 Good day, fellow investors. Today we're going to analyze a 13 million dollar portfolio of stocks and bonds managed by an American investment bank. As you know, I'm an independent stock market researcher. I run the Swenkerlin Stock Market Research platform where I publish all my research, risk reward analysis, my portfolio, my buys, my sales and everything. And there is always the email there and one subscriber has a 14 million dollar portfolio and he wanted me to review and change a little bit his portfolio towards more what I do, but he wanted me to review his portfolio with his investment bank. And this is what we are going to do today. By the way, one reminder, by the end of this year, the price of my subscription will go up. So those who are interested in checking what I do privately, checking my research, please do that before the end of the year, because then I'll be forced because there is more content to raise the price. So you can look in this price forever per year for whatever I do. Now let's go back to the portfolio and discuss what is it that an investment bank does? What are the fees? How have they structured this 13 million dollar portfolio? The topics of today are of course the portfolio, the US equity exposure, the international equity exposures, the issues with that, the fixed income portfolio, which is almost 50% of the portfolio, discussing the fees and the risk reward opportunities and then discussing the investment strategy, portfolio management, risk and reward, of course, what would I do differently? Let's start with the portfolio. This is how the portfolio has been structured, a little bit of cash, 22% in US equity, 25% international, 48.5% in US fixed income. We are talking about a dollar denominated domicile US portfolio. There is a 0.9 percentage per year portfolio management fee and the funds of the client are distributed into three different funds. He doesn't buy into the fund, he simply directly as the portfolio manager of the fund makes a trade, his portfolio automatically makes the same trade as the portfolio management of the fund. So he has his own stocks but the portfolio does everything automatically as the investment banks, portfolio managers, fund managers do. So that is how the portfolio is structured. Let's see what is in the portfolio. US equity portfolio exposure, the portfolio positions are listed from the largest to the smallest and we can see here 26 positions, the largest position is advanced auto parts, I don't know whether the fund bought the stock at the bottom in February or as my investor invested his money in February, he simply got the bottom of that stock and that's why his returns on that stock are about 40-50%. But advanced auto parts has had free cash flows between 300 million and 500 million per year over the last 10 years. On a 10 billion market capitalization, I would say that the expected return over the long term, ups and downs, extremely competitive business, a little bit more recession proof would be around 4-5%. The next position is Comcast, a company that recently won a bidding war and acquired Sky PLC for 38.8 billion and the cash offer will put more pressure on Comcast's balance sheet that already has 114 billion in liabilities. Plus Sky PLC has had operating cash flows of around 2 billion per year for the last 10 years, pretty stable, a little bit declining. This makes it a stretched acquisition as the interest on the debt will be close to 2 billion of the free cash flow that will be coming in from Sky. Another good company, Intercontinental Exchange, stable company, high free cash flows potential return around 4-5%. Again, free cash flows 2 billion on a 42 billion market capitalization. Dana Hare is the fourth largest US portfolio position, another stable company with 3 billion in cash flows on a 70 billion market cap. Progressive Corp. Ohio is an insurer and Kroger is a grocer with similar characteristics as the above businesses. All have dividend yields around 2%, stable business model, we can call them recession proof businesses and business models and price to cash flow ratios of around 20 that should lead to a 4-5% return. If we look at all the other portfolio positions here, those mostly replicate the above. All good companies and we can say fairly priced by the market. There is Google, a little bit of American Express, MasterCard and we could easily say that the US portfolio reflects the client's wishes, safety and quality. But now let me talk about the issues. There is the diversification issue I want to talk about the fees charged for the portfolio management and then something that is not discussed that much but it's the investment management process when you are part of such a big bank. Let's start with the diversification. If I go back to Professor Sharp and 1990 economics Nobel Prize winner and his work on risk, risk, market sensitivity and diversification published in the financial analysis journal in 1972, we see that as soon as you pass 20 positions in your portfolio, the risk equals the market risk, practically equals it. So when it comes to a portfolio, US equity portfolio with 26 positions, I would argue that the results, whatever happens, will be similar to the SAP 500. And even if we look at the SAP 500, it gives practically the same characteristics as those in this portfolio. Great businesses, average price to cash flow yields and average dividend yields. Let's see. So if I look at the top positions of the SAP 500, we are there Microsoft, Apple, Amazon, Berkshire, J&J, Facebook, JP Morgan, etc. Microsoft has a cash flow yield of 3.75%, Apple of 8%, Amazon of 1.8%, but we might argue that in 10 years, Amazon might have a higher cash flow than Kroger, a higher cash flow yield because Amazon's cash flows will probably double in the next 10 years and more. Berkshire is a diversified portfolio by itself focused