Monday, September 8, 2014

Expecting Trouble? Here Are Investments to Ponder

Another interesting article in the Wall Street Journal today arguing for "safe haven" investments because of global conflicts and the Fed exiting QE.

Of course we are in a bubble, and of course there is some risk with what is going on with the Fed and Ukraine.  But, that doesn't change the fact that nobody can predict the market.  This bubble will eventually burst, but it could be tomorrow or it could be five years from now.  Trying to time it and go into "safe haven" investments now could turn out to be a great decision or a horrible mistake.

A better approach of course is to be tactical and stay in harmony with market trends.  Then it doesn't matter when the bubble bursts, you can shift to "safe haven" investments before bad turns into really bad.

Of course, there is also no such thing as a "safe haven" investment but that is a post for another day.

Mutual Funds Five Star Curse

There was an article in the Wall Street Journal this morning on how most funds that achieve a five star Morningstar rating don't eventually lose it:

This makes perfect sense for a number of reasons:

1. Morningstar ratings reflect past performance
2. Most mutual funds are style box investors, meaning they stick to a specific style like large cap value, small cap growth, etc.
3. When their style is in favor they will typically do well
4. When their style is out of favor it is hard for them to do well
5. Styles don't stay in favor forever

So you would actually expect a five star mutual fund today probably won't be a five star fund tomorrow.

Instead of using past performance, like a star rating, to judge whether you should buy a fund or not, you should be trying to figure out if the performance is sustainable.  How did the manager get a five star rating?  Is that something that can be continued?  For example, if large cap value stocks have just had a historic 10 year run and a large cap value manager has a five star rating, how likely is is that the next 10 years would be as good as the past 10 years?  Probably not that likely.

Friday, September 5, 2014

A Rising Tide Doesn't Lift All Boats

Goldman Sachs: Why Stock Pickers Have Suffered a Really Bad Year

Just saw this article this morning on how only 23% of large cap managers have outperformed the S&P 500 this year and how the average hedge fund is up only 2%.  There are a couple of things that investors should read into this:

1. This year is different than last year.  Last year was pretty much straight up, at least in the US, so anyone US focused had a good year.  This year is different as there has been so much going on beneath the surface---small and mid cap under performance, momentum stocks getting killed, etc.

2. Because we are seeing so many divergences this year and so much going on beneath the surface, buy and hold investors should be real nervous as this could be a signal a top is near.  Tactical investors have no reason to fear tops.

3. Comparing a money manager to the S&P 500 is only valid if that money manager invests like the S&P 500.  There are a bunch of money managers who are closet indexers who pretty much try to track the S&P 500, for those guys comparing them to the S&P is valid.  Hedge Funds and other flexible managers can't be compared to the S&P because they have the ability to pursue absolute returns (unlike the closet indexers who ride the market up and down).  These guys will usually under perform at time of high risk and at speculative tops because they will take some money off the table.  This is ok because they will tend to make it back, and then some,  when the market crashes.

Thursday, September 4, 2014

Is Morgan Stanley Advocating Tactical?

Morgan Stanley Braces for Seven Years of Bond Losses

According to this article in Bloomberg yesterday:

Morgan Stanley (MS) Wealth Management’s Jonathan Mackay predicts the securities will post annual returns of between 1 percent and 2 percent for the next seven years -- which means you’ll lose money after accounting for inflation. That’s a big shift considering the debt gained 8.7 percent annually on average in the 30 years through 2012.

 Investors should “have a lower average allocation to bonds than you would have in the previous cycle because they just don’t provide the income and return,” said Mackay, senior market strategist at Morgan Stanley’s $2 trillion wealth management unit. While central-bank stimulus is supporting bond values, “the collateral damage is going to be lower portfolio returns.”
For a moment it almost seemed like Morgan Stanley was advising clients to take a tactical approach to their portfolio instead of the stick your head in the sand and have an allocation to bonds based on how conservative you are because bonds always make money (even though it is mathematically impossible for bonds to have the kind of run they have had over the past 30 years).  But then he ruined it by saying:

 The way to get around this is to buy higher-yielding assets, he said. While higher-rated bonds have been outperforming their riskier counterparts in 2014, that may be poised to reverse.
So still somewhat of a tactical approach since he is advocating moving out of lower yielding bonds into higher yielding but instead of reacting to the market (like buying low yielding Treasuries now because they are in an uptrend) he is advocating blind faith that higher yielding bonds will do better than lower yielding.  Maybe, maybe not.