Not so happy returns

Investments: Several of the industry’s most prominent names have had a disastrous year so far. Do they still have something to offer to retail investors and can they recover their losses?

It was the stuff of the American dream. “My father was a taxicab driver, and that made me a real happy kid because I knew I was going to do better than my father,” Bruce Berkowitz told a crowd of investors packed into a Columbia university auditorium in February.

His youthful confidence was well placed. Mr Berkowitz went on to become one of the most successful financiers of his generation – a fact acknowledged in 2010, when he was named domestic mutual fund manager of the decade by Morningstar, a research group.

Yet one piece of advice he handed down from the stage in New York proved wiser than the enthusiastic advocacy of financial stocks that it preceded. “The risks are the usual: what you don’t know; what you’re not thinking about; probably

the biggest risk is what you are 100 per cent sure about,” he said.

Six months on, investors have begun to flee Bank of America, AIG, Citigroup and the other beaten down financial institutions that Mr Berkowitz had backed so confidently to recover. For Mr Berkowitz’s Fairholme fund, ranked last out of the 311 mutual funds in its category by Lipper, a research group, has lost 26 per cent of its value so far this year.

But he is not the only big-name investor to have combined overconfidence in the strength of US economic recovery with misplaced faith in the power of his own insight.

John Paulson, the hedge fund manager famous for making billions from bets that securities backed by subprime mortgages would prove worthless during the financial crisis, has also suffered as large bets on banks recovering have turned bad. Bill Gross, manager of the world’s largest bond fund for Pimco, has seen his widely followed call to avoid US government debt backfire.

“This is a natural phenomenon,” says Denis Bastin, a consultant to asset managers. “If you had a breed of super financial people who could always get it right whatever the market environment would be, well, all the wealth would be concentrated in very few hands and there wouldn’t be a market any more.”

But the fact that the “masters of the universe” have got it so wrong is a sign of how upside down the investing world is today. Everyone has struggled, with two-thirds of managers of stock funds failing to beat the S & P 500 index benchmark in the past three years, according to Standard & Poor’s.

On the eve of another September when banks are starting to eye each other nervously, as they did in the run-up to Lehman Brothers’ collapse in 2008, mere mortals face a rapidly shifting landscape. Ben Bernanke, US Federal Reserve chairman, only hinted at the possibility of further economic stimulus at last weekend’s annual gathering of central bankers in Jackson Hole, Wyoming. Christine Lagarde, head of the International Monetary Fund, warned that Europe’s banks needed more capital. With no sign of an end to today’s turbulence in sight, investors have a pressing question for the finance industry. Who on earth should they trust with their money?

It all seemed so different back in January. In his report to investors for 2010, Mr Paulson laid out arguments for a continuation of an economic recovery at that stage only five quarters old – a fraction of the six years of growth that followed the previous recession. The US government’s decision to extend tax cuts enacted under George W.



Not so happy returns