Over the holidays, I had time to catch up with an old collection. I watched The Cardinal (1963), a movie about a young Catholic priest who has to confront some hard issues such as interfaith marriage, sex outside marriage, abortion, racial bigotry, and the rise of fascism and war. I must admit those three hours flew by so fast.
But I was specifically impressed to discover that the Vatican actually bankrolled some of the films despite the bold themes — fun fact: the Vatican liaison involved was a young Joseph Ratzinger, who in 2005 became the 265th Catholic Pope as Benedict XVI and was buried on Thursday.
I wondered aloud about some uncomfortable topics and misguided practices of finance and whether we are boldly confronting these. I highlight three today.
Over the past 20 years, research from S&P Indices Versus Active (SPIVA) has demonstrated that after adjusting for risk, most active managers underperform.
In other words, even when good performance does occur, it does not persist.
The latest SPIVA scorecard (2022), which now includes data on global/international managers, shows the same results.
Upwards of 85 percent of fund managers lag their respective markets.
Takeaway: If you choose to hire an active mutual fund manager, the odds are against you. Even the Oracle of Omaha (Warren Buffet) agrees.
In his annual shareholder letter (2014), he advised the trustee of his estate to “put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost index fund” for his wife.
Second, the Folly in Portfolio Rebalancing. Common wisdom tells us that we should periodically rebalance our investment portfolio according to a target asset allocation.
But, why would you sell investments that are doing well to buy investments that aren’t?
This approach, championed by most financial advisers, operates on a misguided assumption that high-flying investments have nowhere to go but down, and that low-performing investments are hidden gems that will rise.
This crazy belief recently got one well-known American fund manager in the crosshairs of financial Twitter (FinTwit).
The manager, who holds a rather large single position (49 percent) of the portfolio after years of letting it appreciate, was questioned on his fund’s risk management capabilities.
MorningStar even downgraded his fund for “lax” risk controls. What many failed to appreciate was that the fund has produced a blistering long-term success — 17.93 percent annualised return compared to 10.3 percent annualised return by S&P Index — by simply letting winners ride and cutting down duds.
Takeaway: Let your winners ride (if there’s extra cash, add onto them) and cut down your losers.
Last but not least is “Bottom Up” investing.
Simply, it focuses on individual securities rather than on the overall movements in the securities market or the prospects of the economy and assumes individual firms with strong fundamentals can thrive regardless of global factors.
The idea that macro does not matter is lost on me. It is the soil that makes the sprout come up.
It is the garden that causes the seeds to grow, not the other around. Takeaway: Macro will always move the micro.
Wishing you all a fruitful 2023.
The writer is MD, Canaan Capital.
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