A recent study by Capital Guardian/American Funds is instructive when judging manager and product performance. Investors, plan sponsors, and other fiduciaries that have a short-term focus can destroy long-term value. Click here for the piece.
"Although investor cash levels have fallen from their record high in March, their value is still equivalent to about 40% of the entire U.S. stock market. This level of cash—as a percentage of what it could purchase of the overall stock market—remains much higher than the 27% peak rate seen during the 2000-2002 bear market, and well above the historical average rate of 16%."
Please click here to continue reading this interesting research report from Fidelity Investments.
The 2008 Russell Index Reconstitution took place on Friday, June 27. Below are some interesting highlights with respect to the Russell U.S. and Global Indexes.
Russell U.S. Equity Index Changes Due to Reconstitution
- Overall, the U.S. market capitalization has decreased by $2 trillion, from $18.5 trillion at last year’s reconstitution to $16.5 trillion at this year’s reconstitution.
- With respect to the Russell 3000, 276 companies were added, and 169 companies were deleted. The largest addition to the Russell 3000 was Visa Inc. (0.29%).
- Financial service companies led the list of additions, accounting for 21% of new adds, followed closely by healthcare with 19%.
- At reconstitution, the market cap range for the Russell 1000 was $1.4b to $469b, and for the Russell 2000 the market cap range was $167m to $2.8b.
- The largest movers in the indexes were energy and financial stocks.
- The weight of financial services stocks increased in the Russell 2000 (+1.09%) as companies moved down from the Russell 1000.
- The weight of energy stocks declined in the Russell 2000 (-1.54%), as companies graduated to the Russell 1000.
Russell Global Equity Index Changes Due to Reconstitution
- Overall, the Global market capitalization decreased from $50.5 trillion at last year’s reconstitution to $49.7 trillion this year.
- Excluding the U.S., 962 companies were added to the Russell Global Indexes, with India and Canada having the most new additions.
- Securities from seven new countries joined the Russell Global Indexes at reconstitution: Kazakhstan, Latvia, Qatar, Slovak Republic, Tunisia, Ukraine, and Vietnam.
- With the exception of Russia, small cap stocks accounted for the significant majority of new additions in the top 20 countries.
- The market cap range for the Russell Global Large Cap Index was $1.4b to $469.0b (ex-Japan).
- The market cap range for the Russell Global Small Cap range was $166m to $3.1b (ex-Japan).
- The top three Global sectors in terms of additions were materials and processing, financial services, and consumer discretionary.
I recommend reading "Are Active Managers Active Enough?" from ING Investment Weekly. The author describes a study that separated managers down into four categories: Diversified Stock Pickers, Concentrated Stock Pickers, Closet Indexers/Pure Indexes, and Factor Bets. The study indicates that active, concentrated stock pickers generate higher excess returns.
Please click on this link for the full text of the article.
With the continuing credit crunch that was created by the sub-prime mortgage market, many other fixed-income strategies have experienced large dislocations -- due more in part to technical factors rather than fundamental factors. Although the economy is slowing and may be moving toward, or already in, a recession, the dislocations have created pockets of opportunities in certain sectors of the credit markets. Senior secured bank loans are just one example of those current opportunities. The attached paper (click here) published by Standish describes this sub-asset class and the current investment opportunity.
Director of Research
In a recent letter to institutional consultants, investment firm Barrow, Hanley, Mewhinney & Strauss addressed why their clients' portfolios owned stock in Bear Stearns. Their comments typify the reaction of most managers that held the stock and describe the valuation metrics that they were considering at the time of the demise.
The text of the letter is available by clicking here.
The 16th annual Colorado Public Plan Coalition (CPPC website) conference was held in Winter Park last week. More than 100 participants gathered for this educational conference dedicated entirely to the challenges and opportunities facing Colorado public sector retirement and health plans. Guest speakers included Mike Coffman, Colorado Secretary of State, Cary Kennedy, Colorado State Treasurer, and John Fielder, Colorado’s most published landscape photographer and author. Innovest presented three topics; presentations are available upon request, please click below.
