Tag Archive for: equities

Financial writing tip: Don’t ignore the elephant in the room

Don’t write about something controversial as if it is an accepted fact.

“Research has shown that the most active managers can beat their benchmarks handily,” wrote Eleanor Laise in The Return of The Market-Beating Fund Manager” in The Wall Street Journal.

Oh, really? Many financial advisors and investment professionals disagree.

Laise should have acknowledged that her statement was controversial. Her failure to do so undercuts the credibility of her article. Keep this in mind the next time you say something that isn’t widely accepted.

Laise could have rephrased her sentence along the following lines: “New research suggests that most active managers can beat their benchmarks handily.”

Research on active managers’ outperformance

Laise’s article alerted me to an interesting research paper, “Active Share and Mutual Fund Performance,” by Antti Petajisto of NYU University’s business school.

Here’s a provocative quote from Petajisto’s abstract:

I find that over my sample period until the end of 2009, the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs. In contrast, closet indexers or funds focusing on factor bets have lost to their benchmarks after fees. The same long-term performance patterns held up over the 2008-2009 financial crisis.

My LinkedIn contacts responded with scepticism when I quoted Laise’s sentence. What do YOU think about the performance record of actively managed funds?

Notable quotes from the CFA Institute’s emerging markets conference

So many great emerging markets presentations, so little time to blog about them.

Below you’ll find quotes or paraphrases of opinions voiced by speakers at the CFA Institute’s  “Investing in Emerging Markets” conference held in Boston on October 19. If these snippets pique your interest, watch the CFA Institute website for podcasts or other records of selected presentations. Also see my recent blog posts, “Bubble?–Emerging markets scrutinized by CFA Institute conference,” “ISI’s Straszheim: China’s interest rate hike is ‘tapping the brakes’,” and “Cautious optimism on emerging market stocks from SSgA’s Hoguet.”

Paulo Vieira da Cunha, Tandem Global partners

  • There is no decoupling. Two-thirds of global consumption and trade is in the advanced economies.
  • There are lots of interesting plays in Brazil today, if you are careful.
  • It’s very clear the Brazilian economy is overheated.
  • China was a big factor in Brazil’s post-2008 recovery.

Kristen Forbes, MIT Sloan School of Management

  • There are few options for emerging market countries to control the impact of capital inflows.
  • Experts disagree about whether emerging market countries should impose temporary taxes on capital inflows.
  • Academic literature says capital controls have little impact, especially long-term. At best, they can shift inflows to safer composition.

Sivaprakasam Sivakumar, Argonaut Global Capital

  • The best opportunities in India are investing in first-generation entrepreneurs. Look for the next Infosys.

Tina Vandersteel, Grantham, May, Van Otterloo & Company

  • When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
  • “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
  • Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

Cliff Quisenberry, Caravan Capital Management

  • There is a significant different between frontier countries in the index and the other frontier countries.
  • Country selection is more important in frontier markets than in emerging markets.

AlisonAdams, Alison Adams Research

  • Emerging markets’ share of global market capitalization could overtake developed markets’ share by 2030, according to Goldman Sachs.
  • Most emerging market governments are reasonably market-friendly.
  • Extreme events can present buying opportunities, as with the Mumbai attacks in India in 2008.

Guest post: “Would you like to know how financial advisors are choosing products?”

Investment marketers want to know what’s driving financial advisor behavior, so I asked  Lisa Cohen, CEO of Momentum Partners, for a guest post.

Financial advisors, what do you think of the RepThinkTank findings that Lisa discusses? Are you–like the advisors whom she mentions–planning to increase allocations to emerging markets and international stocks?

Would you like to know how financial advisors are choosing

products and making investment decisions in this market?

By Lisa Cohen

We thought you might. We did too. The recently-released first report in the RepThinkTank Distribution Dynamics series provides comprehensive information on investment selection and asset allocation trends. The study includes data from more than 1,000 financial advisors across all channels.

