Bill Gross and the Dying Breed of Mutual Fund Superstars – Bloomberg 09-26-14

Salient to Investors:

  • Hedge fund stars and private equity CEOs get huge headlines, but few mutual fund managers of the sort that average Americans can invest with do.
  • Neil Pardasani at Boston Consulting said advisers like to invest in fund brands that their clients know.
  • Investors often stick with star managers even when their performance is weak.
  • Sanford Bernstein estimates up to 30% of Pimco’s assets could leave following Gross’s exit.
  • The biggest firms mostly do without big fund manager stars, which helps put the emphasis where it belongs, on performance.
  • Klaas Baks at Emory University said investors know that a few years of big gains are as likely to be a fluke as a sign of genius.
  • BCG says passive investments’ share of all assets has doubled since 2003, while the share in traditional active assets fell 29%.
  • Investors are getting better at telling substance from celebrity.

Read the full article at http://www.bloomberg.com/news/2014-09-26/bill-gross-and-the-dying-breed-of-mutual-fund-superstars.html

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Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious – Business Insider 09-04-14

Salient to Investors:

James O’Shaughnessy of O’Shaughnessy Asset Mgmt said:

  • Fidelity found that their best performing accounts were those of people who forgot they had an account with them.
  • The shorter you hold a stock, the more likely you are to lose money.

Barry Ritholtz found that when families fought over inherited assets and did not touch those assets for say 10 or 20 years, those years were the best period of performance.

Richard Bernstein of Richard Bernstein Advisors found:

  • Over the period December 31, 1993 to December 31, 2013 the average mutual fund investor underperformed every investment asset class except Asian emerging market and Japanese equities, and even underperformed cash.
  • The average mutual fund investor would have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities.
  • The underperformance suggests the average mutual fund investor consistently bought assets that were overvalued and sold assets that were undervalued.
  • When chaos occurred, the average mutual fund investor ran away.

Read the full article at  http://www.businessinsider.com/forgetful-investors-performed-best-2014-9

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Cash Is Trash? Not To These Value Fund Managers – Bloomberg 07-26-13

Salient to Investors:

The Weitz Value and Weitz Partners Value funds each have cash stakes close to 30 percent. The Yacktman Focused fund has 19 percent in cash. The Westwood Income Opportunity fund has 16 percent in cash,  The IVA Worldwide Fund has 28 percent in cash, the GoodHaven fund has 33 percent in cash.

Morninstar says the average diversified US stock fund has less than 5 percent in cash, while the the average world allocation fund has less than 15 percent in cash.

The Leuthold Group reports that the median PE ratio for large-cap value stocks is 13 percent to 25 percent above its long-term historic norm; large-cap growth stocks trade at an 8 percent to 10 percent discount to their historic norm.

Charles de Vaulx at IVA Worldwide is not finding enough mis-priced securities to buy.

Tom Forester at Forester Value fund said central banks are driving the markets higher, not fundamentals.

Dowe Bynum at the Cook & Bynum fund is more than 40 percent in cash and says it would take a 10 percent to 15 percent drop in any of their existing holdings to consider putting cash to work.

Mark Freeman at the Westwood Income Opportunity fund says bonds are too expensive and expects a transitional market to higher bond yields to last 6 months to a year.

Read the full article at  http://www.bloomberg.com/news/2013-07-26/cash-is-trash-not-to-these-value-fund-managers.html

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Hedge Fund Market Wizards: How Winning Traders Win – Jack Schwager 05-29-12

Salient to Investors:

Jack Schwager writes:

As long as no one cares about it, there is no trend.

All markets look liquid during the bubble but illiquidity after the bubble ends matters more.

Markets tend to overdiscount the uncertainty related to identified risks and underdiscount risks not yet identified.

Low-quality names outperform early in the cycle, and high-quality names outperform late in the cycle.

Entry size is often more important than entry price because the larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience.

When you hit a losing streak, you can’t turn the situation around by trying harder. Better liquidate positions and regain objectivity.

Watching every tick often leads to selling good positions prematurely and overtrading.

In strong uptrends, bad news counts for nothing. But a break in the trend reminds people of losing money in equities, and people start looking at the fundamentals.

Never buy low-beta stocks. If the market falls 40 percent for macro reasons, they will drop 20 percent and if the market goes up 50 percent, they will go up only 10 percent.

An extremely oversold stock is usually an acute phenomenon that lasts for only a few weeks, whereas stocks can remain overbought for a very long time.

If you are in a trade you don’t understand, you will only sell when the price action scares you. Most of the time price action scares you, it is a buying opportunity, not a selling indicator.

Let winners run and cut losers.

There is no high for a concept stock. It is always better to be long before they have already moved a lot than to try to guess where to go short.

In a bull market, prices open lower and then rise for the rest of the day. In a bear market, they open higher and go down for the rest of the day. At the end of a bull market, prices start opening up higher. In the first half hour, only the fools or people who are very smart trade.

