Fabrice Taylor, CFA, publishes the President’s Club investment letter. His letter and The Globe and Mail have a distribution agreement.
The best thing you can say about the Horizons Gartman ETF is that it was launched with impeccable timing. The worst thing, which happens to be true, is that it’s a closed-end fund run by a celebrity adviser who has cost investors a lot of money. There are lessons here.
Starting an investment fund in March of 2009 – near the bottom of the market and the start of one of the greatest bull markets of all time – would seem like an easy way to make investors money.
But the Gartman ETF, named after advisor Dennis Gartman, ubiquitous author of the Gartman Letter, an investment advisory, couldn’t harness the benefits of its fortunate timing. The fund went public at $10 a share. Those same shares now fetch around $7.90.
More astonishing is that this closed-end fund actually saw the equivalent of massive redemptions. That’s unheard of in the closed-end world. With the asset base, and therefore fees, down sharply, it’s no surprise that Horizons Alphapro has decided to shut the fund down next month.
Could investors have predicted this spectacular underperformance? To some degree, yes. They also could have asked some hard questions about the investment thesis, which was to follow the advice dispensed in the Gartman Letter.
We’ll start with what they could have known: Initial offerings of closed-end funds are for suckers. A closed-end fund costs a lot of money to start, and investors pay those costs. IPO shareholders paid $10 a share for the Gartman fund but after the bankers and lawyers and stock exchanges take their fees, that sum would have been reduced to about $9.40 – and that’s typical. In other words, Mr. Gartman and any other closed-end-fund manager, had to earn more than 6 per cent just to get investors back to break-even.
A good manager might do 10 per cent after fees, so investors in the IPO lost two thirds of a year – and in the market, time is generally money.
If a manager is skilled, he or she can make up such a gap. The problem is that there was no compelling reason, when the fund was launched, to think that Mr. Gartman, despite his celebrity status, possessed such skill.
Prior to the fund’s launch, Mr. Gartman had no real track record as a money manager. He had published an investing newsletter for years but there was no record of management prowess, no catalogue of returns. There were, however, lots of documented sharp opinions and interesting views and therefore lots of media appearances.
Mr. Gartman’s high profile was a magnet for retail investors, who rushed to buy the new ETF. Even they would have raised eyebrows at some of Mr. Gartman’s trades, though, such as shorting Berkshire Hathaway stock after calling Warren Buffett an idiot – a most unprofitable trade, it turned out.
Another major drawback of a closed-end fund is that it will typically – and swiftly in the case of poor performance – trade at a discount to its net asset value. The NAV is the value of all the investments in the fund. This may add up to $10 a share, but that doesn’t stop the units from trading at $8 a share.
In short, when launched, the Gartman ETF was a bad product run by someone with no record, who ultimately couldn’t overcome the headwinds inherent in a closed-end fund. Investors should have been more wary.
Mr. Gartman is not the only celebrity to launch a closed-end fund. BMO investment strategist Don Coxe, an excellent financial historian and writer, also launched a commodity ETF – the Coxe Commodity Strategy Fund – that has struggled. Mr. Coxe’s timing was unfortunate, launching in mid-2008. But the vehicle structure works against him just as it did Mr. Gartman, and the high profile could be working against investors’ judgment.
The biggest of all celebrity investors, of course, is Kevin O’Leary, who needs no introduction. Many of his funds haven’t performed well either, but because his profile is so high he raises money easily. Again, the man had no track record as a fund manager or adviser. He did have a track record as a great salesman, though, including selling The Learning Company to Mattel for a lot of money – a deal that helped to crush the share price of Mattel.
What should investors take away from all this? In my opinion, there is a correlation between high profile managers and poor performance. Profile is more a function of salesmanship than skill. And closed-end funds tend to be poor investments, especially on an IPO.