Tag Archives: earnings-center

Why Hasn’t Active Investing Outperformed Passive Investing In Recent Years?

By Jason Voss, CFA Over the last several months, I’ve explored why active investing has been unable to outperform passive investing in recent years. My series is called Alpha Wounds, and so far, the issues covered are the unintended consequences of benchmarks on active management, the poor measurement techniques of investment industry adjuncts, and the lack of diversity in the human resources portfolio . In this week’s CFA Institute Financial NewsBrief , we decided to ask our readers their explanation for the lack of active management outperformance. Rare for our polls, we included a large number of options to try and capture a wide swathe of opinions. The options provided appear to have successfully reflected the broad range of views, as 90% of the 743 respondents selected one of the specific choices rather than “other”. Because it is difficult to know the precise reason for choosing the “other” category, it makes sense to recalculate the percentages without including “other”. These modified results are the ones listed in parentheses below. Note: We did receive one e-mailed response from a reader who opted for “other”. The reader explained, “I marked ‘other’ [because] the market is illogical, so trying to apply logic is bound to fail.” Why has active investing been unable to outperform passive investing in recent years? (click to enlarge) Active Managers Can Do Nothing to Outperform About 24% (27%) of respondents believe that the reason for active management’s underperformance is the deleterious effects of high fees on net performance . This is not surprising, given the large number of studies highlighting this fact. Many asset management firms are, in fact, trying to reduce their expenses to mitigate this alpha drag. Another 15% (16.5%) believe that individual investment managers cannot compete with the wisdom of financial markets. Combined, this means that about 40% (43.5%) believe that no matter what active managers do, they cannot beat passive investment strategies. Active Managers Can Do Something to Outperform Of the remaining five options, 10% (10.8%) believe that the concentration of top stocks in indices detracts from the success of active managers. For those not familiar with the argument, it recognizes that indices have built in momentum effects because many of them are market capitalization-weighted. Indices are, effectively, “must buy” lists of securities that create demand, not because of fundamentals, but because passive strategists must buy the securities in order to closely track their index. Controlling for these momentum effects is outside the specific capabilities of active managers as security prices advance. When indices fall, however, active managers not invested intimately with the securities in the index should be able to avoid some of the downside. What hope do active managers have of beating passive strategies? Together, the four remaining options provide some insight. Most importantly, according to 18% (20.2%) of respondents, active managers should minimize their use of benchmarking, style boxes, and tracking error, which lead to a sameness of results. Next, 13% (14.7%) believe that active managers are guilty of short-termism and need to change their investment time horizon and lower turnover. Incidentally, lowering turnover reduces trading costs and will reduce the expense ratio of active funds. Increasing diversity of opinion in active management is believed by about one in 20 respondents (5.5%) to be critical for improving success. Lastly, approximately 5% (5.2%) of those polled think that active managers should improve their due diligence to better compete with passive strategies. Active vs. Passive Tug-of-War Taken together, the above four tactics, all well within the purview of active management, represent about 46% of total responses as compared with the roughly 44% of responses from those who believe active strategies can never beat passive ones. This result indicates a tug-of-war between camps and, to my mind, reflects the conversation occurring in the financial community in the long-running active vs. passive debate. Disclaimer: All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

SEC Proposes New Liquidity Rules For Mutual Funds And ETFs

By DailyAlts Staff The Securities and Exchange Commission (“SEC”) has proposed new rules designed to cut risks in the multi-trillion-dollar asset-management industry. The rules, which were proposed on September 22, would require mutual funds and ETFs to take more precautions to protect against periods of large investor withdrawals. “Changes in the modern asset-management industry call on us to now look anew at liquidity management in funds and propose reforms that will better protect investors and maintain market integrity,” said SEC Chair Mary Jo White. Liquidity Risk The 2008/09 financial crisis identified weaknesses within open-end fund structures and their ability to manage large redemptions during crisis periods. In response to this, the SEC has proposed Rule 22e-4 that would require funds to have liquidity risk-management programs, that would include each of the following elements: Classification of the liquidity of portfolio assets; Assessment and management of a fund’s liquidity risk; Establishment of a three-day liquid asset minimum; and Board approval and review. Perhaps most notable of these elements is #3, which would require funds to carry enough cash and “assets that are convertible into cash” within three business days at a price that doesn’t “materially affect the value of the assets immediately prior to sale.” Other Proposals Liquidity risk isn’t the only bogeyman the SEC is out to slay. Regulators also proposed amendments to Investment Company Act rule 22c-1 that would permit mutual funds (but not ETFs) to use so-called swing pricing. This concept is designed to protect existing shareholders from dilution by passing on trading costs to purchasing and redeeming shareholders. Moreover, the SEC also outlined new disclosure and reporting requirements for N-1A Forms, and the recently proposed N-PORT and N-CEN Forms. What’s Next? The SEC published a white paper titled Liquidity and Flows of U.S. Mutual Funds explaining how portfolio liquidity varies depending on a fund’s redemption history and how portfolio liquidity is affected by large redemptions. The paper is available for download from SEC.gov. The SEC’s proposals were approved in a 5-0 vote . Its proposal will be published in the Federal Register, followed by a 90-day comment period, before taking effect. For more information, visit SEC.gov . Share this article with a colleague