Key findings include:

  • Continued commitment to a short list of top managers and families (American Funds, Franklin Templeton, PIMCO), and
  • High regard for growing managers including Davis Investment Advisors, Ivy Investment Management, First Eagle Investment Management, and Thornburg Investment Management
  • Plans to increase allocations to Emerging Market Equities and International Core, among other asset classes, and to slightly decrease exposure to fixed income
  • Changing risk/return expectations and the financial crisis are a top driver of recent changes in the asset allocation of client portfolios
  • Advisors’ median allocation across all channels to passive investments is 20%. Data suggests a growing appreciation for using passive investing as both a core allocation and as a way to adjust investor exposure to specific asset classes.
  • Use of third party portfolio construction tools by nearly a third of advisors in all channels. In light of advisors’ anticipated increase in use of mutual fund wraps, this data suggests the continued outsourcing of asset allocation.

The complete report is available from any of the RepThinkTank partners and is priced at $7,500. RepThinkTank is an experienced, integrated team of leading financial services research, advisor practice management, and advisory firms. Learn more at www.repthinktank.com. You can contact Lisa at 866-995-7555.

Should the Morningstar style box go 3-D? Quality counts, says Atlanta Capital

Investment professionals and financial advisors are familiar with the Morningstar style box, which categorizes stock funds by market capitalization and style. A recent CFA Magazine article made me wonder if Morningstar should turn the style box into a style cube by adding a third dimension: quality.

Stock quality may overwhelm size and style

Quality counts for just as much as size and style.

That’s according to Brian Smith, director of institutional services and principal at Atlanta Capital Management, in “3-D Investing” in the Sept.-Oct. issue of CFA Magazine. The CFA Magazine article is based on a longer white paper, “The Third Dimension: An Investor’s Guide to Understanding the Impact of ‘Quality’ on Portfolio Performance.” To access the original white paper, click on “Publications” across the top of the Atlanta Capital website.

“…our research indicates that ignoring quality and investing solely by capitalization and style dimensions is unwise. In fact, the performance of high- and low-quality stocks can have a significant influence on an investor’s risk and return characteristics, in many cases overwhelming the influence of either size or style,” writes Smith in his CFA Magazine article.

I wondered if there might be something other than quality at work.  Could one style be more associated with quality than another?

Smith notes in the white paper that certain value and growth styles are sometimes associated with high- or low-quality stocks. “Conservative growth” and “relative value” tend toward high-quality vs. low-quality for “absolute value” and “aggressive growth,” he says. Smith refers to this as a “hidden quality bias.”

Smith compared returns by quality, size, and style using Russell indexes and custom benchmarks based on the Standard and Poor’s Earnings and Dividend rankings. Looking at 2009 returns, he found that “Clearly, each size, style, and quality index responded differently to the same economic stimuli….”

In other words, the correlations among the quality, size, and style indexes were weak.

The “quality cycle” in the stock market

Smith suggests that a “quality cycle” exists because fluctuations in the performance of high- and low-quality stocks are associated with the economic and stock market cycle. Low-quality stocks briefly outperform high-quality stocks at both ends of a market cycle. This is probably because they’re more sensitive to the economy, the availability of credit, and investor speculation. High-quality stocks win the rest of the time.

Smith concludes,”If history is a guide, high-quality stock should post stronger relative returns in 2010 and 2011….”

Do you agree? You’ll probably want to read more of the CFA Magazine article or Atlanta Capital white paper before you decide.

Guest post: "Talking to clients about social investing"

Socially responsible investing can make for a difficult conversation between investment managers and their clients. But it doesn’t have to be that way if you follow the tips provided by my friend Annie Logue, the author of Socially Responsible Investing for Dummies.

Talking to clients about social investing
By Ann C. Logue

Often, an individual client will walk into an office with a list of industries and companies that he or she does not want to own. Some clients have well-thought out objections or religious obligations that set the tone, but others have a vague idea of the goodness or badness of an industry without any real reasoning behind it.

How do you deal with such a customer?

Social criteria can be legitimate investment constraints, so one tactic is to approach it as a constraint. Get the client to identify the real issues, ideally in writing. Are they religious? Well, you can’t argue with religion! If they are more vague, then use some good questioning to get them onto paper, or ask the client to do some research. Some good sources are CSR Wire and Triple Pundit.

