Tag Archives: investing-strategy

What To Look For In A Successful Money Manager Today: Mindsets And Beliefs

We have been discussing for weeks the effects of globalization on all economies, financial markets, companies and money managers. Last week I listened to the speakers at the Sky Bridge Alternatives Conference in Las Vegas talk about the demise of the hedge fund industry. I say: Instead of dwelling on the past, let’s look at what is needed today to be a successful money manager regardless of asset class. In this article I will look at the mindsets and beliefs of a successful money manager. In the next article, I will examine the skill set and track record necessary to successfully manage money. Then in a third article, I will discuss the personal attributes necessary in the character of a successful money manager. In order to be successful, a money manager must have the right mindset and system of beliefs. To be specific, a successful money manager must: Have core beliefs that can be articulated and supported by the facts. You do not want a manager who reacts to every piece of news and trades out of his positions. Look for someone who gathers all the data; understands the inter-relationships between all markets utilizing a systematic approach; reflects and pauses before reacting; considers first the proper asset allocation with risk controls; and finally does in-depth independent research on each investment Think long term. Stop thinking as a trader. You cannot be overly concerned about daily performance, because in fact, it will impact/jeopardize your long-term returns. Market psychology is such that investors like the idea of buying low and selling high but unfortunately act in reverse. It is ironic that hedge funds were so hot after 2008 when risk management and protecting assets were the major emphasis but are so cold now as hedge funds have under-performed in an historic 7-year up market. Think globally regardless of asset class and have a holistic perspective. Linear thinkers who trade rather than invest unfortunately dominate the markets causing excessive volatility and confusion. Have cardinal rules for investing that can be applied to all economic environments, asset classes, regions, industries and companies. Think like a master chess player focusing both three or four moves down the board while contemplating the very next move. Be good for all seasons, which means protecting assets in down markets, performing reasonably well in up markets, therefore outperforming over market cycles. This is the mindset a money manager must have to be successful. He must think globally and long-term. In my next article, I will discuss the skill set of a successful money manager and also offer advice about what the track record of a manager you hire should be. Invest Accordingly!

Steer Toward Small-Caps With Hands On The Wheel

By James MacGregor, Bruce Aronow, Samantha S. Lau, Shri Singhvi The pullback in smaller US stocks over the past year offers a compelling opportunity for investors who want to restore their exposure to the asset class. But how they go about it matters. Even with a modest recovery this spring, absolute valuations for small-caps remain below their historical average. And after two years of underperforming large-caps, small-caps also look cheap relative to their larger peers. As we detailed in a previous blog post , we think the punishment that small- and mid-cap (SMID-cap) stocks endured during the recent downturn was unwarranted, and we expect a rebound as risk appetite returns. That’s why today’s valuations in much of the small-cap universe look so attractive. For investors who may have lightened up on their holdings, now looks like a good time to reload. Choosing the Right Investment Strategy Still, the strategy investors choose can make all the difference. Investors have lately been putting more money in exchange-traded funds and passive mutual funds that track small-cap indices, such as the Russell 2000 Index. This mirrors the popularity of passive strategies in other asset classes. Here’s the problem: the small-cap market isn’t as efficient as the one for large-caps, and shares are often misunderstood – and mispriced. Over time, a hands-on, active approach has produced better results (Display) . We don’t see that changing, and we suspect passive strategies will benefit less from a small-cap recovery. Click to enlarge Digging Deep and Adding Value Why do active managers have an advantage? To start with, smaller companies get less research coverage than larger ones, so their business models and prospects are not always well understood. Active managers can add value by digging into fundamentals and identifying fast-growing companies that the rest of the market has underestimated or overlooked. Think of it as finding a Netflix (NASDAQ: NFLX ) before video streaming takes off. An active approach works better for value-minded investors, too. Because smaller companies get less attention from analysts, their shares tend to get hit harder than large-cap stocks when markets get volatile. But a bigger price decline means more opportunity for managers to add value. For instance, managers who can distinguish between companies most likely to recover quickly, and those that face steeper challenges stand a good chance of boosting returns and creating value for investors. The Drawbacks of Indexing Of course, not every small-cap stock or sector is cheap today. Investors abandoned most small-cap sectors during the sell-off, but not all. A clutch of “safer” sectors that tend to deliver more stable earnings bucked the trend. These included value-oriented sectors such as utilities and real estate investment trusts (REITs), the so-called “bond proxies.” In the growth space, biotechnology- and Internet-related names also attracted sizable inflows during the multi-year run-up that peaked last summer. These sectors have done very well over the past few years – so well, in fact, that they now look overpriced relative to the rest of the market. But if you’re using a passive, index-tracking strategy to gain access to the market, you’re pouring a lot of money into these sectors, which account for a large share of the broader market. Utilities and REITs, for instance, comprise almost one-quarter of the Russell 2000 Value Index (Display) . Click to enlarge While these sectors have done well during the small-cap pullback, we think they have much less room to rise in the future. The rest of the smaller-cap market, on the other hand, looks attractive, and we think it will outperform in an equity market recovery. A skilled active manager can be choosy and zero in on high-quality, inexpensive stocks that have the most potential to deliver strong returns, while avoiding the pricey ones. Investors who rely on passive vehicles, on the other hand, may miss a good share of any small-cap rebound, because these vehicles, by design, will have large positions in the most overvalued sectors. We think reallocating to a small- or SMID-cap portfolio can boost investors’ return potential. But the key to success, in our view, comes down to strategy. Active managers can structure their portfolios so they benefit only from the risks that are being mispriced. A passive approach can’t match that. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. James MacGregor, CFA, is Chief Investment Officer – Small and Mid-Cap Value Equities Bruce K. Aronow, CFA, is Chief Investment Officer – US Small/SMID-Cap Growth

