Close to the Edge?

What happened to active management this year?

Global Market Update - Front FlipSource: Lipper

The idea behind active management seems sound: hire experts to help you navigate the treacherous waters of the stock market and profit from their experience and know-how. Most people do this via mutual funds—a pooled investment account where small investors can hire a big money manager.

But there’s an issue here. It’s called the principal-agency problem. The manager’s interests and the investor’s interests may not align. Investors want performance. Big managers need to look good. They can do this by outperforming their bogies or by massaging their numbers—or both.

But beating the market is hard: there are only two ways: time it just right, or pick winning stocks. Timing was particularly difficult in this year’s steady, up-trending market. And stock-picking has also been rough—over half the year’s move is from just 10 stocks—Apple and Microsoft prominent among them. Because these mega-caps have rallied so much, if managers didn’t overweight them—a gutsy call—they had a big performance hole to fill. And what they usually use to augment returns, selected small-cap and international shares, has been a drag on performance.

As a result, over 90% of mutual funds have underperformed the S&P 500 this year. That doesn’t mean active management is broken—people still need help. But it does mean that this was an especially tough time for them to beat their bogies.

It’s hard to discern the signal from the noise with short-term numbers—so much changes from year to year. What’s most important is if the manager is helping you meet your goals. That, and integrity. That’s a performance factor that can’t be faked.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By |2017-07-17T12:23:11+00:00December 1st, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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