on US equity and it holds great businesses and has a price to cash flow of around 4%. Now, this leads me to the question, is the 0.9% yearly fee justified? When you can buy the same quality businesses, same yield, same price to cash flow for a 0.04% yield at Vanguard? So that is something that I simply cannot justify when I look at the portfolio and compare it to the SAP 500. And in this digital era, we might even argue that Amazon or Facebook are even more defensive stocks than let's say Kroger because the grocery industry, everything is getting a little bit disrupted or even say, let's say, displaced. So we might see whom will be the winner again in the next 10-20 years. Past data and looking at what happened over the last 30 years with constantly declining interest rates and slow disruption might not be what will happen in the future. Now, there is another thing that I want to discuss, investment fund behavior. The thing when it comes to banks is that there is a lot your bank isn't telling you. Aside from the 0.9% yearly management fee, the bank makes money as they buy and sell through their own brokerage, custody fees, perhaps they are even the market maker for the security, they pay for research, marketing costs, administration, setup fees, etc., etc. That usually you don't see and you don't pay in your top line fee. In this case, the client pays, I think, apart from the fee also, the transaction fees, perhaps the market making something that's something that has to be added on top of the pie that is given to the bank. So just something to keep in mind. But there is something even more important is about the investment process when it comes to investing which such a huge investment bank. Now, if I would be an investment banker and I manage, let's say, 10 billion and then clients want their money back because the market is crashing, they are panicking, which is something that usually happens and then I have to sell 3 billion of my portfolio. That's a lot of money, that shakes markets and what do you think, can I sell whatever I want that is in the best interest of the client or I have to sell what is in the best interest of the bank. Then if I want to sell something and something is illiquid, I might make things worse than they are already and therefore I'm forced to sell something perhaps that's more liquid that's easier to sell and I cannot hold on to the position that might be better over the long term or provide better risk reward returns over the long term. So when things go well, everything is well but you really see what's going on and what happens and how it is actually managed when shit hits the fan. When there is a panic at such an investment bank, Lehman Brothers or whatever, so when that happens then I don't know whether the investment banker will have your interest in the first place, which is something always to keep in mind when it comes to investing in such investment vehicles, so be careful about that. Similarly, Warren Buffett has 114 billion dollars in cash sitting on his bank account. An investment banker has to be invested 100% because you're paying him a fee to swing, how would Buffett say swing new bump. So he doesn't have any flexibility when it comes to investing so that's something you don't get when investing with an investment bank but you pay a big fee for it and we'll discuss more about the fees. So think about it Buffett is waiting for a market panic to deploy the 100 billion dollars he has in cash which is something the investment banker cannot do and he will be practically probably forced to do the opposite and sell the positions that are under pressure and sell the positions or buy something else that will save the image of the bank etc etc. Those are things that we will only see developing when shit hits the fence but that is something that can happen and has to be kept in mind. Now let's see the international portfolio overview 25% of the whole portfolio and has a total of 68 positions. Since the inception of the portfolio in February 2018 the performance has been really bad but that's normal as all european international emerging markets have really suffered and positions like Ryanair are down 44%. Now the largest position is Medetronic followed by Dune Lever, Compass Group, Aptiv, Ryanair I already mentioned. There is a little bit of everything there, Tencent, BHP, Indian Nisisi Bank, Russian version of Facebook, Yandex, some Chinese stocks like 58.com that we discussed, South American payment processors like Ciello etc. Just a note on Medetronic it's the world's largest medical device company, makes most of its revenues and profits in the US healthcare system but it's headquarter in Ireland for tax purposes. So that's an international stock that should be in US stocks. Nevertheless the cash flows there are 4 billion per year have been over the past 10 years and the market cap is 120 billion so that's a yield of what 3.5%. Now my simple comment is holding 69 stocks doesn't move the needle we can expect equal to market risk and reward performance therefore one can simply buy the Vanguard total international stock ETF for a fee of 0.11% per year that is what one tenth of the fee that is charged by the investment bank and if we compare Vanguard's top 10 position and the portfolio we are analyzing I see that Royal Dutch Shell is in both portfolios same as Tencent, Novartis, Roche, Taiwan Semiconductor so a portfolio I'm paying 0.9% per year to be managed has five positions that are also in the Vanguard total international stock ETF top 10 positions with a management fee of 11%. Now let's see if there is more value added in the bond portfolio. 