GATHER

Last week I read this FT article about copy trading. I was expecting the routine stories of users that started full of hopes and eventually got rugged: the first part of the piece did not disappoint me. After referring to the usual suspect in this field, eToro, the author mentioned other two platforms, Follow in the US and Gather in the UK.

At first, I thought it made sense that others tried to replicate eToro “success”. It is indeed a lucrative biz, for eToro. But then the article offered a more Gather-targeted section where I read the following:

“Gather adds that unlike most copy trading platforms it does not offer users the chance to buy individual stocks, focusing instead on funds. The company says funds expose customers to less volatility and discourage day trading.“

I can only agree with this statement. In my still-naive mind, funds = ETFs and considering the harsh restrictions UCITS imposes on ETFs distributed in Europe I thought “there is not much damage that can be done here”. What’s the craziest allocation you can suggest, 3X levered S&P500 ETF? Crypto ETFs?

Diversification is the only free lunch

I spent a lot of time in “finance”, trying trading, fundamental models, quant models, technical analysis and so on. Most likely, I have never been the most intelligent guy in the room and that’s the reason why I realised the only way (for me?) to get an edge is via diversification. Combine low-cost assets in a manner that is hopefully more risk-efficient than the single parts alone.

An activity that would not require any kind of entrepreneurship maintenance, looking for the next opportunity once the previous market inefficiency stops working. Patience (and trust in the process) is the only ingredient required.

Inventing the wheel

A copy trading platform that focuses on funds is…a robo-advisor. Let’s not fool ourselves, the general idea has been out there for a decade. What is missing is how to structure the business in a way that is profitable.

In the past, I wrote about Composer and FinanceDrip. I find Composer a great product but I understand why it might not be that appealing to a wider audience: you need a more-than-basic knowledge of financial products and metrics plus an idea of how a programming language works. It is not even a digital divide matter anymore: my wife kicks ass with Canva but she’s comfortable with Excel as me when I was 15. FinanceDrip is still at that embryonic phase where it has not decided yet what it wants to do as a grown-up.

Raising the knowledge bar that high allows Composer to filter for users that have already replied to a fundamental question: what’s the goal of your financial portfolio(s). The reason why a user should copy a portfolio is because that particular portfolio is the most efficient, risk-wise, way to reach a specific goal. Traditional robo-advisors solve this issue with a questionnaire at the start of a user journey while providing educational material along the way. Solve…let’s say that so far that solution did not exactly work as expected. But has anyone else found a better way that does not involve a dedicated babysitter, holding the saver’s hand all the time?

Gather

You can design your business to nudge customers to do the right thing in a clever, unique way, or you can design your business to nudge customers to pay fees to you while thinking they are doing the right thing. It is too early to say if Gather will be a success but it is clear enough (to yours truly!) that they belong to the second group. Unfortunately.

The Gather website looks like what an AI would create out of the prompt: “How can I convince a reader of The Good Life to invest with me?” [I have been out of the game for half a decade, do not @ me if The Good Life is now cringe and there’s something fresher on the block].

“Dude, your portfolio looks like our wardrobe, a nonsensical pile of random wannabe conscious stuff, ihihihih”

The Gather experience revolves around the Community:

Instead of leaving lads prey to random charlatans, they curate a community of investment pros, finfluencers and…Jorginho, that users can follow free of shitcoin pseudo advice risk. It makes sense, it is a wild world out there! Just yesterday I stumbled on a YTer praising the advantages of using an Introducing Broker to InteractiveBrokers…in a market where IB is available.

Users can follow experts they already know and trust or find inspiration in someone new. Each profile comes with detailed personal information (why they invest, their experience, their goals and so on) and insights written by that person. Josh Brown wrote “How I invest my money“, the Excess Return YouTube channel has a “Show Us Your Portfolio” series: the idea of financial pros talking about their own personal investments is not new. The hard part is to slalom through all the charlatans to get there.

Adding pros outside the finance world to offer inspiration is a great idea; the hard part is how to filter them in order to maintain an appropriate environment. Jorginho is there because he’s an investor in Gather, for example. Setting the right criteria is not easy 😉

Investments selection

The sour notes start with the “unique range of curated portfolios and investment styles” that Gather offers its users. Gather partnered with BlackRock but instead of using their super-cheap, plain vanilla ETFs as portfolio building blocks they decided to go the more complex, high fee / low transparency route. Investments are categorised into three buckets: Premier Cash, Investment Playlists and Investment Albums.