The real conversation is about what your client would rather invest in. Social investing doesn’t have to have lesser performance than traditional investing; the KLD Social Select 400 Index has minimal tracking error to the S&P 500 and, right now, outperforms it slightly. The secret is making sure that the companies you do invest in have a similar risk and return profile. If your client wants to sell BP, then you’d better find a company with similar characteristics. Replace BP with a speculative green tech company, and you’re changing the portfolio’s nature. Replace it with a large multinational food company with responsible business practices, paying a high dividend, and subject to commodity price fluctuations, and you’re getting closer to the portfolio contribution of BP without the oil exposure.

Keep holding the conversation, too. BP had a great reputation for its social responsibility right up until April of 2010. Social investing is still investing, and you still take on company risk. Just as there is no perfect job and no perfect boyfriend, there is no perfect investment. Remind your client of the long-term goals. Many clients prefer to separate their investing from their philanthropy, figuring that the more money they make, the more money they can donate and the more time they have to volunteer.

Finally, turn your clients into activists. Talk to them about proxies. They can vote their proxies and have an influence on companies even if they do not change their ownership positions. That gives the client power without disrupting an investment position.

Social investing doesn’t have to underperform, and it doesn’t have to be a wedge between you and your client. You can use a client’s interest as an opportunity to educate them and to show how you can add value to their portfolio.
Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

Copyright 2010 by Susan B. Weiner All rights reserved

If you enjoy my #CFA2010 tweets…

…you may also enjoy my free monthly e-newsletter with practical tips for your client communications. You’ll also find at least one investment or wealth management article. 

I often report on presentations to the Boston Security Analysts Society, so you know you’ll see topics of interest to CFA charterholders.

Topics in the May 2010 issue included

  • Watch out for inflation, says veteran value investor, Jean-Marie Eveillard
    Treasurys vs. Treasuries–Which is the right spelling? 
  • How to guest-blog on personal finance or investing 
  • Poll: How do you sign your business emails? 
  • Last month’s reader poll about ghostbloggers 
  • Morgan Creek Capital’s Yusko on investing

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

Copyright 2010 by Susan B. Weiner All rights reserved

Small-cap investing opportunities according to Artio’s Dedio

“Opportunities in Smallcap Investing” was the title of the presentation that Samuel Dedio, head of US equities for Artio Global Management, delivered to the 2010 annual conference of the Financial Planning Association of Massachusetts. The growth of options trading was his most interesting theme, in my opinion. By the way, if you don’t recognize the name Artio Global Management, it was formerly Julius Baer. 

Where the opportunities lie 
Dedio identified opportunities in financials sector, including regional banks, online brokerage companies, and insurance. He figures that “industry consolidation and stimulus spending may potentially benefit this area.” 

Industrials and materials stocks will benefit from emerging markets’ demand. For example, Dedio likes silver, where supply is not keeping up with demand. Compared with gold, silver has many more industrial applications, yet it trades at a discount to gold.

In healthcare, Dedio likes companies that can help implement cost savings. This means companies in diagnostics, medical technology, pharmaceuticals, and home healthcare providers.

The survivors of the 2009 shakeout in retailers will benefit in 2010. “We expect margins (and earnings) to recover more rapidly than in prior cycles,” wrote Dedio in the consumer discretionary section of his handout.

Finally, in technology, Dedio focused on the undervalued importance of semiconductors. 

Options: Why online brokerage may thrive 
Dedio particularly likes online brokerage companies with exposure to options trading as a play on demographics and rising interest in making money through options. 

“The younger generation eats it up,” said Dedio, referring to options trading. This is apparently tied to younger investors growing up with computers and to educational efforts by companies such as Think or Swim.

“Don’t 85% of options expire worthless?” asked an audience member. That’s exactly what makes options a great business, according to Dedio. Investors have to buy more options on an ongoing basis. 

Dedio displayed a graph showing that total monthly equity option trading volume has more than doubled since the year 2000. Monthly trading volume, which was under 100 million until January 2004, has been  200 million–and sometimes exceeded 350 million–during the period January 2008 to September 2009.

