Introduction
Learning experiences occur everyday for investors with an active, searching mindset. We can see their importance more clearly if we utilize a number of tools. At this point in the market’s evolution from a combination of volatility and no forward progress for many stocks, we should be searching for some guides for both our investment emotions and our considered actions. I am suggesting there may be some valuable insights being offered by looking through a microscope as to very recent investment performance for equities and fixed income.
Current Views through a Microscope – Equities
One of the basic beliefs supporting market analysis is that from time to time the ownership of stocks rotates from “strong” sound, long- term holders to short-term oriented momentum trading “weak” players. Strong and weak are applied loyally to their current holdings. In theory the market’s purpose for periodic meaningful declines is to shake out the weak holders selling at indiscriminate prices; e.g., offering bargain prices to strong buyers who foresee longer term value at these depressed prices. Historically, after a low price is followed by a rally, the question comes up whether the low price is actually the bottom of the move. Often a second or even a third down move “test” is required to convince some strong investors to be buyers. These tests can be at or somewhat near the prior low price. For me it is not only the price move that is critical in declaring a bottom. What I look for is a dramatic change in attitude on the part of the sellers who are exhausted from the emotions of the decline and proclaim they are leaving the game, often calling it “fixed.” At the moment I am not hearing this lament from the sellers. Thus, I believe the February bottom to be a weak bottom. Most of the time weak bottoms are not when the base for subsequent, substantially new highs are generated.
With the above thoughts in mind I wonder whether the stock market, not individual stocks has seen its high in January, which would fit the pattern of post performance from a prior good year.
For Those Committed to Equities for the Long-Term
Many of us have responsibilities to be largely invested in stocks or stock funds because the history of successful large macro bets is poor for many that have tried. Getting three successive correct decisions (Buy-Sell-Buy) in a row has proved to be difficult for most who try. Thus for the rest of us professionals we try to produce the best returns that we can within our prescribed market.
One of the reasons that all institutional investors should pay attention to the results of mutual funds is in aggregate they are the best contemporaneous record of institutional money. (Bear in mind many of the mutual fund management shops manage a great deal of money in non-mutual fund accounts, but use many of the same securities and strategies.) By using a microscope on the very small number of average mutual fund performance through March 1st, one can see some useful patterns. The average US oriented diversified fund declined only -0.31% where the average sector fund fell -3.13 % and the average world equity fund gained +0.11%. What these numbers suggest to me is that during periods of volatility liquidity is important. Further, that an important part of short-term global investing are the inputs from currencies.
There are some other lessons from this study. The best diversified US oriented fund category was the Large-cap Growth funds, which gained +4.02%. (Part of the gain is probably due to investments in a small number of globally oriented tech companies; the average Global Science & Tech fund rose +6.36%) What is significant about the leading performance of the Large Cap Growth funds is that in most weeks it has the largest redemptions. Contrary to the popular view that redemptions are a sign of disappointment in returns, (as these are often the oldest funds many investors own) the redemptions are the completion of particular phases in an investor’s life cycle; e.g., retirement.
Fixed Income through the Microscope
Utilizing the mutual fund data through March 1st, the average domestic fixed income fund was down -0.91%. Not particularly helpful to balanced accounts that were looking to fixed income gains for stability to offset equity losses. Institutional investors and some retail investors did find better investments than the general bond market in Loan Participation funds (Bank Loans) +0.97% and Emerging Market Debt funds in local currencies +2.65%. To emphasize, the importance of currency in Emerging Market Debt fund investing, bonds traded in dollars were down -0.63%.
In reading the annual reports of fixed income funds that our clients own, I found the following statement, “Credit sector is less compelling.” This particular fund has a long history of providing slightly above average income with less downside than most of its peers. Currently, they are sitting with shorter duration bonds or higher quality.
I have written in the past of my unease with the growth of credit funds, both in the US and globally. The leading bank distributing syndicated loans is Bank of America, not one of the leaders that I know of in credit research. The search for yield has been a trap in the past.
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Showing posts with label institutional money. Show all posts
Showing posts with label institutional money. Show all posts
Sunday, March 4, 2018
Sunday, July 12, 2015
Leaders vs. Managers
Introduction
In building a portfolio of funds for clients, essentially the choices are to choose leaders, managers or a mix.
Leaders
In building a portfolio of funds for clients, essentially the choices are to choose leaders, managers or a mix.
Leaders
This last weekend may
show my inclination. We spent the weekend with our enlarged family group
of forty-seven, some or all participated in visits to George Washington's home
in Mount Vernon, the US Marine Corps oldest base at 8th and I street in
Washington for the sunset parade and silent drill team demonstration, and the
National Museum of the Marine Corps.
One could build an entire leadership course based on George Washington's life and pursuits. While much has already been written on these topics, for us involved with investing, two themes merit our review. The first is aggressiveness. Before and after his military battles during the American Revolution Washington was an aggressive investor in land. At the time of his death he owned some 70,000 acres all the way into the Ohio Valley. Many of the land parcels he had surveyed years before, but some were virgin territory for him. Unfortunately while he believed in both physical as well as financial planning, he died with lots of land and some debts and very little cash, thus much of his assets had to be liquidated without further development in order to meet his debts. As with most leaders he was ahead of his time focusing on the potential of future development. (He could have used a more competent cash manager.)
