Saturday, May 26, 2012

Portfolio Management

This is the story of a fantastic portfolio manager. He/She has managed to grow Assets at 15.5% compounded rate for the last 32 years and in real terms, at 9.4%!
Oddly, very few people have heard of this person as a portfolio manager.
To put things in perspective, Ray Dalio's Bridgewater Associate's Pure Alpha Fund has managed between 15 and 17% gross returns over a 20 year time period and one of the best funds ever - Berkshire Hathway - has managed a 19.8% Compounded return over 46 odd years.
However, according to my calculations, BRK has managed only 8-11% in the last 13-14 year period.

Here is the mysterious fund manager's track record:


Year Base Value - constant terms Nominal Terms GDP - USD Billion Real Growth Rate Nominal Growth Rate
1979 507.5 403.8              275 7.6
1980 547.1 451.8              298 7.8 11.9%
1981 575.5 486.2              314 5.2 7.6%
1982 629 529.5              346 9.1 8.9%
1983 698.9 593.5              388 10.9 12.1%
1984 805.8 717.1              458 15.2 20.8%
1985 912.1 896.4              529 13.5 25.0%
1986 989.7 1,020.20              580 8.8 13.8%
1987 1,103.50 1,196.30              656 11.6 17.3%
1988 1,228.20 1,492.80              740 11.3 24.8%
1989 1,279.80 1,690.90              771 4.1 13.3%
1990 1,333.50 1,854.80              802 3.8 9.7%
1991 1,454.90 2,161.80              883 9.2 16.6%
1992 1,660.00 2663.8           1,029 14.2 23.2%
1993 1,877.50 3,463.40           1,190 13.5 30.0%
1994 2,114.00 4,675.90           1,361 12.6 35.0%
1995 2,304.30 5,847.80           1,521 10.5 25.1%
1996 2,530.10 6,788.50           1,682 9.6 16.1%
1997 2,745.20 7,446.30           1,845 8.8 9.7%
1998 2,959.30 7,834.50           2,001 7.8 5.2%
1999 3,169.40 8,206.80           2,154 7.1 4.8%
2000 3,422.90 8,946.80           2,341 8 9.0%
2001 3,707.00 10,965.50           2,553 8.3 22.6%
2002 4,044.34 12,033.30           2,808 9.1 9.7%
2003 4,448.77 13,582.30           3,120 10 12.9%
2004 4,898.10 15,987.80           3,471 10.1 17.7%
2005 5,383.01 18,386.80           3,852 9.9 15.0%
2006 5,980.52 21,087.10           4,333 11.1 14.7%
2007 6,662.30 24,661.90           4,891 11.4 17.0%
2008 7,301.88 31,404.50           5,410 9.6 27.3%
2009 7,937.15 34,506.90           5,926 8.7 9.9%
2010 8,762.61 40,201.20           6,614 10.4 16.5%
2011 9,586.30 45,000.00           7,300 9.4 11.9%
CAGR Real 9.4%
CAGR Nominal 15.5%


Ah, I hate exporting from excel to this site!
Source: http://www.chinability.com/GDP.htm
But well, I let out a small secret: The fund manager actually handles China's GDP. This can be considered equivalent to increasing shareholder wealth from a USD 275 Billion in 1975 to a near USD 7300 Billion in 2011. The numbers might be slightly off but the second column is more reliable.

But they have still managed a 13.7% nominal return in the last 14 years compared to BRK's 8-11%. The differential is smaller for this country - 1.8% points - as compared to BRK's 18% points.
So why did BRK perform so (relatively) badly? Because beyond a certain size it is difficult to find good avenues for investments. BRK's book value is USD 99.8 Bn compared to this country's USD 7300 * 10 ? Bn, and yet, this country did not find it difficult to grow in the recent past.

Odd?
But I do have an explanation. BRK's numbers have been audited. China's numbers have never been audited. Something is amiss.

To put things in a better perspective, I tabulated the GDP numbers of the world's largest economy.
Between 1900 and 2011, in any 32 year period, the highest nominal GDP growth that the US has managed is 8.3% between 1933 and 1965. The highest real GDP growth rate for any 32 year period has been  5.2% for the same time period.
I am certain that China has created some seriously ridiculous numbers. The truth shall unfold.



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