Posts filed under “Markets”
Given yesterday’s monster $66B Trade Deficit (see chart below), perhaps its time to look at some other factors that might be influencing both US and Foreign Markets.
Many people’s working assumption has been that markets outside the US were closely correlated to the US dollar. Indeed, up until the autumn of 1999, equity markets outside the U.S. loosely tracked moves in the dollar.
Since then, however, they have diverged from the buck, and instead tended to mirror the performance of the S&P 500.
This raises several questions, but the one that leaps to my mind first is if overseas markets are tracking the S&P500, then why should investors bother diversifying overseas? There are plenty of other good reasons to do so, but uncorrelated returns to US markets may no longer be one of them.
Michael Panzner notes that it comes down to several factors in no particular order:
1) more U.S. players (hedge funds, broker-dealers) are "exporting" the arbitrage and investment strategies that use in the domestic market to other parts of the world;
2) the growth of the internet and of 24/7 business/financial news coverage, especially over the past five years, means investors all over the world are immediately aware of new developments and market trends occurring elsewhere;
3) the heavier-weighted (i.e., largest cap) stocks in most mature markets tend to be multinationals (think Sony, BP, Deutsche Bank, HSBC, etc.) which trade more in line with each other than with domestic peers, sectors, or indices;
4) expanding global trade has caused some degree of convergence among many leading economies, as well as supply-and-demand patterns for goods such as oil;
5) correlations tend to increase in bear markets (of course, the market has been rallying since 2003, but sentiment-wise, one could argue that what we have now is unlike the bullish euphoria we saw in the last half of the 1990s).
I am sure there are more, but you get the idea.
Among individual investors, David Swensen isn’t a household name. But he is an icon in the world of big institutional money managers such as endowments and pension funds.
Mr. Swensen’s fame comes from his oversight of Yale University’s $15 billion endowment fund, which, since he was hired 20 years ago, has returned an average of 16% a year, far outpacing the market and other funds run for universities. Before arriving, Mr. Swensen had never overseen an institutional portfolio, and he brought to the job an unconventional approach for dividing up the portfolio among different asset classes. He is now Yale’s chief investment officer.
Five years ago, Mr. Swensen set out to write a book that would bring the lessons he learned to individual investors. Instead, he says he found that the option most accessible to individuals — mutual funds — often makes it impossible to beat the market. And even when they do find good managers, individuals end up shooting themselves in the foot, he says.
So while Yale relies on actively managed portfolios, Mr. Swensen says individuals should just stick to index funds, especially those run by not-for-profit companies. He also likes exchange-traded funds, which trade on exchanges like stocks, but says "buyer beware."
Excerpts from an interview with Mr. Swensen follow:
WSJ: You had hoped to give small investors a road map for beating the market based on Yale’s approach to investing. What happened?
Mr. Swensen: I found when I started down that path that individuals just don’t have the same set of investment opportunities available to them that we do here at Yale. In fact, the evidence showed me that the mutual-fund industry has completely failed to provide reasonable active-management returns to individuals.
WSJ: To say that it completely failed — that’s a pretty harsh statement to make.
Mr. Swensen: I think the evidence is there. The crux of the failure is with the for-profit management of funds for individuals. Mutual-fund managers have a fiduciary responsibility to investors. Obviously, if they are operating in a for-profit mode, they have a profit motive. When you put the profit motive up against fiduciary responsibility, that fiduciary responsibility loses and profits win.
continued below . . .
Yale Manager Blasts Industry
THE WALL STREET JOURNAL, September 6, 2005