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Money managers under the microscope
from Reuters Money:
Actively managed ETFs and other wrinkles
The following is an edited excerpt from Never Buy Another Stock Again: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity, written by David Gaffen, who is the Reuters markets editor. It was printed with permission of FT Press, an imprint of Pearson.
One of the biggest growth industries in finance right now is in exchange-traded funds, and further growth in ETFs appears likely to come from several places.
Sector or country-specific ETFs and actively managed ETFs are likely to continue to be a growth area, along with perhaps a combination of the two (an actively managed ETF focusing on small-cap stocks, for instance).
The most popular sector ETFs are in natural resources and technology, although State Street, which sponsors the SPDRs ETF, has S&P sector ETFs for nine of the ten S&P sectors (telecommunications is the lone exception—it’s folded into another area); new ones continue to crop up.
For professional investors attempting to beat the market, they’re an ideal vehicle because they carry a relatively low cost and have tax efficiency, as David Kotok of Cumberland Advisors has pointed out. But John Bogle, in his book “The Little Book of Common-Sense Investing,” quoted (anonymously) a chief investment officer at an ETF company cautioning against “pin-pointed” bets on sectors, because they “still involve nearly as much risk as concentrated stock picks.” But that doesn’t mean they’re going to stop growing.
Like mutual funds, tech stocks, tech funds, and other hot investments that dominated the landscape for a time, the ETF world is turning into its own “app economy,” as Nicholas Colas, chief market strategist at BNY ConvergEx Group, puts it. This, by itself, is not necessarily a bad thing, but with more choices comes more confusion.
Another area where one can expect a growth spurt is in actively managed ETFs, first introduced by investor Harry Dent with his Dent Fund through AdvisorShares, which is now marketing other new actively managed exchange-traded funds. And so ETFs are starting to come full circle: While this is still designed for the same kind of tax efficiency and liquidity offered as most ETFs, now investors have the (supposed) benefit of active management—but the higher expenses to boot.
from Reuters Money:
Lazy portfolios win again in 2010
Those of you who diligently invest from reclining chairs with passive portfolios, rejoice! You had another good year without doing much of anything.
Not only did you get more out of life by not watching business TV channels, stock prices on your smartphone or fretting over the latest blip on Wall Street, you built up your retirement portfolio without much effort.
Those of you who thought you were smart and safe by piling all of your money into bond funds, turn off your TV. There's a better way.
One of the best approaches last year -- as in most years -- was to cover the major asset classes in one portfolio. This doesn't involve guessing whether stocks, bonds or real estate will be hot. You place almost equal amounts of money in every major category.
Craig Israelsen, who teaches finance at Brigham Young University, has a real lazy portfolio he calls "7-12." The concept is elegant: seven asset classes covered by 12 funds. He blankets nearly all of the U.S. and overseas stock and bond markets, real estate, commodities and a little bit of cash.
Over the past five years, the 7-12 has been among the best performing passive portfolios tracked by the online service MyPlanIQ.com, sporting a 13 percent return.
The 7-12 makes it simple by equal weighting most U.S. stocks and bonds (16.7 percent each) with smaller allocations to real estate, non-U.S. bonds and cash (about 8 percent each).
from Reuters Money:
The year’s best and worst ETFs
The best investments often don't have the highest returns. I know this is heresy to most, yet mass behavior can be a siren song.
About this time every year, we gaze intently at our portfolios, hoping against hope that we did something right. Sometimes we get lucky.
Two years ago, we didn't even want to open the envelope containing the bad tidings of the market meltdown. I kept my mutual fund statements sealed that year.
This year, there's some palpably good news to spread around, although it doesn't necessarily involve the best-performing investments.
Unfortunately, those who noted and invested in the best performers in ETFs recently are doing exactly the wrong thing. They are loading up in overheated funds when the general consensus is that this is the right thing to do. As previous market manias have proven, "the lemming effect" is something that millions of investors routinely forget or ignore.
Case in point are the sizzling returns of the most-popular ETFs this year. The iShares Gold Trust (IAU), with a three-year return of almost 20 percent (year-to-date as of Dec. 13), was one of the darlings of the precious metals crowd. The SPDR Gold Shares (GLD), iShares Silver Trust (SLV) and Powershares DB Precious Metals ETF (DBP) were not far behind.
