Seeking Alpha

WallStreetRanter's  Instablog

WallStreetRanter
Send Message
An anonymous blogger from the 'financial industry' writing about the economy, markets, politics, corrupt organizations, or whatever else seems worth discussing.
My blog:
Wall Street Rant
  • Is This Bull Market Fundamentally Driven? (A Look At PE Expansion)

    www.wallstreetrant.com

    This post over at The Big Picture Blog which had a listing of Bull markets of 20% or more without a 20% correction got me thinking about Bull Market fundamentals. Some people talk about this bull market being driven by the Fed and not fundamentals (me included). I can easily point at a Shiller PE of 23 to highlight overvaluation but I wanted to look at it another way, so I focused on PE expansion.

    Fundamentally driven bull markets should rely more on cyclically adjusted earnings growth and less on investors willingness to pay ever increasing multiples on those earnings. To look into this I decided to focus only on bull markets of 100% or more. I looked at the Starting and Ending Shiller PE using Robert Shiller's online data and updated it with daily pricing data for the important dates (as he only has monthly prices). Then I divided the Bull Market gains by the amount of PE expansion to see how much gains investors were receiving per unit of PE expansion. The results are below, sorted by most fundamentally driven to least fundamentally driven. The results are quite interesting.

    (click to enlarge)

    Take a look at the 1974-1980 Bull Market compared to today....The magnitude of the advance is similar between the two but the 1974-1980 advance only relied on a PE expansion of 2.2 vs 11.1 today. You will also notice that those that relied least on PE expansion tended to experience smaller subsequent bear markets. The top 5 averaged a bear market loss of 30.4% vs the bottom 4 which averaged a 48.5% loss. If history is any guide people should expect that the next bear market will be deeper then average because this bull market is lacking a fundamental underpinning.

    UPDATED: 3/19/2013 - Corrected chart to reflect the proper starting PE of 8.8 for the bull market starting 6/13/1949. However, this did not change the overall ranking of any of the bull markets.

    Mar 19 9:05 PM | Link | Comment!
  • Performance Of Morningstar's New Analyst Ratings For Mutual Funds In 2012

    Performance of Morningstar's New Analyst Ratings For Mutual Funds in 2012
    -------------------------------------------------------------------

    Last year I wrote about Morningstar's new analyst ratings for mutual funds (here as well). These are different from their Star Ratings in the fact that these are meant to be "forward looking". From Morningstar (bold added by me)

    "The Analyst Rating is based on the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years."

    Now it should be clear that these ratings are longer-term in nature so take the following breakdown with a grain of salt but I said I would follow-up on these so I am.

    First lets start with a review of what the distribution of Morningstar's Analyst Ratings looked like at the start of 2012

    (click to enlarge)

    While the distribution of ratings has gotten a little better it remains a mystery why Morningstar has an allergic reaction to assigning negative ratings. As of the start of 2013 they have now rated 1069 funds but only 52 (or less then 5%) have negative ratings. Although the neutral ratings have increased to 28%, Bronze to 25%, Silver is down to 24% and Gold down to about 18%.

    Without further ado, below is how the rated funds performed in 2012. These only include funds rated at the start of 2012.(click to enlarge)

    Not much really stands out after the first year. While their was a slight positive result for Gold and Silver rated funds, Neutral rated funds did even better. As for Bronze and Negative rated funds, outperformance was pretty much a coin flip.

    Below is the Average Rank for each, as you can see Neutral rated funds performed the best and Negatively rated funds performed the worst.

    (click to enlarge)

    Take this for what it's worth, which at this point is not much because full market cycles are indeed a better measuring stick. For instance, in 1999 and 2006/2007 a lot of bad managers did good thinking the unsustainable was in fact sustainable while a lot of good managers did bad as they realized irrationality when they saw it. However, this is at least a starting point for looking at the performance of these Analyst Ratings.
    -------------------------------------------------------------------
    The Wall Street Ranter
    www.wallstreetrant.com

    Feb 19 9:52 PM | Link | Comment!
  • My 3 Favorite Mutual Fund Managers For Navigating The Market Going Forward

    My 3 Favorite Mutual Fund Managers For Navigating The Market Going Forward
    -------------------------------------------------------------------

    The mutual fund world has no shortage of managers. But when it comes to finding managers which have a rock solid understanding of market history, a real grasp of the true drivers of long-term investment returns, a strategy for capturing those returns over time, an eye for avoiding market fallacies that lead the herd and most importantly -- know what it means to be stewards of Other People's Money. Well, that list is much shorter.