Dedio’s one concern about options trading is pricing pressure. However, cost cutters are at a disadvantage in the options arena, where education remains critical. Education requires more robust margins than cost cutters manage.
Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

Copyright 2010 by Susan B. Weiner All rights reserved

Watch out for inflation, says veteran value manager Jean-Marie Eveillard

Value investing was the focus of the presentation by Jean-Marie Eveillard, senior adviser and board trustee to the First Eagle Funds and senior vice president of First Eagle Investment Management, LLC, to the Boston Security Analysts Society (BSAS) on April 13. Eveillard also opined on the world economic outlook.

Three economic scenarios
Eveillard thinks there are three potential directions for the U.S. from here.
1. A typical post-WWII expansion— In this scenario, the authorities lever up the system again, so we get a three- to five-year expansion, Eveillard said. This would mean that we are still in a post-World War II environment. Eveillard is concerned about the short-term, even speculative orientation of investors in an environment in which equity mutual funds average 100% annual turnover.
2. Japanese-style stagflation–As the private sector continues to deleverage, the U.S. might fall into stagflation similar to that experienced in Japan for the past 20 years. This would happen if lenders don’t want to lend and borrowers don’t want to borrow, despite the government’s efforts to combat their resistance. Eveillard considers this unlikely because, unlike the Japanese, Americans are not resigned to economic stagnation. We’ll act.
3. Negative, unintended consequences including inflation–Eveillard is concerned about the unprecedented scale of the U.S. government’s intervention. This includes a gigantic budget deficit, zero interest rates, and the ballooning of the federal balance sheet.

The third scenario is most likely, said Eveillard, who spoke about the lessons of the Austrian school of economists. The main lesson: If you’re stupid enough to get into a really bad credit boom, you’ll have a bad credit bust. However, the Austrians also say not to do a short-term patch after a bust because you’ll compromise the medium-term and long-term recovery. This seems to be one of the roots of Eveillard’s fear of the third scenario.

But Eveillard’s inflation fears haven’t made him give up on stocks. People make the mistake of thinking that inflation is all bad for stocks, he said. He believes in owning the stocks of companies that are able to raise prices as their costs rise. For example, that’s something that newspapers were able to do back in the 1970s.

Eveillard did not comment on specific stocks that he favors now. “If I knew what my five best ideas were, that’s all I would own,” he quipped.

Benjamin Graham and The Intelligent Investor
Eveillard spent most of his time with the BSAS talking about the history of value investing. For him, the two big names are Benjamin Graham, author of The Intelligent Investor, and well-known investor Warren Buffett.

Graham’s emphasis on the role of humility, caution, and order in investing make sense to Eveillard. He illustrated Graham’s approach to investing as finding a business with an intrinsic value of $50 per share, buying it at $30-$35 per share, and starting to sell it at $40. This is what Warren Buffett called the cigar butt–one puff and it’s over, said Eveillard.

Although Eveillard conceded that Graham’s approach to investing is static and balance sheet-oriented, it still offers opportunities. There are “Ben Graham-type stocks” in Japan, especially among small caps, he said. Because “net cash is greater than market cash…you get the business for less than nothing,” he said.

Warren Buffett added qualitative to quantitative
Benjamin Graham was “all about numbers.” Even today,  value investors all start with companies’ publicly available financial information, and then move on only if they’re satisfied with the public numbers, said Eveillard.

Warren Buffett added qualitative analysis on top of Graham’s quantitative analysis, said Eveillard. For example, Buffett likes companies that have a “moat,” a sustainable competitive advantage.

Comparing Graham and Buffett, Eveillard said that the Graham approach is much less time-consuming, though potentially less rewarding, than the Buffett approach. The First Eagle Funds started out in Graham style, then switched to Buffett’s style after adding the analysts that enabled them to do the necessary research, said Eveillard.

The case for value investing
Eveillard gave two reasons for pursuing value investing. First, it makes sense. Second, it works over time. He doesn’t buy the argument that value investing works only in the U.S. In fact, First Eagle has never opened offices overseas because it doesn’t want to be influenced by how the locals think. Still, he noted, “There are few genuine value investors in the U.S., but even fewer outside the U.S.”

