Opinion

James Saft

Active management’s slow bleed

Jan 10, 2013 21:40 UTC

By James Saft

(Reuters) – Punished by another year of bad performance from active investment managers, there is some encouraging evidence that investors are finally wising up.

Call it the triumph of experience over hope, or simply a case of slow but steady learning, but last year equity-trading volume slumped and the flow of funds into low-cost options like exchange-traded funds continued to gain momentum.

A record $188 billion poured into U.S. ETFs in 2012, according to IndexUniverse, taking assets under management in ETFs to $1.35 trillion. The vast majority of the money is in low-cost index-based vehicles. While that’s only about 12 percent of the $11.6 trillion industry, at least it represents a growing minority that is accepting the boring but rewarding reality that handsomely paid managers are not worth it because they are not going to consistently beat the market.

No two ways about it, the active management industry had a bad year, failing to keep pace with the S&P 500′s 16 percent gain and the broader Russell 2000′s 16.3 percent performance. Only 36 percent of funds outperformed their benchmark, down from 41 percent in 2011, according to an analysis by Goldman Sachs of $1.3 trillion in U.S. equity mutual funds. Just under half of large-cap growth funds beat their benchmark, while a pitiful 20 percent of large-cap value funds managed the trick.

And don’t kid yourself that only “dumb” retail money goes into mutual funds, and the big boys and girls find their alpha in hedge funds. As of the last week in December, 88 percent of hedge funds were lagging the S&P 500. The average hedge fund logged a return for the year of just 3.5 percent, according to the HFRX Global Hedge Fund Index, a good sight better than their nearly 9 percent loss in 2011 but hardly the kind of reward you want for paying the standard hedge fund charge of 2 percent in fees and 20 percent of the profits.

Earnings rest on shaky legs: James Saft

Jan 9, 2013 21:16 UTC

Jan 9 (Reuters) – There are two big-picture reasons to doubt
corporate earnings: they are improbably high and there are
significant reasons to think they are being gamed.

The U.S. corporate earnings season kicked off this week with
a creditable performance by bellwether Alcoa and amid
expectations that fourth-quarter reports for the S&P 500 would
grow by 2.7 percent. That compares well with a disappointing
third quarter, when earnings for the group barely grew, nudging
up just 0.1 percent.

Even that modest growth, though, if it comes, will be
recorded during a period which is, by many measures, extremely
unusual. So unusual that it may make sense to apply a large
discount to discover the underlying truth. This is not an
argument about the fiscal cliff, or the cost of capital, but
simply put we may be in one of those periods when we need to
take a couple of huge steps backward to get the right
perspective.

Basel’s golden ticket for bankers: James Saft

Jan 8, 2013 05:04 UTC

By James Saft

(Reuters) – Bankers may just have gotten another golden ticket.

The Basel Committee on Banking Supervision, a global group of central bankers and regulators, unveiled on Sunday newly diluted plans intended to make banks capable of withstanding the next crisis, giving banks more time to meet softer requirements and, critically, hugely loosening proposed rules over the kinds of assets banks will be encouraged to hold.

This will fuel demand for riskier debt, such as mortgage-backed securities and corporate bonds, and takes the financial world a substantial step backwards towards its pre-crisis set of incentives.

But what fuels a boom for banks, capital markets issuance and riskier assets may not translate into a boon for the actual economy, as the new regulations may prove a disincentive to making loans, especially to smaller companies.

Shunning Japan gets riskier: James Saft

Jan 4, 2013 15:29 UTC

By James Saft

(Reuters) – After 23 years of being the smelly wet dog of global markets Japan may be at a turning point.

With many massively, and understandably, short on Japan, the possibility that new policies actually work, or fail memorably, means investors are carrying considerable, and growing, risk. Now might be a prudent time to move closer to a benchmark allocation, which for most of us means putting money back in Japan.

A set of radical new fiscal and monetary policies being pushed by newly-minted Prime Minister Shinzo Abe might finally succeed in bringing inflation and growth back to Japan, but also could easily end in a financing or banking crisis.