The Hazards Of Over-Diversification In Investment Advice

One thing I have learned over the course of my career is there are never any shortage of opinions or strategies on how you should be investing your nest egg. Everywhere you look there are hedge funds, mutual funds, ETFs, advisors, newsletters, insurance companies, and other fringe “experts” touting their methods. There is no doubt that each approach will have their own benefits and drawbacks. Opportunities and risks will be characterized by security selection, position size, timing, and costs. However, the problem that many investors run into is when they try to implement several divergent paths simultaneously. I had an investor email me the other day and say that they are subscribing to several newsletters in tandem with placing multiple accounts with different investment advisors. He wanted to know more about how we use ETFs – in effect shopping for one more opinion on what he should do with his money . I know his intentions were quite genuine. He is likely thinking that this structure is highly diversified and allows him to cover numerous bases with his investment portfolio. However, the reality is that he is trying to drink from a fire hose of information and absorbing opinions from a wide range of conflicting sources. Some questions immediately come to mind when I think about this common dilemma: How do you decide the weighting of each advisors’ opinion or strategy? What systems are you actually using and which ones are just there for “market research”? Are you increasing your overall costs by implementing all these services continually? Do each of these services enhance your total return or are they just giving you something to do? Are you just needlessly searching for the holy grail of strategists that will outperform in every market environment? (hint: they don’t exist) In any group of 4 or 5 advisors, there are probably going to be at least one that is taking a contrarian viewpoint and possibly even implementing that in their recommendations. That means you are likely absorbing opposing views that will erode your confidence in sticking with a simple and reliable plan . Let me tell you from experience what will happen. You see one guy tell you to buy bonds as a core allocation and shock absorber for your portfolio. The next guy tells you that rising rates are going to destroy the foundation of the American economy. The only reasonable course of action then is to do absolutely nothing – and you will. Sitting in cash fretting about which person to believe and then only likely implementing the correct answer long after the move has been made. The funny thing is that both of these recommendations will likely be right at some point. The problem is that we only know which one (and when) with the clarity of hindsight. Or worse, you end up going long bonds in one account and short bonds in another account, which effectively offsets both trades. There is nothing quite like the experience of paying to go nowhere. The same can be said of stocks as well. I read three articles last week talking about how consumer staples stocks were risky because of their high relative valuations. This morning I woke up to an explanation of how consumer staples are historically some of the best stocks to own during the summer months. It’s that kind of conflicting advice that permeates this industry. One argument is fundamentally driven, while the other is data-driven. Both have their own merits. Who do you believe? There Is An Easier Way My best advice is to pare down the number of advisors with a substantial influence on your portfolio. One or two professionals that have proven their worth through your experience or research should be enough to guide you through the best and worst of times. This should also include tuning out the noise of the media and allowing a specific philosophy a reasonable time to work. I’m not here to advocate for the “best strategy” because everyone has a different philosophy, risk tolerance, goals, and experience. There are many different ways you can make money in the market as long as you realize the benefits and drawbacks of your specific method. My personal view is that you should be focusing on a relatively simple framework using low-cost ETFs as core holdings. You can easily customize a well-honed list of funds to your specific needs and make small adjustments over time as conditions warrant. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.