Stocks suddenly no longer dropping on bad news is a positive sign.

To avoid value traps, stay away from companies that can’t grow their cash flow and increase intrinsic value.

Buffett says that time is the enemy of the poor business and the friend of the great business.

Over the short term, perhaps as long as 2 or 3 years, value investing may not always work. The fact that value investing sometimes doesn’t work over short periods,  is why it continues to work over the long term.

Institutionalization of the market has reduced the window of time managers have to outperform. They can’t wait 2 years for an investment to work because their institutional and individual clients won’t wait.

The best-performing mutual fund for the decade the market was flat was 18 percent a year, on average, yet the average investor in that fund lost 8 percent because every time the fund did well, investors piled in, and every time it underperformed, investors redeemed.

Buy the book at  http://www.amazon.com/Hedge-Fund-Market-Wizards-Winning/dp/1118273044/ref=sr_1_3?ie=UTF8&qid=1374162364&sr=8-3&keywords=jack+schwager

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Man vs. Machine: The Great Stock Showdown – Wall Street Journal 05-10-13

Salient to Investors:

Mark Hulbert writes:

The small number of advisers who outperform the market rarely keep doing so, so choosing a recent market beater does not increase your odds of future success. Of the 51 advisers out of more than 200 tracked who beat the Wilshire 5000 Total Market index, including reinvested dividends, in the decade that ended April 30, 2012, only 11 have outperformed the market since – no better than the percentage of all advisers, regardless of past performance. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percent.

Lawrence Tint at Quantal Intl says:

Before computer-dominated trading, it was slightly easier to identify winning advisers in advance, because you could more easily understand and evaluate what they were doing. The average reader of The Wall Street Journal won’t be able to identify market-beating advisers, and repeated studies have shown that even the best institutional investors have been unable to identify them in advance, though there is an above-average chance that an awful adviser will continue to perform terribly, so avoid these.

Another reason it is hard for top-performing advisers to beat the index over the long-term is that they attract lots of new money which dilutes their ability to continue performing well.

Computers are ill-suited to thinking outside the box and devising new strategies to beat the market in the future.

Terrance Odean at University of California said the other side of the trade used to be a human but is now a supercomputer, so individual investors will almost certainly lose. Odean says academic studies over the past decade found that the average stock that traders sell outperforms the average stock they buy.

Traders are general unable to assess complex data – they look at the same data on different occasions and reach different conclusions, and unwittingly let their emotions dominate their intellect.

Daniel Kahneman at Princeton says humans consistently lose out to machines from medicine to economics to business to psychology to predicting the winners of US football games and judging the quality of Bordeaux wine – in each the accuracy of experts was matched or exceeded by a simple algorithm.

Bill Miller at Legg Mason says it is mathematically true that there is a portfolio size beyond which it is difficult, if not impossible, to beat the market. Miller says the primary cause of losing his hot hand at Legg Mason Value Trust was simply bad decision-making. Miller says Warren Buffett will have a more difficult time in the future picking stocks that will perform better than an index fund, and that much of the value that Berkshire Hathaway has added in recent years has not been from Buffett’s stock-picking skills but from his negotiating skills and Berkshires huge cash.

Individual fixed-come and equity investors should not trade. Short-term trading is now so dominated by computers that individuals and professional managers almost certainly will lose over time. Better to buy and hold diversified index funds with very low expenses.

Brad Barber at the University of California said computers either cannot, or do not do well, determine which patterns that emerge from data crunching makes sense.

Read the full article at http://online.wsj.com/article_email/SB10001424127887324059704578471154109438438-lMyQjAxMTAzMDEwMzExNDMyWj.html?mod=wsj_valetbottom_email

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Protecting Your Portfolio From a Downturn – Wall Street Journal 05-10-13

Salient to Investors:

Matt Schreiber at WBI Investments says limiting losses is critical to keeping with your investment plan.

Morningstar says 40 of the 2,600 non-sector stock mutual funds it tracks have lost money in the 12 months through April 2013.

Zheng Sun and Lu Zheng at University of California, and Ashley Wang at the Fed found that of the 5,000 hedge funds studied from 1994 to 2011, the funds with the best returns when markets were up did not necessarily outperform over the following year, while the funds that lost the least when markets tanked tended to keep outperforming the market. The top 20% of hedge funds that performed the best in down markets outperformed the returns of the bottom 20% of funds by 5 percent over the next year. Sun said if who is good and bad is not obvious when times are good, then it is best to focus on the downside.

David Vincent at Fred Alger Mgmt recommends against simply buying funds with the lowest downside-capture ratios, because a fund can achieve a low downside-capture ratio by keeping a lot of cash. Vincent recommends divide a mutual fund’s upside-capture ratio by the downside ratio. 1,503 of 2,547 stock funds monitored by Morningstar have captured more of their benchmarks’ downside than upside over the past 5 years through April, while only 233 had an upside/downside capture ratio greater than 1.1.