The speculator republic: James Saft

Jan 2, 2013 21:35 UTC

(James Saft is a Reuters columnist. The opinions expressed are his own.)

By James Saft

(Reuters) – Short term movements in the stock market don’t tell you much, and one of the main things they don’t tell you is how to make public policy.

The idea that a given policy can be justified by its impact on the stock market, or that movements on the stock market in and of themselves call for (usually pacifying) public policy is one of the great fallacies of our time.

The “fiscal cliff” farce is a prime example, with lawmakers urging a deal on the grounds that stocks would fall if one was not forthcoming and analysts nodding their heads approvingly when news of the deal, at best a temporary balm, was met with a sharp rally in stocks on Wednesday.

COLUMN: UBS and too-big-to-punish – James Saft

Dec 26, 2012 20:33 UTC

Dec 26 (Reuters) – As well as too-big-to-fail it looks as if
we must think of our largest banks as too-big-to-punish as well.

After comments from top U.S. Justice Department officials in
the wake of the $1.5 billion settlement with UBS over
interest-rate manipulation, the bank’s counterparties,
employees, clients and competitors certainly will.

UBS was fined and a subsidiary pleaded guilty to one count
of felony wire fraud over its part in a wide-ranging effort to
doctor key benchmark interest rates such as the London Interbank
Offered Rate (Libor).

UBS and too-big-to-punish: James Saft

Dec 26, 2012 20:32 UTC

By James Saft

(Reuters) – As well as too-big-to-fail it looks as if we must think of our largest banks as too-big-to-punish as well.

After comments from top U.S. Justice Department officials in the wake of the $1.5 billion settlement with UBS over interest-rate manipulation, the bank’s counterparties, employees, clients and competitors certainty will.

UBS was fined and a subsidiary pleaded guilty to one count of felony wire fraud over its part in a wide-ranging effort to doctor key benchmark interest rates such as the London Interbank Offered Rate (Libor).

The 3 Ls of 2013: low growth, low returns, lower risk

Dec 21, 2012 01:56 UTC

Dec 20 (Reuters) – Look to 2013 to be the year of three
Ls: Low growth, low returns, and thankfully, lower risk.

The upshot for investors may be a calmer year, but possibly
one that is less lucrative. It could be quite a contrast from
2012, which featured plenty of drama, notably in the euro zone,
but also decent returns courtesy of a 12.5 percent gain in the
S&P500 stock index and a similar return from global shares.

Extraordinary monetary easing and pledges from the Federal
Reserve, the Bank of Japan, and the European Central Bank will
provide a safety net to investors in 2013. However, we still
face a global economy that is facing both deleveraging and a
drag from falling government spending in important economies.

Corporate bond risk gets silly once again: James Saft

Dec 19, 2012 21:35 UTC

Dec 19 (Reuters) – Proving yet again that history rhymes
rather than repeats, just a few short years after an epochal
crash the search for yield just gets wilder and wilder.

Perhaps the best place to see this is in the corporate bond
market, where yields are at or near all-time lows while, by some
measures in key sectors, investor protections have never been
weaker.

Don’t expect, though, to see a repeat of the bloodbath of
2008 and 2009, when markets froze and there was real fear that
normally viable companies would as a result hit the shoals. For
one thing, companies are more liquid and less leveraged.

Abe’s threat to banks and the old: James Saft

Dec 18, 2012 05:03 UTC

By James Saft

(Reuters) – Japanese banks and pensioners will be first in line to feel the pain if Japan successfully reignites inflation and inflates away its debts.

Which are two very good reasons truly effective central bank action may not happen, and if it does will carry heavy unintended consequences.

Fresh from a landslide victory on Sunday, Shinzo Abe, Japan’s next prime minister, lost no time in hammering home the demands he’s made on the Bank of Japan, saying the electorate had ratified his calls for more stimulus.

  •