Today Francesco Guerrera of the Wall Street Journal published a piece in which he postulated that a recent drop in correlation between sectors of the S&P 500 and the overall index itself augured well for stock pickers. More simply put, if stocks' performance is less driven by the index, it should be easier to pick winners.
Could be. But who are the pickers who'll be picking well? And how is the retail investor to pick from the pickers? Most importantly, how will the good pickers know when to stop picking and just go with the flow? And how do they cut expenses when it's better to be passive, without eviscerating their corporate culture? How will they guard against the temptation to extrapolate from their recent victories that they have been anointed by the gods of the market with outsized prescience, and therefore diminish their discipline, or have their judgment clouded? And if they do well, and bring assets into their firms or funds, how will they be able to scale their investment processes and provide succession planning to make certain that their success is sustainable?
Guerrera really shows his hand a few paragraphs in, when he writes "Aping an index, as so-called passive investors do... will be less viable options." Why are these so-called passive investors? "Passive" is a widely accepted term denoting the strategy of using index products to capture the returns that markets offer investors while minimizing fees. There's nothing so called about it. It is in fact active investors to whom the "so-called" moniker is most aptly applied, since active funds, as they grow, find it more and more difficult to make their returns differ from indices. Hence the importance of the "active share" metric that has emerged in recent years as an analytical/marketing tool.
Guerrera's argument that "it's a stock picker's market" is trotted out all too often, like some 7-year old mare at the Aqueduct, needed to put a warm body in gate 5. I remember when the highly esteemed Peter Bernstein made this assertion shortly before his demise in 2009. Has it been a stock-picker's market since then? Ummmm, no. In fact, so frequently does a pundit proclaim The Shining of the Stock Picker's Market that I can easily imagine writing an automated text generator to draft such articles. And its content would be scarcely more cogent, verifiable, or value-additive for investors, than the life's work of the Jack Nicholson character in the Stephen King classic: "all work and no play makes Jack a dull boy."