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Fund Manager Scorecard

Each year Standard and Poors produce a scorecard of the performance of a regions fund managers against their comparison indices. You can find the raw scorecards here.

I decided to download the one for Australia and tidy up the data a little so it was more presentable. The chart below looks at the number of funds in various categories that have failed to match or beat their benchmark over a 1, 3, 5, and 10 year period. Just a reminder this table shows the number under performing, not the number that beat the index.

As you would expect this is one of those – I think I have seen this movie before type of scenarios. The majority of fund managers failed to match the index in all categories over all time frames. I had a quick glance at the scorecards for the other regions and this pattern repeats itself in all regions. The reasoning for this I think is that all managers are captive to the same narrative fallacies and are caught in the same academic, philosophical and psychological delusion. It is not that markets cannot be beaten because there are clearly well known managers who have beaten their index year after year. But if you based your investment strategy on notions such as the Efficient Market Hypothesis, perceptions that you know the value of  something and plain stupid ideas such as we dont need stops because we are smart and would never buy a company that went down. Then you deserve to made to look like an idiot.

However, there is a wider implication and that is the impact that this sort of massive non performance has on issues such as retirement. As I have said before part of the looming retirement crisis could be solved simply by nationalising all superannuation funds and placing everyone in an index fund. Overnight long term returns would double and fees would be more than halved. But there is also another impact and this one in related to the impact of on performance on the broader confidence in market participants. Is it any wonder that Australians opt for real estate as the prime mechanism of passive wealth creation when they hear about this sort of rip off.

Winners and Losers

I have been thinking some more about the issue of short selling and the problem faced with the upward bias of equities. Armed with excel I decided to look at the average gain as a function of the average loss for the stocks in the S&P/ASX 200 – once I had the data it was a simple matter of dividing average gain by average loss for the past year and seeing what the data said.


I have colour coded the data in the following way – those coded blue are above average, those coded orange are below 1. The higher the number the better the performance of the stock in terms of its average gains versus its average losses over the past year – this doesn’t necessarily mean that the stock was a runaway winner in terms of trend trading but rather it had a strong propensity to make good its losses. It should also be noted that all this does is tell us a little bit about the past and nothing at all about the future. Ideally, if you were a stock picker you would want to look back and see a high number and a strong propensity to trend over the long term – the winner for this period of data is WHC.  In terms of losing stocks a ratio of 1 could be interpreted as the stock simply meandered during the year and congested and a ratio of below 1 is a bad sign.

What is interesting to me is the strength of the upward drift in stocks. However, it does need to be considered that the S&P/ASX 200 is a biased sample size since stocks are in effect selected for their upward drift. My guess is that if I were to repeat this list next year some 20% of these stocks would baring some miracle have been dropped from the index and replaced.



S&P/ASX 200 Volume

I was looking at the chart below of the ASX 200 and its volume. As you can see below the chart whilst looking reasonably standard has two points of interest for me.


Firstly, the trace of volume  by coincidence  looks like a nice little bell curve, with the peak occurring as we initially bounced out the GFC slump. However, what interested me more was the level of volume since the GFC. Average volume is presently higher than it was in the run up to the GFC. This run up was a widely supported popular bull market, yet at present we have a market that is grinding up but is doing so on historically relatively high volumes. My initial guess is that you have a host of institutions trading with one another no doubt driven in part by the ever increasing glut of superannuation money. To see whether this was true I dug up some figures on total super assets and stuck them in a chart.


Total superannuation assets have almost doubled since the GFC. More people in work and higher contribution rates means more money for funds to try and drop into the small local market. The key question is what does this mean for the average trader and my initial guess is not a lot. Bull markets such as the one the US is experiencing require a wide degree of investor support not just institutional interest. So whilst the market will remain liquid in certain aspects whilst other areas will suffer. Bull markets locally have traditionally been driven by second and third tier stocks, particularly special situations such as technology or commodity stocks – these stocks are too small and illiquid for institutions to bother with. If you are running a find why would you bother with Teds Dodgy Technology Company with 20M issued shares when you can buy Apple or some equivalent.

What is also apparent from the volume on the ASX is that ETF’s have not eaten the market like many suggested they would – the growth in the ETF market has been explosive with a nearly 100 fold increase in the number of ETF’s available since the turn of the century. Granted most local ETFs are rubbish but the market continues to motor along.

Nothing To See Here

With a free afternoon I decided to look at the individual performance of stocks that make up the ASX 200 since the beginning of the year. What I did was assume that you invested $1.00 into each on the first trading day of the year and then see what their current valuation was. The table below maps them from highest to lowest.


