Tag Archives: polls

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.

Biotech In A Bear Market. First Move? Don’t Panic!

It was a putrid week for biotech, partially triggered by a tweet from presidential candidate Hillary Clinton. The main biotech indices fell some 13% in five trading sessions. This sort of volatility is nothing new for this sector of the market. In fact, this is the fifth bear market for small cap biotech stocks since 2009. However, this too shall pass for this lucrative area of the market and brighter skies will return. Here are my time worn strategies for navigating the current turmoil in biotech. It doesn’t matter how one describes the action in the biotech sector this week, it was just plain ugly. The main biotech indices sold off ~13% including an almost five percent plunge on Friday even as the S&P 500 managed to end flat on the day. Investors in biotech have not been treated this much like rented mules by the market during one week in quite some time. (click to enlarge) Part of the deep pullback was triggered Monday by presidential candidate Hillary Clinton who tweeted her outrage about drug price “gouging” . She then made it part of her campaign as she tacks even further left for the upcoming primaries as a self-avowed socialist continues to gain against her in the polls for the contest for the Democratic Party nomination for president. It should be kept in mind that this type of electioneering is par for the course. Even if Mrs. Clinton is elected president and wanted to follow through on these primary promises, they have absolutely little to no chance of passing. The Republicans will still be charge of the House of Representatives and quite possibly the Senate. There are also no guarantees that Mrs. Clinton will be elected president or even secure the Democratic nomination for that matter. Who knows either her and/or Republican front runner Donald Trump might even develop a sense of shame at some point and withdraw from the race. In addition, this sort of turmoil is nothing new to this lucrative but volatile sector of the market. This is now the fifth time since 2009 that the small cap biotech sector has declined by at least 20% and entered an official bear market. The last time started in early March of last year. During that decline that lasted 6-8 weeks, large cap growth names in the sector like Gilead Sciences (NASDAQ: GILD ) fell back 20% to 30% before bottoming. Many small cap names plunged 50% to 70% before all was said and done. Given that I run the Biotech Forum on SeekingAlpha and approximately 40% of my articles here, on Real Money Pro and Investors Alley are centered on biotech investing; I have been inundated from questions from readers and subscribers this week. The quick downturn has caused a significant amount of anxiety. This is understandable but also part of investing in the biotech industry. I have been warning since the early summer that the overall market was overdue for at least a 10% pull back and that the biotech sector was quite possibly in a bubble as well. The weakness in the market should be no surprise and is also affecting other high beta sectors of equities with small cap stocks being down 3.6% this week as well. My first piece of advice is the same as the core theme of the cult classic “The Hitchhiker’s Guide to the Galaxy”. This is simply “Don’t Panic!”. This too shall pass. Thanks to algorithmic computerized generated trading now accounting for more than 50% of trading in the equity markets; these declines are getting deeper and quicker than they used to be as these programs decide to abandon momentum driven and high beta sectors of the market in nano-seconds. I have been successfully investing in biotech for over two decades. I have seen many such bouts of turmoil and I plan to see many, many more before I hang up my investing spurs. Over these periods I have developed several core principles to manage a well-diversified biotech portfolio that helps position these holdings to outperform the overall market over time while to help mitigate risk and lessen the overall volatility of the portfolio as well. My hope is that they can help readers manage through the current carnage in the biotech sector until sentiment once again turns positive on this part of the market. April 14th Article on Biotech Forum: The biotech & biopharma space is one of the most volatile of any of the sectors of the market. This is especially true as it relates to the small caps that make up a good portion of the companies that occupied the biotech & biopharma arena. It is not unusual to see a small biotech equity be listed as the top gainer of the day in the market with another small play in the space taking biggest loser of the day honors. Volatility is a fact of life for investors who want to invest in these high beta sectors of the