Investment managers, who were hiding under rocks since the market bottom in March, took until August of this year to recognize that a new bull market had started. MarketWatch published the findings of a monthly Bank of America survey in August under the title of “Fund Managers Are More Optimistic on Stocks than at Any Time Since the Pandemic Began”. By the end of August, the S&P had shot up by 58% in posting one of its sharpest recoveries in the first five months of a new bull market.
Money managers, along with the media, failed to recognize that a new bull market had started until the S&P 500 moved up to an all-time high in mid-August. Curiously, the words “new bull market” were never uttered by the talking heads or written in the published media while the market was moving higher for months. Meanwhile, the stock market has rallied 65% off its bottom and is up 17% on the year as of this writing.
The SPIVA report on 10,000 active managers covering a fifteen-year period shows that only one-in-eleven managers was able to beat the S&P 500 return over the entire period. This fact alone goes a long way in helping to explain the shortcoming of mangers this year. On the heels of a steadily rising stock market, manager bearish sentiment of 47% in July flip-flopped and now more managers think that we are in a bull market instead of a bear market. Thus, the in-and-out of the market tendencies of managers continue to penalize investors over and over again.
In Barron’s monthly survey, managers are benchmarked against a standard portfolio of 60% stocks, 30% bonds and cash component of 10%. Only 12% of managers were over-weighted in stocks at the end of June which means that the vast majority of managers missed a rally of major proportions – just one more argument against market timing. Moreover, managers have adhered to the 60/30/10 portfolio mix for the better part of a century failing to account for an increase in life expectancy which has improved dramatically in the past few decades. Longer life spans require higher savings rates along with higher returns in order to cover future living expenses.
So, how does one find a manager who can beat the S&P 500? First, hire a manger that stays fully invested at all times given the wide body of evidence that shows managers cannot time the stock market. Second, only pursue a long strategy since hedge funds which go both long and short offer great intellectual appeal, but have fallen flat on their faces in recent years. In support of this assertion, the average equities fund in the Lipper Survey provided a 182% cumulative return over 10 years compared to the HFRI equities hedge fund composite return of 58%. Third, instead of selecting managers across a wide spectrum of strategies, focus on selecting managers in the investment styles that have provided the highest returns.
The Wiesenberger Fund survey serves as a compass in this regard. It shows that a $100 investment in income funds, also referred to as value finds, grew to roughly $6,000 from 1957 through 2004, whereas $100 invested in growth funds grew to $9,000 and the same $100 grew to $14,000 in aggressive growth funds. Are aggressive growth fund managers really that much better than the others? Probably not; it’s just that they ply their trade in the right sandbox.
Investors are too frequently focused on risk exposure, often ignoring that when risk is reduced in a portfolio, potential returns may be reduced at the same time. Very little consideration is given to opportunity costs and what could have been earned over the long term in riskier assets, keeping in mind that risk goes away with time in just about every market basket of securities.
~Novel Serialisation: Heavens Fire~
Given the reality that 10-year Treasury bonds are currently yielding 0.94% means it that will take 74 years for money to double and that’s before taxes. For much lower yielding T-bills, it will take 528 years to double money. These realities urge a fresh look at the question of owning bonds, in particular and asset allocation in general, in any long-term portfolio.
By Robert Zuccaro, CFA
Disclaimer
Target QR Strategies, LLC (“Target”) is an investment adviser to private investment funds. This material is for general informational purposes only and does not constitute a solicitation or offer for any investment product or service. Certain information may be derived from third-party sources and is believed to be reliable, but its accuracy and completeness are not guaranteed. Opinions, estimates and projections constitute Target’s judgment and are subject to change without notice. Past performance is no guarantee of future results and it should not be assumed that any investment or strategy will be profitable or will equal the performance of any example or illustration. Different strategies will have varying risks, potential for return, and costs which should be understood prior to investing. Investing involves risks and you may incur a profit or a loss. The investments or investment strategies discussed herein may not be suitable for every investor. CFA® is a registered trademark owned by CFA Institute. Data shown is through the date listed on article.