48% of the portfolio is placed into a bond fund and the holdings are the following you see a lot of bonds but most of the bond portfolio is placed in US treasuries so we have 18% of the portfolio in US treasuries now why the heck would I have to pay a 0.9% fee to be invested in treasuries when I can do that by myself without any fee and invest directly treasuries the maturities are from five years to 10 years so that is something one can do by himself and it shouldn't be charged the 1% fee especially as the yield on those treasuries is 1% so actually his real returns are negative further if we look at the corporate bonds there is a lot of it the yield is between 2% and 3% a lot of corporate bonds but if I look at the Vanguard long-term corporate bond investment grade the yield now is what 4.9% 4.35% 3.7% on the short-term corporate ETF so one can again buy an ETF with a fee of 0.11% or 0.07% and simply save a lot of money on fees and even get the better yield for perhaps the same risk if you want to be exposed to fixed income so on a portfolio of 66 bonds 60 excluding the treasuries I simply don't see any difference except the huge fees and there might be pressure when it comes to trouble in the bond market that the fund manager sells this or this in place on that and that and further makes this service to the management higher yields lower management fees can be achieved and this is simply outrageous to charge 0.9% to have your money in treasuries so this is really something that I see okay for the same risk for the same diversification for the same exposure you can have a much much lower fee of 0.1% with Vanguard and have the same risk reward for the long term the owner of the portfolio asked me to create an all-weather portfolio if that is possible for me to manage his portfolio I unfortunately declined because my investment strategies are more like a buffet like approach when we invest in great businesses and we accept volatility an all-weather portfolio sacrifices long-term higher returns to minimize risk and that's something I'm not focused on and as you know I'm building a portfolio and it will take a year two years to build that to find the best investments to watch the best investments so I simply don't have the time to manage another all-weather portfolio even if it would be profitable if I would just charge 0.9% on the 13 million from this client I would make 117 thousand dollars per year so that's something I have renounced to do what I think is best for me and that is fine great businesses and investing great businesses however here I have laid out the strategy for this portfolio which is just by ETFs Vanguard ETFs or Vanguard index funds even better with a much smaller fee and that's something I cannot charge 117 thousand per year as the bank is doing that is outrageous from my standpoint and here it is all free the strategy so if you have such a portfolio from an investment bank compare it to what can be done for free and that is what makes all the difference I have made the video on Canadian pension funds where the fees go up to 2% and are practically invested in the same way as we discussed above and this is the result over 30 years this is a portfolio with the 4% return which is expected from current markets we see the bond yields the stock market yields so if I put 4% over 30 years 4% per year and I put a 2% fee on that the difference is staggering if we start with 1 million then the result with a fee is 1.8 billion without a fee or with a 0.1% fee from Vanguard you get to 3.2 million and that is why I urge people to first focus on fees because special stock picks investment in direct stocks managing a portfolio or whether is not for everybody but lowering fees is something everybody should do now if we go deeper into the investment strategy that this portfolio can be put in there is something to keep in mind if we look at this chart we have banks that are perhaps the most obsolete when it comes to investments they offer no real investment strategy negative alpha they usually put their money in high diversified portfolios so they really don't give anything special and charge high fees then we have major asset managers that are a little bit better but still the same even perhaps we have less commission there then we have large alpha seeking funds you have to have 100 million in the bank to be a part of bridgewater so that might be a solution here with some other funds but then you have to again structure the portfolio in a proper way so you have to sit down with an independent advisor who can tell you okay let's structure this portfolio by deploying the money with a few alpha seeking funds that are even a little bit hedged but that's something different then we have small alpha seeking funds which can a little bit be more related to this investment fund but that implies a lot of work and then we have ETFs that cost zero that will give you market performance which isn't bad if you compare it to a high fee again market performance so my opinion is that one should first try to get as much as education as one can get on investments on what is the risk and reward and always ask the question that i read in a great comment from richard b in the previous video we made is always ask why why do you put 48 percent of my portfolio in bonds why is the yield three percent why is the yield not four percent why are we buying croger why are we not buying amazon etc etc always ask why why why why why and over 10 years of asking why you will get a clear indication of what is going on and why is what going on and you can protect yourself much better so thank you for watching if you enjoyed this approach to investing please subscribe please comment ask questions you can always send me email like this subscriber did so please feel free we are here to educate the world about their finances and if we can just lower the fees for the same risk reward of a portfolio we have saved we have saved millions of dollars for many many people around the world thank you please subscribe and i'll see you then in the next video