It doesnt take a genius to work out that you will get a spectrum of values ranging from the very good – BGA to the very bad – ISD. The count is mildly positive with 109 stocks being at breakeven or above for the period. You can get a better sense of the distribution by looking at the frequency distribution of values below.

table 2

As you would expect there is a fat hump in the middles and two reasonably even tails. Some did really well, some did really badly and most didnt really do much However, this once again raises the question of the value of this sort of analysis and I would say outside of curiosity there is none. But it passed the afternoon and satisfied my curiosity.

Once Upon A Time

Sometimes I feel sorry for traders/investors who need to construct a narrative as part of their investment process. Whilst you are cocooned inside your own delusional story you would never know whether your story is the right one and is the one the market has chosen. As an example consider the year to date moves of various indices from around the world.

Index Performance YTD

As might be expected there are a range of performances but what is interesting to me is that if you look at the US markets in isolation you see something interesting. The Russell 3000 and S&P500 are doing better than the benchmark index. This positive performance seems quite obvious when you drop in the performance of the VIX – the so called fear index.

Index Performance_VIX

The VIX has had a somewhat precipitous drop since the beginning of the year. As such the narrative could go volatility (uncertainty) has leaked out of the system therefore investors feel more comfortable with equities. Sounds reasonable, however, there is always someone who will spoil a good story. Consider the chart below  is of the ETF GLD and the Dow since the US election in November. GLD tracks the spot price of gold so it serves as a useful proxy.

Dow_GLD Since Election

Throughout November the gap in performance between the Dow and GLD widened – this would fit our existing narrative of the market being more settled therefore there is no need to set in place a hedge via gold. However , this story starts to change as Trumps profound lack of suitability as President  becomes obvious and the performance gap narrows. If we shrink the time frame down to YTD only then the Trump idiot premium widens.


All of a sudden we have a wrinkle in our narrative. The original narrative was uncertainty has left the system, investors are happy and buying equities but hang on the performance of gold which is traditionally seen as a hedge instrument is improving. WTF is going on?

This is the issue with narratives they are simply stories designed to make us feel better about our decisions as such they are equal parts post-dictive error, self justification  and comfort food. Hence, they are largely meaningless.


Peculiarities Of The Dow

One of the intriguing quirks of financial history is that the Dow Jones Index has become the benchmark of the health of the US stockmarket and by extension a metric everyone else is fascinated in.It is interesting that the Dow has become this because of its strange mechanism of calculation and is somewhat anachronistic view of the world. In many ways it is little more than a favourites index or watchlist and this becomes apparent when you look at the quirks in its construction. If you look at the S&P/ASX 20 you see that it is what is known as a capitalisation index – that is the biggest companies have the most heft within the index. If you look at the table below you can see the market capitalisation of its components along with their weighting within the index.


In this sort of index size counts but that is not the way the Dow works. Below are the relative market caps of the Dow components.

market cap

You can see that Apple with a market capitalisation of $675 billion dwarfs everyone else – it is simply enormous. However, something odd happens when you graph the weightings of the components.

% weighting

Goldman Sachs with a market capitalisation of only $95 billion makes up almost 8% of the index compared to Apples 4.45%. So a stock with a market capitalisation that is 14% that of Apple has a weighting just short of twice that of Apple. It is an odd thing when history overtakes common sense.


Well Here It Comes

In line with the notion of January predicts the direction if the not the quanta of the year ahead here is a rundown of the January gains or losses for various markets. Make of it what you will….if anything…..


What is more interesting to me is what I perceive to be a dislocation between perception and reality. The market commentary I have had the misfortune to hear lately has spoken about the sudden rise in volatility in the market. The basis for this judgement has been a bit of a jump in the VIX over the last trading period. Of course completely ignoring the fact that the VIX has been meandering around at historically low levels for the past three months. It is worth noting what the VIX measures before assigning any weight to it.

According to CBOE’s marketing blurb –

The CBOE Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices. With the introduction of the VIX® Index in 1993, followed by the launch of trading of VIX futures at CBOE Futures Exchange (CFE) in 2004 and VIX options at CBOE in 2006, there has been a growing acceptance of trading VIX and VIX-linked products as risk management tools.

VIX options and futures enable investors to trade volatility independent of the direction or the level of stock prices. Whether an investor’s outlook on the market is bullish, bearish or somewhere in between — VIX options and futures can provide the ability to diversify a portfolio or hedge, mitigate or capitalize on broad market volatility.

That is the VIX is a measure of other peoples perception, granted this is arrived at by looking at changes in volatility expectations implicit within options pricing. So the VIX really doesn’t measure market expectations and hence one of the major criticisms I have of it. It is simpler to default to actually looking at what the current historical volatility of an instrument is.


This is the Dow with a simple 15 day historical volatility plotted and as you can see since July of last year the peaks in volatility have been dropping and the post electio bump has been a time of very stable volatility.

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