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Friday

Data scientist

Index fund guru, a long only genius and a machine learning data scientist are flying in to present to a New Zealand institutional investor. As the plane lands they see one purple sheep alone in a field.

Professor Passive says "All kiwi sheep are purple! I must buy them all. NOW. Pay ANY prices the owners want, no matter how high or overvalued. It's not my money. No need to know ovine business or earnings. Forget about analysis or due diligence. Ignore risk! Prices are always correct as markets are efficient. I have academic tenure and Swedish taxpayers bought me a fake 'Nobel' in economic 'sciences'. Risk free...for me!"

Beta Bandit says "Some kiwi sheep are purple but the professor says they all are. I am benchmarked to the index so I must also buy that purple sheep no matter how high the price. Can't risk tracking error and not being fully invested or consultants will remove me from their recommended lists. It's not my money either. I get paid the same whether customers win or lose. When markets drop 50% again, if I only lose 45% I have great outperformance. 5% alpha!"

Data Scientist says "That sheep MIGHT be purple but my machines have deep learnt that nothing should ever be sold short or bought without regard to price. My clients are retirees, widows, orphans, endowments offering student scholarships and foundations serving good causes so I MUST do much deeper analysis. Our interests are aligned as ALL my wealth and family and friend money is in the fund. I study potential investments very closely so that ABSOLUTE pension liabilities can be paid out.

It's my fiduciary duty as a TRUE money manager, unlike you asset gatherer salesmen. I'm only paid well if, and only if, I make absolute money for clients. Unlike you I invest as a prudent man does. You guys are breaking suitability and fiduciary rules for your unfortunate customers. Doing no analysis or due diligence before buying an alleged purple sheep at any price? What are the outrageous fees you charge for your so-called "work" actually for?

There seems to be a sheep, one side of which appears to be temporarily purple. This may be due to chemicals in the sheep-dip, an accident with dye or paint, an optical illusion, a practical joke or a smudge on the airplane window. I will closely study sheep fundamentals and talk to many shepherds, shearers and wool merchants with extensive domain expertise.

My data wrangling team will gather petabytes of global ovine data and conduct rigorous statistical analysis, mathematical modeling, stress tests and scenario simulations. Perhaps, after exhaustive research, I might be able to decide whether to short sell or even buy that apparently purple sheep, depending on its value and risk.

The Nobel Foundation, the professor's university endowment and long only dude's pension plan are my clients because they need the absolute returns I deliver irrespective of market direction or beta factors. You can't buy food, pay faculty or meet liabilities with relative returns in bear markets. Professor Passive's employer is able to offer student scholarships and pay his tenured salary because it avoids his beloved, high risk index funds. Too volatile and expensive."

Which fund would YOU invest in? Who should get the NZ$250 million mandate? Who is most likely to generate RELIABLE risk-adjusted returns? Whose fees represent the best VALUE for the work? What manager is really the "cheapest"?

Would an investor truly following the prudent man rule choose a passive fund given the fiduciary duty for due diligence in selecting appropriate investments for beneficiaries? Passive funds that do no security analysis or risk management are a clear breach of fiduciary duty.

Which fund offers alignment between client and manager interests? "Cheap" index funds are the joke. The more conservative you are the more you need in quality hedge funds. Index firms pay "experts" outrageous fees to market "low cost" high risk unskilled toxic waste to the masses. Don't get suckered in. No professional anywhere in the world puts one cent in unskilled long only.

After Wellington and Auckland I'm spending a few days in Queenstown. But I'll let you know who wins the beauty contest.

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