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Thursday, July 3, 2014

A Not Surprising Result : Active Underprerforms Passive

I like to call it hope springs eternal, Active fund managers constantly insist it is a stock pickers market" and virtually every time active fund managers underperform the market. The argument for "a stock pickers market" is often based on the argument that "correlation between stocks is high therefore more stocks are likely to outperform. The WSJ reports on the first half highlights in red and comments in bold

The SPIVA report from S+P  which is more accurate since in measures performs vs a more specific benchmark (large cap funds vs large cap index etc). The results at the end of 2013 showed under performance in 1, 3 and 5 year performance. Also remember the report studies the percentage of outperformers not persistence of returns thus the active managers that outperform for 3 years may not be the same that outperformed over 5 years.

From the WSJ


Stock Pickers Have Tough Time in 2014


Despite the cry of a "stock pickers" market "dispersion of returns another factor that would increase relative returns of active investors  has been low as well
Correlations between individual shares in the S&P 500, measured over a 60-day period, have fallen to 0.31 this year, according to research firm Axioma. This month, they fell to a three-year low of 0.27. A correlation of 1 means all stocks trade in the same direction. In late 2011, as the euro-zone debt crisis intensified and the U.S. credit rating was downgraded, the measure rose above 0.7.
Still, that hasn't been enough for active managers. Other, more-fundamental missteps have fed into their market-trailing returns: The economy hasn't accelerated as quickly as many had anticipated, and investors overall have gravitated toward larger stocks, rather than the small stocks that many active pickers tend to buy.
As for the future...yes hope springs eternal
Fund managers say that a rebound in smaller stocks would help active-management returns. Others are looking to the resurgence in mergers and acquisitions this year, which allows portfolio managers to make bets on potential buyout targets.

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