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Stocks have been on a tear since the election in November as investors gear up for a wave of tax reductions and regulatory reforms. After rising 1.8% in January, the S&P 500 surged 3.7% in February.
Yet the good times are not spread around. Unfortunately, most U.S. mutual funds are burdened with leaky strategies and fat fees. They can’t beat the market. They can barely keep pace.
According to a new Bank of America report, this trend has been in place for a while. In 2016, a measly 19% of U.S. actively managed mutual funds bested their benchmark indexes. In January, 52% managed to match or beat the indexes. However, in February, that number dwindled to 35%.
“February should have been a better month for stock-picking,” wrote Savita Subramanian, Bank of America U.S. equity strategist, in a note to clients, as reported Friday by Bloomberg. “But a better backdrop for stock-picking does not necessarily equate to fund managers making the right picks.”
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| Mutual fund managers are pulling their hair out as their funds get chewed up by markets that live by the law of the jungle. |
You have to feel for them. Trickery is the nature of markets. In the pro-growth era of Trump, the odds seemed long that staid utilities and real estate stocks would beat the market. Yet, to the chagrin of pros, that is exactly what happened.
Jesse Livermore, the inimitable speculator immortalized in the 1923 classic, Reminiscences of a Stock Operator, understood the dynamics of markets. He knew that markets brutally sort out winning and losing strategies. He knew that only fools fight markets because, in the end, markets always win.
That’s a bitter pill for professional money managers to swallow. Their strategies are largely designed to win by bucking trends and blazing a solo path. That is how they justify their massive fees. Yet most fail.
Many individual investors are beginning to see the light. They’re looking to lower-cost alternatives like individual stocks and to broad-based strategies like exchange-traded funds. CNBC reports index ETFs saw $288.6 billion of inflows, while mutual funds had $90.8 billion in outflows in 2016.
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“The Sinister Reason Gold is Not $5,000 an Ounce” The media is making a big deal about gold on the heels of Trump’s pledge to tear up trade agreements, and Wall Street experts are issuing “extreme” predictions that gold could rally 40% from here. But let me tell you, they don’t know the HALF of it. Watch this special investor alert and I’ll show you why I have rock-solid proof gold will surpass the media’s wildest claims, and why it actually has nothing to do with the U.S. or Donald Trump, but a massive, murderous gold conspiracy taking place right under our noses. |
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“It’s not so much about active versus passive, it’s more about moving from high-cost funds to low-cost funds,” Ben Johnson, Morningstar director of global ETF and passive strategies research, told CNBC.
PricewaterhouseCoopers predicts ETF assets under administration will grow 23% annually to $5.9 trillion by 2021.
With individual stocks, the cost can be even lower and the rewards can be even greater. Finding the right stocks for the right market is key. I produce a select list of stocks based on the time-tested criteria used by Livermore.
These companies, large and small, have found a way to win by building industry-leading market positions and profit margins. As they get larger, they become more profitable. It is winner take all.
These companies are dominant in pizzas, credit cards, restaurant equipment, utilities and many other businesses you might not expect.
Last week The Wall Street Journal reported such medium and large companies were upending the laws of creative destruction.
The normal course of capitalism has been for big, profitable companies to become fat and lazy and vulnerable to nimbler, hungrier small companies.
But today, well-run companies are doing the opposite. They are becoming bigger, leaner, meaner and unstoppable. And their owners are making bank.
Best wishes,
Jon Markman
{ 4 comments }
“The normal course of capitalism has been for big, profitable companies to become fat and lazy and vulnerable to nimbler, hungrier small companies.”
“But today, well-run companies are doing the opposite. They are becoming bigger, leaner, meaner and unstoppable. And their owners are making bank.”
And I remember when General Motors was unstoppable. So was GE, US Steel, RCA, Westinghouse, AT&T, IBM, etc.
Today’s successful companies are doing well…….now. In a free society, the economy is dynamic and things continue to change. Google, Amazon, Facebook, etc. will suffer the same fate someday. We just don’t know when.
Mr. Markman,
Good column. As a Financial Educator, I recommend that all investors/traders read your Annotated Version of Reminiscences of a Stock Operator. Would you please share a source link for the following statement?
“According to a new Bank of America report, this trend has been in place for a while. In 2016, a measly 19% of U.S. actively managed mutual funds bested their benchmark indexes.”
Thank you.
David O. England
Davidoengland.com
WHY MUTUAL FUND PERFORMANCE USUALLY DISAPPOINTS
Actively Managed Mutual Fund Managers are hemmed-in by a number of factors, such as their mandate ( Fund’s Prospectus Objectives), large positions hard to liquidate, following the herd ( their peers ) rather than paying attention to trends like momentum and relative strength. In addition, too many “active” managers simply hug their respective benchmark indexes, plus or minus a percent or two. It could be said they really don’t “earn” their 1.30% annual management fees. So, fund managers rarely do well overall due to inherent over-diversification. ( This is also true of many Index ETF’s, as well).
In fact, active mutual fund managers often seem to ignore sector momentum (RSI & MACD) for years or fail to take notice when it starts to decline relative to the rest of the market, not just in their stock positions. So, many funds keep good companies in punk sectors because they can not possibly “turn on a dime” which amounts to “Dead Money” and acts like a drag on their annual total return performance. Its a real handicap for them, all things considered.
Insightful report. As a first investor, which stocks and/or mutual funds would you recommend…