The wsj reported this week that despite active managers’ refrain “that it’s a stock picker’s market” (one of the great all purpose clichés of wall street) which is supposed to apply more in down than in up markets, the performance of active managers has been dismal so far this year:
As the article below shows, the useless cliches were coming hard and fast from the active managers (my comments in bolds)
Though Stock Pickers
Struggle, Tech Shares Revive
Managed Funds Fail to Outpace Indexes
By DIYA GULLAPALLI
May 31, 2008;
If this is supposed to be a stock picker's market, the stock pickers need to start picking better stocks.
Bearish periods are touted as stock picker's markets because money managers are supposed to deftly hand-select winning companies rather than rack up losses along with broad benchmarks that are tracked by popular index funds.
Money managers, who charge far higher fees than index funds, have happily promoted this idea. It's "a stock picker's market" that should validate "human-based fundamental analysis," noted one Janus fund in the past year. It's "a stock picker's market" that doesn't "reward broad ownership of sectors or industries," said the $257 million Schroder U.S. Opportunities Fund in a recent filing. It will "continue to be a stock picker's market" since "not every corporation will be able to grow its earnings" in a slower economy, the $22 million Adams Harkness Small Cap Growth Fund said in a recent shareholder letter.
Active funds held up well last year. But so far in 2008, they have fallen behind indexes in six of nine major categories of U.S. stock funds. In the three areas where they are ahead -- small value, small blend and large blend -- it's by about a half-percentage point or less.
Actually the number cited above which is based on aggregate returns in each category is less important than the numbers in the box which show that your odds of picking a fund that outperformed their category ranged from a bit over 2 in 10 to a bit over 6 in 10. And since research has shown that “winners’ seldom persist in beating their relevant index, the argument for active investing is even weaker than it appears from the short term data.
While the data above is only for the first five months of 2008, it is in line with historical experience:
Stock pickers' record during the six bear markets from 1973 to 2007 is three for six, according to research by Vanguard, which pioneered the index fund, but also runs actively managed funds. Beating the market half the time doesn't bolster the case of stock pickers' outperforming during downturns. During economic recoveries, stock pickers beat the market half the time in the 12-month periods following the bear markets. In the bear market from February 2000 to February 2003, active managers in a Lipper general equity average trailed the Dow Jones Wilshire 5000 index by two percentage points…..
That might explain why investors have been looking elsewhere. Last year, nearly 60% of net new cash to funds was captured by index and exchange-traded funds, according to data from the Investment Company Institute. As recently as 2006, index funds and ETFs garnered only 36% of the new dollars.
One hopes that the trend to low cost index and exchange traded funds is a sign of greater knowledge than investors rather than a short term phenomena which will reverse should active funds produce a short period of very strong performance.
Below are the reasons given for this current round of poor performance, but the big picture remains constant: it is very very hard to beat the relevant index.;
A variety of missteps have contributed to fund managers' sluggish results this year. Many value funds that prospered in the past by buying financial stocks on the cheap have done so again in recent quarters only to see financials keep getting pounded. ….
….Meanwhile, many growth funds have resisted buying booming energy stocks, which aren't normally considered growth stocks. Instead, these funds have stuck to typical favorites such as technology and health-care shares, which are down more than the S&P 500 overall.
Active large-growth funds are among those having the toughest time. Only 25% are beating the Russell 1000 Growth Index this year, the lowest percentage since 1996. Mid- and small-growth funds are posting similar results, and are behind their benchmarks by the widest margin of all nine stock-fund categories.
Large-growth funds are seeing some of the widest differences in returns, a situation that often helps a good manager stand out.
Perhaps the growth of index funds and etfs is indication that the tired claims of active management are gaining an increasingly skeptical audience.
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