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Bristlecone Monthly News Digest
Greetings!
Although the overall market has not moved much since our last issue, there are some additional signs indicating that the economy's downturn may have passed its trough, among them the fact that weekly unemployment claims seem to have peaked back in early April or that exports from China have picked up recently.
We are at the onset of a much scrutinized earnings reporting season as investors will look for signs of stabilization or improvement in company profitability. As far as we're concerned, one quarter does not typically make or break an investment idea since we tend to own shares for years rather than days or months. Yet, we expect to see some improvement, especially among our banks and credit card companies. Credit markets have recovered, and banks are earning record spreads between the money that they lend and the money that they borrow, the so-called net interest margin.
In the meantime, we hope you'll enjoy this issue. |
How Active Is Your Fund Manager? A New Measure That Predicts Performance
Cremers & Petajisto - Yale School of Management
It is an oft-repeated truism in our business that "portfolio or fund managers over time lag the market and that investors would be better served by just buying an index". This argument is supported by numerous studies that have shown that approximately 60% to 70% of fund managers lag the market over time.
Clearly, we do not buy the argument that picking stocks with the goal of beating the market (so called "active management") is a fool's errand; otherwise we would not be doing what we're doing. Nonetheless, we agree that a lot of investors would be better served by investing in an index. But it has always been equally clear to us that investors who do beat the market over time tend to share some important characteristics that we attempt to emulate in our investment process. Among them are a willingness to invest against the crowd, a belief that price and value are two separate concepts, and a portfolio construction process that ignores what the market looks like.
This last point was the subject of this 56-page study published by two Yale researchers. The most important insight provided came from dividing the sample based on a manager's level of "Active Share" (i.e. how much their portfolios deviate from the relevant benchmark). What they discovered was that a very large percentage of professional fund managers are "closet indexers" and run portfolios that are very close in composition to their benchmarks. Deduct the costs of managing the portfolio and... voila, you have an underperforming fund. On the other hand, the more a fund manager's portfolio differs from an index, the greater the odds that he or she will outperform. The study offers evidence that truly active management can work.
Read the Article |
The Science of Economic Bubbles and Busts
This Scientific American article offers and in-depth review of the emerging fields of behavioral finance and neuroeconomics as models for explaining economic and investor activity. These stand in contrast to classic economic theory, with homo economicus-the purely rational self-interested market participant-cast in the central role. As value investors, our investment philosophy is based on the idea that securities can be irrationally priced by the market, at least temporarily, so we are keenly interested in developments in these fields.
Read the Article |
Avoid These Estate Planning Pitfalls
In this interview with Morningstar, H. Susan Jones, an estate-planning attorney based in the Chicago suburbs, discussed some of the most common pitfalls of estate planning and how to avoid them, as well as some underutilized estate planning maneuvers.
Read the Article
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