One could build an entire leadership course based on George Washington's life and pursuits. While much has already been written on these topics, for us involved with investing, two themes merit our review. The first is aggressiveness. Before and after his military battles during the American Revolution Washington was an aggressive investor in land. At the time of his death he owned some 70,000 acres all the way into the Ohio Valley. Many of the land parcels he had surveyed years before, but some were virgin territory for him. Unfortunately while he believed in both physical as well as financial planning, he died with lots of land and some debts and very little cash, thus much of his assets had to be liquidated without further development in order to meet his debts. As with most leaders he was ahead of his time focusing on the potential of future development. (He could have used a more competent cash manager.)
Discipline
I have often written about the second important aspect of Washington’s leadership, discipline, which I have learned from my active duty service in the US Marine Corps. On this trip the skills and bravery of the individual Marine was an important focus. The National Museum of the Marine Corps in their displays depicted the bravery and fighting skills of individual Marines. In addition to listening to the very talented Marine Band and the Drum & Bugle Corps, one of the highlights was watching the silent drill team's parade. This platoon of perfectly selected young Marines go through their routines with no audio commands issued. Their memory of endless rehearsals and the discipline to follow ingrown procedures produced a striking tableau. In addition to the Marine Corps Commandant, the honored guests included a sizable number of members of Congress who one point wore the US Marine uniform. Perhaps it was no accident that the current Commandant, General Joseph Dunford has been nominated to be the Chairman of the Joint Chiefs of Staff pending the approval of the US Senate. In that role he will become the chief military advisor to the US President.
I have often written about the second important aspect of Washington’s leadership, discipline, which I have learned from my active duty service in the US Marine Corps. On this trip the skills and bravery of the individual Marine was an important focus. The National Museum of the Marine Corps in their displays depicted the bravery and fighting skills of individual Marines. In addition to listening to the very talented Marine Band and the Drum & Bugle Corps, one of the highlights was watching the silent drill team's parade. This platoon of perfectly selected young Marines go through their routines with no audio commands issued. Their memory of endless rehearsals and the discipline to follow ingrown procedures produced a striking tableau. In addition to the Marine Corps Commandant, the honored guests included a sizable number of members of Congress who one point wore the US Marine uniform. Perhaps it was no accident that the current Commandant, General Joseph Dunford has been nominated to be the Chairman of the Joint Chiefs of Staff pending the approval of the US Senate. In that role he will become the chief military advisor to the US President.
At
the end of the evening the Commissioned Officers marched away and were replaced
by the leading Non-Commissioned Officers to march off the troops returning to
the barracks. These NCOs are the real managers of the infantry. They get the
job done accomplishing the officers’ orders.
Do you want Leaders or Managers Managing Your Portfolio?
I sit on a number of investment committees as well as managing discretionary accounts of portfolios of funds. One of the characteristics of investment committees is that there is a strong desire for them to reach unanimous decisions. Often there are official or unofficial benchmarks that become performance targets. All too many investment committees react politically by agreeing to the least aggressive strategy, with emphasis on beating a benchmark regardless of the nature of the account or composition and management of the benchmark. By adopting this strategy they are really making the decision in favor of managers who will be graded on how close they come over time to the benchmark. As all too often the benchmark is of individual securities that are assembled without management and trading expenses they are also without the auditing standards normally used by professional organizations. In addition, not much attention is paid to component weights and methodology and the timing of additions and deletions. The drags caused by expenses and the desirability for some operating cash makes it quite difficult for most managers over time to beat securities benchmarks.
If you wish to have superior results from specific portfolios which do not have the low expense ability and/or the need for operational cash, one should take the risks of going with leaders. Leaders are managers doing some things differently than the normal (not currently the best) performers. Because of their relative isolation, leaders can often be strong personalities with some missionary zeal. A complicating factor in choosing a potential future leader is that often they are not the smooth presenting managers that garner so much of the institutional money. Further, most of the time they have little or uneven performance records. The key to their selection rests on their well thought-out, but different investment approaches.
What Do We Do?
We build a mix of managers and leaders. The managers are selected on the basis of their expense control and their ability to reasonably hug the benchmark. These are then combined with managers that we believe will have a good chance to be future performance leaders.
Question of the week: Can we discuss our approach with you as applied to your investments?
Do you want Leaders or Managers Managing Your Portfolio?
I sit on a number of investment committees as well as managing discretionary accounts of portfolios of funds. One of the characteristics of investment committees is that there is a strong desire for them to reach unanimous decisions. Often there are official or unofficial benchmarks that become performance targets. All too many investment committees react politically by agreeing to the least aggressive strategy, with emphasis on beating a benchmark regardless of the nature of the account or composition and management of the benchmark. By adopting this strategy they are really making the decision in favor of managers who will be graded on how close they come over time to the benchmark. As all too often the benchmark is of individual securities that are assembled without management and trading expenses they are also without the auditing standards normally used by professional organizations. In addition, not much attention is paid to component weights and methodology and the timing of additions and deletions. The drags caused by expenses and the desirability for some operating cash makes it quite difficult for most managers over time to beat securities benchmarks.
If you wish to have superior results from specific portfolios which do not have the low expense ability and/or the need for operational cash, one should take the risks of going with leaders. Leaders are managers doing some things differently than the normal (not currently the best) performers. Because of their relative isolation, leaders can often be strong personalities with some missionary zeal. A complicating factor in choosing a potential future leader is that often they are not the smooth presenting managers that garner so much of the institutional money. Further, most of the time they have little or uneven performance records. The key to their selection rests on their well thought-out, but different investment approaches.
What Do We Do?
We build a mix of managers and leaders. The managers are selected on the basis of their expense control and their ability to reasonably hug the benchmark. These are then combined with managers that we believe will have a good chance to be future performance leaders.
Question of the week: Can we discuss our approach with you as applied to your investments?
__________
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A.
Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
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Contact author for limited redistribution permission.
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