A QUITE remarkable document titled 'Memo for internal use only' appeared in a brown envelope on our desk a little while ago.
It was an internal evaluation of a unit trust investing in Hong Kong stocks, and reported - quite correctly - that the fund had consistently underpeformed the Hang Seng index.
Also, as fundholders sold their stocks through the slow Crash of '94 the fund manager sold off the best stocks instead of the worst, so the underperformance steadily got worse.
Well, nothing odd about that. Often fund managers' performance is damaged by fundholders wanting cash when the market is doing badly, just at the time the fund manager would like to be buying bargains.
What really caught our eye is the bit starting 'switching of the stocks in the portfolio has been kept to a minimum.' The document states: 'This seems to be a strange situation as switching of the constituent stocks not only shows the fund is trying to keep abreast of corporate opportunities, but also generates commission for us, as trades will add to our brokerage's turnover.' In other words, the fund manager is being blamed for putting the interests of the fundholders first, rather than churning stocks to generate brokerage commission.
Unfortunately, we can't name the company.
