Posted by Debbie on Nov 18th, 2008

This morning we have a quick quiz for you. Don’t worry, answers are provided below.

Question 1. What do you get when you own shares in BHP Billiton?

Question 2. What do you get when you own shares in Woolworths?

Question 3. What do you get when you own shares in Qantas?

Answers, in order are – a mining company, a supermarket company, and an airline.

Admittedly it is not quite as simple as that. BHP mines all sorts of different things such as iron ore and coal, and it even drills for oil.

Woolworths sells thousands of different products in its supermarkets from cleaning fluids to dog food to fresh vegetables.

And Qantas for the most part gets its passengers safely from one city to another in aeroplanes.

But all three have something in common. You don’t need to be an expert in mining, supermarkets or airlines to understand what the company does and how it makes its money.

We do have a bonus question that may be a bit harder to answer. But see how you go anyway.

Question 4. What do you get when you own shares in Macquarie Group?

Well, to be fair, you would have been pretty unlucky not to get this one right because it seems that Macquarie does everything. This morning Macquarie released its first half results. The highlights were a 43% drop in profits, and a huge increase in write-offs – sorry, write downs.

But that doesn’t answer the question about it does. So let’s go through a list of some – but not all – of the businesses that Macquarie Group is involved in and where it invests shareholders money:

Brisbane Airport, London City Airport, Belfast City Airport, Pennsylvania Turnpike, Thames Water, APRR toll road in France, Arqiva, European Directories, M6 Toll road, Wales & West Utility, 407 ETR toll road…

… but wait, there’s more – Copenhagen Airport, Sydney Airport, BrisConnections, Spirit Finance, Macquarie Goodman Asia, Macquarie Office Trust, Macquarie Leisure Trust, Mortgages in Australia, US, Canada and Italy…

… and not forgetting bonds, hybrids, CDOs and other derivatives.

In fact Macquarie owns a share in over 800 assets worldwide. That’s more than the mines owned by BHP, more than the supermarkets owned by Woolworths, and more than the aeroplanes owned by Qantas.

Plus it makes money with its broking and advisory division. In a nutshell, Macquarie Group is an active managed fund. One where it buys up a bunch of assets to either own directly, indirectly or to on-sell as a structured product. And naturally it isn’t doing all this for love, it charges a management fee to manage those assets.

So if we look at an investment in Macquarie the same way as we would look at an investment in a managed fund it turns out investors may not be getting quite as good a deal as they think.

The market capitalization of Macquarie is $5.7 billion. This represents the total value of shareholders’ funds. The total expenses incurred by Macquarie during the half year was $2.2 billion, which if we annualize that equates to around $4.4 billion.

Even if we are kind and value the Macquarie fund on its net asset position it still only totals $10 billion.

So if we put it this way, if you had a lazy $10 billion to spare, would you spend it all on Macquarie Group knowing that the expenses (or MER as they call it in funds management) worked out to about 44% per annum?

Inexplicably, the market has loved the first half result this morning with the shares trading up by 13%. From what we can see, an investment in Macquarie requires a helluva lot of running just to stand still.

This article is written by Kris Sayce from Money Morning. Money morning is a website that aims to give you intelligent and enjoyable commentary on the most important financial stories of the day, and tell you how to profit from them.