Tuesday, October 06, 2015
Monday, October 05, 2015
Monday, September 28, 2015
The number of money managers with “underweight” positions in emerging markets touched a 10-year high, according to September’s monthly survey of fund managers from Bank of America Merrill Lynch. “It is too early to call a bottom in emerging markets, but valuations now appear attractive,” says Ursula Marchioni, chief strategist at BlackRock’s iShares ETF division.
Posted by Bud Fox at 6:38 PM
Thursday, September 10, 2015
Thanks to the new normal world of extremely loose monetary policy and extraordinary accumulations of financial assets by Central Banks, Deutsche Bank finds that we live in a period not of selectively expensive global asset prices, but of record "expensiveness" across developed market bonds, stocks, and real estate.
In aggregate, across the three main asset classes, average valuations are close to the highest they’ve ever been relative to their long-term trend. The current reading of just under 80% is similar to that seen at the turn of the twentieth century and during the 1940s when financial markets were artificially repressed around war time.
And, based on Deutsche's valuation metrics, bonds and equities alone are at their highest ever combined valuations when aggregated across these 15 countries.
In addition, 83% of observations are in their top 20% of valuations through history.
Peak Asset Prices?
Source: Deutsche Bank
Posted by Bud Fox at 5:47 PM
Posted by Bud Fox at 5:31 PM
Friday, September 04, 2015
Last week JPMorgan Chase & Co. (NYSE:JPM) Chase & Co. warned its clients that Volatility Target strategies, CTAs and Risk Parity portfolios could sell a combined total of $150 billion to $300 billion of equities during the next few weeks as momentum drives selling (Concerns Over Risk Parity Grow [Cont.])
The report from JPMorgan came a few days after the Financial Times published an article on the risks that Risk Parity strategies posed to the global bond market. The Financial Times cited a new report from AllianceBernstein (Introduction to Tail Risk Parity an old copy of the paper can be found here), which estimates that risk parity is now a $400 billion industry. Assuming an average leverage ratio of 355%, these funds control around $1.4 trillion in assets.
Leon Cooperman on risk parity
Reports from the Financial Times, AllianceBernstein and JPMorgan all imply that Risk Parity is a disaster waiting to happen. And Leon Cooperman, the founder of Omega Advisors just joined the party.
Within his August letter to investors, Cooperman blamed Omega's poor returns (year to date Omega's funds are down between 6% and 11% according to Omega's letter to investors reviewed by ValueWalk) on "price-insensitive" investors.
Our investment process, grounded in fundamental company research, with a capital marketr overview designed to help us gauge appropriate risk asset exposure, has served us well since our inception 23 years ago, and we believe in its continued effectiveness. The firm has virtually no debit balance, and we like what we own.With respect to the investment outlook, we believe that shares in the U.S. will end the year higher. A slowing in China's economic growth, the surprise devaluation of the yuan in August, continued weak oil and commodity prices, and uncertainty as to the timing of the first Federal Reserve rate hike, all contributed to an initial weakness in U.S. and global equity markets in late August. However, these factors, we believe, cannot fully explain the maenitude and velocity of the decline in equity markets last month. We think that much of that decline can Ix attributed to systematic/technical investors that are price-insensitive and largely indifferent to fundamentals. Such investors include risk-parity funds, derivative hedgers, trend-following CTA's, and insurance variable-annuity programs.The month of August was a bad one for global risk markets and a bad one for Omega. The S&P 500 dropped 6%, its worst monthly decline in over three years. Our various investment funds, excluding our Credit Opportunity Fund which eased just 1.4% last month, declined by between 9% and 11% in August. Year to date, our equity-focused funds are down between 6% and 11%; differential returns among our funds reflect different investment mandates. The Credit Opportunity Fund has a total return of 9% year-to-date.We are very disappointed in our performance. Prior to the August decline in U.S share prices, we were of the view that our equity market was in a zone of fair to full value and had moderate upside potential to year-end. The swift and severe correction in U.S. and global equity markets took us by surprise, as our analysis of the fundamentals did not signal noteworthy equity-marks vulnerability. Be assured that everyone at Omega is committed to reversing our 2015 year-to-date experience. Our investment process, grounded in fundamental company research, with a capital marketr overview designed to help us gauge appropriate risk asset exposure, has served us well since our inception 23 years ago, and we believe in its continued effectiveness. The firm has virtually no debit balance, and we like what we own.With respect to the investment outlook, we believe that shares in the U.S. will end the year higher. A slowing in China's economic growth, the surprise aevaluation of the yuan in August, continued weak oil and commodity prices, and uncertainty as to the timing of the first Federal Reserve rate hike, all contributed to an initial weakness in U.S. and global equity markets in late August. However, these factors, we believe, cannot fully explain the magnitude and velocity of the decline in equity markets last month. We think that much of that decline can 3e attributed to systematic/technical investors that are price-insensitive and largely indifferent to fundamentals. Such investors include risk-parity funds, derivative hedgers, trend-following CTA's, and insurance variable-annuity programs.While it is obviously difficult to estimate when these systematic/technical investors will stop roiling the markets, we do believe that the conditions for a further sustained decline in share prices are not in-place and that shares should trend higher over the coming year. Put simply, the end of an equity bull market has almost always required the following: significant acceleration in wage and consumer price inflation; tight monetary policy as represented by declining year-over-year growth in real money supply; the expectation of recession; investor exuberance; speculative aggregate market valuation; and net purchases of equities by individuals. None of these precursors to a bear market are evident today nor do we expect their arrival any time soon. Further, the large percentage of stocks in the S&P 500 down year-to-date, and the significant percentage of stocks down in excess of 15% year-to-date, both signal that substantial damage to shares has already been incurred. Based on these observations, if the U.S. equity bull market is over, it will be the oddest ending to a bull market in the post-war period.
