Expectations vs. Reality

June 14, 2011

Index Universe reports the following from the “S&P Persistence Scorecard,” which  analyzes the persistence of top performing fund managers over time.

S&P found that over a five-year period ended March 2011:

  • Of the funds with top-half rankings, only 0.96 percent of large-cap funds, 1.14 percent of midcap funds and 2.59 percent of small-cap funds maintained that top-half ranking over five consecutive 12-month periods. To put those numbers in perspective, random expectations would suggest a rate of 6.25 percent, S&P said.
  • Of the funds with top-quartile rankings, 19.15 percent of large-cap funds maintained that top-quartile ranking over the next five years. Also, only 9.38 percent of midcap funds and 23.26 percent of small-cap funds did so over the same period. Random expectations suggest a rate of 25 percent, S&P said.

Of these results, Index Universe states the following: “the persistence data paint a damning picture of the world of actively managed investments.”  Really?!  Because the funds in the top half of the rankings five years ago did not maintain top-half performance in each of the past 5 years they conclude that this is damning evidence against actively managed investments.  As pointed out above, 19.15 percent of large-cap funds did maintain their top-quartile rankings over the next five years.  However, just because they weren’t in the top of the ranks every single year, the conclusion is that active management fails.  The article also completely fails to address the issue of large percentage of managers who profess to be active, but are really closet indexers.

Any investor that expects their actively managed strategy to outperform every single year is asking for for a lifetime of disappointment. Does that mean that there are not actively managed strategies that outperform over time?  Hardly.  The evidence is pretty clear about historical results of relative strength and value, for example. Furthermore, history tells us that relative strength has not outperformed in all 3 and 5 year periods, but it sure has outperformed a high percentage of the time.


Source: Psychology Today

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More Money Has Been Lost Avoiding Risk Than at the Point of a Gun

June 14, 2011

That’s a paraphrase from Ray DeVoe’s old maxim about money being lost reaching for yield.  For some reason—gee, I wonder if 2008 had anything to do with it?—investors are intensely allergic to equity risk right now.  So, instead, they are buying safe things like structured notes.  That hasn’t worked out too well.  According to an article in Investment News:

Structured notes and other derivatives products have been marketed by Wall Street as safe and secure investments. Of course, there’s safe and then there’s safe. Retail investors of all stripes have lost at least $113 billion by purchasing these purportedly safe instruments, according to a new study conducted by the nonpartisan policy center Demos and The Nation Institute, a media think tank.

“In my three decades of Wall Street experience, I have not seen any other product as absurdly destructive as retail investments linked to structured products,” securities arbitration consultant Louis Straney wrote in the report.

We’ve written about this kind of karma boomerang before: the harder you try to avoid getting nailed, the more likely it is that you’ll get nailed by exactly what you are trying to avoid.  

This happens because risk cannot be defined simply by volatility or capital loss.  Risk is much more encompassing and there is no way to avoid it.  Since you can’t avoid it, take your risk without significant leverage, in assets that have a chance to grow in value, in relatively liquid marketable instruments that you can understand—and do so in a systematic fashion.

Do you feel lucky, punk? Do ya?

Source: www.simpsonwallpapers.net

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Top ADR Performers Over Trailing 12 Months

June 14, 2011

Although U.S. investors often focus on U.S.-based companies because of greater familiarity, I suspect that many would be interested in learning more about international companies that trade on U.S. exchanges in the form of American Depository Receipts (ADRs).  The top ten performing ADRs over the past 12 months, out of our universe, are shown in the table below.  As of 6/13/2011.

To learn more about Dorsey Wright’s Systematic Relative Strength International portfolio, click here.

Dorsey Wright’s ADR universe is a sub-set of the entire universe of ADRs.  Dorsey Wright currently owns AMRN.  A list of all holdings for this portfolio over the past 12 months is available upon request.

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Greece Teeters on the Brink of Default

June 14, 2011

Things are working out pretty much as Ken Rogoff forecasted—financial crisis followed by sovereign defaults several years later.  We are three years into the financial crisis and now Greece is nearing the end of the charade.  According to Bloomberg:

Greece was branded with the world’s lowest credit rating by Standard & Poor’s, which said the nation is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history.

C’mon, you knew this was coming.  Ironically, an actual Greek default may have much less psychological impact than the fear of Greek default did early in the process.  Markets adapt and your investment process should too.

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