Superbowl team: online finance’s best

by on February 8, 2010

Football Team

In the wake of the big commercial fest Super Bowl yesterday (wait, there was a game yesterday??), I thought it would be interesting to put together a team of the Web’s best financial analysts, talking heads, and pundits.  An all star team of sorts for online finance.

Offense

Quarterback: The Big Picture, Barry Ritholtz.  Barry’s the go-to guy, calling the shots — the plays, as you will — of what’s happening as it’s happening.  With the eye of an on-field general, Barry’s commentary pulls no punches and provides a certain vision.

Wide receiver: Zero Hedge.  With all the flair, bling, and panache of an OchoCinco or Terrell Owens.  When he hits it big, he hits it, but when he’s off, well, he’s still a personality…

Running Back: The Pragmatic Capitalist.  Being a good back requires strength, grit, patience and explosiveness.  TPC’s coverage of core issues and broad/narrow analysis has upped it a notch this past year.

Offensive Line: Abnormal Returns, The Reformed Broker, Here, we’re looking for people who produce — day in and day out — without getting a lot of the headlines but contributing to the success of the rest of their teams.

Strength Coach: Gregor.us. You want to understand energy policy, technologies, and energy market dynamics — he’ll pump you up.

Kicker: Anal_yst.  Kicking is about coming in when it matters and producing under a lot of stress.  The Atlantic’s Anal_yst doesn’t post often, but when he does, it’s worth reading.

Offensive Coaches: David Merkel (The Aleph Blog), Felix Salmon. Offensive coaching is about teaching technique, hawkish understanding of the plays and assimilating what the defense is giving you.  It’s about being smarter than the other guys and finding the best way to exploit weaknesses.

Statistician: Bespoke Investment Group.  Wanna know anything about anything?  Bespoke consistently provides food/analysis for thought by slicing and dicing the data to help investors make better decisions.

Defense

Defensive line: BaselineScenario, Paul Kedrosky, Capital Spectator. These guys make sure that nothing gets through, picking up and tackling anyone that attempts to go through or around and putting pressure on the offense.

Defensive Coaches: Farnam Street, CrossingWallStreet, Jeff Miller, MarketSci. These guys are hawks, looking for any inefficiencies in the market, and trying to find ways to exploit them

Linebacking crew: Naked Capitalism, Calculated Risk, Leigh Drogan.These are the guys you DON’T want chaperoning your daughters.  They’re aggressive, quick, and really strong.  Always bringing the heat.

Defensive backs: Vix and More, Meb Faber, James Altucher. These guys are quick, some of the best athletes on the field.  Most importantly, they need to be able to cover the offense deep over the air while being strong/aggressive enough to step up and make a play on the ground.

All purpose player/Utility: Howard Lindzon, This athlete can do a little of everything, contributing all over the field (and off).

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Referee: IR Web Report.  Dominique has been on the front lines, calling it as he sees it for all issues surrounding financial reporting, for investors, analysts and firms themselves.

Cheerleader: DealBreaker, with coverage of the uh, underbelly of the ‘real’ finance world, this game is a better place with DB.

So, there it is.  Who do you think would win in a smackdown? You make the call.

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Study shows (again) that mutual fund hot hands quickly cool

by on February 7, 2010

As if we needed another study to spell this out, S&P published a recent study (.pdf) that undermines the hot money chasing performance in the mutual fund industry.  The study shows that very few funds demonstrate persistence — the ability of asset managers to consistently achieve top-quartile or top-half performance.

The amazing take-away from the study:

Over the five years ending September 2009, only 4.27%
large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile ranking over the same period.

Couple of things here:

  • Not one large-cap or mid cap fund maintained top quartile ranking.  Should investors just use large cap and mid cap indices for their exposure here regardless?
  • While still posting rather poor results, there are twice the percentage of small cap funds achieving top-half performance than large caps.  There still seems to be significantly more value in active portfolio management in the small cap arena.

The study’s ultimate takeaway:

Our research suggests that screening for top-quartile funds may be inappropriate.A healthy plurality of future top-quartile funds comes from the prior period’s second, third and even fourth quartiles. Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.

Compare that to the findings of Jagannathan, Malakhov, and Novikov in “Do Hot Hands Exist Among Hedge Fund Managers?”:

We find evidence of persistence in the performance of funds relative to their style benchmarks. It appears that on average more than 25% of the abnormal performance during a three year interval will spill over into the following three year interval.

