Should You Stick to the Straight and Narrow?

I recently  read an interview with the decision maker of an actively managed materials sector fund.

The chart compares that fund (in light brown) versus iShares Global Materials (MXI), which I own for some clients, since the inception of MXI.

There are a couple of things here worth noting. For most of the time the ETF outperformed the active manager, but what this chart does not really capture is that over the last 12 months the actively managed fund has cleaned the clock of MXI. MXI is flat in the last year; the active fund is up 25% or so.

What I think this reveals is an evolution of the theme. Success in the last 12 months has required more of a sniper approach than a shotgun approach (footnote Richard Kang on that saying). As a cycle ebbs and flows there are periods where going narrower matters more than at other times.

You would either need to pick a stock or a very narrow product or realize that even the correct broad sector pick might not always be a home run. I would note that an overweight to MXI, flat over 12 months, would have added relative outperformance versus the S&P 500 even if buying Potash (POT) would would have been better.

While this post is a touch nuance-y, it is important for anyone willing to invest at the sector level to realize that at times narrow will matter. There will be times when narrow will hurt. With the path you choose, there will be times where your portfolio is better off for what you prefer and other times where your portfolio will be worse off for what you prefer.

This is the sort of thing to think about ahead of time because making a change midstream (especially going from broad to very narrow) is likely to result in performance chasing, and performance chasing is often done after the move has occurred, or  at a time of emotion where a big move has come, someone on TV projects that recent past as continuing forever, more people buy in and then comes the big airpocket.

Comments

[dsrtwriter:]

very timely comment. I notice, for example that the CGM Focus fund has had an incredible return, not only last year,but over twenty percent this year, while so many other funds have languished.

That probably means this is not the time to throw out the latter and go to the former, but it goes against human nature, and is as difficult for me as for anyone.

2008 Jul 23 02:58 PM