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Analysis

Active Fund Managers Underperform Indexes

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Are active fund managers worth their fees? Not according to a newly-released report from S&P Dow Jones Indices that reports on actively managed fund performance.

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Actively managed funds did not fare well against indexes in the last 1-,3-, 5- 10- and 15-year spans, meaning investors are better off sticking with passive funds that track the established indexes and don’t charge hefty management fees.

Barely one third of large-cap managers beat the S&P 500, according to the new report. The news worsened farther down the equity scale: 89.4 percent of mid-cap managers and 85.5 percent of small-cap managers also fell short, respectively.

Active managers manage funds, buying and selling individual stocks. Passive funds, on the other hand, track indexes without actively managing individual stocks. Active funds typically carry much higher fees.

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Passive Strategies Gain

Investors have been moving steadily into passive strategies. Exchange-traded funds that mostly track indexes took in record cash inflows during the first quarter of this year for both stocks and bonds. Passive funds in 2016 drew a net $508.4 billion while active funds lost $340.1 billion in outflows, according to Morningstar.

The SPIVA U.S. Scorecard from S&P that reports on active fund performance presents an even weaker long-term outlook.

For the first time, the scorecard tracked 15-year performance to present a “complete market cycle.”

In that 15-year period, 92.2 percent of large-cap managers missed their goals, while the number was 95.4 percent for mid-caps and 93.2 percent for small-caps. More than 58 percent of equity funds in the U.S. folded or merged during the 15-year period.

During the one-year period ending Dec. 31, 2016, 66% of large-cap managers, 89.37% of mid-cap managers, and 85.54% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively. The figures match the one-year performance figures reported in June 2016, except for large-cap managers, who fared better.

Figures over the five-year period did not change markedly from the SPIVA U.S. Mid-Year 2016 Scorecard. For the five-year period ending Dec. 31, 2016, 88.3% of large-cap managers, 89.95% of midcap managers and 96.57% of small-cap managers underperformed their benchmarks.

Market Conditions Affect Performance

Given that market conditions can affect managers’ performance from year to year, the scorecard added rolling three-year relative performance figures from 2003 through 2016. The figures were calculated on a semiannual basis across domestic and global equity categories

Global markets ended the year on a positive note. International large caps measured by the S&P Global 1200 and emerging markets measured by the S&P/IFCI Composite both rallied to end the year with gains of 8.89% and 10.79%, respectively.

Across all time horizons, most managers of international equities underperformed their benchmarks.

Interest Rate Boosts Performance

In December 2016, the United States Federal Reserve raised the interest rate for the second time in 10 years. Managers investing in intermediate- and short-term credit performed the best for the one-year period, with 19.75% and 26.61% underperforming, respectively. The same trend held through the five-year period. The 10- and 15-year periods proved to be difficult for all credit managers.

The strength in high-yield bonds market delivered a positive spillover effect on the leveraged loan sector.

The S&P/LSTA U.S. Leveraged Loan 100 Index posted a 10.88% year-over-year gain. This outperformance proved difficult for actively managed senior loan funds for the one-year period, however. Nearly 82% of funds underperformed the benchmark.

Trends at mid-year 2016 continued through the year. Spreads narrowed, testing high-yield bond market managers. More than 94% of managers ended the one-year period underperforming the index’s performance of 17.13%.

Other Sources Confirm S&P Tracking

The scorecard is discounted by some because S&P sells index products. However, the findings track measures from other Wall Street sources.

JPMorgan Chase reported active managers have performed well at the start of 2017, but the win rate for large cap managers is only 52%, according to CNBC.

Active managers point out that investors have to know how to assess managers, including market conditions, strategy and performance.

Nick Colas, chief market strategist at Convergex, said it is not certain the current scenario will last indefinitely since markets move in cycles. He said a drop in correlations, the tendency of stocks to move in unison that has characterized the current bull market, will help active managers that can capitalize on pricing discrepancies.