As economic klaxons sound alerts about the troubled Euro and Dollar, investors have herded into precious metals with abandon. The SPDR Gold Shares fund alone has grown to more than $54 billion in assets.
from Reuters Money:
Coming soon: the loud thud of a gold bust
Some time in the future the price of gold will crash and it won't have a fairy-tale ending for the millions of investors who piled on in recent months.
If I could tell you when gold was going to bust, I'd likely be wrong or bigger than Warren Buffett, so I won't even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.
It's not that I don't nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.
And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn't mean it will, of course.
Yet the back story of the world's financial insecurity isn't necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.
One flaw in the "gold can still climb to $2,000" argument is that the last boom was due to the hyperinflation of the 1970s and early '80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.
Right now, though, we're in a deflationary mode. This "deleveraging" could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.
John, I don’t know about gold, but the discussion here has certainly made me a convert to prevailing theories on Behavioral Finance.
A few notes:
A FIAT currency is one where it is the only currency in the system, and is not convertible to others. The dollar is fully convertible.
Hyper-Inflation is inflation measured in the 100s to 1,000s percent range, and thus the 14.7% inflation peak of 1984 would not qualify. By the way, it’s pretty much always associated with a weak central bank.
The current catastrophic reasoning is somewhat discouraging in its lack of scope. After Y2K I was able to pick up dehydrated food at tremendous discounts. Ten years of camping trips have worked down the supply, but there seems no relief in sight, yet. Generator is still holding up well though.
from Reuters Money:
6 healthy healthcare funds
The following column is by Tom Roseen, senior analyst for Thomson Reuters.
Prospects may be brightening for healthcare and biotechnology stocks, now that the election is over and earnings in that sector are strengthening.
Third-quarter earnings reports and advance guidance have been fairly good, according to our Thomson Reuters Proprietary Research team. With 58 percent of the healthcare constituents of the S&P 500 reporting thus far, 86 percent have beaten their consensus earnings estimates.
And with the 2010 mid-term elections finally in the history books, the political and regulatory risks for the sector may have receded—at least slightly—with Republicans’ taking over the House and making inroads in the Senate. The ambiguity surrounding healthcare reform had dampened the performance of these stocks. Investors have been concerned about the heightened regulatory scrutiny of the healthcare industry, and there have been mixed views about the impact the legislation would have on healthcare firms’ profitability and margins.
The sector was also hurt by the recession. Healthcare is considered a defensive play during downturns – after all, people can’t forgo critical care, delay the delivery of that new bundle of joy, or discontinue life-prolonging medication. But we know from firsthand experience that families will often put off a physical exam, purchase a generic brand of medication, or delay elective procedures when times get tough.
In the first 10 months of 2010, Lipper’s Health/Biotechnology Funds (up 5.68 percent) classification has underperformed the domestic equity funds macro-group (up 8.72 percent) by over three percentage points.
Investors who think this is a good time to add some healthcare exposure to their portfolios can use the Lipper Fund & ETF Screener to find funds that fit their needs. We follow two categories that invest in healthcare, medicine and biotechnology: Health/Biotechnology Funds (which invest at least 75 percent of their assets in domestic companies) and Global Health/Biotechnology Funds (which invest more than 25 percent of their assets in foreign companies.) Although they are relatively small groups of funds, both categories invest in a diverse group of sectors in the industry.
from Global Investing:
Equities — an ‘even years’ curse?
Are global equity markets under an 'Even Years Curse' that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International's' director of asset allocation Trevor Greetham suspects so.
"It's not just hocus-pocus but to do with global inventory levels," he explained at a forum organised by the London-based investment house.
The inventory cycle typically lasts about two years. 'Up' years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the 'stocking up' years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.
Looking at the MSCI All World Equity Index, Greetham found equities generating a 69-percent return over the 12-year period starting from 1998. Breaking this down into odd and even years, equities went down by 30 percent in even years, and up by 143 percent in odd years.
On an annualised basis, growth was 4.5 percent, down three percent in even years and up 7.7 percent in odd-numbered years.