If you need to be sold this type of dream in order to start saving…maybe you are not ready yet?

Why do not use proper names like portfolio or asset allocation instead of albums and playlists?!? One thing is to save users from a complicated context-specific lingo, another is to feed them bs. Saving and investing are too important for people to get away with knowing exactly zero. There is a ton of unnecessary info out there but everyone should be comfortable knowing the difference between a stock and a bond, a mutual fund and an ETF. Make the minimum effort, you know…

Premier Cash is just a Money Market Fund. Easy Peasy [curiously enough, this is Jorginho choice within the app, the most conservative option…while we know that in his real-life portfolio he likes to invest in start-ups like Gather, kind of opposite of the spectrum…which raises a bit the question on the role of the Gather Experts, do what I say, not what I do?].

Investment Playlists are portfolios. Here is where the unnecessary complications start. Instead of offering the basic RoboAdvisor portfolios (the 60/40s, 80/20s and so on), Gather has a couple of actively managed fund of funds that come with the usual goodies of “good luck timing the market by switching weights between funds” and “let’s pay fees on top of fees”. To complete the offer, we find the (obvious?) Global ESG fund, a thematic fund centred on megatrends (more on this when I talk about Albums) and a portfolio, sorry playlist, of Alternatives.

The Alternative section is where I was looking to find something different (in a good way) from the classic Robos and Gather delivered. Sort of…

This is a bold allocation from a standard “tracking error nightmare” point of view: it should dance at its own tune compared to stocks or stocks + bonds. Unfortunately, Gather does not provide a price graph (God forbid a total return one!) for this portfolio, only yearly returns (maybe users that are actually invested in the strategy have it, but still…).

Here is where issues start. The first two items in the portfolio are mutual funds and I do not think there is a good tool like PortfolioVisualizer in Europe to combine easily ETFs and mutual funds total return performances; Curvo.eu is the only one that I know but is more centred around ETFs.

Let’s have a look at the portfolio’s individual components:

BSF Global Event Driven Fund – Class D2 Hedged (EUR) Accumulating

An “event driven” fund is a type of hedge fund that invests in securities of companies that are undergoing significant corporate events such as mergers, acquisitions, bankruptcies, reorganizations, spin-offs, and other major changes. The fund tries to take advantage of the market inefficiencies and mispricing that can occur during these events by investing in the securities of the companies involved. The goal of an event-driven fund is to generate returns by identifying and capitalizing on the opportunities created by these corporate events. Definition from an AI chatbot, is quite accurate I would say.

ED strategies try to be absolute return-like, they should provide positive returns irrespective of what financial markets do. For this reason, they are typically benchmarked to cash instruments (3 months T-Bills), sometimes plus a spread. In reality, their return profile is definitely more volatile than cash and not completely uncorrelated to stocks.

This BlackRock fund is definitely less volatile than a 60/40 (here called Moderate Allocation) but they are closer to each other than the fund and a money market instrument. Still, looking only at those performances, I would choose the Event Driven fund over the 60/40 every day of the year: higher returns with lower volatility! Unfortunately, reality is a bit more complex than this. The is very little beta in this type of strategy, returns are driven by the ability of the fund manager(s) to select mispricing, in other words their ability to beat the efficient market hypothesis. How likely are you to find that manager? How likely are you to know if that manager moves to another fund?

If alpha is uncertain by definition, costs aren’t. As you would expect, costs for this fund are quite steep:

In the above performance graph you do not see the 5% entry charge, which coincidentally would eat almost all the overperformance of the fund vs the 60/40 allocation. While a 20% performance fee aligns, in theory, with the manager and the investor goals, in reality it is only an incentive for the manager to close the fund after a sensible underperformance period; the investor would not enjoy any “free of fees” regression to the mean because that regression would be part of a new fund performance, a fund with a conveniently lower high water mark.

This is a good fund…as far as active funds go. When the inevitable period of underperformance comes, how the investor and the manager would react (or not) will dictate the long-term performance more than anything else.