Bob Doll, a senior portfolio manager at Nuveen Asset Management, said market conditions are conducive for managers this year. He sees a likelihood small-cap stocks will outperform this year, that global stocks will outperform the U.S., and that value stocks are leading growth by a wide margin.

Investors Must Screen Managers

Investors have to screen managers for various qualities, said Steve Deschenes, product management and analytics director at Capital Group, which manages more than $1.4 trillion in assets, including American Funds.

Deschenes said lower fees and managers who own the investments they endorse are good signs.

It doesn’t matter if 20% of managers beat the market, he said. It matters if you can identify that 20%.
Performance has differed considerably among different strategies, even though all have fallen short of market benchmarks.

Over the past three years, only 4.4% of large-cap growth managers beat the benchmarks, while 11.4% of large-cap value managers managed to do so. The best performance was for multi-cap value funds over a three-year period, posting a 17.8% win rate.

Investors in all fund categories need to consider their options when choosing actively managed funds given the higher costs of these funds and the likelihood the higher costs will deliver better value.

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Analysis

Bitcoin’s Record-Breaking Rally Continues as Prices Cross $8,100

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Bitcoin surged to new highs on Sunday, as the world’s largest crypto by market cap continued to generate bids following the cancellation of Segwit2x.

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BTC/USD Price Levels

The value of a single bitcoin reached a daily high of $8,110.59, its best level on record. At press time, BTC/USD was valued at around $8,002 for a gain of 4%.

With the gain, bitcoin’s market cap now exceeds $133 billion. That’s roughly $100 billion greater than Ethereum, the market’s second most valuable cryptocurrency.

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Bitcoin has added more than $1,100 over the past five sessions. It was down around $5,600 just one week ago.

Bitcoin Cash (BCH), a digital currency alternative that broke away from the original blockchain Aug. 1, was down 5.1% at $1,185. BTC and BCH locked horns earlier this month after the Segwit2x hard fork was abandoned.

$10,000 and Beyond?

Institutional clearing platform LedgerX has initiated its first long-term bitcoin futures option, which is set to expire Dec. 28, 2018. In setting up the option, LedgerX is assuming a price of $10,000 at the time of expiration. That’s a 25% premium on current levels.

Investors who buy the option are essentially saying they believe prices will exceed $10,000 by the time of expiration.

Bitcoin is being helped by growing institutional demand for the digital currency, as hedge funds, day traders and other mainstream investment outfits look to access this burgeoning asset class. CBOE and CME Group have each announced plans to integrate bitcoin into more conventional investment vehicles in the coming months.

The rush of institutional money into bitcoin is a sure sign that the digital asset class is becoming too big to ignore. The value of all cryptocurrencies in circulation has already exceeded $230 billion, with more than a dozen coins valued at $1 billion or more. Nine others have a market cap of $500 million or greater.

Coinbase Responds

The rise of institutional capital has also compelled Coinbase to introduce a custodial service targeted at account holders with more than $10 million in assets. This service targets hedge funds and other institutions that have remained largely on the sidelines of the crypto revolution.

In a recent blog post, Coinbase CEO Brian Armstrong announced that the new service will launch sometime next year.

“When we speak with these institutions, they tell us that the number one thing preventing them from getting started is the existence of a digital asset custodian that they can trust to store client funds securely,” Armstrong wrote.

In addition to maintaining the minimum $10 million asset requirement, institutions must pay a $100,000 setup fee to gain access tot he Custodial program. In response, institutional investors will receive assurance that their assets are secure.

The Coinbase Custody website lists broad support for bitcoin, Ethereum (ETH) and Litecoin (LTC), as well as ERC20 tokens. The ERC20 protocol has emerged as the favorite for startups launching initial coin offerings (ICOs), a controversial crowdfunding model that has already overtaken early stage venture capital.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

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Cryptocurrencies

Is Ethereum Ready to Play Catch Up With Bitcoin?

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In mid-June of this year, the difference between the market capitalization of bitcoin and Ethereum had narrowed down to less than $8 billion. This had many market participants excited. They expected Ethereum to dethrone bitcoin as the leader, a move popularly termed as flippening.