Target Date Retirement Funds: Not Created Equal presented by Rich Todd
Tools for Participants wanting a DB Option from their DC Plan presented by Rick Rodgers
Capacity Issues for Investment Managers presented by Scott Middleton
HedgeWorld recently published an article on their subscription website (sign up for free at www.hedgeworld.com) detailing the results of a survey conducted by business media firm Terrapinn Ltd., regarding the increased use of 130/30 strategies. The conclusion of the study was that 130/30 strategies are no longer just a fad but are slowly becoming an integral part of an investment portfolio. The biggest concern among those polled as to why they have not implemented the strategy into their portfolio is due to manager selection; many feel they don’t have confidence in the manager’s shorting ability. Another interesting fact in the survey was that a majority of managers who offer 130/30 strategies do so because they feel it creates a competitive advantage.
At Innovest, we are currently conducting research on the viability of 130/30 strategies. We believe they very well may have merit and a place in a portfolio. However, with most track records less than three years long, it is difficult to make a complete analysis. As these strategies gain traction and there are more data points to analyze (especially the volatile months of July and August 2007), we will form more of an opinion as to if and when we may advocate implementing them into client portfolios. As with any investment we analyze, it is important to not only look just at performance but at the team managing the strategy. Since many “long-only” shops don’t have a great deal of experience shorting, it is extremely important to understand the shorting process and the inherent risks it brings.
Please check back often to see our continuing thoughts on 130/30 strategies.
In a recent Pensions & Investments article, "Line blurs further between growth and value strategies," several investment advisers noted that the differentiation between growth and value stocks has decreased significantly in recent years. Because of a smaller dispersion in stocks' relative valuations and forward growth potential, a larger number of stocks have become attractive to both sets of managers. As a result, money manager due diligence needs to focus all the more on managers' investment process and philosophy. (Click here for the article.) In addition, there has been a widening gap in year-to-date performance for the Morningstar categories for Large Cap Growth (+6.53%), Mid Cap Growth (+9.86%) and Small Cap Growth (+5.95%), over their Value counterparts (+2.90%, +4.20%, and +0.21%, respectively). These performance disparities could further widen with ongoing increases in market volatility.
At times, plan sponsors struggle with what to do with problem products in their plans. Linked is an opinion by Fred Reish, Bruce Ashton and Stephanie Bennett tackling the issue from a legal perspective.
To keep our clients more informed about the investment products we cover and to provide greater insight about the way we evaluate products, Innovest is proud to introduce our new monthly publication named INFoRM.
INFoRM the acronym for the INnovest Fund Report Monthly will provide an in-depth assessment of various investment products. The six main criteria we evaluate -- Organization, People, Philosophy/Process, Performance, Asset Base, and Expenses -- will be expounded upon to give our clients clear insight into their investment products. In addition, at the end of each review there will be an evaluation written by our analysts about each product, as well as a fact sheet. Published monthly, INFoRM will cover three products that are the most utilized by our clients.
We hope you enjoy this first edition of INFoRM, as well as all future publications. All comments are welcome.
Please click here to download the file.
Listed below are the investment firms that Innovest met with during the month of July, either in our office or onsite. If you have questions regarding our thoughts on any of these firms, please feel free to contact us.
- Benchmark Plus
- Boston Company
- Cadogan Management LLC
- Centennial Partners
- Eaton Vance
- Fuller & Thaler
- Genesee Investments
- Ironwood Capital Management
- Legg Mason
- Navallier & Associates, Inc.
- Parametric Portfolio Associates
- Portfolio Advisors
- Rainier Funds
- Red Rocks Capital Partners
- Royce & Associates LLC
- Santa Barbara Asset Mgmt.
- Wakefield Asset Management
- Western Asset Management