Tuesday, August 26, 2014
Wednesday, August 20, 2014
You can't go long without reading an article about the death of active management. Somewhere in a discussion like that you will also hear that the larger a fund gets the more likely it is to under-perform. My purpose of this post is not to get into either of those issues but I thought it would be interesting to take a glimpse back in time to the largest funds of 1999 (15 years ago).
For this exercise I decided to screen for the largest actively managed funds 15 years ago (8/1999) which had the S&P 500 as their prospectus benchmark. The top 10 results looked like this
So how did they do? Were they too big to outperform?
Indeed, the largest fund did manage to under-perform. However, as a whole, these large funds did quite well. Over the last 15 years the largest 10 funds which were benchmarked to the S&P 500 managed to return an average of 5.47% compared to 4.47% for the S&P 500.
What's also interesting is that despite the fact that I compared them all to their prospectus benchmark of the S&P 500, a few of them tend to have a known growth tilt (Vanguard Primecap, Growth Fund of America, Fidelty Contrafund) but they all managed to significantly beat the S&P 500 despite the fact that growth significantly underperformed the S&P during this time (Russell 1000 Growth returned only 3.18% compared to 4.47% on the S&P 500).
Posted by Bud Fox at 5:03 PM
I thought this excerpt from Warren Buffett’s 2011 interview in India was relevant to not only investing but also decision making. A member of the audience says to Buffett: “As we all know, you are an extremely intelligent person. At the same time, you are very disciplined with your investing approach. What makes Warren Buffett a great investor? Is it the intelligence or the discipline?”
Here is Warren’s response.
Warren: The good news I can tell you is that to be a great investor you don’t have to have a terrific IQ.If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament. You need to be able to detach yourself from the views of others or the opinions of others.You need to be able to look at the facts about a business, about an industry, and evaluate a business unaffected by what other people think. That is very difficult for most people.Most people have, sometimes, a herd mentality which can, under certain circumstances, develop into delusional behavior. You saw that in the Internet craze and so on. I’m sure everybody in this room has the intelligence to do extremely well in investments.Moderator: They’re all 160 IQs.Warren: They don’t need it. I’m disappointed they haven’t sold off some already. The 160s won’t beat the 130s at all necessarily. They may, but they do not have a big edge. The ones that have the edge are the ones who really have the temperament to look at a business, look at an industry and not care what the person next to them thinks about it, not care what they read about it in the newspaper, not care what they hear about it on the television, not listen to people who say, “This is going to happen,” or, “That’s going to happen.”You have to come to your own conclusions, and you have to do it based on facts that are available. If you don’t have enough facts to reach a conclusion, you forget it. You go on to the next one. You have to also have the willingness to walk away from things that other people think are very simple.A lot of people don’t have that. I don’t know why it is. I’ve been asked a lot of times whether that was something that you’re born with or something you learn. I’m not sure I know the answer. Temperament’s important.Moderator: That’s very good advice, to be detached from all the noise. You shouldn’t go with the herd.Warren: If you don’t know the answer yourself don’t expect somebody else to tell you. If you don’t know the answer yourself and somebody else says they know the answer, don’t let that fact push you into coming to a conclusion about something that you don’t know enough to come to a conclusion on.
Stocks go up and down, there is no game where the odds are in your favor. But to win at this game, and most people can’t, you need discipline to form your own opinions and the right temperament, which is more important than IQ.
Pascal said it best: “All men’s miseries derive from not being able to sit in a quiet room alone.”
Warren: If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.What happens is people start listening to everybody talk on television or whatever it may be or read the paper, and they take what is a fundamental advantage and turn it into a disadvantage. There’s no easier game than stocks. You have to be sure you don’t play it too often.
You need the discipline to say no.
Ajit: The discipline to say no, if you have that and you’re not willing to let people steamroll you into saying yes. If you have that discipline, that’s more than 50 percent of the battle.Warren: Don’t do anything in life where, if somebody asks you the reason why you are doing it, the answer is “Everybody else is doing it.” I mean, if you cancel that as a rationale for doing an activity in life, you’ll live a better life whether it’s in the stock market or any place else.I’ve seen more dumb things, and sometimes even illegal things, justified (rationalized) on the basis of “Everybody else is doing it.” You don’t need to do what everybody else is doing. It’s maddening, during the Internet craze when the bubble was going on.Here’s your neighbor who’s got an IQ of 50 points below you, and he’s making all this easy money and your wife is telling you “This jerk next door is making money, and you’re smarter than he is. Why aren’t you making money?”You have to forget about all those things. You have to do what works, what you understand, and if you don’t understand it and somebody else is doing it, don’t get envious or anything of the sort. Just go on and wait until you find something you understand.
From this video
Posted by Bud Fox at 4:46 PM
Thursday, July 31, 2014
As the end of the 30 year bond bull market begrudgingly gives over to the consensus-expected rate rise, investors’ persistent worries about the impacts of falling bond prices on their portfolios have provided great opportunity for asset managers to aggressively market and/or launch “nontraditional bond” funds. Unlike core or intermediate term bond funds, which typically benchmark their asset classes, duration and performance to the Barclays U.S. Aggregate Bond Index, nontraditional bond funds generally seek to limit interest rate exposure in an effort to preserve capital in the event of higher yields and tightening monetary policy.
Posted by Bud Fox at 6:11 AM
Sunday, July 27, 2014
Thursday, July 24, 2014
A Preqin report says two-thirds of institutional investors are considering investing in private debt
A new research report from Preqin focuses on the rapidly growing private debt market within the alternatives sector, in particular on how institutional investors are finding value in undertaking financing roles that banks played until the recent financial crisis.
Institutional investors’ view on private debt market
The Preqin report surveyed 240 institutional investors to get answers to the following questions:
- How do institutional investors view the private debt market?
- Do they consider the segment as private equity, fixed income, or a hybrid of structures?
- Which fund strategies are most sought after?
- What do target returns tell us about risk appetite and performance expectations?”
Of note, two out of three institutional investors have invested in or are considering investing in private debt, and 78% of institutional investors look for direct lending funds when investing in private debt.
Details on survey results
Breaking down the Preqin survey data, more than two-thirds of institutional investors surveyed are active in or are considering investing in private debt. The reports says this suggests a “continued warming toward the wide array of private debt fund structures.”
The mean current allocation to private debt instruments among survey respondents was 5.6%, with a median allocation of 2.1%. However, 73% said they had no target allocation, “suggesting there may be opportunistic investing in the space, or the allocation is coming from broadly defined pools (Fig. 3)”.
Moreover, although a growing number of large public firms continue to launch exclusively debt-focused units, many institutional investors plan to allocate to private debt from fixed income (24%), private equity (20%) or general alternatives buckets (19%). The Preqin report mentions that one large U.S.-based pension fund said that they currently have “a private debt allocation of 1.8% of total assets, pulled from a private equity bucket.”
High returns targeted
Institutional investors expect to earn strong returns on their private debt investments. Preqin’s survey reported that aggregated target returns for private debt investors generally came out in a range of 8%-14%, with the size of the range “reflecting the variety of investment goals and expectations among LPs.” However, the report also noted that target returns for investors varied significantly by region, with North American investors looking for somewhat higher returns from their private debt portfolio at 9%-15% relative to European fund managers at 7%-13%).
Posted by Bud Fox at 5:38 AM