Yesterday someone asked me a question about the American Century Funds. I thought a bit, then connected American Century to American Century’s Sr. Vice President, Harold Bradley, who you may remember stated in his Congressional Testimony in 2003(1) that soft dollar brokerage was an approximately 1.2 billion dollar per year drain on investors’ assets.(2)In 2003, after reading Mr. Bradley’s testimony, and realizing that he derived his estimate from a Greenwich Consulting Survey, I reviewed the Greenwich Survey, found the flaw in Greenwich’s questionnaire and I algebraically computed a more accurate annual drain on investors assets from (all) soft dollar brokerage arrangements. I recall Integrity Research Associates published an article I wrote about the survey question, and the computational error.(3)At that time, I sent letters describing the survey error and the computational error to the then Chairman of the SEC, Christopher Cox, to staff members of the SEC’s Office of Compliance, Inspections and Examinations (OCIE), to Greenwich Associates, to Senator Christopher Dodd, and to Harold Bradley at American Century Funds. I never received replies from any of these recipients.When I was asked about American Century Funds yesterday, I connected the funds’ name American Century to American Century’s Senior Vice President, Harold Bradley. And, I was interested in doing a key words search on - Harold Bradley soft dollars – just to find out if he got my message.I was pleased to see that Mr. Bradley is now quoted as estimating soft dollar brokerage costs at “about 12 billion dollars a year . . .” however, he doesn’t explain where the other 10+ billion per year in his estimate comes from.(4) I suspect the new 10+ billion of soft dollar brokerage Mr. Bradley now includes in his estimate is the non-transparent soft dollars which institutional investment advisors generate in bundled undisclosed soft dollar arrangements with full-service brokerage firms' institutional trading desks.It would be interesting to know if 10+ billion still is actually a good current estimate of total institutional soft dollar brokerage. It seems to me that competition, new transaction efficiencies, and trading cost compression would force a smaller portion of total institutional brokerage commissions to be used in 'paid-up' soft dollar brokerage arrangements. (It seems in the current environment of very high quality transaction cost analysis, it would raise questions if investment advisors paid significantly higher brokerage commissions than what is required to compensate the executing broker for the broker’s fully-negotiated costs of transaction execution.[In mid-2007, after SEC Chairman Christopher Cox sent letters, to Senator Christopher Dodd and Congressman Barney Frank, requesting that “Congress consider repealing or substantially revising Section 28(e) of the Securities Exchange Act of 1934”(5) In his letters Chairman Cox mentioned the potential investment effects of an excess of 1 billion dollars of third party brokerage soft dollars.At that time, I again sent a letter to SEC Chairman, Christopher Cox, to Senator Christopher Dodd, and to SEC Staff at the OCIE. In these letters I attempted to explain that the 1 billion dollars of fully-disclosed institutional third-party soft dollar brokerage seem to invite far fewer abuses, and fewer conflicts-of-interest, than my estimated 6.5 billion dollars of soft dollars institutional investment advisors generate in bundled undisclosed soft dollar arrangements with the institutional trading desks at full-service brokerage firms.] (6)Footnotes:(1) From the supporting documents included in Mr. Bradley’s Congressional Testimony, it seemed obvious that Mr. Bradley’s estimate was based on a flawed survey produced by Greenwich Consulting.(2) Harold Bradley’s Congressional Testimony on soft dollar brokerage March 12, 2003:(3) Integrity Research article on the Greenwich Survey’s soft dollar brokerage question:(4) Key-words-search on: Harold Bradley Soft Dollar Brokerage(5) See, SEC Chairman Christopher Cox’ May 17, 2007 letter to Senator Christopher Dodd in which Chairman Cox requests that Congress “repeal or substantially revise Section 28(e) of the Securities Exchange Act of 1934”, at: http://www.scribd.com/doc/13752510/Cox-Requests-Legislative-Action(6) June 1, 2007 letter to SEC Chairman, Christopher Cox and U.S. Senator, Christopher Dodd which discusses the true magnitude, and potential for abuse, of non-transparent undisclosed bundled soft dollar brokerage arrangements, at: http://www.scribd.com/doc/502783/CoxDoddOther Relevant Resources:(1) A brief history of soft dollar brokerage titled, “Thirty Three Years Later” Published September 2, 2008, at: http://www.scribd.com/doc/5468892/Thirty-Three-Years-Later(2) Manager – Investor Conflicts In Mutual Funds By Paul G. Mahoney pub. Journal of Economic Perspectives Vol. 18 #2 Spring 2004 page 172 (which is page 12 of the linked .pdf) at: http://www-personal.umich.edu/~kathrynd/JEP.MutualFunds.pdf(3) Advisors Misreport Use of Soft Dollars By Sara Hansard published Investment News July 24, 2006, at: http://www.scribd.com/doc/18375964/Soft-Dollars-Defined andhttp://www.investmentnews.com/article/20060724/SUB/607240718&ht=Advisors%20Misreport(4) An example: SEC Press Release: SEC Charges Fidelity, Executives Employees For Accepting Lavish Gifts Paid For By Brokers pub. SEC Website, March 5, 2008, at: http://www.sec.gov/news/press/2008/2008-32.htm and Fidelity Investments Settles SEC Gift Lawsuit by Riley McDermid & Jonathan Burton - published MarketWatch, March 5, 2008 at: http://articles.marketwatch.com/2008-03-05/finance/30762361_1_fidelity-employees-fidelity-spokeswoman-anne-crowley-fidelity-magellan-fund(5) What motivated many of the abuses outlined in the SEC’s Spotlight On: The Global Analyst Research Settlement, at http://www.sec.gov/spotlight/globalsettlement.htm
Many people and much of the media are pointing to recent improvements in home prices as a sign that the single family home market is bottoming and starting to recover. It seems to me that an alternative way to look at recent changes in the housing market might be to look at things a bit differently.
