Introduction
In an imperfect world I am always
studying to see what I can learn that will help my clients to make smarter
decisions. As an analyst I have never been satisfied with any given number as a
complete summation of past or present events. In this search I often question
the perceived accepted knowledge. Often I find the summary is either incomplete
or wrong in the terms of usefulness for future decision making. This blog post deals
with some of the generally accepted views.
Asset Allocation
As we all are very much aware,
investment performance has left a lot to be desired recently. In preparation
for an upcoming client discussion I was considering some managers of funds that
put a great deal of faith in allocating portions of their portfolios to different
asset classes- equity, fixed income and cash and whether their decisions led to
better investment results. One of the fortunate elements of my investment
practice is that I have easy access to my old firm’s data. Lipper, Inc., a ThomsonReuters
company has produced a computer service known as Lipper for Investment
Management. With some help, I asked to see the investment performance of Multi-asset
mutual funds for the one year period ending January 31st, 2016. I
compared the results with the proportion of each portfolio in the three main
asset classes. The universe contained 433 funds. Some of these funds were the
old Balanced fund type, some were Target Date Funds either with fixed or
managed allocations; others were flexible funds that regularly used the three
asset classes. Further I focused on the top quintile in each sort of
performance and asset classes. Thus to be in the top quintile a fund had to be
in a select group of 86 funds. Over this particular period the universe on
average produced a small single digit loss. The single best fund was up +
3.14%.
One would have thought that the
funds that had the highest portion of their portfolios in cash would have done
the best in view of the general market decline. Only 21 out of 86 of these
funds were in the top performance quintile. Only 32 funds with the largest
commitment to fixed income also were in the top performance quintile and
finally 55 of the equity funds were in the group that showed the best results.
My working conclusion, assuming that
this
specific one year time period is representative of some future periods, is that
while asset allocation can help performance it is less important than selection
of individual securities. In the case of Lipper Advisory, as a manager of
portfolios invested in funds, the individual selection of funds can be more
important than sole reliance on asset allocation. (As this is a somewhat contentious
opinion,
I look forward to hearing from our subscribers with their views.)
GDP & Unemployment Statistics
Market pundits as well as
politicians spout GDP and unemployment numbers as if they are accurate and
meaningful. To me they are not to be used for decisions but as indicators as to
what other people think who don’t spend time with people in the marketplaces of
commerce and finance. It is these people as decision makers of both small
things as well as large that affect the real world. That is why markets often move
differently than the perceived numbers. While not as bad as the Argentine
inflation numbers, which the new government is addressing so all can understand
what is really happening; the US statistical budget has been starved for more
than twenty years on an inflation-adjusted basis. Part of the problem with most
countries’ GDP data is the failure to recognize the unreported numbers. One
clue in the US and the Eurozone is that the fastest growing portion of both currencies
is in large denomination bills, 100s and 1000s. You can guess who needs these
and what they do with them. Further in the US there are at least six different
measures of unemployment. If one takes the most severe and subtracts that from
those employed the proportion of the population is indeed still large. Some
might even suggest that these two factors (the under-reporting of GDP and the
most severe unemployment) could be connected.
From my standpoint I do not put much
reliance on the government produced numbers. I find it interesting that when
the Presidents of the local Federal Reserve Banks get together they are
questioned as to what have they learned from their interfaces with their local
communities. Investors and portfolio managers do the same thing. Thus, my
suggestion is to follow the markets for the best near-term feel as to
direction.
Co-Investor
Risk
Too many
investors, including professional investors, focus on the risks of the issuer of
the securities they own or are considering. To me there is almost always a
bigger set of risks. The risk of my co-venturers in the security is the bigger
risk. If enough of them want out immediately before I want to exit the
security, their selling can damage my terminal price. The current prices
of financial securities are a good example. The MSCI Europe Financials index
through February 11th is down ‑32%, the KBW Bank Index is also down ‑19%
(26% since July) with the S&P 500 only down ‑8.8%. While there are some
more non-performing loans in Europe, particularly in Italy, most Bank analysts believe
the majority of banks are in better shape than
when the last crisis hit. I believe the reason for the materially larger
decline in bank securities is the fact that 45.9% of the oil-related Sovereign
Wealth Funds were invested in financials. By the way, perhaps I am the only one
that got nervous when we were told that Jamie Dimon bought 500,000 shares of JP Morgan Chase*
stock on Thursday. This action reminded me of the quote from Mr. JP
Morgan in 1929 that he and his son were buying. In the earlier case it worked
for awhile but had no lasting stock price benefit. We will see what is the
impact of Jamie’s purchase.
*Held in a personal account.
Statistical
Records vs. People
There were
lots of lessons from last weekend’s Super Bowl. There was no doubt that on the
surface the Carolina team not only had a better record as well as a younger
more athletic star quarterback, but they lost in a not too close game to the
Denver team driven by a few very aggressive defenders who forced the supposedly
better team to make mistakes. This reminds me that at times and under
appropriate circumstances we select to invest with managers who we think are
good and determined over those that have better records. Sometimes statistics
can lead to the wrong decisions. Currently in the stock tables General Motors’
price/earnings ratio is listed at 5.5 times. This is historically cheap and
therefore to some, attractive. We don’t follow the stock, but I wonder whether
looking forward, the market is saying that the stock is selling more like 15
times or similar to the overall market or perhaps higher because the long-term outlook
is for materially
lower than recently reported earnings.
PS:
I am writing this blog post on Sunday
evening, watching Bloomberg Television over my shoulder and seeing the Chinese-related
markets are opening down even though their currencies strengthened during the
Lunar New Year holiday.
I will be in my office on Monday.
____________
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Copyright © 2008 - 2016
A.
Michael Lipper, CFA,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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