Tuesday, January 22 2013
In my previous blog I mentioned the fascinating challenge in the UK which pitted Orlando the cat against students and a panel of market professionals to see who could invest £5,000 the most successfully across a one year timeframe. Orlando won and also beat the broad UK FTSE All-share market index by over 3%.
The professionals were well beaten by both Orlando and the index.
Jim Parker from Dimensional has followed up on this discussion with a more in depth discussion in his latest Outside the Flags article. Jim also discusses the forecast from a well known finance commentator at the end of December 2011 to sell down share holdings. This call did not turn out so well with what followed being a well above average year in 2012 for Australian shares.
By no means was this a scientific experiment so don't go out and get your household cat or dog (or octupus for those who remember Paul from the 2010 World Cup) to pick your investments. Rather build your portfolio around a well diversified portfolio of assets and minimise taxes and costs where possible.
Jim's full article can be found here:
January 22, 2013
Cool for Cats
You've heard the line about stock picking being better left to blind-folded, dart-throwing orangutans. Now there's new competition – from cats.
UK newspaper The Observer staged an experiment, pitting a panel of market professionals and a group of students against a ginger feline called Orlando in a competition to see who would have the most success in picking stocks in 2012.1
Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.
The professionals used their experience, insights and market knowledge to select stocks. The cat's method was rather less elaborate. Orlando simply threw a toy mouse onto a grid of numbers allocated to stocks in the index.
The newspaper reports that while the cat was trailing the pros at the end of the September quarter, his feline intuition kicked in the final months. As a result, his portfolio increased to end 2012 at £5,542. This represented a gain of nearly 11% for the year, outpacing the index's 8.2% rise and shading the professionals' portfolio by 7%.
While this experiment was hardly scientific, it does provide another reminder about the difficulty of generating consistent above-market returns by picking individual stocks or making forecasts. And it's something to keep in mind when you are confronted by media and market prognostications for 2013.
In the US context, Bloomberg highlighted this difficulty recently in a piece entitled Almost All of Wall St Got 2012 Market Calls Wrong.2
While many forecasters began 2012 by issuing downbeat calls for equity markets - based on the ongoing Euro Zone crisis, China's slowdown and US political logjams – the market value of global equities increased by about $US6.5 trillion last year.
As one analyst quoted by Bloomberg noted, many pundits were too wrapped up in the "fear du jour" and failed to keep an eye on the big picture.
So it was in Australia, where one prominent television finance commentator said at the end of 2011: "The conditions are in place for a panic sell-off. It is not certain that it will happen…but the risk is now such that you must take action. I will be significantly reducing my already reduced exposure to equities possibly to zero".3
More fool him and commiserations to anyone who had the misfortune to act on his advice, because the Australian equity market delivered a total return in 2012 of 20% in local currency terms. Gains in many other equity markets were even stronger.
It should be plain by now that basing your investment strategy on someone else's forecast is a haphazard way to build wealth. No matter how diligent and expert your forecaster is, unexpected events have a way of messing up their expectations.
As well, those who insist on believing that forecasting is a sustainable investment strategy tend to under-rate the capacity of capital markets to very quickly build all those expectations into prices. You think markets will tank/soar this year? So does someone else and they're trading off that belief.
The good news is you don't need a crystal ball to build wealth. You just need a regularly rebalanced diversified portfolio of assets designed for your needs and risk appetite. You also need to keep an eye on costs and taxes.
Most of all you need to keep your cool and exercise patience. Like a cat.
Sunday, January 20 2013
APRA have recently released the rates of return for Australia’s 200 largest superannuation funds and it does not make great reading for Bookmakers Superannuation Fund. It has performed the worst over the past 5 years and second last over 9 years.
We became aware of the fund back in 2006 when a potential client was seriously looking at using the fund after some positive reporting including from Alan Kohler. To be fair the fund had provided some strong returns in the years to 2005 and had a low fee basis. (The fund became publicly available in September 2004.)
Unfortunately if you had joined the fund after it went public the results have been disappointing. If you serch for why returns have been poor a major reason was that the fund had a heavy exposure to investments held with MFS which failed in 2008.
This story reminds me of the Legg Mason Value Fund in the US. For 15 straight years through to 2006 the fund outperformed the S&P 500 index. In the five years later following it trailed the S&P 500 by more than an average of 7% per annum.
The clear message from both of these stories is to be very careful "chasing" active fund managersand advisers who report strong historical returns. History also shows us that keeping this performance going is extremely difficult. If you get in at the top of the wave you are potentially heading for a huge dumping.