How about reading the tea leaves this way:
Several institutional asset managers have convinced investors that buying single family homes ‘in-bulk’ and then renting the houses or flipping them is a good business that will provide better yields than most other investments currently available (in The Bernanke Economy). However, it seems the institutional asset managers that are doing this have ignored that single family home property management and single family home ‘flipping’ are generally not ‘scaleable’ activities. That is, the operational costs of single family property management and single family home 'flipping' are very high, and the activities involved usually cannot reach economies of scale.
Meanwhile, the media is reporting a recovering market in housing. And, some homeowners who have discretion about the timing of selling their homes make a discretionary decision not to list their home and to wait for a better price – because all indications and the media say home prices are rising. This reluctance to list reduces the LISTED inventory, which further creates the appearance of a recovering housing market.
Then, in a few months, the investors in the institutional funds that have purchased homes 'in-bulk' begin to realize the institutional managers are not reaping the expected returns and they begin to cash-out of the institutional home buying funds. This cashing-out forces the institutional funds to sell the homes they bought ‘in bulk’ at the best price they can get.
Many very smart institutional investors have mentioned the operational difficulty and lack of ‘scaleability’ as reasons bulk home buyers may not succeed at single family home property management and / or single family home ‘flipping’.
Private Equity Has Too Much Money to Spend on Homes By John Gittelsohn | pub. Bloomberg News - Jun 12, 2012: http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-money-to-spend-on-homes-mortgages.html
Institutional Investors Are Turning to Residential Foreclosures Investing in single-family rental market in its infancy By Arleen Jacobius | Pensions & Investments April 2, 2012: http://www.pionline.com/article/20120402/PRINTSUB/304029978
Insight: The Wall Street Gold Rush in Foreclosed Homes By Matthew Goldstein & Jenneifer Ablan - Forbes Magazine 3/20/2012, at: http://www.reuters.com/article/2012/03/20/us-usa-foreclosures-investors-idUSB...
Investors Flock to Housing Looking to Buy Thousands of Homes in Bulk By Morgan Brennan - Forbes Magazine 4/3/2012, at: http://www.forbes.com/sites/morganbrennan/2012/04/03/investors-flock-to-housing-aspiring-to-own-thousands-of-homes/
Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business Submitted by Tyler Durden on 10/17/2012 http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
The Housing Bet Warren Buffett Wishes He Could Make By Steve Shaefer pub. Forbes Markets 3/29/2012: http://www.forbes.com/sites/steveschaefer/2012/03/29/the-housing-bet-warren-buffett-wishes-he-could-make/#
Critics Question Investment Fund’s Sacramento Rental Venture By Hudson Sangree and Philip Reese Sacramento Bee – Monday April 8, 2013 http://www.sacbee.com/2013/04/08/5323832/critics-question-investment-funds.htm
Lower Rates Push Yield Seekers to Higher Risk By A. Gary Shilling – Bloomberg News - Jan 29, 2013, at: http://www.bloomberg.com/news/2013-01-29/lower-rates-push-yield-seekers-to-higher-risk.html
Warren Buffett Says, “Buy Real Estate Now!” at the same time he mentions the problem of “scaleability” see video from CNBC Squawk Box pub. February 27, 2012: https://youtu.be/XOGP6hd0B24
Not All Investors Are Equal
Published: July 17, 2012
Surveys Give Big Investors an Early View From Analysts
By GRETCHEN MORGENSON
Published: July 15, 2012
Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...