Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN
Tuesday, May 3, 2005
Q. Don, time flies (so we must be having fun, right?): the year isalready four months gone.A. Right, and so far equity funds on the whole are down a bit, after a badstart in January.
Q. What is the average fund's performance, year to date, anyway?
A. Equity funds are down about 5.1% (rescued somewhat by a big rallyFriday), and bond funds are up less than 0.2% on average, so they have losta little principal value too.
Q. Can you put some perspective on this for us?
A. Sure. Of course, there are no guarantees, and markets don't go up allthe time, so we tend to get impatient since we are such aninstant-gratification society. While the first four months were far from afinancial disaster for funds investors, it is true that there were very fewtypes of funds that actually had plus signs...
- Natural Resources Funds +5.0% (up over 15% at one point not manyweeks ago!)
- Specialty Diversified Equity Fds +4.9% (these include short-sidefunds and market neutrals)
- Utility Funds +3.4%
- Pacific Ex Japan Funds +1.1%
Q. And what were the ones bringing up the rear of the standings?
A.
- Gold Oriented Funds -13.8%
- Science & Technology -13.0%
- Small-Cap Growth -11.0%
- Telecomm Funds - 8.9%
- Small-Cap Core Funds - 8.4%
Q. A definite flavor of technology and smaller-stock funds.
A. Right; people seem to have been quite risk averse in terms of the stocksthey are buying versus selling.
Q. Can you put this into a somewhat longer-term picture for us?
A. Sure. And while it is not a lot longer, I think a six-month look back isquite interesting. That is, from the bottom of the market last October 22,just before the big pre- and post-election rally took hold.
Q. OK, what do you see through that window?
A. For exactly six months, the S&P 500 index was up 5.8%, so that setssomewhat of a benchmark. The average of all equity fund classes of sharesgained 6.4%, and the Lipper 1000, which tracks the 1,000 largest equityfunds, added 5.9%. So you could say we're "up about 6%," which inhistorical terms is pretty much on or a bit above the average for the verylong term.
Q. UP 6%?? THAT IS VERY SURPRISING. There is so much discontent out there!
A. You're right about that, and I think we have figured out the reasons.
Q. What are they?
A. Timing (the latest trend) and Selection (what kinds of funds people havethe most money in), and Volatility (investors don't like it).
Q. Well, we sure have spent most of 2005 heading slightly south.
A. Exactly. About three months out of four, with only February on theupside nicely. And down nine of the 17 weeks, with the bigger moves beinglosses rather than gains. Of course all the daily and weekly TV reportsfocus on year-to-date numbers... and it happens, unhappily, that the top ofthe election rally was December 30. We had another little top on March 7,but the leadership (minus technology and small caps) was pretty narrow. Thetone reminds me of much of 2004, when the market went sideways to down alittle on the excuse of election uncertainty.
Q. So let's go back to your factors: Timing?
A. Sure. Basically in the past six months the market first rose about 12%and then gave back about half of it. What the market has done for (or to)people lately is what forms their mood. If we had gone down 6% first and up12% lately, for the same net gain, people would be feeling much better!It's a perception thing. Since March 7, the market has been down between 5%and 6% -- that is almost 1% per week, and people notice that kind oferosion.
Q. Any more instances of unhappy timing?
A. Yes indeed. The only 5-year winners, Real Estate funds, lost 7% early inthe year and now are still down about 3%, and people recently fell in lovewith them. And of course people are still holding their breath about theirbond funds, where they put in a lot of money in 02 and 03, and which thenlagged in Ô04 and are flat in Ô05.
Q. And you mentioned selection. Haven't people put a lot of money latelyinto energy-type funds?
A. Only in relative terms, but a tiny amount compared with their overallholdings. But they have done this lately, and it has seemed to backfire. Welooked at the top ten performing equity-funds groups (out of 55) over thepast 6 months, and together they hold only 4% of investors' stock-fundassets. So the raw averages are doing better than the dollar-weightedaverages, which capture what the people's money has done! And that problemwas compounded by the worst ten funds types: they hold almost 20% (19.5) ofthe money.
Q. Can you give some examples of that?
A. Sure. Growth and Core funds have more assets than Value funds, and havedone about 4% worse.
Q. Any more instances of unhappy selection?
A. People have put a lot into Balanced funds and other mixed-equity types,feeling they would be safer. These are also down nearly 4% for the sixmonths, so people feel burned there too.
Q. And what about volatility, as you mentioned?
A. I think that that has been a very big factor in making peopleuncomfortable. Traders may like a market that moves around a lot, butinvestors (the greater bulk of funds people) get nervous stomachs from it.
Q. Have we been especially volatile lately?
A. More than average, especially for a market that has not been eitherzooming or crashing. It has just been very uneven on a daily basis. In the43 trading sessions since March 1, TEN of them, nearly one in four!, haveinvolved one-day moves of 100 points or more on the Dow Industrials, whichis what the public most watches. The day after all the hoopla about the200-point jump in the Dow, stocks fell back again. And we had a sillystreak that finally was broken yesterday: the previous NINE trading dayswere one up, one down, one up, and so forth. No consistency. That makesinvestors very uncomfortable, and makes them move to the sidelines to watchand wait.Q, Any other factors making the public a little uneasy?
A. Maybe. The president has been out on the road pushing for the SocialSecurity personal accounts plan for the past 6 days, and the market hasbeen heading south coincidentally. But that media attention has meant morepeople watching the market just when it has been sliding. Bad luck, butprobably a real actor.
Q. So what's the bottom line?
A. Investors, unfortunately, tend to chase recent trends. They buy what hasbeen hot late in the move, and tend to panic a little and move to cash whenthe market has been falling. So on average their money will do less wellthan the general market of funds averages do. It is a product of poortiming and adverse selection.
Q. The cure?
A. Change human nature, if you can! Failing that, diversify -- and stopwatching the daily and weekly wiggles, because they tend to make you movein the wrong direction more times than not. Think big picture and thinklonger term.
Q. Thanks, Don.
A. Thank you.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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