The following editorial piece was published in Monday's Advocate newspaper by Peter Mancell, the Managing Director of FYG Planning Pty Ltd, in Peter's capacity as director of the Mancell Financial Group and director of FYG Planning.
Peter regularly publishes opinion pieces in The Advocate and I thought this one was well worth republishing here. In this week's piece Peter talks about the Bookmakers Superannuation Fund along with a really interesting story out of the UK where a cat has beaten stockbrokers in a stock picking challenge over a 12 month period.
I hope you enjoy the article.
Bookies Finally Lose, While Cat Beats Brokers
Given the self important and often overpaid nature of the finance industry, each week often throws up at least one irony.
Last week there were two.
Firstly, APRA released the rates of return for Australia’s 200 largest superannuation funds.
The number one fund over the past five years was the Challenger Retirement Fund, while over nine years it was Goldman Sachs/JBWere’s corporate staff fund.
Of course as interesting as who finished first, is who finished last.
For those who’ve lost a little too much money on the horses over the years, they’ll be interested to know the Bookmakers Superannuation Fund came last over five years, and second last over nine years!
Between June 2008 and June 2012 the Bookmakers Superannuation Fund failed to have one positive yearly return.
I don’t know what their strategy is, but by the looks of it they might have done better ‘investing’ at the racetrack!
Secondly, the news out of England that a cat named Orlando managed to beat stockbrokers, fund managers and a group of schoolchildren in a stock picking challenge.
At the start of 2012 each group invested a hypothetical £5,000 in the FTSE (UK share market); the groups were allowed to revise picks every three months.
Orlando picked his stocks by throwing a toy mouse onto a numbered grid, while the experts used their knowledge.
After 12 months, Orlando’s portfolio had grown to £5,542, the experts’ portfolio to £5,176, while the schoolchildren’s portfolio fell to £4,840.
While the schoolchildren finished last, they did perform the best in the final quarter which led to some misplaced optimism from their deputy headmaster, Nigel Cook.
“We are happy with our progress in terms of the ground we gained at the end and how our stock-picking skills have improved,” Mr Cook said.
Despite his students being shown up by a cat, Mr Cook still missed the point of the exercise.
Stock picking remains futile and you can’t ‘improve your skills’ at it because no one can predict financial markets with any certainty.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
Mancell Financial Group
Mancell Financial Group ABN 29 009 541 253 is an Authorised Representative No. 226266 and Credit Representative No. 403187 of FYG Planners Pty Ltd, AFSL/ACL No. 224543
Friday, January 18 2013
I am in the process of writing a client update for clients reflecting on the past year and looking forward. The overall results have been pleasing with all major investment asset classes (barring cash) performing strongly.
If we look back at where we were at the beginning of January 2012 I think it would be fair to suggest that sentiment was poor. 2011 returns had been poor for everything other than bonds. There did not seem to be any major progress with the European debt crisis, growth was slowing in China and the US had only a few months previous been through a bruising political period culminating in the downgrade of the credit rating of US government debt. Not a great environment to provide confidence for the year ahead.
So why did things turn out so much better than what we might have expected?
The key driver in markets through 2012 seemed to be the hunt for yield underpinned by developments that were more positive than expected:
1) Increased Central bank stimulus measures including here in Australia.
2) The Chinese economy seems to have picked up after what appears to have been a stable political transition.
3) The US avoided the fiscal cliff ... for now.
4) Euro breakup fears eased after the head of the European Central Bank (ECB) Mario Draghi saying that the ECB will do whatever it takes to save the Euro
So what can we learn from the events of 2012?
Three really crucial lessons were evident for me:
1) Whilst current news might look negative (or positive), it's what happens next that is important for investment markets.
2) Trying to predict the next move for markets is very difficult.
3) The benefits from diversification are alive and well.
Jim Parker from Dimensional thrashes out these points in a little more details in his latest Outside the Flags article - Many Happy Returns. The article included some interesting data about returns from 20 developed markets and 20 emerging market some of which you might find surprising. I have included his article below.
Here's to a good year for 2013 hopefully with plenty of surprises on the upside!!
The summer holiday season encourages media retrospectives about financial markets. It's fun to match these up with what people were saying a year before.
In December, 2011, the publication Barron's told investors to "buckle up". The consensus prediction of its panel of 10 stock market strategists and investment managers was for the US S&P-500 to end 2012 some 11.5% higher at about 1360. 1
"That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway," the writer said. "Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past."