The most proven indicator of future returns continues to be low fees and the easiest way to minimize costs is to dismiss active managers and use low-cost index funds.

Read the full article at http://online.wsj.com/article_email/SB10001424127887324059704578471430852569560-lMyQjAxMTAzMDEwMzExNDMyWj.html?mod=wsj_valetbottom_email

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Pick funds with stellar recent returns – MarketWatch 04-26-13

Salient to Investors:

Mark Hulbert writes:

Avoid mutual funds whose recent performance has begun to slip, no matter how good their performance might have been in previous years.

Favor funds with stellar recent returns, even if their longer-term performance is dismal.

No Load Fund X is the best performing stock-mutual-fund advisory service tracked by the Hulbert Financial Digest over the past two decades with an 11.3% annualized return versus 8.6% for the overall stock market.

A FundX Investment study of over 300 broad market funds found that the best portfolio was one that picked funds according to an average of their returns over the trailing 1, 3, 6 and 12 months – an 11.7% annualized return from 1/1/99 through 3/31/13 versus 3.5% for the S&P 500 – both include reinvested dividends and net of expenses. Using just the best performing funds over the past 12 months, produced a 10.2% annualized return.

Janet Brown at No Load Fund X said too much weight should not be placed on expense ratios when choosing funds.

The strategy has not beaten the market every year. Funds in mid-2008 that were exhibiting the best performance over the recent past were big casualties in the fall 2008 market meltdown.

Taxes eat into the profit of a frequently switching portfolio, so fund-switching strategies make more sense in tax-deferred portfolios.

The strategy does not work well with funds that charge a commission for purchases or levy transaction costs when selling shares held for only a short period.

Strategies that invest based on short-term recent performance historically don’t work as well with the riskiest funds.

Read the full article at http://www.marketwatch.com/story/pick-funds-with-stellar-recent-returns-2013-04-26

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BlackRock Net Rises 10% as Demand for ETFs Boosts Assets – Bloomberg 04-16-13

Salient to Investors:

Laurence D. Fink at BlackRock said we have not seen any large major change in attitude in bonds are not seeing the same investor appetite for long-dated bonds, which will persist for some time. Fink sees no evidence of a large-scale rotation into stocks from bonds as global and high-yield bonds continue to attract investors – investors are moving money from low-yielding cash accounts into equities but remain cautious about the stock market.

ICI says assets of ETFs, the fastest-growing segment of the asset-management business, in the US increased 19 percent to $1.4 trillion versus a 0.5 percent rise for mutual funds to $13.5 trillion.

Read the full article at http://www.bloomberg.com/news/2013-04-16/blackrock-net-rises-10-as-demand-for-etfs-boosts-assets.html

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Lawsuit Shines a Harsh Light on Subadvisory Fund Fees – Bloomberg 02-21-13

Salient to Investors:

Going to court to prove that a mutual fund charges small investors excessive fees is often an exercise in futility because the courts have set the bar so high for plaintiffs that most suits are dismissed before they even get to trial.

Niels Holch at the Coalition of Mutual Fund Investors said if a management fee is higher than the subadvisory fee and the sub-advisers are doing all of the work, you have to ask yourself what the management company is doing for its fee.

Lipper found the average sub-advised equity mutual fund charges 0.10 percent more than the average internally managed one, 0.05 percent for bond funds.

Vanguard is the only fund company run at cost.

Read the full article at http://www.bloomberg.com/news/2013-02-21/lawsuit-shines-a-harsh-light-on-subadvisory-fund-fees.html

 

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Where Is Your Fund Manager From? – Bloomberg 02-07-13

Salient to Investors:

Research finds that, among US-based fund managers, a Brazilian-born manager who speaks fluent Portuguese and is familiar with the country’s business culture had better results when investing in Brazilian companies than a German-born manager.

Quoc Nguyen at University of Illinois found:

  • US funds that overweight stocks from the local ethnic group’s home country outperform otherwise similar mutual funds by 1.4% per quarter in their international holdings.
  • Funds which held main offices in communities that had a high concentration of a specific ethnicity held 14 percent more in stocks from that ethnicity’s home country than peers. When there was no such concentrated community, the funds invested 9 percent more in the manager’s ethnic homeland than otherwise similar funds.
  • Outperformance was stronger among managers whose families come from emerging-markets nations.
  • The ethnicity effect is strongest in funds that invest primarily in the US but dabble in foreign stocks versus funds that invest exclusively overseas.

Alec Walsh at the Harding Loevner Equity Fund disagrees, saying:

  • Home bias can blind money managers to investment opportunities outside their comfort zone.
  • Knowledge leads to overconfidence about your abilities to forecast the future.
  • World markets have become increasingly homogenous in the last 20 years thanks to the Internet and globalization.
  • In certain countries, having a native on staff is an advantage.

Read the full article at http://www.bloomberg.com/news/2013-02-07/where-is-your-fund-manager-from-.html

 

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