Wall Street hits Libya hard, too

Daniel Akst is a member of the Newsday editorial board.

 Those who think the little guy always gets the short end of the stick on Wall Street will be heartened by the release of a report showing that people with $64 billion to invest get treated little better.

That's the impression left by last year's third-quarter report of the Libyan Investment Authority, which manages that unhappy nation's oil money on behalf of Moammar Gadhafi.

Of course, nobody should cry for Gadhafi. For years, critics of his regime have charged that he and his cronies used its funds (now frozen as a result of international sanctions) as a personal piggy bank. The weapons he's turning against his own people in the current civil war were probably paid for out of Libya's oil money.

Gadhafi hasn't been able to rout the rebels fighting to overthrow his despotic government. But judging by the new report -- which was leaked to Global Witness, an organization that investigates the misuse of resource wealth -- he is no match for the world's investment pros.

Although the report doesn't give a very detailed picture of how Libya's various investments performed, it does focus on a number of subpar externally managed funds into which Libya had invested $1.4 billion at the start of 2009.

What's striking about these funds is that their managers charged sky-high fees for such execrable performance. At a time when stock markets around the globe were up more than 25 percent, the report complains, these funds were down 23 percent. One professionally managed fund was down nearly 40 percent, yet charged $27 million in fees -- nearly 10 percent of the original investment.

The report doesn't make clear how well Libya has done on other such funds, yet even if some have excelled, how can any professionals charge so much to accomplish so little? Unfortunately, some version of this same potent combo -- high fees and mediocre performance -- is working against Joe and Jane Investor as they struggle to save for retirement.

In the long run, stocks are a pretty good investment, yet study after study has demonstrated that active stock-picking by professional managers has little or no value. Few managers beat the market consistently, and it's almost impossible to predict who will do so. The problem is that management fees and taxes take such a big bite out of investment returns. Stock fund investors pay an average fee of nearly 1 percent a year, and while that may not sound like much, in the long run it adds up.

Actively managed funds also generate bigger tax bills because they buy and sell a lot. But even when a stock fund is sheltered from taxes in a retirement account, most investors would be better off just investing in a so-called index fund, which mimics the performance of a major stock index, such as the Standard & Poor's 500, at very low cost and with little tax-generating turnover.

For example, if Gadhafi had invested his $1.4 billion in an S&P 500 index fund -- the kind advertised widely and available to any small investor -- he'd have had $1.7 billion by the time of the report. But instead, the pros handed back only $1.08 billion.

Most fund managers no doubt try hard to do a good job for their investors, and many savers probably wouldn't invest at all without the baseless confidence they derive from having a pro in charge. Unfortunately, the pros are engaged in a Sisyphean struggle to push large piles of money uphill. All the evidence suggests hardly any will overcome the handicap of their own expenses. And most who do are just lucky.

So far NATO jets haven't managed to unseat Gadhafi. Maybe it's time to take off the gloves -- and call in some more money managers.