Compared against the JPMorgan Government Bond Dollar Index, equity returns beat bonds by 13 percent per annum on an average compound basis during odd-numbered years. In the even-numbered years, global stocks underperformed bonds by 15 percent.
from From Reuters.com:
Following the smart money
At least 20 of the 30 biggest hedge funds boosted their positions in financial institutions in the last quarter, a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.
The push into financials indicates fund managers including Steven Cohen and John Paulson -- closely watched as barometers of risk -- have shifted from routine merger arbitrage plays to directional bets with more reward potential.
More coverage analyzing the Smart Money:
Out of the woods
The hedge funds industry may be finally emerging from the woods after last year’s debacle. The Credit Suisse Hedge Fund Index is up 9.69 percent in the year to date, with some strategies, like convertible arbitrage (up 30.7 percent) and fixed income arbitrage (up 16.07 percent) delivering bumper returns.
It’s all very different from those dark days at the end of 2008. Charlie Porter, CEO of Thames River Capital, which is split 55 percent hedge, 45 percent long-only, says most firms were focused on survival. “No one knew where their businesses were. A lot of hedge funds have disappeared over the last year but there were probably too many of them.”
He says new firms are now starting up again - albeit at a slower rate than before. But it remains to be seen whether mainstream firms will continue to flirt with absolute return, after products like 130/30, which take both long and short positions, performed so poorly.
Aymeric Poizot, a senior director at Fitch Ratings, believes many absolute return products disappointed investors because they weren’t diversified in terms of their performance drivers. “You can’t make alpha if you don’t have breadth or depth. You need to be able to take many uncorrelated, diversified bets,” he argues.
Cultural issues bedevilled some mainstream firms attempting to run their own absolute return processes and it is questionable whether some offerings can survive in their current form. Certainly, the labels are likely to change. “130/30 is largely a horse’s arse,” says Porter. “It has proved popular for some US institutional usage but in the UK retail space, the good products are few and far between.”
However, he sees the growth of absolute return within the traditional investment industry as a positive development. “If products can be created that more reliably generate consistent outcomes for investors, it must be a good thing,” he says. “
from Global Investing:
For better or worse?
Wealth managers at Citi Private Bank are telling their clients to stay neutral in their exposure to hedge funds at the moment, whether the strategy be event driven, equity long/short or macro. The main reason is that capital markets are still stressed and many hedge funds still need to deleverage.
The firm points out, however, that hedge funds had a good news-bad news kind of year in 2008. Based on the HFRX Global Hedge Fund Index, it was the worst performance on record. The index lost 23.3 percent. Its next worst performance was 2002 -- and that was only a 1.5 percent decline.
Losses were widespread across all kinds of strategies. Only merger arbitrage and systematic macro gained anything.
The good news, so to speak, was that that this dreadful performance was better than what you would have got from just plain equities. The S&P 500, for example, lost 38.5 percent, meaning that the hedge fund index outperformed by a whopping 15.2 percentage points.
It was that kind of year.
from Global Investing:
A dish best served cold
Alain Grisay, the softly spoken CEO of F&C Investments, was in a wry humour at F&C’s annual press seminar for European journalists on Thursday.
Fresh from his bout with the UK’s Treasury Select Committee on the causes of the banking crisis, and enjoying a respectable set of fourth quarter figures, Grisay is in the rare position of having come through the storm with his house intact. “We have just gone through an unrequested market stress test that confirms our model works,” he said. “We were able to report resilient results for the year and took the market by surprise."
His company has been viewed as boring in the past by market commentators, but Grisay observed drily that in some quarters F&C is now viewed as a “must have”.
With majority shareholder Friends Provident confirming that it has given up trying to sell F&C, Grisay said he saw a lot more value to be created in building up the shop rather than taking it to pieces.
He was also relatively sanguine about the fall out from the credit crunch, saying that changes in the asset management industry would be deep and long-lasting. “Half the hedge fund industry will be shut down by the end of 2009 due to a combination of redemptions and write downs,” he said, sounding far from worried. “The industry is melting like snow in the sun.”
But he saved his best jab for the UK’s hapless legislature, still struggling to shut the stable door long after the horse has run off and joined the circus. Having survived the Treasury Select Committee’s dissection, Grisay expressed his surprise at the Committee’s approach.
"They are able to produce these typed conclusions from the discussions you have with them, that they have typed up the night before. It’s really very efficient!"