markets. One does so because few if any areas of the market can offer up the five and ten baggers that are the stuff of dreams and can turbocharged the performance of one’s portfolio by just be fortunate enough to occasionally catch one of these “rockets”. Over the years I have identified many of these huge winners in the pages of SeekingAlpha including Lannett Group (LCI ), ZELTIQ Aesthetics (NASDAQ: ZLTQ ), Novavax (NASDAQ: NVAX ) , Avanir Pharmaceuticals (NASDAQ: AVNR ) and myriad others. Recently Eagle Pharmaceuticals (NASDAQ: EGRX ) has soared over 275% since I listed as a “Best Idea” on Real Money Pro on 12/19/2014. (click to enlarge) (click to enlarge) I have also had my share of disappointments like Regado Biosciences (RGDO) and Synta Pharmaceuticals (NASDAQ: SNTA ). It is simply the nature of the game. For every home run they will be at least one strike out. However, if managed right and optimized collection for small and large cap biotech & biopharma stocks can be a key contributor to overall outperformance from one’s portfolio over time. (click to enlarge) (click to enlarge) It is my passion and success in the biotech arena over the past two decades of investing that drove me to create the Biotech Forum which launched on SeekingAlpha early in April. I want to share my thoughts on how to properly manage and optimize a biotech/biopharma portfolio and some tricks of the trade have absorbed over many years of investing in this space. They will be the tenets of the Biotech Forum portfolio which will consist of twenty stocks. Five of these will be from the large cap space. These companies will already have achieve profitability, have solid products & pipelines and are selling at attractive or at least reasonable valuations on a long term investment basis. These will be labeled as “CORE” positions. The remaining 15 stocks will come from the more volatile and speculative small cap sector. These will be tagged with the “SPECULATIVE” moniker. Depending on your risk preferences you will want to weight each large cap selection three to six times heavier than each small cap pick. This will mean 50% to 75% of your portfolio will be made up of these more stable and less volatile large cap equities. The remaining portion of your portfolio we will go hunting for some multi-bag grand slams. This portfolio will be built slowly as I believe in dollar cost averaging in these areas. This sector has outperformed the overall market for five straight years and could be overdue for a pullback if sentiment sours on “risk on” areas of the market. Each month we will add one large cap pick and three small cap equities to the mix. Once we have our twenty stock portfolio we will make adjustments/modifications as we deem prudent over time. I will also offer up some future promising opportunities each month for those who might want to assemble a portfolio in a different or faster way than how we create the Biotech Forum portfolio. Our small cap selections will be focused on different technologies and disease areas to provide diversification. We will also look for concerns with multiple “shots on goal”, partnerships with larger players within the space, strong balance sheets which also could make attractive buyout opportunities. There are three terrible feelings when investing in small biotechs & biopharma stocks. The first is when a trial goes wrong or a company announces other disappointing news resulting in your investment cratering. Unfortunately, there is little one can do avoid these landmines as bringing a compound to market is a very complicated affair and is why one must make myriad small investments across promising opportunities in these sectors to provide diversification. The second thing that go wrong is when one makes an investment that comes at a very opportune time. Your stock doubles or triples in short order and you do not take any profits. Over time, the stock falls back to where you bought it or even lower and the feeling of regret of not taking any gains clouds future investment decisions. Finally, there are instances when your investment doubles or better and you cash out entirely only to see the stock triple or quadruple from there. I have had this happen many times over the decades and there are few worse feelings in investing. I have develop a rule of thumb over the year when it comes to small biotech stocks. It is to sell 10% of your original stake once one achieves a 50% gain, 20% of the original stake after the stock doubles and 20% more if one is fortunate to have your stock triple. The other half of the original stake now rides on the “house’s” money unless something drastically changes on the company’s prospects. That concludes a brief overview of some core themes that will be core drivers behind the formulation of our optimum twenty stock Biotech Forum portfolio.

