I’ve just updated my Keeping Score page for a sideways-moving S&P in December.
Tag Archives: investment performance
the Mainstay Marketfield fund (ii)
I’ve been thinking about the Mainstay Marketfield fund. The I shares (the ones with the longest track record) = MFLDX.
Is this a risky fund?
A lot depends on what you mean by “risky.” And a lot depends on the time frame you use.
The standard academic way of assessing risk is to equate it with the short-term volatility of returns. The idea has some initial plausibility. All other things being equal, and for everyone besides roller coaster junkies, a smooth ride is better than a bumpy one. Greater assurance that the price tomorrow isn’t going to deviate much from the price today sounds good, as well.
The main virtue of risk-as-volatility, though, is that it’s easily quantifiable and the data for measuring it are readily available. There’s no need to delve into the actual investments and make potentially messy judgments about what a security/portfolio is and how it works, either.
On this way of looking at things, MFLDX isn’t risky at all.
During late 2008 – early 2009 the fund declined less than the S&P 500. From the beginning of the bull market in March 2009 until mid-2013 it tracked the S&P relatively closely. Less volatile in down markets, average volatility in up markets. Not a bad combination–if this is all risk is.
Regular readers will know that I’m not a fan of this academic orthodoxy–which is, by the way, also universally accepted by the consultants who advise institutional pension plans. It isn’t only that you don’t need any practical knowledge of the products you’re assessing–just a computer and a data feed. Nor is it that my portfolios routinely had part of their excess returns explained away by their greater-then-average volatility. No, it’s that, in my view, for an investor with a three-, five- or ten-year investment horizon whether a security goes up/down a little more or a little less than the market today and tomorrow has very little relevance.
Risk-as-volatility has done serious damage in financial markets in the past. For years, academics and consultants regarded junk bonds as relatively safe because their volatility was close to zero. They didn’t realize that the prices never moved because the securities were highly illiquid and seldom traded. In fact, during the 1990s, i.e., even after the junk bond collapse of the late 1980s, Morningstar continue to have junk bond funds in the same category as money market funds. Since NAVs never moved, the former got all the highest ratings.
Back to MFLDX.
Suppose we look at the fund in a commonsense way.
Marketfield’s website portrays ithe firm as consisting of three principals who concentrate on macroeconomics. The career descriptions indicate that only the director of research, who arrived in 2011, had any prior portfolio management experience.
The group runs a highly sectorally concentrated portfolio. MFLDX can be both long and short. It has a global reach. It can own/sell short stocks, bonds, currencies, sectors, indices.
Despite having all these potentially return-enhancing weapons at its disposal, the fund was unable to outpace an S&P 500 index fund during the first four years of the bull market.
Yes, short-term price fluctuations were not extreme. And I’m not saying that one could have predicted that MFLDX would be down 12% in 2014, in a market that is up 13%–sparking massive redemptions. But it seems to me that risk-as-volatility didn’t come anywhere near to capturing the risk elements present in this fund.
a bad year in the US for active equity managers
Too much traffic and too much last-minute bricks-and-mortar shopping mean that I’m only getting around to this post late in the day ..and that this one will be short.
Reports I’ve been reading over the past month or so say that 2014 will turn out to be a very bad year for active equity managers, in two senses:
–a larger proportion of managers than normal are underperforming their benchmarks. The figure I’ve heard tossed about is a whopping 85% vs. a more “normal” 65%;. Also,
–the degree of underperformance is more severe than in typical years.
I’m assuming that the 85% is before fees. The ideas that underperformance is worse across the board than normal suggests that the number of underperformers before fees could be as high as 75% – 80%.
Two questions:
–since investing is a zero-sum game, whose pockets are filling up with the money active professional managers are losing to the index?
–wha makes this year so different?
Since index funds by definition neither win nor lose vs. the index, the underperformance of professionals must end up either as fee income for middlemen (brokers, marketmakers) or dor investors who don’t publicize their returns. The largest portion of the latter class is individuals, although I find it hard to believe that you and I are beating the index by enough to make such a big dent in professionals’ results. On the other hand, I have no better answer.
The second point is more interesting, I think. On a sector basis, I suspect that professionals had too little IT and too much Energy. 2014 has been a recovery year for large-cap last-generation tech like MSFT (+28%) and INTC (+44%). AAPL, which makes up 3.5% or so of the S&P is up almost 40%, as well. Not having these names would have been costly. As to Energy, it’s possible that many pros bet heavily on rising crude oil prices through offshore drilling companies and unconventional oil sources like tar sands and shale oil–all of which would make the holder exceptionally vulnerable to price declines.
ln my strategy posts, I suggested that, because 2015 would be the first year in a long time in which government policy would not be clearly stimulative around the globe, the fundamental question of whether the near-term market direction will be up or down won’t obviously be “UP” for the first time since early 2009. Not knowing in advance whether to be aggressive or defensive would make portfolio structuring that much more difficult.
In hindsight, maybe the first year of no one-way bet has been 2014. If so, it’s possible that this year’s performance by pros isn’t the outlier. Maybe 2010-13 are. I wonder, in other words, if this year’s poor active manager performance is a harbinger of what the future has in store.
More on this topic after Christmas. Now to present wrapping.
HAPPY HOLIDAYS!!!
Keeping Score, October 2014
I’ve just updated my Keeping Score page for October. …out of reverse but (for now) only back in low gear
a professional portfolio manager performance check
I subscribe to the S&P Indexology blog. Like most S&P communications efforts, I find this blog interesting, useful and reliable.
Anyway, two days ago Indexology published a check on the performance of equity managers who offer products to US customers.
In one respect, the findings were unsurprising. For managers with US stock portfolio mandates, well over half underperformed their benchmarks over the one-year period ending in June. Over five years, more than three-quarters failed to match or exceed the return of their index.
This is business as usual. Why this is so isn’t 100% clear to me.
One of my mentors used to say that ” the pain of underperformance lasts long after the glow of outperformance has faded.” I think that’s right. In other words, clients will punish a PM severely for underperformance, but reward him/her by a much smaller amount for outperformance. In a world where risks and rewards aren’t symmetrical, it’s probably better not to take the buck-the-crowd positions necessary to outperform. Instead, it’s better to accept mild underperformance, keep close to the pack of rival managers and spend a lot of time marketing your like-me/trust-me attributes.
(To be clear, this isn’t a strategy I wholeheartedly embraced. I generally achieved significant outperformance in up markets, endeavored not to lose my shirt in down markets. My long-term US results were a lot better than the index, but at the cost of short-term volatility that was greater than the market’s. Pension consultants, heavily reliant on academic theories of finance, tended to demand a smoother ride, even if that meant consistently less money in the pockets of their clients. Yes, a constant problem for me. But it illustrates the systematic pressure put on managers to conform, to look like everyone else.)
The surprising news in the blog post comes in international markets. Generally speaking, the markets overseas are simpler in structure, information flows much more slowly than in the US, and PMs tend to be ill-trained and poorly paid. Rather than being the culmination of a long a successful career, being a PM abroad is often only an early stepstone to something better. So pencil in outperformance.
On a one-year view, however, Indexology reports that the vast majority of managers of global, international and emerging markets portfolios all underperformed their benchmarks. This is the first time this has happened since S&P has been checking!!
I don’t watch this arena closely enough to have a worthwhile opinion on how this happened. The fact of underperformance itself is surprising–the fact that more than 75% of managers of international funds underperformed is stunning. My guess is that no one saw the deceleration of Continential European economies coming.
For anyone with international equity exposure, which is probably just about everyone, current manager performance is well worth monitoring closely.