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What If No One Ever Sells Fannie Mae?


There are many great managers of risk but it is up to you to find them.


Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof Succo,

I see that 93 % of Fannie Mae (FNM) shares are owned by institutions. Is it possible that these institutions could just sit on their shares and not sell at all? Ever? Does it not mean that institutions can basically set ANY price for their assets if they want to?

Is this game so simple? What am I missing? I mean, what if they just "decide" to play among themselves and swap shares? That would set the price where they want it.

Minyan Shikhar

MS -

A true fiduciary would sell assets thought to underperform and buy assets thought to outperform. The manager would adjust these positions for risk, obtaining a level of diversification and correlation thought to maximize return for risk.

Mutual funds and hedge funds should be fiduciaries. There are many that take that responsibility seriously and act upon it. Most, I am afraid, do not because the funds themselves have a profit motive: the best way to maximize a fund's fees is to maximize performance, and this often means abandoning risk control or worse. This is not in the best interest of the investors. I have talked many times about Other People's Money (OPM) syndrome.

One glaring example of this was Janus, which was found to own the same stocks in many different funds despite different objectives for each fund. They were just buying the same stocks as new money came in, driving up the prices and driving performance. The good performance attracted new money and it simply became a ponzi scheme in the end. The fund managers were more interested in maximizing their own fees than they were in acting as a fiduciary.

A stock like FNM can definitely be controlled by the holders, but it takes them all acting in concert. Of course, free market motives should prevent this, but often does so only in extreme circumstances because of the powerful temptation for managers to defend their core holdings.

In the case of FNM, the stock held up for quite a while, but the news just got worse and worse. One of the major holders, Fidelity, finally broke ranks and sold to others that continued to defend.

We see this all the time. There are many great managers of risk but it is up to you to find them.

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No positions in stocks mentioned.

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