Career risk, fear of getting fired, often results in portfolio managers investing in a way that protects their jobs at the expense of long-term performance. This trend, combined with investors' tendency towards impatience and chasing performance, makes career risk the most underrated reason most funds fail to beat their benchmarks.
In 2013, Valeant Pharmaceuticals International Inc.'s 112-per-cent return meant that, on its own, the stock was responsible for almost 13 per cent of the S&P/TSX Composite's 10.6-per-cent return for the year. At that time, a hypothetical fund manager with concerns about Valeant's outlook – which, in hindsight, would have been perfectly reasonable – and did not own the stock would likely have under-performed the benchmark, very, very badly.
Investors do not like funds that trail the benchmark by a wide margin, even for one year. Many, even most, investors would be tempted to sell our hypothetical managers' fund at the end of 2013, even though the next two years would have proven the manger correct. A portfolio manager like this could have been fired in early 2014 if investor redemptions were extreme.
A fund manager worried about getting fired would never avoid holding a large cap stock that was driving index returns – the risks of being wrong are too large. For many professional managers, career risk means holding stocks in which they don't truly believe to protect annual returns.
- Scott Barlow
Stocks to ponder
Information Services Corp.
After harshly criticizing the stock of the former Crown corporation upon its initial public offering, David Milstead has made a u-turn as it has shed its label as a Saskatchewan pure play. There are valuation concerns, but a robust dividend and 4.7-per-cent yield are worthy of attention.
Premium Brands Holding Corp.
This food stock reached an all-time high this past week and is now up almost 85 per cent over the last year. That rise may not end soon. Brenda Bouw said analysts see even further upside as it grows faster than the rest of the industry.
Ritchie Brothers Auctioneers Inc.
In his weekly TSX RSI column, Globe Investor columnist Scott Barlow breaks down the stock's buy and sell signals after it landed on the index's most oversold list.
Perhaps things are looking up for the troubled Canadian tech giant. One analyst thinks so, upgrading his rating for the stock and expressing enthusiasm for the company's shifting focus from hardware to software.
Brookfield Infrastructure Partners LP
Yield Hog columnist John Heinzl has been pleasantly surprised by the performance of this infrastructure play. Noting its attractive yield of almost 4.8 per cent, he's hoping its roll continues.
State of confusion
As the TSX continues its rise, commodity prices continue to slump and Canada's government bond yield fell below 1 per cent. Tim Kiladze said bluntly: "These markets don't make sense any more." He said investors now sit in a difficult position, trying to decipher mixed indicators and messages.
No time to celebrate
Wall Street was gleaming on Thursday. Both the Dow Jones industrial average and Nasdaq hit record highs for the first time in 16 years. However, David Rosenberg thinks all is not rosy. He provides a list of reasons for investor caution.
In need of a cure
Valeant Pharmaceuticals International Inc. was once the superstar of the TSX. Now, its troubles (and plunging value) have had the opposite effect, dragging down the entire index. Ian McGugan says it demonstrates the fundamental danger of allowing companies with only modest ties to Canada to dominate the results for domestic investors.
The love-hate debate
Credit Suisse analysts released a report this week that tried to gauge the dominant trends in the U.S. stock markets by examining sentiment and positioning by hedge funds, mutual funds and sell-side analysts. The result was a list of overly loved and despised groups and stocks. Tim Shufelt examined the findings.
How's Buffett's backstroke?
Columnist John Reese thinks there are a lot of similarities between elite Olympians and star long-term investors, like Warren Buffett and Benjamin Graham. There is plenty for investors to learn from their techniques and wisdom.
What's up in the days ahead
Larry Berman will explain why having a little gold and some real return bonds in your portfolio is a good idea right now. Gordon Pape will tell us why he's particularly excited by the Nasdaq's success at hitting record highs this week. And Robert Tattersall is going to reveal the sector he believes is the most fertile ground for finding stocks that could beat the major indexes.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by David Leeder and Darcy Keith