Larry Williams’ Principals And Insight Into Becoming A Better Trader

Larry Williams is a well-known trader and newsletter writer in the stock trading space. He has over 40 years of experience in the market and has written numerous books including Trade Stocks and Commodities with the Insiders: Secrets of the COT Report and How I Made One Million Dollars … Last Year … Trading Commodities . There is something to be learned from someone who has been in the markets for 40 years and been extremely successful. We were extremely lucky to be privy to a recent interview Larry Williams was a part of. Below are some notes we’ve gathered from the conversation: 1) Fundamental and technical analysis both work, however they will only work under the right market conditions whether it be a bull or bear market. For example, in the latter stages of a bullish market, as a buyer, you might find companies with low P/E ratio to be few and far between. Therefore, if you stick with fundamental analysis, you will most probably miss out on buying opportunities you’d otherwise find through technical analysis. In technical analysis, your focus is more on supply and demand in what is most likely a shorter time frame versus how well a company is fundamentally performing over the long haul. 2) For commodities, retail traders like to buy strength, but commercials like to buy weakness because the cost is less. Our interpretation of this is that most successful traders buy strength because of human behavior. People see an underlying asset like a derivative of oil go up, they jump on it for fear of missing out even if the prices jump and then more people jump on it. Until of course the prices become too ridiculously high and then people try and sell to lock in their profits. Commercial companies that use commodities like to buy at low prices because it keep their cost of goods sold lower. If revenues are constant and you reduce costs then you’d have better margins. 3) Most indicators are redundant, RSI (Relative Strength Index) and STO (Stochastic Oscillator) are essentially the same. There are a lot of things to look at, but when using an indicator understand the purpose of the indicator you are using. There are a lot indicators out there that essentially do the same thing. Both the RSI and STO both help to determine overbought and oversold conditions. While there are evidently cases when regardless of whether or not a stock or index is overbought, prices continue to print higher. The key is not to have too many, keep it simple, and don’t use the same overlapping indicators. 4) Trade your personality, find the system that fits you and lifestyle. Can you trade during work or at home? Do a personality check. One thing I’ve learned through trading in the stock markets for about 10 years now is that you have to trade your personality. Take someone else’s trading plan and trying to trade against that typically doesn’t work out unless the both of you have the same personality. Each of us have different risk tolerance and financial needs. You should only trade with what you are willing to lose and not only that but you have to be comfortable with actually losing that amount. Market Related Information When interest rates go up, stocks have historically been hit hard in the short term, but you’ll want to buy that weakness. The logic behind this is that when rates begin to go up, more people will feel goosed into borrowing and that leveraged money will go into consumption and production. Market tops are typically well formed and structured thereby also taking a long time to develop. On the other hand, market bottoms are based on crashes and plummet on panic. How many positions should you hold? Any more than 4 positions is a lot of multi-tasking. For Larry Williams, 3-4 positions is plenty. Any more than that require too much multi-tasking. In addition, he typically puts on a 2%-4% risk of total trading capital on each trade . Losing four consecutive trades at 4% risk would be a 16% drawdown. What is the biggest lesson Larry has learned from trading? He learned to be humble when you are winning and learning from other people. All highly successful traders are a little unsure of themselves, so they never bet big. None of these successful individuals have had high levels of emotional response to things and therefore don’t get emotionally rattled. What are the four steps to making a trade? Find condition, find the entry, set your target, create trailing stops. What are some other interesting tips and tidbits? 1) Conditional traders look at conditions, seasonality and overlay technicals. 2) Trading should be like combo lock where you need to get a number of factors going your way.