RBC: Selling slows
While Leon Cooperman and others are blaming Risk Parity strategies for the market panic caused at the end of last month, in a note to clients this week RBC Capital reported that there's been a sizeable slowdown in the exposure cutting of leveraged trading strategies this week.
RBC's traders have reported a "strong bid into the back part of the SPX cash session 4 of the past 5 days." However, according to the note to clients, the bank reports that a number of different buy-side sources have estimated anywhere from $75 billion to $100 billion apiece of S&P futures selling from leveraged vol target / risk-parity / systematic quant strategies over the past 10 days -- an estimated $275 billion of futures supply against estimates from some around $300 billion of exposure cutting to do.
Posted by Bud Fox at 5:23 AM
Wednesday, August 26, 2015
Market has demonstrated MORE fear in this move than Lehman?!?
Yes, this is a major correction. Now you have the numbers.
Bear in mind the marginal buyer/seller. Feels like ETFs/Passive (indiscriminate) are playing a large role.
For all the talk about slowing Chinese GDP and the stock market, it doesn't seem that they're all that connected. Convenient narrative?
Long Bond Outperforming...for a while now
Sentiment went from Bullish to Very Bearish --- Real Fast
In case anyone asks, What happened in China?
David Einhorn's Holdings - this month performance. Ugh.
Eurozone Credit Leading Equities Higher, ahead of Draghi in Jackson Hole
Bear Market Checklist
China is a big player in commodities, but not the only consumer
Posted by Bud Fox at 5:59 AM
Figure 1: Morningstar Style Box Performance and Percentage of Managers that Outperformed. Three years ending June 30, 2015.
Source: Morningstar magazine, August/September 2015, chart and regression by R. Ferri
Figure 1 graphically illustrates the relationship between style performance and the ability of active fund managers to outperform the style. Mid-cap Value (MV) earned 20.7% annually and outperformed all other styles; MV managers had a very difficult time outperforming this index and succeeded only about 9% of the time. In contrast, Large-cap Value (LV) earned 14.1% annually and was the worst-performing style index; LV managers had an easier time outperforming, winning about 63% of the time.
The regression is close to 85%. This means the percentage of managers who outperformed in each style is highly correlated with the relative performance of the style index. The greater a style index outperforms adjacent styles, the fewer managers outperformed in that style and vice versa.
This observation isn’t new in mutual fund analysis. William Bernstein wrote about the phenomenon in 2001 article, Dunn’s Law Review: The Life and Times of “Core and Explore,” in which he noted, “[T]he fortunes of indexing a particular asset class depend on its performance relative to other asset classes.”
The concept was expanded by William Thatcher in a 2009 article, When Indexing Works and When It Doesn’t in U.S. Equities: The Purity Hypothesis. Both articles indicate an inverse relationship between a style’s relative performance to other styles and active management’s ability to outperform in style.
This brings us to a couple of important questions. First, when do a majority of active managers outperform a poor-performing style? Second, can managers time styles and position their portfolios accordingly and make it worth investing in messy active funds?
Tables 1, 2 and 3 help answer the first question: When do a majority of active managers outperform a poor performing style? The yellow box with the red numbers in each table represents the percentage of managers that outperformed that style over a three-year period ending in June 2015. The red box represents the performance of the Morningstar style index for that category. The green box represents the performance of surrounding Morningstar style indices.
Table 1 indicates Large Cap Value (LV) managers had a great run over the three-year period ending June 2015. Almost 63% of active manager beat the Morningstar Large Value Index return of 14.1%. It’s easy to see why. The green areas in Table 1 represent the performance of adjacent styles indices: Large Core (18.3%), Mid Core (19.9%), and Mid Value (20.7%). All three had notably superior performance to Large Value. Any messy LV managers who invested outside of, but near the LV style index constituents would have added performance to their portfolio.
Table 2 shows the opposite story for Mid Cap Value (MV) managers. Only 9.0% outperformed their style index. MV was the highest-performing style of the nine style boxes, so any messiness on the part of MV managers would have hurt their performance relative to the style index – and it did.
Table 3 represents Small Cap Value (SV) managers, 33.6% of whom outperformed the Small Cap style index. Although the index performed satisfactorily at 17.0%, it underperformed the adjacent style indices, but not by as wide a margin as LV in Table 1. Accordingly, there was some benefit to active SV manages, but not enough to increase their win rate over 33.6%.
This latest evidence substantiates what Bernstein and Thatcher have indicated in the past: It appears there is no truth to the cliché that the market is inefficient in one style and not another. It’s about style performance relative to adjacent styles, and how messy managers are about remaining within a style in their equity selection.
Active fund managers look superior when their benchmark style performs poorly relative to adjacent styles, and they look bad when their benchmark style outperforms adjacent styles by a meaningful amount. Eventually, this all comes out in the wash. Active managers in every style have underperformed by about the same percentage. Please see The Power of Passive Investingfor more analysis on this topic.
The second question is easier to answer: Can active managers time styles and position their portfolios accordingly? They cannot. If they could, today’s Morningstar active versus passive results would show improvement since the time Bernstein wrote about it. But it has not. Managers do not appear to have persistent skill in timing investment styles.
Mutual fund rating services help investors compare the performance of one style to another by creating style indices, and they help investors compare the performance of funds within a particular style. But raw data can create the illusion of superior performance when none exists. You’ll need to dig deeper into a manager’s performance to determine if he or she truly has ongoing skill or if it’s just an illusion.
Posted by Bud Fox at 5:20 AM