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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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4.8 stars on average, based on 4 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

Daily Analysis: Oil Extends Rally as Nasdaq Leads Stocks Higher

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2749 1.38%
DAX 12,483 0.18%
WTI Crude Oil 63.58 1.29%
GOLD 1330.00 -0.16%
Bitcoin 10,14 -0.09%
EUR/USD 1.2295 -0.28%

US equities built up some bullish momentum towards the end of the week, ignoring the technical damage that the volatility-crash caused, and the major US indices rallied into the close today, squeezing the shorts. The Nasdaq, which led the rally as we expected, took out the key 6850 level in late trading and added another percent to, incredibly enough, finish only a hundred point of the all-time high.

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NASDAQ 100 Futures, 4-Hour Chart Analysis

Should the tech benchmark retest the high next week, it will be amid very strong negative divergences, but hey, those divergences have been building for months now. The rally in equities was boosted by the dip in Treasury yields, especially at the long end of the curve, while Amazon continued ot lead the charge, closing right at the historic $1500 per share level.

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Russell 2000 (Small Cap) Index, 4-Hour Chart Analysis

The advance in the Dow and the S&P 500 is much less convincing and with small caps also lagging the tech-behemoth juggernaut, we remain skeptical regarding the sustainability of the move. That said, if the broader indices stay above the key levels, we will be trading the long side in equities, even as from an investment standpoint, valuations are still way above acceptable.

Forex Markets and Commodities

The lackluster performance of European and Asian stocks adds to the negative divergences, especially as the Euro stopped appreciating against the Greenback, and that should be helping stocks of the old continent. Of course, the DAX and the EuroStoxx 50 could play catch-up next week, barring another surge in the common currency.

EUR/USD, 4-Hour Chart Analysis

The most-traded forex pair remains in a short-term downtrend, as it failed to recapture the previously broken rising trendline, and the commodity related risk-on currencies also remained under pressure. The Canadian Dollar did bounce back off yesterday’s 8-week lows, boosted by the much hihger than expected inflation release and the jump in the price of crude oil.

USD/CAD, 4-Hour Chart Analysis

Oil benefited from the positive shift in sentiment, while the Syrian situation, which took a backseat in the headlines, still supports the rally. The Japanese Yen and gold were stable amid the risk-rally and that adds to our suspicions regarding the upside potential form these levels.

Cryptocurrencies

The segment started out the day with a strong bounce that carried the major coins higher by around 10%, but given the recent steep short-term pullback, even that wasn’t enough to turn the tide, and the day ended with an (almost usual) sell-off after the US close. Despite the recent volatility, the overall picture is still encouraging, with most of the majors being safely above the crash lows, likely in a new bullish cycle that has the potential to last for several more weeks or even months.

While new all-time highs are it guaranteed following the 60-70% declines among the largest coins, but even without those, plenty of upside potential is left for investors. With that in mind, investors should hold on to their coins and even add to their holdings on the short-term dips like the current one.

ETH/USD, 4-Hour Chart Analysis

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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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Analysis

Technical Analysis: Majors Stage Rally but Strong Levels Still Ahead

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The cryptocurrency segment has recovered from a broad correction today in early trading, with the most valuable coins all turning into green during the session, despite the bearish start to the overnight session. With bottom-to-top gains of up to 15%, the rally helped in easing the worries of bulls, especially in the case of the relatively weaker coins.

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Bitcoin and most of the largest altcoins remained stable during the selloff, and BTC recaptured the $10,000 level quickly after trading as low as $9600 overnight. The initial rally topped out near $10,400, and the coin is trading back near the $10,000 level, as the bullish momentum faded away somewhat.

BTC/USD, 4-Hour Chart Analysis

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That said, we expect the uptrend to continue even if the correction could still carry Bitcoin lower. Further strong support is found between $9000 and $9200, while targets are ahead at $11,300, $13,000, and $14,250.

ETH/USD, 4-Hour Chart Analysis

Ethereum showed strength during the bounce again after yesterday, together with the early leaders of the rally, and although the coin dipped below the $845 level in the second half of the session, the signs remain positive for bulls. Support levels are now found at $780, $740, $625 and $575, while resistance is ahead near $910 and $1000.

(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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4.7 stars on average, based on 115 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: Stocks Refuse to Fall Even as China Takes Over Key Insurer

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Although it should have been a very quiet week in China, thanks to the New Year celebrations, the recent surge in volatility and the plunge in equities didn’t pass without consequences in the key market. Just shortly after effectively shutting down the Chinese version of the Volatility Index (VIX) (presumably to calm the markets…), one of the main actors of the monstrous financial web, Anbang, of the country had to be taken over to avoid a systemic event and stop the “creative” financial engineering that involved criminal activity (the shadow of 2008).

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China will likely need many more duck-tapes like this one if it wants to stop the largest credit bubble in human history to collapse, but for now, the solution could work. Equity futures edged higher since yesterday’s volatile close, and as the major US indices are holding up well, not far off last Friday’s highs, our bearish short-term view might have to be revised.

Nasdaq 100 Futures, 4-Hour Chart Analysis

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As we discussed before, the long-term uptrend is intact, and we expect at least a re-test of the highs even if we are in a large-scale top formation, but we thought that the technical damage caused by the crash three weeks ago would require more healing.

We are not turning bullish just yet, but today’s session could finally decide if we the BTFD-crowd is strong enough to turn the tide after the choppy drift lower this week. We are still focusing on the Nasdaq, as the broader market seems to be following the lead of the tech benchmark, and a move 6850 (in the Nasdaq 100 futures, and still the 2735 level in the S&P) would be a very positive sign for bulls.

DAX Index, 4-Hour Chart Analysis

The German DAX index is also showing some tentative short-term relative strength although it remains almost 10% below its all-time high, and it remains a strong negative divergence to be monitored.

Forex Markets Quiet

EUR/USD, 4-Hour Chart Analysis

The main pairs are trading in a choppy narrow range today after the strong move in the Yen and the drop in the USD yesterday. US Treasury Yields are edging lower today, helping the calm in equities and currencies, but on a bearish note, commodity currencies failed to rebound so far, and they were providing good signals since the crash. Day-traders should note that the Canadian Dollar will likely be very active again, with the Canadian CPI report coming out pre-market.

To sum the outlook up, we are still leaning on the risk-off side here regarding the short-term outlook, but we wouldn’t bet the farm on that, as there are mixed signals before the weekend.

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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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4.7 stars on average, based on 115 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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