    Most of the investment landscape is filled with products in a race of relative performance. It is rarely about making decisions to maximize long-term returns. Too often it is only about making decisions to outperform some index -- without making any decisions that might lead to temporarily underperforming that index, even when it is the best long-term decision. Therefore, it is a world of closet indexers and many of those who don't closet index still wouldn't dare be anything other than 100% invested.

    While there are some very good managers who only manage funds with less flexible investment mandates, my purpose here is to highlight my 3 favorite mutual fund managers with the flexibility for navigating the markets . This isn't about past performance -- these are the managers I would feel most comfortable allowing to manage my money over the next full market cycle for the reasons described at the start of this post. Is it subjective? Of Course! This is MY list (and in no particular order).

    Rob Arnott (Pimco All Asset and Pimco All Asset All Authority)

    At Pimco essentially everything is managed "in-house". That is except for these 2 funds sub-advised by Rob Arnott of Research affiliates. These are tactical asset allocation strategies and the only limitation for Rob is that he must use Pimco Funds and abide by these very loose guidelines.

    Rob Arnott is a great "big picture" guy and truly understands valuation. He is also well known for his fundamental indexes.

    John Hussman (Hussman Strategic Growth)

    This is not Hussman's only fund but it is his flagship fund and where he has the majority of his own investable assets. Hussman invests the portfolio like a traditional equity fund and then "hedges" using index options and futures based on his outlook for the market in general -- which has resulted in a highly hedged stance most of the time.

    Someone might look at his performance year-to-date (-6.8%) while the market is up 11.1% or point to his performance over most of the rally since 2009 and think I'm crazy. Hussman is catching a lot of flak recently and you can see his response in one of his commentaries from February "Notes on Risk Management - Warts and All". But as I said before -- this isn't a backward looking list of my favorite mutual fund managers.

    There aren't many that understand the drivers of long-term returns more than Hussman and I think his ability to stay true to his strategy will prove out in the long run (the next full market cycle). Even if you don't invest in his fund, his weekly commentaries are always worth the read.

     

    Ben Inker (GMO Benchmark-Free Allocation and Wells Fargo Advantage Absolute Return)

    This is less a story just about Ben Inker himself and more about all the people at GMO including Jeremy Grantham and a more recent addition of James Montier. It is a good meeting of the minds there at GMO and their Asset Allocation Team.

    The GMO Benchmark-Free Allocation Fund is actually not open but they started a distribution agreement with Wells Fargo in March. Therefore the strategy can be accessed in mutual fund format through the Wells Fargo Advantage Absolute Return Fund. I personally like the GMO name for the fund better -- but I am assuming for marketing reasons Wells Fargo chose the "Absolute Return" name. I am personally not a fan of most "Absolute Return funds" I see in the market, as most are nothing more than a giant ball of derivatives (but that's another story).

    Wells Fargo already had a fund (Wells Fargo Advantage Asset Allocation) sub-advised by GMO but the investment mandate did not give GMO very much flexibility in the allocation. You can see the difference this flexibility made below.

    Jeremy Grantham talks about the advantages of flexible investment mandates, as well as the "career risk" it introduces in GMO's most recent quarterly letter (definitely worth the read).

    There you have it!

     

    It is important to remember this is not my 3 favorite managers for the next month, or the next year. These are my favorite mutual fund managers for the next full market cycle. Some will perform better than others during different parts of the cycle. For instance, if the market were to begin falling tomorrow, based on current positioning, I would expect John Hussman's Strategic Growth to perform best, then Rob Arnott's All Asset Strategy (either one), then Ben Inker's Benchmark-Free strategy. And obviously opposite if it continued up.

    The Wall Street Ranter

    Apr 27 1:08 PM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.