“V” is for the volatility that the market experienced in the first quarter. It’s also the shape which the S&P formed over that same time period. The first half of the quarter consisted of wild daily swings and a sharp decline (down 11%), while wild daily swings and a subsequent sharp increase (up 13%) made up the second half. Despite all of the crazy movements, the S&P 500 ended right about where it started, +1.30%.
It was a crazy first quarter and an extremely tough one for investment managers. Nearly 80% of Large Cap mutual funds underperformed the S&P 500, and unfortunately, it doesn’t seem like the backdrop for the second quarter will get any easier. Despite the volatility, and the sharp reversal to the upside, the same fears and issues remain: oil price volatility, global slowdown fears, Fed uncertainty, China destabilization, and presidential election uncertainty. Because things have yet to paint a clearer picture, our strategy largely remains unchanged.
As we enter 2016, we remain mindful that we are in the 7th year of a strong bull market, and as the length of its run grows longer, emotions rather than sound advice and fundamentals tend to drive prices. Volatile price swings in both directions become commonplace and markets move counter to common sense. While difficult during times like this, it’s important to stay disciplined in your strategy and continue to focus on longer term investment objectives.
While the trajectory of returns since the March 2009 bottom is unsustainable, we believe that markets can and will continue upward. This doesn’t mean that there won’t be volatility, but people tend to forget that before we hit highs in 2013, the market, on a price basis, had been flat for 13 years. It’s only been 2 1/2 years since that record high, and if history repeats itself, which it tends to do in the investment world, the bull still has room to run.
Most of our clients know we are big believers in low cost investing with passive investment vehicles. Although it is easy to grasp the concept of paying lower costs, it is harder to grasp that you can pay lower costs and also outperform most other investments.
The most recent SPIVA report, published by Standard & Poor’s, is now available. In 2014, over 86% of mutual fund managers (large cap) underperformed their benchmarks. Although this makes a pretty good case for investing in indexes (ETFs), mutual funds still outnumber ETFs by 10 to 1, based on assets under management.
Pundits used to argue that inefficient asset classes could outperform the market, but as you can see in the report, it is pretty standard across the board, active management loses over nearly every time period and asset class!
For the most part, there is a reason as to why a Bank or Brokerage firm puts a mutual fund in your account – FEES. Whether it’s through being paid directly by offering up a propriety product or through revenue sharing by allowing another fund family to participate on their platform, Brokerage firms have found a way to legally double dip on your account. The adviser makes his commission or asset management fee for managing the account, and then the institution makes its fee from the mutual fund. This is a very lucrative, but far from objective practice endeavored upon by most large brokerage firms. Most clients have no idea what is going on. This is because the conflict of interest is only revealed to them in tiny print on the back page of a prospectus, which is rarely read. If the firm does have proprietary funds, many hide the affiliation by naming the fund family something that is hard to trace back to the parent company.
“No Man’s life, liberty, or property are safe while the legislature is in session” -Mark Twain
Over the past week, Neil and I have received many questions about the government shutdown and impending debt ceiling and how they might affect the markets. So we thought we would share with you a quick summary of what we believe is happening and how we are positioning our portfolios as a result.
We at Canal Capital Management are big believers in ETFs, otherwise known as Exchange Traded Funds, because of their salient characteristics: cheap, tax efficient, intra-day trading, index replicating, etc., But just like with any investment product, they are not all created equal. Due diligence is required when investing in any ETF. At our firm, we follow a disciplined process when vetting any investment, and ETFs are no exception. We apply the following test: Efficiency, Tradability & Fit. Efficiency looks at a fund’s costs, while Tradability assesses average daily trading volume, and Fit examines the securities the fund owns. Though it may sound corny, this mnemonic device describes a process by which we narrow down some 1,500 ETFs to a more manageable security universe of choices that will best fit our investment objectives.
