Monday, December 29, 2014

We had everything before us, we had nothing before us…

While the S&P 500 is on track to conclude another stellar year of gains, those who sought to beat the index are poised to finish with a more dubious distinction. According to Lipper, 85% of all active stock mutual fund managers had been trailing their benchmarks through the end of November. In a typical year, there are nearly twice as many managers outperforming, with only around two thirds of funds struggling to catch up. Lipper says this is the worst year for active managers relative to the market in three decades.
Stock pickers encountered difficulty this year in part because of concentration at the top of the market. Just five stocks—Apple, Berkshire Hathaway, Johnson & Johnson, Microsoft, and Intel— accounted for 20% of the market’s gains. If you weren’t at least equally weighted toward them, you had virtually no shot at making up for missing their enormous, index-driving gains. A majority of the market’s stocks did not perform nearly as well. According to the Leuthold Group, only 30% of S&P 1500 stocks posted gains exceeding the index itself. You’d have to go back to 1999 to see anything like this.
Fund shareholders weren’t wasting any time reacting to this year of disappointment. Collectively, they’ve added just $35 billion to active stock-picking funds in the last 11 months, less than a quarter of the $162 billion they added in 2013, which was the first year of positive flows for the industry since 2007. This is not to say that they were sitting still. ETFs and passive index funds took in over $206 billion in net deposits through Thanksgiving, and Vanguard surpassed the $3 trillion mark sometime in late summer. Investors seem to have decided that they’d rather bet on the horses than the jockeys, after all.
The malaise was not confined to those picking individual stock winners. Through December 1, aggregate hedge fund returns trailed the market to the point of farce. According to data compiled by Bloomberg, hedge funds were up an average of 2% on the year, just barely offering the coupon rate of a risk-free 10-year Treasury note. Over 1,000 funds are on track to close down in 2014, the worst year for liquidations since 2009.
Among the gargantuan hedge funds that make up a majority of the industry’s assets under management, dispersion of returns shot up to notable levels. And for every big winner, like William Ackman’s Pershing Square, there was a big loser to counterbalance it, like John Paulson’s Advantage Fund. Investors choose hedge funds for their “non-correlated returns,” meaning a tendency to move opposite from the general market’s direction. They certainly got such returns this year, unfortunately.
Financial advisors and asset allocators who had been hoping to see some benefit this year from tactical strategies were also not spared the punishment of a capricious market. Of the top three tactical strategies in the country (Mainstay Marketfield, Good Harbor U.S. Tactical Core, F-Squared Premium AlphaSector Index), two had nearly imploded with double-digit losses while the third found itself under SEC investigation for misleading the public about its historical returns. The other giant tactical manager, Schwab’s $9 billion Windhaven Diversified Growth product, looks to end 2014 with a return close to zero. So much for tactics.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.