Rotating Leadership Likely on the Horizon - Weekly Blog # 641

Mike Lipper’s Monday Morning Musings

Rotating Leadership Likely on the Horizon

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

Voters and investors have difficulty separating reporters, analysts, and forecasters, as they themselves don’t understand their function. Unfortunately, each is required to briefly summarize their work without confusing their audience, any more than they are already.  The standard way of reducing the clutter is to find the lowest common denominator or distinctive identity and equate that with all the factors that appear to fit. Thus, one can build a house with a hammer, screwdriver, and a saw.

This approach worked reasonably well for many years but is showing signs of not working as well, due to the size of the lowest common denominator shrinking in both the political and investment spheres, as reporters capture gross movements of a limited number of identities. Analysts track the movements of these identities and most forecasters extrapolate present trends into the future. As a defender and generator of investment capital, I think our responsibility is to look for future changes that in total are threats or opportunities. Some examples?

Politics is a witches’ brew of both policies and pragmatism. On the runup to a much-debated election, most of the chatter is essentially about policies, with very little execution through various governmental actions. Beneath the surface, each of the two major political parties are increasingly split on the implementation of policies. There has been almost no discussion on moving all legislation through the houses of Congress, state legislatures, city councils and even the White House. At this point in the calendar, I suggest very little will pass until later next year. We will then need to deal with the relatively small amount of time before the demands of the 2022 Congressional election materialize, which is likely to dictate the success of the person in the White House. Thus, I have little confidence in all the political inputs into investment decisions, at least for quite a while.

Changing Investment Leadership through Mutual Fund Lenses

Professionals often use more and different tools than the public or the media. In looking at mutual fund performance, most look at the average performance for a category of funds. However, there are two other measures that are useful to me, weighted average and median results. The first measures how the dollars invested are doing and the second measures the midpoint of the group. For the year to date period, there were 2483 large capitalization funds with total assets of $3.2 Trillion. They were essentially flat at +0.40% through August 6th. However, on a weighted average basis, the same group of funds produced a return of +9.98%, a +9.58% spread vs. the average. One of the reasons I expect a rotation away from the extreme focus on growth, is the ten-year spread of large-cap vs. the average only +4.05%.  Growth funds as a category, including large, mid, and small, both domestic and international, had a median ten-year average gain of +11.12% vs +10.35% for the current year to date period.

The real concern with growth is that there are only two handfuls of big winners and perhaps forty performance followers. The spread by size is unsustainable. Year to date, Large Gap Growth is up +21.19%, with the lead taken over by the Mid-Cap Growth +21.53%. The international Small/Mid-Cap Growth peer group was the only negative performer for the period -0.23%. At some point I expect “value” funds to get some exposure as leaders. In terms of the three different performance measures, the group is down -12% year to date. The ten year average compound growth rate was +12.57%, the weighted average +10.96% and the median +11.12%.

Can One Be Early with Value?

The great John Neff of the Windsor Fund, but he was an original thinker, both as an analyst and then portfolio manager. He trained at a mid-western bank before joining Wellington Management in Philadelphia, where he stayed after Jack Bogel pulled the Wellington Funds out of Wellington. After he was fired by the firm, he was resurrected by the outside fund directors to form Vanguard. The portfolio of Windsor was largely comprised of companies headquartered within 500 miles of his Valley Forge office and was heavy weighted toward financials and industrials. When I visited with him during a recession, many of his stocks had little or no earnings, particularly Citi Group. He explained that his stocks were cheap on an earnings power basis and that was more important than current reported earnings. During the recovery he proved to be correct. 

When John retired there were a few retirement dinners for him. At a small gathering in New York, open primarily to those connected with Wellington and Vanguard, there were only two outsiders invited, John Reed, the CEO of Citi, and myself. While many investors define value in terms of liquidating value, John defined it in terms of future value based on the in-depth analysis of earnings power. We continue to search for the new John Neff, as their time is probably coming.

The “Market” is Searching

Each week in Barron’s there is a list of the twenty-five best and ten worst performing funds for the week from my old firm. Normally, over half of each list is from a single peer group, but this week the lists were much more diversified. There were fourteen separate peer groups identified for the winners and eight for the laggards. This indicates that market participants are searching for new winners and losers to be sold. This is a sign that we are probably in a new phase.

Question of the Week: 

Have you found some new names of interest? Or have you given up on any disappointments?

  

   

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2020/08/more-to-learn-by-seeing-more-weekly.html

https://mikelipper.blogspot.com/2020/07/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/07/that-was-week-that-was-change-weekly.html

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