3 Mutual Funds To Buy If Fed Opts For Rate Hike

In our Mutual Fund Commentary yesterday we spoke about funds in focus if the U.S. Fed decided against a rate hike as soon as September. Utilities funds demand attention then as low interest rate environment, which has for sometime been near a zero level, has been extremely conducive for its growth. The capital intensive utilities industry needs to access external sources of funds to expand its operations. While it remains too close to call, today let’s look at funds that investors may immediately add to their portfolios if the Fed announces rate hike. Amid the market volatility, the Fed seems to be stuck between global central banks’ easing measures, dollar strengthening, deflationary pressures arising from the energy sector and troubles in the global economy. While most polls recently turned against a September rate hike, a recent CNBC survey shows that 49% predict a rate hike now. We do not rule away the chances of a rate hike completely, may be by 0.25%, but uncertainty is what is ruling the roost. Whether lifting the monetary policy stimulus would be a prudent move is the question that the Fed needs to answer. The two-day Federal Open Market Committee’s policy meeting ends today. The finance sector, in this regard, seems to be a good bet, as several industries including insurance, banking, brokerage and asset managers tend to benefit from the rising rates. Before we pick the funds, let’s look at some other details. CNBC Survey Goes Against Other Polls According to a CNBC survey, 49% of respondents out of 51 economists are projecting a rate rise now. This data as of Sep 16 is in line with predictions on Aug 25. On the other hand, those believing in a delayed rate hike dropped to 43% from 47% on Aug 25. The rate has increased for those who are unsure, as the percentage is at 8% as of Sep 16 compared with 5% on Aug 25. They predict that the Fed will finish hiking rate in this cycle, or take it to “terminal rate” in the first quarter 2018. This brings the prediction forward by six months. Separately, most are of the view that markets have priced in the hike. While 56% believed its priced into stocks, 60% said its priced into bonds. However, the Standard & Poor’s 500 is estimated to finish 2015 at 2,032, lower that prior projection of 2,135. Meanwhile, a Reuters poll shows that 45 respondents out of 80 economists believe that the Fed will leave its benchmark interest rate between zero and 0.25%. Only 35 respondents expected a rate rise. Looking at the primary dealers or economists from banks dealing directly with the Fed, 12 banks see no rate hike now as against 10 expecting a rate hike. Financials to Gain While Deutsche Bank believes they expect a “hawkish hold,” stance, UBS chairman Axel Weber is expecting a rate hike. He said: “The underlying economic data in the U.S. warrants a rate hike. The U.S economy can stand it. The U.S. economy in my view actually needs it medium- to long-term and I’m pretty convinced that the U.S. will see a rate hike, most likely in September.” The financial sector will be among those which will gain if a rate hike occurs. One particular beneficiary of higher rates is the insurance industry. This is because they take in premiums from customers, invest them — usually in fixed income securities — and then pay out claims in the future. Also, brokerages earn interest income on un-invested cash in customer accounts. So when rates rise, they can invest this cash at higher rates. Banks may benefit from rising interest rates, as long as long-term rates move up more than short-term rates. Banks derive benefits from a steep yield curve, i.e. when the spread between long-term and short-term rates is wide. The interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates. This means that the potential rise in rates will enable the banks to charge more for loans, leading to an increase in the spread between lending rates and the rates paid on deposits. Moreover, an improving economy means that credit quality will likely improve, which will also aid banks’ profitability. Insurance companies invest majority of the premium income received from policyholders in government and corporate bonds to earn investment income. They utilize this investment income in meeting their future commitments to policy holders. The potential rise in rates will allow the insurance firms to invest their new premium income in higher yielding securities, thereby leading to higher future returns. With a rise in rates, brokerage firms are likely to engage in more investment activity. Brokerage firms earn interest income on un-invested cash in customer accounts. The rise in rates will allow the brokerage firms to invest at higher rates. Further, asset managers can position themselves favorably with the rise in rates. In the fixed income sector, default rates are likely to decline and higher interest rates will enable reinvestment at higher yields, which ultimately will boost portfolio returns. The benefit can be achieved by positioning fixed income portfolios strategically through proper management of duration, diversification of sources of yield and maximize the reinvestment of income. 3 Financial Mutual Funds to Buy Below we present 3 Financial mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). We expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The funds have encouraging year-to-date, 1-year and 3 and 5-year annualized returns. The minimum initial investment is within $5000. These funds also have low expense ratio and carry no sales load. Emerald Banking and Finance Fund A (MUTF: HSSAX ) seeks long-term growth through capital appreciation. Income is a secondary objective. HSSAX generally invests at least 80% of its net assets in common stocks. Emerald Banking and Finance’s managers limit the fund investment to 50 companies and the fund invests primarily in U.S. based companies. HSSAX currently carries a Zacks Mutual Fund Rank #2. It boasts year-to-date and 1-year returns of 11.9% and 18.3%. The 3 and 5 year annualized returns are 20.1% and 18%. Annual expense ratio of 1.60% is however higher than the category average of 1.52%. Moreover, HSSAX also has low beta score. The 1, 3 and 5 year beta scores are 0.58, 0.63 and 0.75. Franklin Mutual Financial Services Fund A (MUTF: TFSIX ) seeks capital growth. TFSIX invests a lion’s share of its assets in undervalued companies that are involved in the financial services domain. TFSIX may also invest in merger arbitrage securities and securities of distressed companies. TFSIX currently carries a Zacks Mutual Fund Rank #2. It boasts year-to-date and 1-year returns of 4% and 7.3%. The 3 and 5 year annualized returns are 13.9% and 11.2%. Annual expense ratio of 1.44% is lower than the category average of 1.52%. Moreover, TFSIX has 1, 3 and 5 year beta scores of 0.81, 0.83 and 0.70. John Hancock Regional Bank Fund B (MUTF: FRBFX ) invests most of its assets in equities of regional banks and lending companies. These may include commercial banks, industrial banks, savings and loan associations, financial holding companies, and bank holding companies. FRBFX may also invest in other U.S. and foreign financial services companies. A maximum of 5% may be invested in stocks outside the financial services domain. FRBFX currently carries a Zacks Mutual Fund Rank #2. It has year-to-date and 1-year returns of 2.2% and 8%. The 3 and 5 year annualized returns are 14.3% and 13.2%. Annual expense ratio of 1.98% is however higher than the category average of 1.52%. Moreover, FRBFX has 1, 3 and 5 year beta scores of 0.62, 0.65 and 0.88. Link to the original article on Zacks.com