Boston Business Journal
37% Return -- With Regularity
By Nicholas Veronis
Ask the people who have tracked his performance or invested their money with him and they would agree: Gil Blake could become the next Peter Lynch if he really wanted to. But that's just it -- he really doesn't want to.
Blake, 44, is regarded as the best mutual fund switcher in the world and one of the best short-term investors around. Over the past five years, he has averaged a 37 percent annual return for his clients. Although 37 percent is impressive enough, it's the regularity of the return that separates Blake from most money managers.
"You've got to have a logical, inherently profitable approach and you have to be faithful to it," said Blake, who graduated with high honors from Wharton Business School. "Traders go through phases as they mature. Most go through a phase when they want to invest but they want to do it the easy way. Successful people begin to think in terms of their own approach to the market -- their own philosophy. I am so preoccupied by it that I think about it all the time. I think about it in the shower even. My mind is somehow working on it most of the time."
Beside the fact that he simply enjoys what he does, Blake has good reason to be thinking about his trades as often as he does. He shares the profits as well as the losses of his clients. He keeps 25 percent of whatever he makes for his clients and, on the downside, forks over 25 percent of whatever he loses to his clients. The arrangement is highly unusual since very few money managers are willing to share losses, no matter what the upside offers.
$ 740,000 a year
Blake's willingness to do so is also part of the reason why he may never become a Peter Lynch. First of all, Blake is able to make a lot more money using a much smaller pool of funds than the average money manager because of his bold 25 percent fee structure.
He manages about $ 8 million. If he makes 37 percent per year on that money, that comes to $ 2.96 million. Of that, he gets to keep 25 percent, or $ 740,000. Not bad, you say, but if he weren't so good he could easily wind up paying out as much or more in losses.
Most money managers earn a much smaller percentage -- as little as 1 percent -- on the assets they manage, plus a bonus. On the 1 percent arrangement, discounting any bonus, Blake would have to increase his portfolio from $ 8 million to $ 740 million just to make the same amount of money.
The point, however, is that Blake is already making a lot of money. He works out of a spacious office above his garage in Wayland and, as he put it, "There's no commute. I've done my hours on Route 128. I love working at home because I get to spend more time with my family." He has a wife and three children, ages 8 to 17.
Turning away money
A second point is that, legally, Blake is not allowed to take on any more clients. He has 14 already and once he hits 15 he has to register with the SEC, which he doesn't want to do because most incentive fees are not acceptable under SEC guidelines. Blake has already turned down numerous requests and has a waiting list of people who want him to manage their money.
Blake has actually considered lowering the amount of money he has under management. The reason has to do with a recent change at Fidelity, where he conducts all of his trading.
Blake is one of a handful of traders who pinpointed an exceptional trading opportunity within Fidelity's family of 36 select mutual funds. After countless trips to Fidelity, writing down the hourly changes in the share prices of various select funds, Blake discovered a very persistent and very profitable pattern.
It turns out that when the shares of the select funds go up a specific amount in price, there is a strong likelihood that they will go up even further -- again, by a specific amount -- before falling back in price. Blake was able to identify the various patterns so that whenever the price of a particular select fund went up enough, he would buy it and then ride it for just the right amount of time before selling it as it headed back down.
Non-random behavior
"If the Dow climbs 10 points, what's its expected further excursion before reversing?" asked Blake, attempting to explain his system in the simplest way possible. It's hard to tell because it's random and you can't beat it. But with sector funds (such as select funds), once they've gone, say, 1 percent in one direction, they're likely to go 2 percent further before they go back again. That's because they're homogeneous and their behavior is non-random -- it's predictable, it has persistency."
Although he keeps up on most of the financial news, Blake never uses any of it to determine how to trade. He looks solely at the share prices of the select funds.
"My rule may be that I want to see the American Gold Fund go up 12 pennies before I get into it because I know that once it's moved 12 pennies in one direction, statistically, it's going to move 28 pennies further before it reverses 12 pennies. And all I've done is I've gotten the hourly prices of these funds," he said.
Blake's whole system, however, depended on the fact that each trade only cost him $ 25 to make -- the cost Fidelity charges its customers when they trade within the select funds.
Last March, however, word leaked out that Fidelity was planning to change the $ 25 transaction fee to a fee based on the percentage of the total assets traded. The new ".75 percent charge" would only apply to those select shareholders who traded funds that they have held for less than 30 days. The idea was to penalize the short-term traders -- like Blake -- who were, in Fidelity's opinion, abusing a system that was set up for the small investor. Sure enough, Fidelity recently announced the new transaction fee plan, which will go into affect Nov. 15.
If Blake now trades a fund that he has held for less than 30 days, which he almost always does, he will have to pay .75 percent on the total amount of money being traded -- a cost that makes the system he has thrived on for the past several years no longer feasible. In other words, the goose that laid the golden eggs for the Wayland trader is now dead.
"The cost to trade the select funds was virtually zero," Blake said. "Twenty-five dollars to trade a million (dollar) account is essentially nothing. Let's say my average "profit to trade a million-dollar account was on the order of $ 5000 to $ 7000. If I'm going to make $ 5000 or $ 7000 for a client and have to pay $ 25 to trade . . . it's nonexistent. And that phenomenon existed for eight years with most of the public being unaware of it."
Ever since he first heard about the proposed changes, Blake has been searching for a new trading strategy. And although he admitted that he may never find anything that is both as profitable and predictable as the short-term trading in the select funds, he said he is currently exploring some "interesting possibilities.