[Hat tip: Pragmatic Capitalist]

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ETFs, overindexing and the power of financial brands

by on February 7, 2010

Just doing some thinking about the growth and future of the ETF industry:

In my eyes, ETFs began as a second-generation of mutual funds with the following characteristics:

  • Passively managed: ETFs were passively managed (though that’s changing), building upon Jack Bogle’s success at Vanguard.  Most research at the time clung to the Efficient Market Hypothesis and academics declared that trying to beat the markets was a fool’s game.  ETFs were this vehicle.
  • Cheap: They were cheap.  If theory shows that you can’t pick stocks and win the game that way, better to index and reduce fees for better long term success.  ETFs’ passive structure enabled fund sponsors to get big and compete on price, driving prices further downward.
  • New access: Beyond their philosophical underpinnings and reduction in asset management fees, ETFs also opened doors to new asset classes (commodities), markets (Peru), and strategies (leveraged short funds) that weren’t easily accessible or understandable for retail investors previously.

Things are a’changin

Things are changing.  With Blackrock’s purchase of Barclays Global Investors iShares (BGI), ETFs are no longer seen as a pure threat to the much larger mutual fund industry.  Diversified asset managers like Blackrock and PIMCO, mutual fund firms like Vanguard and Fidelity, and online brokers like Schwab are building and buying ETFs as part of a larger smorgasboard of choices for their clients.  ETFs fit in like precious metal and international funds into a firm’s offerings.

In a sense, ETFs have now become purely productized, competing against similar strategies in different structures.  Contributing to this trend is the fact that numerous ETF offerings targeting the same strategy/geography have all hit the market. With multiple offerings for almost every market and strategy in ETF land, overindexing has blurred any and all distinctions in investors’ minds about which securities to select.  Instead of doing the work to pick the most appropriate security, brand will ultimately trump other things.

While there may be 3 general, broad ETFs for investors to get Chinese market exposure, most retail investors have no idea that they’ve been structured differently, that the compositions of the indices these ETFs track are wildly different and have led and may very well lead to different performance outcomes.

Brands, brands, brands

What this means, then, is (like most things in life), competition in the ETF space gets muddled.  ETFs compete against mutual funds every bit as much as they do against each other and with this backdrop, the emergence of the firm’s brand will trump performance and index structure.  Index composition or the race to build a better mousetrap becomes less important.  Branding will sway investor decisions and assets away from the smaller, more innovative players, towards the larger, stronger brands.

Like everything commercial, brands wield power.  So true in the financial sector as well.

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Investment newsletters REALLY bearish — time to buy?

February 4, 2010

Wow! Expectations that U.S. stocks will drop at least 10% has risen to the highest levels since April 1984.
In a recent survey of investment newsletters by Investors Intelligence, Bloomberg reports that:

The following are results from Investors Intelligence’s
analysis of investment newsletters for Jan. 27 through
yesterday. The company determines the proportion of writers who
are bullish and bearish [...]

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Bloomberg beefing up reflects good things for financial industry

February 4, 2010

I’ve written about previously (here and here) about Bloomberg’s expansion and eventual dominance of financial media from news to data and consumer.  The WSJ reports today that indeed, Bloomberg is forecasting a respectable 10% growth rate for 2010 and plans to add an additional 1300 employees.
The revenue gains would come largely from a projected increase [...]

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Top 6 resources for piggyback investing

February 3, 2010

Piggyback investing is the art/science of building portfolios based on mimicking the stock picks of some of the best superinvestors — asset managers who have exhibited long term market-beating results.
Early research (check out some here) has shown that investors can achieve similar returns by piggybacking as the can by investing directly with the asset managers [...]

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Online Finance Wishlist: Can you show a brother some love?

February 2, 2010

So much progress has been made in online finance, but man,  we still have so much more to do! While the amount of investing information has exploded online, there are still major gaps in many of the top sites that seem like no-brainers to fix.
The following list — submitted to me over the past 12 [...]

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Smallcap performance: does size matter?

February 1, 2010

Long standing conventional wisdom has it that small caps exhibit a “size-effect” — they tend to outperform larger stocks in general over the long term.
MarketSci has done some great work digging in to why this is the case in a recent article. According to the post:
I break from conventional wisdom on the subject of the [...]

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Goldman saves its clients gold and outmaneuvers JPM in trade execution 2008-2009

January 31, 2010

In a hyperactive market, brokers continue to compete on speed.  According to the Tabb Group (quoted in this Bloomberg article), almost 61% of U.S. stock market activity and 70% of individual trades were part of a high-speed trading technique.  For brokers competing in this environment, technology and services are critical in executing these trades.
Institutional clients [...]

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