Fixed Income Global Opportunities Fund

This is a flexible (i.e. active) bond fund, meaning the fund manager is not constrained by a target duration and/or credit ratings and/or currencies: this freedom should allow the manager to generate a positive performance regardless of what interest rates or credit spreads are doing.

possibly comparing a Total Return index with one that is price only?

more fair comparison?

As for the previous fund, it looks like the manager delivered on their objectives: the fund declined way less than the Global Aggregate benchmark. As for the previous fund, it is hard to even find the correct total return performance. Plus the same exorbitant fees:

iShares Diversified Commodity Swap

The other three funds in the portfolio are low cost ETFs, good news! The bad news is…their underlying strategies.

A plain vanilla buy&hold of a commodity basket, like this ETF, is definitely an uncorrelated strategy but not the best approach to the asset class. It has been demonstrated that a trend filter improves the risk-adjusted performance quite sensibly; almost any trend filter, a fact that allows the fund to decouple from the “active manager” issues described above. In short, there are better instruments on the market, even in Europe (see $UEQC).

iShares Listed Private Equity

The issue here is similar to investing in shares of commodity producers instead of commodities themselves. The investors think to get a diversification benefit whereas, in reality, they get almost none. It has been demonstrated that PE is simply a leveraged small-cap investment; here we are looking at the first derivative of that, companies that benefit from the fees (and hype) of that.

iShares Global Infrastructure

See above, just switch infrastructure with private equity. Despite the not-so-brilliant performance so far, I actually like this concept more because investors get something closer to what they think they bought. No, not underperformance, you cheeky boy, but steady, less volatile cashflows (hopefully, in a low-rate environment). This is also the asset class that was sold for more than a decade to conservative institutional investors as the panacea to any problem; I want to vomit every time I hear infrastructure now but at least I have a couple of funny stories, like the debt to finance the Tottenham Spurs stadium that won a “best infrastructure deal” prize months before Covid (“it is backed by ticket revenues!!!”).

Investment Albums

Sorry but this post is becoming a monster and I am tired of writing so…let’s go fast (at this point I probably lost the majority of you anyway). Albums have not been released yet but they seem to be that sort of thematic investing that works great only for the bonus of someone who loves marketing but somehow found only a job in a boring industry like finance.

These things never worked in the past and won’t in the future…profit-wise. Obviously, if you have different priorities it is a different matter, but then you are definitely on the wrong blog. At best, you will end up in the situation described in this tweet:

Fees

Another great marketing stunt. Since the app is already winking so much at Spotify…why not disclose fees on a monthly basis? 3bps looks super competitive compared to other Robos, until (if?) the user realises it has to multiply by 12 to get the real cost. The added bonus here is that every annual 12bps cost increase is masked as a trivial 1bps addition…but would you expect from a country that is still pricing rents on a weekly basis?

The Soho Works collab

This makes so much sense that my mind immediately jumped to “Is there a Soho House equivalent in Italy so that I can pitch the idea to FinanceDrip?”.

Gather craves for young users with spare money to invest and the Soho House is the best place (I guess?) to find them. Plus if you get on board the cool cats you might see the wannabe cool cats follow through, like we are back at high school dynamics again? 😉 I clearly do not know anything about coolness these days but I am putting my money they do?

Anyway, if you want to target young affluent in Italy your best bet is to team up with a morgue. The sad reality is that the few Italian young pros who earn high salaries already have a private banker because they come from a wealthy family. If you have investable assets and you are young, most likely the life event that happened to you is that your father is no more.

Or maybe that marketing strategy also works on an older audience; let’s admit it, I am myself approaching this stage of life:

So?

Overall, I think Gather is not strictly better than any other Robo-advisor out there. But there are a few feats to save.

To provide a trusted list of experts, completed with links to their written material and social networks so that each user can do their own due diligence, is great.

The fact that each portfolio’s historical return is published on an aggregate level avoids that investors would fall for the “single line item” fallacy. Gather still delivers full transparency, in the sense that users can check each fund that is included in the portfolio. [The idea of portfolios’ blind taste discussed in this video is amazing, by the way]

Lastly, AQR is listed in their community! There are just insights (i.e. their written content) now but maybe their funds will be available in the future?!? Dreaming is free 😉

What I am reading now:

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