New Norm for Stock Investors: Performance Matters; Stocks Are No Longer Moving in Tandem With Broad Market

New Norm for Stock Investors: Performance Matters

Stocks Are No Longer Moving in Tandem With Broad Market

ALEXANDRA SCAGGS And DAN STRUMPF

March 9, 2014 1:49 p.m. ET

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Stock pickers are starting to breathe a sigh of relief.

After years of moving in lock step on the back of global economic shocks, individual stocks increasingly have been dancing to their own tune.

This is long-awaited good news for stock pickers, who in the years after the financial crisis found that with many stocks moving in tandem with the broad market, it was even harder than usual to deliver market-beating returns.

More investors have begun gravitating back to so-called actively managed strategies, where money managers select specific companies in which to invest.

Actively managed stock funds have brought in a net $1.3 billion this year, according to Morningstar’s most recent data, on top of $9.8 billion that came in the door in 2013.

While small, that contrasts with the trend seen between 2009 and 2012, when investors yanked about $360 billion out of actively managed U.S. stock funds.

“As our confidence rises in stock selection, we’re increasing that portion of our portfolio,” said Danilo Kawasaki, co-founder of Gerber Kawasaki Wealth & Investment Management, which manages $225 million.

The actively managed portion of the firm’s portfolio has risen to 75%, from 70% a year ago. “If we have a conviction in a few ideas we’d much rather distribute cash toward those stocks” rather than an index fund or ETF, he said. For Mr. Kawasaki, some calls already have paid off—his firm held Tesla Motors Inc. for months during its meteoric rise, he said.

The shift can be seen in correlations, which measure the tendency of stocks to move in the same direction.

Correlations between individual stocks in the S&P 500 have fallen to near their lowest level since the financial crisis, according to Strategas Research Partners LLC.

The 65-day average correlation of stocks fell to 0.52 in January. While the correlation briefly fell lower in 2011—to an average 0.51 in February—the measure rose to 0.84 later that year. A correlation of 1 would mean that all stocks traded exactly in lock step. From 2009 through the end of 2013, the correlation was an average 0.63.

Another data point: Since August 2013, there have been an average of 1.3 days a month when 90% of stocks in the S&P 500 moved in the same direction, whether up or down, according to Strategas. That marks a sharp drop from August 2011, when there were 12 days when 90% of stocks in the S&P 500 moved in the same direction during a single session.

“Active managers are going to do better” this year, said Douglas Wilde, chief portfolio strategist with UBS Wealth Management. “You would expect… the cream to rise to the top.”

But there have been head fakes before when it comes to declines in correlations. Investors and advisers say if extended turmoil returns to the markets, perhaps due to a worsening of the situation in Ukraine or serious financial troubles in China, stocks likely would start moving in lock step again, disadvantaging stock pickers. And indexing continues to draw money: Passively managed funds saw inflows of $63.8 billion last year and $9.8 billion so far in 2013.

For now, however, they point to several reasons for the shifting dynamic.

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There are fewer concerns about dire economic outcomes than there were after the financial crisis and again during the euro-zone crisis in 2011.

Meanwhile, the Federal Reserve is reducing the bond purchases it has been using to support the U.S. economy, an effort that many investors believe contributed to a “rising tide lifts all boats” kind of market, as was seen in 2013 when the S&P 500 rose 30%.

Instead, with a moderately growing economy and less Fed stimulus, investors expect returns for stocks to be in the high single digits this year—the kind of backdrop where individual stock selection can make a big difference.

Michael Tiedemann, chief investment officer of Tiedemann Wealth Management, said this year he has allocated more money to hedge funds with “long-short” strategies that bet on individual stocks going up or down. Currently, about 14% of the money he oversees is with such investors, up from about 10% to 12% a year ago.

“If you’re in an environment where everyone is focused on Greece or Chinese growth or what the Fed is going to do…important company-specific announcements are sort of lost in the weeds,” said Mr. Tiedemann, whose firm manages about $8 billion.

David Rolfe, who manages the $1.5 billion RiverPark/Wedgewood Institutional Fund, said he is seeing signs in his portfolio of greater differentiation among stock performance.

Mr. Rolfe’s biggest holding, Berkshire Hathaway Inc., has risen 3.5% this year, outperforming the S&P 500’s 1.6% gain. Last year, the shares trailed the index. M&T Bank Co., the only stock his fund bought last year, is up 2.5% year to date, and lagged behind the broader index last year as well.

“The sorting-out process has to return to fundamentals,” he said.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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