Week In Review
November 16, 2009
Best Fund Managers Consider Macroeconomic Trends, Time Market
Investors would be wise to work with mutual fund managers who pay close attention to macroeconomic investment trends when the market is declining and microeconomic factors when the market is rising, according to three New York University Stern professors Marcin Kacperczyk, Stijn Van Nieuwerburgh and Laura Veldkamp.
They found that the top 25% of actively managed equity mutual funds exhibited extraordinary stock-picking ability during expansionary periods and sound market timing ability in recessions. They also found that the funds they managed tended to be smaller, and that the managers held MBA degrees and moved to hedge funds later in their careers.
"The current recession has left many investors with lost confidence in financial markets and, more narrowly, in the people managing their money," Kacperczyk said. "Given that we are currently in a recession, our work suggests that individuals should be looking for a different type of investment manager: one that invests based on macro information."
Their report is available at: http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/attention.pdf.
Managers Offer Flexible Funds to Time the Market
Sensing that investors are still worried about market volatility and an impending reversal of this year's rally, fund companies are increasingly allowing their managers to hold larger amounts of cash, or offering tactical, dynamic, absolute-return or other types of funds that have the flexibility to reverse course.
And these funds are selling neck-to-neck with equity funds, with investors placing $4.1 billion into allocation funds in the first nine months of the year, compared with $4.3 billion into stock funds, according to Morningstar. Of course, this pales in comparison with the $213 billion invested in bond funds in this period of time.
Long-Term Mutual Funds Take in $3.14 Billion
Long-term mutual funds took in $3.14 billion in the week ended Nov. 4, marking the 34th straight week of inflows, which now total $349 billion, according to the Investment Company Institute.
Outflows from equity funds surged to $4.7 billion, up from the $840 million the previous week. U.S. stock funds lost $5.25 billion of assets, while foreign stock funds took in $546 million.
Outflows from hybrid funds totaled $358 million, surpassing the $239 million in outflows from hybrid funds the previous week. Inflows to bond funds slowed to $7.49 billion for the week ended Nov. 4, down from $10.19 billion of inflows the previous week.
Meanwhile, investors redeemed $13.13 billion from money market funds, according to iMoneyNet, continuing a trend of recent months of investors seeking better yields than the near zero percent money funds now offer.
Target-Date Funds Getting A Bum Wrap: Manning
Although target-date funds could possibly be better designed and perhaps have less disparity between their equity exposure and glidepaths, they are not to be held responsible for the current retirement shortfall many people are now facing, according to Manning & Napier. No mutual fund could adequately shield investors from the near collapse of the U.S. financial system, according to the firm.
As Patrick Cunningham, a managing director with Manning, noted, even the Senate Special Committee on Aging, in its recent Oct. 28 hearing on target-date funds, recognized in its final report that target-date funds "offer investors certain advantages generally not offered by other types of investment vehicles, and well-constructed target-date funds have great potential for improving retirement income security."
"The committee's concerns regarding target-date design seem to be based on the significant differences in asset allocation and investment performance amongst the various providers of 2010 target-date funds, as well as the sizeable losses experienced by many 2010 funds in 2008," Cunningham said.
Instead, Cunningham dismissed the widely different approaches that target-date fund managers take, chalking it up to "different perspectives" in a free market system, saying, "It really should not come as a surprise that various investment managers have different perspectives on what securities should be owned, in what percentages, and in what environments. Part of what makes the stock market function is that different investors have different perspectives."
Cunningham also believes that the Great Recession of 2008 was somewhat of an aberration and that it is unfair to single out a fund category's performance in a single year.
Instead, Manning & Napier advocates that plan sponsors and participants get better, clearer information on a target-date fund's glidepath, equity exposure and overall investment discipline. In addition, the firm said, lower fees may not guarantee a better-quality, higher-performing result.
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