There was so much for forecasters to get right - a negotiation of the Euro Zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election and the challenge for emerging economies to sustain high economic growth rates.
More than a year later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high and a number of countries that share the single currency are unable to pay their debts. The US presidential election gave way to worries over the so-called "fiscal cliff", while Chinese exports have been hit by the slowdown elsewhere.
In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron's panel forecast of the S&P-500 reaching 1360, which the magazine said was ambitious, turned out to be conservative. The index ended the year 13% higher at 1426. What's more, some of the strongest performances have been in emerging and frontier markets.
The table below shows performances for 2012 (to December 31) and annualised returns for the past three years of 20 developed and 20 emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in Australian dollars.
Among developed markets, three members of the 17-nation Euro Zone - Belgium, Germany and Austria - were among the top performing equity markets last year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.
While not one of the very top performers, the Australian market nevertheless delivered solid returns of 20% for the year despite the difficult international circumstances and the uncertainties at home over the extent of the slowdown in the domestic economy.
And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India and China, the real stars in the emerging market space these past three years have been the south-east Asian markets of the Philippines, Thailand and Indonesia.
There a few lessons from this. First, while the ongoing news headlines can be worrying for many people, it's important to remember that markets are forward looking and absorb new information very quickly. By the time you read about it in the newspaper, the markets have usually gone onto worrying about something else.
Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from what the market has already priced in. My research colleague Jim Davis has done an interesting study on this. 2
Third, if you are going to invest via forecasts, it is not just about predicting what will happen around the globe. It also requires that you to predict correctly how markets will react to those events. That's a tough challenge for the best of us.
Fourth, you can see there is variation in the market performance of different countries. That's not surprising given the differences in each market in sectoral composition, economic influences and market dynamics. That variation provides the rationale for diversification - spreading your risk to smooth the performance of your portfolio.
So it's fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It's far better to let the market do the worrying for you and diversify around risks you are willing to take.
In the meantime, happy new year and many happy returns!
Thursday, January 10 2013
The article looks at a fascinating example from the early 19th century in London where investors were conned into investors in bonds for a fictitious Central American settlement Poyais. Well worth a read if you are interested in
The practical element from the article that caught my eye looked at why people fall for fraud. It refers to research out of Boston University by Tamar Frankel based on the study of hundreds of financial cons. The research suggests that the following are recurring traits of victims:
- Excessively trusting
- Have a high risk tolerance
- Have a need to feel exclusive or part of a special group
The article also refers to other research suggests that victims tend to:
- Harbour dissatisfaction with their current economic status
- Desire not to be left behind
- Feel envious of economic neighbours
This all leads to greedy or risk investing.
Many of us shake our heads when we hear of others being trapped by financial fraudsters and ask how could someone fall for the outrageous claims they make. Reading the list of characteristics might lead many of us to rethink our perceived safety from financial fraud. We could easily fit into the class of potential victim.
So what's the investment lesson?
A key to avoiding making the same mistakes as financial fraud victims of the past it is really important to carefully question any investment that you get into. Look for total transparency and not a black box where you really don't understand what you are investing in and finally seek trusted professional advice before jumping in.
Tuesday, January 08 2013
Happy New Year!! I hope that 2013 will be a happy, healthy and succesful year for all readers of this blog.
The start of a new year encourages reflections on what happened in 2012 and what is likely to happen next.
Weston Wellington, from Dimensional Fund Advisors in the US in his latest commentary piece reminds us that much of what was predicted for 2012 didn't happen:
- The plunge off the so-called fiscal cliff was averted.
- The euro zone did not fall apart.
- China’s economy and stock market did not crash.
- The bond market did not implode.
- The re-election of President Barack Obama did not derail the US market.
- Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
It goes to show that trying to predict the future for investment markets is near impossible. This proposition is backed up by a myriad of historical and contemporary research showing the great difficulty in being successful with an active approach to management of your investments
So if you are prone to try to make such predictions and consequently make big bets with your investment portfolio, go away, have a cuppa and then come back to your investment portfolio with the objective of a building a portfolio structured for the long term and not on the latest whim.
Weston's full article can be found below.
January 5, 2013
2012: The Year It Didn’t Happen
Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For US dollar-based investors, results were further enhanced by a modest decline in the US dollar relative to the euro, the Danish krone, and the Swiss franc.
As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and detachment that eluded many investors.
2012 Index and Country Performance
Total return (gross dividends) for 12-month period ending December 31, 2012.
|WORLD ex USA
|EMERGING + FRONTIER MARKETS