within it?
We have always said that these types of investments are not bought by clients but sold to them.