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Passive money management strategy actively crushing stock pickers


The stock market is beating the tar out of professional stock pickers again this year. According to this morning’s Wall Street Journal more than 74% of actively managed mutual funds are lagging the S&P 500 (^GSPC) so far in 2014. Even when the numbers are tweaked so that funds are compared to their sometimes arbitrary benchmarks it’s the worst year for active managers since 2011.

It’s a disheartening reversal from 2013 when 50% of actively managed funds were able to keep up with the S&P but it should hardly come as a surprise. Over the long-term very few funds beat their benchmarks or the market as a whole.

Not that the numbers keep the industry from kneeling at the altar of stud money managers. The front page of today’s Journal features a 2,000+ word article about the comeback of Legg Mason’s “Mutual Fund King Bill Miller.” Miller’s Value Trust mutual fund outperformed the S&P 500 for a stunning 15 years before the financial crisis vaporized his relative gains, reputation and a good portion of the assets under management.

The market’s biggest advantage against active managers is that people are notoriously dumb when it comes to calculating returns, assessing risk and deploying assets. As Josh Brown points out, the un-ironic lauding of Miller rather nicely summarizes everything people do wrong when it comes to making investment decisions.

In the attached video Janney’s Mark Luschini says good old fashioned risk-aversion is responsible for much of the underperformance this year. “Everybody’s expecting a correction in equity prices. A lot of managers have braced for that by having excess cash in portfolio waiting for an opportunity to put it to work at a better price. So far it’s been steady climb into about a 7% return year to date and a lot of active managers as a result are paying the price.”

Luschini says that caution is warranted, even if it’s been costly so far. He’s got a roughly 2,000 price target on the S&P 500 by year end, a mere 2% higher than current levels. Against that potential reward he sees a fairly large amount of risk.

“The market is ripe for a pullback. We’re seeing full valuations in the making equity prices vulnerable to surprise whatever that may be, could be a spike in oil prices or shift in Fed policy later this year.”

Despite the risk with no where better to go Luschini thinks the mix of largely long stocks with a touch of cash on the sidelines will prove to be a winning strategy by year end. Even for those playing low-cost index funds banking a little profit makes sense by his thinking.

Ultimately the goal for individual investors isn’t beating the market but mastering their own emotions and saving money for a comfortable retirement.

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