For most dollar oriented investors 2014 was an "okay" year with a third year in a row of double digit gains for the S&P 500, but not for the bulk of institutional accounts. Consciously or not, many investors and managers were aware of the length of the present bull market having entered its 61st month. This has created twin dilemmas for the prudent management of responsible money.
First dilemma - Large Cap over-ownership
As regular readers of these posts recognize and true to my analytical history, I tend to view investments through the lens of mutual funds. When simplifying the fund performance data for 2014 by size of market capitalizations the following is revealed:
This suggests that when putting together a portfolio of funds or managers, it would be wise to try to diversify the various biases of the hired portfolio managers as well as our own as the owners or fiduciaries of the capital being deployed.
I have a definite advantage in this task by personality. By nature I am both curious of what I don't know and often a contrarian. As a contrarian again using the mutual fund microscope, the following may be useful thoughts:
Looking to extremes one might wish to set up a pair trade of being long some of the components in the S&P Latin American energy index which declined -39% vs. the average Indian fund which was up 41% in 2014. In a similar fashion one might start to research funds in the following groups that declined in 2014:
I take some comfort in the contrarian thoughts contained in the headline to John Authers insightful Financial Times column: "The case for gently shifting money away from US." I believe a well-reasoned portfolio should be looking for opportunities on a global basis both in terms of what companies do and where various securities are traded.
Many year-end predictions are essentially extrapolations of existing market trends and this could be what will happen. However, I am searching for the beginnings of new trends that will produce +20% or -20% in a twelve month period. I would appreciate hearing your thoughts as to when and which direction (or both) you expect price movement. I firmly believe we will once again experience this kind of action.