Why so few value investors? For starters, it’s hard work. “Sell-side research is seldom useful” because of its six- to 12-month time horizon, said Eveillard. When your time horizon is five years, it makes a big difference in how you look at a business. That’s why First Eagle’s 11 analysts are “the true heart of our operation,” he said.

The psychological hurdle to value investing is even higher than the research hurdle. It’s not easy sticking with value investing’s long-term time horizon. That’s especially true when it means your investment performance may lag its benchmark in the short-term. First Eagle lost seven out of 10 investors during the period when its performance lagged from Fall 1997 to Spring 2000, said Eveillard.

To be a value investor, “there has to be a willingness on the part of the investor to take the short-term pain.” In addition, you have to be willing to move away from the herd when it’s nearing the cliff, said Eveillard, citing Warren Buffett. Value investing takes a temperament that many lack.

If you’d like to learn more about Eveillard’s views, he’s scheduled to appear on Bloomberg TV on Wed., April 14 April 14 at 5 p.m. EST, according to the First Eagle Funds website.

The next session of “How to Write Blog Posts People Will Read: A Five-Week Teleclass for Financial Advisors starts April 22. Sign up to receive my free monthly newsletter.Copyright 2010 by Susan B. Weiner All rights reserved

Technical analysis of stocks can boost the power of your fundamental research

You can use technical analysis in combination with your firm’s fundamental equity analysis to help decide when to buy or sell stocks. This is the message I took away from “Applying Technical Analysis to a Fundamental Investment Strategy,” a March 23 presentation to the Boston Security Analysts Society by David Keller, who oversees technical analysis as a managing director of research for Fidelity Investments. 

Technical analysis is not voodoo science, throwing darts at a board, or even a prediction of the future, said Keller. Rather, it’s a way to analyze supply and demand using patterns, he said.

Fundamental research and technical analysis tackle different parts of the decision to trade a stock. Here’s how Keller described them.

  1. Fundamental research analyzes the company for the what and why of buy and sell decisions.
  2. Technical analysis analyzes the stock, looking purely at market activity for when and how to buy or sell

These two approaches overlap, in the opinion of Keller and the Fidelity portfolio managers who use his team’s research. Technical research helps to identify the best time to execute a fundamental strategy, he said. You can think of technical analysis as a trigger, he said.  

When the results of technical analysis diverge from those of fundamental research, portfolio managers should pay attention, according to Keller. He referred to point and figure charts as “a gut check on how I look at individual stocks.”

Relative strength indicators are among the most important technical indicators, Keller said. They can be warning signs, he added.

Keller’s message was warmly received by members of the audience, most of whom raised their hands when asked if they regularly consulted technical indicators. 

Related post
* Fidelity’s head of technical research addresses “Where will the stock market go from here?”
The next session of “How to Write Blog Posts People Will Read: A Five-Week Teleclass for Financial Advisors” will start in April. For more information, sign up to receive “Information on upcoming classes, workshops, and other events” as well as my free monthly newsletter.
Copyright 2010 by Susan B. Weiner All rights reserved

Fidelity’s head of technical research addresses "Where will the stock market go from here?"

Will the bull market continue? 

Investment professionals are always curious. So naturally the question came up during a Q&A session with David Keller, who oversees technical analysis as a managing director of research for Fidelity Investments. The question followed Keller’s March 23 presentation to the Boston Security Analysts Society on “Applying Technical Analysis to a Fundamental Investment Strategy.”

The bottom line: It appears that the market is in an uptrend and the offensive sectors will outperform their defensive peers. 

However, Keller framed his comments cautiously, saying that there is little evidence that the stock market is not in a sustained uptrend. Nor does he see evidence that the market is overbought.

“I can’t say,” replied Keller, when asked to identify his favorite sector. He’s looking at groups that are traditionally considering offensive. “But it’s not as clear cut as in the past,” he said.

The next session of “How to Write Blog Posts People Will Read: A Five-Week Teleclass for Financial Advisors” will start in April. For more information, sign up to receive “Information on upcoming classes, workshops, and other events” as well as my free monthly newsletter.
Copyright 2010 by Susan B. Weiner All rights reserved