Posts filed under “Markets”

Still Waiting for the Big Caps (Same as it ever was)

Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to
I’m still waiting…I’m still waiting…I’m still waiting…
I’m still waiting…I’m still waiting…I’m still waiting…
I’m still waiting…I’m still waiting…

-Talking Heads, Crosseyed and Painless (Remain in Light)


Terrific observations from Barron’s Mike Santoli, who notes the inconvenient facts about the Big Cap stocks, and the crowd of managers and strategists who have been oh-so-wrong in their guesses about them.

They are still waiting for the Big Cap outperformance to begin:

"For at least two years, many Wall Street strategists and fund managers have been plying the line that the time for large-cap stock outperformance was at hand. So far, however, hugeness has remained a liability to portfolio performance.

The charts and tables have become familiar, showing large-caps’ valuations relative to the rest of the market is at multi-year lows. Smith Barney explains that the forward price-earnings multiple of the 25 largest S&P 500 companies is now at 90% of the overall S&P 500 multiple. That’s a 20-year low; the last time it got under 95% was in 1991.

Another point in favor of size: The big names’ dividend yields are at 120% of the broad index, handily a 20-year high.

A UBS analysis shows that as of Sept. 30, the top 50 stocks in the index accounted for less than 49% of the S&P’s market value, down from 58% in 2000. In just the past year, the largest 50 names have lost four percentage points of their weighting in the index.

All of these data items, on the surface, seem to argue for the heftiest stocks being the better risk/reward bargain in the market.

But hold on: Very similar relative-value arguments could have been made — and were indeed made — in favor of mega-caps since at least mid-2003. Yet that hasn’t kept them from declining versus smaller shares. (Most recently, a widespread selloff engulfed even Dow stalwarts ExxonMobil and Altria, as a mini-inflation scare helped knock the index back 276 points to 10,292).

The largest stocks were the area of some of the greatest excesses in the bubble years. In fact, it could be plausibly said that the only real bubbles were in tech and mega-caps. Thus the big guys have borne the brunt of the market’s P/E multiple compression. At the market top, the 25 largest names traded at 20% premiums to the index. Who’s to say that now they’re poised to outperform just because they’re at a 10% discount?

Also worth noting is the sentiment profile of large-cap shares. They tend to be ardently loved by the Street, based on consensus analyst recommendations. And they have microscopic short-interest levels. Counter-trend moves usually come against, not with, the grain of prevailing sentiment.

Quite possibly, however, mega-cap outperformance would happen in the context of an overall weaker market. In other words, they might go down less than the average stock if the market enters a prolonged slide.

This dynamic, writ small, occurred during last week’s selloff. The biggest 50 stocks fell 2.1%, bettering the S&P 500′s 2.7% drop. But it’s hard to make a compelling case, based on the recent action, that the giants will lead any coming rallies."

Same as it ever was.


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Yale Endowment Manager: Index

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,,SB112597100191832366,00.html


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