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Key observations

  1. Ethereum has hugely underperformed bitcoin
  2. The chart pattern suggests that Ethereum is likely to play catch up in the next few months
  3. Stay on the long side of Ethereum to benefit from the bullish setup

However, fast forward five months and the difference in the market capitalization of the top two cryptocurrencies has increased to about $96 billion. This shows that while bitcoin has raced ahead in the past few months, Ethereum has hugely lagged behind.

However, is the underperformance about to end?

The chart pattern shows that Ethereum is likely to embark on a rally of its own that can carry it to $645 to $670 levels in the next few months. Let’s see how we arrived at these levels.

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Ethereum opened trading at $8.16 on January 1, 2017. It started its rally in March and by June 12, it reached a high of $420, an astronomical rally of about 5047%. Thereafter, it entered a period of consolidation, digesting the gains.

On the charts, Ethereum has formed a large symmetrical triangle, which usually acts as a continuation pattern. The breakout is generally in the direction of the long-term trend, or the trend that was prevailing before the pattern formed. In this case, the sharp move from January to June confirms that the cryptocurrency was in an uptrend before forming the triangle.

However, this is not a fool proof trade because sometimes the symmetrical triangle acts as a reversal pattern. Therefore, the best way to play this trade is to wait for a breakout of the triangle before initiating any trade.

Where can we take an entry?

Currently, the resistance line of the triangle is at about $378 levels, a level close to today’s intraday highs. The bears are likely to strongly defend this level. However, if the bulls breakout of $378 and manage to close above the resistance line, the trade on the long side will set up.

Different traders use different methods to confirm whether the breakout is valid or not. Some wait until price moves 3% above the breakout level, others wait for three consecutive closes above the resistance level.

However, we have observed that the best breakouts never look back, hence, waiting for three days may lead to a missed opportunity. Therefore, we can wait for a closing above the resistance line of the triangle and initiate the long positions on the following day.

The breakout can face resistance at $400 and $420. However, we expect the virtual currency to scale both these resistances and rally towards its pattern target zone of $645 to $670.

Notwithstanding, even the most reliable patterns can fail. Therefore, our stop loss will be kept at $340. We don’t want to hang on to the trade if it falls back into the triangle. We shall raise our stops to breakeven as soon as Ethereum breaks out to new lifetime highs. From thereon, we shall trail the stops higher to protect our paper profits.

Note

The chart pattern suggests a resumption of the long-term uptrend in Ethereum. However, this will not get confirmed until the cryptocurrency breaks out and sustains above $380. Therefore, please initiate positions only on a breakout and close above the triangle. Entering presumptive trades may result in losses.

Featured image courtesy of Shutterstock. 

 

 

 

 

 

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Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Flirts with $8000 as Altcoin Bull Persists

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Bitcoin’s swift recovery was the main topic of the week, as the most valuable coin not just regained its steep losses, but hit a marginal new high towards the end of the period. The entire segment is experiencing capital inflows as the total value of the coins climbed above $230 billion for the first time ever after finally leaving the vicinity of the $200 billion mark.

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BTC breached the $8000 level before turning slightly lower on Friday, but despite the severely overbought daily chart, it is still trading near its all-time highs. As the long-term picture still suggests a deeper correction, investors should wait with opening new positions and traders should also control position sizes here. Key support levels are found at $7700, $7000, and $6700, while the recent key break-out level at $5000 still hasn’t been re-tested.

BTC/USD, Daily Chart Analysis

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Dash is still the most bullish altcoin from a technical standpoint, despite this week’s short-term correction, as the coin is trading above its prior all-time high, and this weekend, it looks ready to test the break-out high near $500. Support levels are still found at $400, $360, and $330, and as the long-term picture is approaching overbought territory, investors should only hold on to their positions here.

DASH/USD, Daily Chart Analysis

The other major altcoins are also mostly in bullish setups, with some of them already in the latter stages of this cycle, like Monero and IOTA, but elsewhere in the segment, there are still opportunities for both traders and investors. Let’s see the detailed long-term view.

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