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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.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Analysis

Long-Term Cryptocurrency Analysis: Correction Deepens but Leaders Remain Stable

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As the major cryptocurrencies got hit hard this week, losing around 20% on average, the long-term picture in the segment got close to an entry point for investors. The overbought readings that developed during the late-April rally are now cleared and although the short-term trends are still clearly negative, we still expect the coins to resume the recovery. With that in mind, long-term investors could start accumulating the relatively stronger coins.

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On a negative note, even the leaders violated key support levels during this week’s selloff, but the secular long-term trends are not yet in danger. The prior leaders Ethereum, EOS, and IOTA are still in the center of attention, as we expect them to form a bottom soon. Bitcoin and the other relatively weak coins, like Litecoin, Monero, Dash, and NEO are still lagging the form a technical perspective, but they are also well above the support levels that would indicate an end of the secular bull market.

BTC/USD, Daily Chart Analysis

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Bitcoin is below the key $7650-$7800 support level and it remains the biggest drag on the market, despite a brief period of relative strength this week. The upper boundary of the base pattern that we identified in April is found near $6150, with a weaker zone around $6500, and with the short-term trend clearly being negative, the latter might be tested before a bottom forms. Further resistance is ahead at $8400, $8700, and between $9000 and $9200, and traders and investors still shouldn’t enter positions here.

ETH/USD, Daily Chart Analysis

Ethereum is testing the $555-$575 support zone after violating the $625-$645 range, with the declining short-term pattern being intact. A bottom near the $500 would still keep the recovery intact, but the correction low might already be in, and investors could already add to their holdings here. Further resistance zones are ahead between $735 and $780 and near $845, while support is found near $450.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 257 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Pre-Market: Oil Plunges Below $70 as Markets Mixed Before Long Weekend

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Financial markets are relatively calm today, despite the hectic week that was highlighted by the Turkish currency crisis, wild swings in bonds, and a step back in US-North Korean relations. Stock markets turned lower globally, with US equities outperforming the rest of the world, essentially drifting sideways all week long, thanks to the slight correction in the Dollar’s rally, and the dip in Treasury yields that was triggered by the dovish Fed meeting minutes.

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S&P 500 Futures, 4-Hour Chart Analysis

Today, the durable goods report came out before the opening bell and although the headline number was a tad worse than expected the more important core figure beat the consensus estimate, helping the slightly dampening economic outlook, even as yields continue to fall, especially with regards to long-dated Treasuries.

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EUR/USD, 4-Hour Chart Analysis

Although emerging market currencies are way less volatile today than recently, despite the rebound in the Dollar, equities shed their early gains and are now slightly in the red. The all-important EUR/USD pair hitting yet another 6-month low near 1.1650, and the test of the key long-term 1.1450-1.15 zone looks more and more likely in the coming weeks, even as the pair is a bit oversold.

Energy Markets in Turmoil as OPEC Signals Production Increase Again

WTI Crude Oil, 4-Hour Chart Analysis

It seems that the crude oil market is in for a strategic switch yet again, as the OPEC, together with Russia made it clear today that the price of the Black Gold finally reached a desirable level. The cartel will be targeting a higher level of output later on this year in order to keep the US shale players under pressure by capping the advance in the key commodity’s market.

The WTI contract reached a 4-year high at $72 per barrel recently and the Brent contract which is more exposed to Middle East woes rose as high as $80 per barrel after trading below the $30 level just two years ago. The last phase of the advance extended above the level where a large portion of the shale plays turn profitable, and as global growth worries also surfaced, the commodity entered a selloff this week.

Gold Futures, 4-Hour Chart Analysis

Safe haven assets continue to be bid despite the relatively calm environment, and gold hit a two-week high today despite the bounce in the Greenback as buyers are back after the wash-out plunge below $1300. With the long-term setup and fundamentals still being favorable for the precious metal, the short-term downtrend line is in danger here.

As US markets will be closed on Monday, which usually favors an active session, volatility might remain high throughout the day.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 257 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Recommendations

Trade Recommendation: Intact Financial

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Technical Overview

  • Since double-bottoming in 2008 and 2009 at $26 (violet horizontal trendline in Figure 1), Intact Financial (IFC.TO) has enjoyed a four-fold increase. During the 2013, 2016 and 2018 corrections, the stock found support at a long-term trendline (support – green trendline; retests – green arrows).

Figure 1. IFC.TO Weekly Chart

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  • Zooming in, after topping in November’17, IFC completed a H&S pattern (tops – yellow ellipses, neckline – yellow trendline in Figure 2).
  • In January, March, April, and May, all up-moves halted at a well-defined short-term resistance (red trendline). Yesterday (May 25), the stock managed to break and close above the resistance.
  • Today, the stock closed in positive territory, whereas the Financial sector (TTFS.TO) declined by over 0.5%.
  • The $95 level had served as support on multiple occasions in 2018 (purple horizontal trendline and arrows).

Figure 2. IFC.TO Daily Chart

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Implications

  • The bounce off of the long-term support and the break above the short-term resistance are considered constructive.
  • The stock is expected to find support in the $95 – $96.50 range during pullbacks (i.e. at the red and purple trendlines).
  • The downward target from the H&S pattern was nearly met during the May decline (target – $92.25 – white vertical trendline in Figure 2, May 9 low – $92.65 – last purple arrow).

Outlook

  • Short-term bullish as long as the stock remains above $95
  • Long-term bullish as long as the stock remains above its long-term support (green trendline in Figure 1).

 Trade Recommendation

  • Buy the stock at current levels ($97.50 at EOD on May 24).
  • Target: Half at $101 (the January low which served as resistance in March – second red arrow). Other half at $108 (origin of the late 2017 decline).
  • Stop: Half upon a close below $95. Other half upon a close below the long-term support (currently at approximately $93.50).

Disclosure: No position yet but may initiate at any time. Will likely recommend the stock to my clients as a potential play within the financial sector.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.8 stars on average, based on 12 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” (http://ifta.org/public/files/journal/d_ifta_journal_18). Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms. http://www.linkedin.com/in/konstantindimov




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