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Does Past Performance Matter?

When Diversification Fails

Where's the beef?

Passive Pensions

Are Dividends the Answer to Growth for Income Hunters?

Does Past Performance Matter?

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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The phrase “past performance is not a guarantee of future results” has never rung more true for active mutual funds.  Our semi-annual publication, the Persistence Scorecard, takes a look at the performance of top quartile active funds over three- and five-year consecutive 12-month periods.  Based on the most recently released report, out of 269 large cap funds that were in the top quartile as of March 31 2011, only 3.35% (amounting to only 9 funds) remain in the top quartile at the end of March 2013.  It is worth noting that of the 102 mid cap funds that were in the top quartile, there was none left at the end of March 2013.

In short, the report is a sobering reminder that we cannot use the past performance figures as the sole or the most important criteria in fund selection.  In addition, the transition matrices in Report 4 and 5 suggest that a healthy percentage of top quartile funds in the subsequent period come from prior period second or third quartiles.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

When Diversification Fails

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Diversification means different things in different contexts.  We can speak, for example, of diversification within an equity portfolio — i.e., of holding a number of stocks with potentially-offsetting risks, as opposed to concentrating on only one issue or on a handful of similar stocks.  Or we can think of diversification across asset classes — e.g., by adding bonds, or international stocks, or commodities to a (diversified) U.S. equity portfolio.  Conventional wisdom smiles on these two forms of diversification, and rightly so, since the final diversified portfolio typically has a higher expected return, or lower expected risk, than the starting portfolio.

But diversification might not always be a good idea.  Suppose I go a casino, find the roulette wheel, and bet on a number at random.  I’m likely to lose my money.  If I do the same thing a second time, and a third, the result is likely to be the same.  I haven’t created a diversified portfolio of bets — I’ve merely repeated the same mistake several times over.

A recent white paper asks whether the selection of active investment managers is a useful or fruitless form of diversification.  (Spoiler alert: fruitless.)  Why?  Active managers, more often than not, underperform the indices against which they’re benchmarked.  An investor who chooses an actively-managed fund over an index fund is therefore more likely than not to underperform.  Adding a second and third actively-managed fund is likely to leave the investor worse off than he was with only one (just as multiple turns at the roulette wheel are likely to leave a gambler poorer than he was after his first bet).

If it were easy to find outperforming active funds, diversifying active management might be beneficial.  But it’s not easy — and that implies, as discussed here, that picking active managers is one of those areas where diversification fails.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Where's the beef?

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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While I was eating at a well-known restaurant chain, I saw this sign in the front window:

Where's the beef?

So of course as a commodity lady my mind doesn’t think about choices like chicken or veggies, but I wonder what happened to the price of beef in the shortage and why is there a shortage?  

The S&P GSCI All Cattle, which includes both the S&P GSCI Feeder Cattle and Live Cattle, has gained 4.4% since the end of May, after losing 8.6% from the beginning of the year. See the monthly returns in the table below:

Source: S&P Dow Jones Indices.  Data from Jan 2013 to July 17, 2013.  Past performance is not an indication of future results.  This chart reflects hypothetical historical performance.  Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.
Source: S&P Dow Jones Indices. Data from Jan 2013 to July 17, 2013. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.

An obvious driver is that the grilling season has kicked in, but that is on the demand side. Also on the demand side, as reported in the United States Department of Agriculture (USDA) report on July 11 was U.S. beef exports rose 4.3% in May from a year ago for muscle meats and 2.7% for total beef and beef variety meat sales. The increase was from a 74% increase in sales to Japan, which eased its age requirement on U.S. beef to cattle under 30 months of age from 20 months or younger.

In addition to the rising demand, the summer heat has disrupted supply since cattle eat less when it’s hotter outside. Also the drought conditions have affected rangelands, leaving little water and forage for livestock, prompting the Bureau of Land Management (BLM) to undertake targeted actions, such as reducing grazing.

Last year beginning in May, the S&P GSCI All Cattle had a 4 month winning streak driving the index up 7.9% before a small dip in Sep of 1.1%. By the year’s end the index gained 13.3% from the trough in Apr. Could the drought in 2013 drive similar shortages and higher returns as from the 2012 drought? Compare droughts here.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Passive Pensions

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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We read this morning that the California Public Employees’ Retirement System (CalPERS) is considering increasing its commitment to passive equity vehicles. This follows, by less than two weeks, a study suggesting that public pension funds generally could improve their performance by doing exactly what CalPERS is reported to be considering.

Of course whenever you speak about CalPERS, you’re speaking about enormous size (at $256 billion, the nation’s largest pension fund), and the fund’s size may be a key to its plans. For CalPERS to move its figurative needle, it needs to generate a huge amount of active investment return. As readers of our SPIVA reports know, most active managers underperform most of the time, so CalPERS may well conclude that the active management game isn’t worth the candle, especially at the scale required for their asset base. If that’s what they decide, it would be a hard conclusion to dispute.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Are Dividends the Answer to Growth for Income Hunters?

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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Dividend focused strategies as well as strategies offering exposure to alternative income sources have become popular and proliferated over the past few years given the low interest rate environment.  Throughout history, dividends constitute an important part of total equity return. In decades such as the 40s and the 70s, dividends constitute 50% or more of the equity markets returns whereas during the 90s, dividends made up only 14% of the total return with capital appreciation making up the rest.  In addition, academic research has shown that dividends offer protection during bear markets.  It must be noted that, while dividends offer benefits, not all dividend strategies or dividend indices are constructed the same.  Some indices are designed with the specific purpose of absolute high yield, some focus on stable, consistent dividend growth and others encompass a bit of both.  Nearly all dividend indices employ quality measures to ensure their objectives are achieved.  During our webinar this Thursday on dividends, we will breakdown the methodology construction behind several leading dividend indices as well as highlight how different index mechanics can lead to different risk/return profiles and sector compositions.

The posts on this blog are opinions, not advice. Please read our Disclaimers.