The latest edition of Merrill Lynch's monthly survey of global fund managers offers insight into the importance of career risk in the asset management business. The New York Times' Upshot site offered a summary of the Merrill report,
"A record share [of managers], 46 per cent, say equity markets are overvalued … But that hasn't changed the net percentage who say they're overweight equities, which is currently 0.3 standard deviations above the historical norm." Merrill analysts also noted that most managers expect U.S. profit growth to slow.
The 'I know it's expensive but I'm holding it anyway' manager tendency is familiar to investors who lived through the Nortel Networks Corp. madness in the 1990s. Before the tech bubble imploded, there were a number of institutional investors who were comfortable with Nortel's extremely high valuation levels in light of the allegedly bright future. Most managers, however, were highly uncomfortable with market weight positions in a stock that was trading at over 150 times trailing earnings by early 2000.
Fund managers get fired for performance that dramatically trails the index. The reluctant investors in Nortel felt they had to hold the stock, which was by far the main driver of TSX returns at the time, or risk unemployment if it kept climbing.
The S&P/TSX Composite's mediocre returns this year suggests that domestic portfolio managers are not chasing benchmark returns by holding stocks they don't like. In the U.S., however, a manager not holding Facebook Inc. would be struggling to keep up with the S&P 500 – the stock is up 47 per cent, and its $492-billion (U.S.) market cap means it has an outsized influence on index returns. There are likely a lot of managers holding it for job security reasons who might not otherwise be interested.
U.S. portfolio managers are nervously overweight equities despite expensive valuations and expectations for falling profit growth. I strongly suspect that in many cases, this portfolio positioning is not because their holdings have strong outlooks, but in order to keep up with the index, and keep the monthly paycheques coming in. This is not a great sign for investors in U.S. stocks.
-- Scott Barlow is The Globe's in-house market strategist
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Stocks to ponder
Pattern Energy Group Inc. This company offers investors an attractive dividend yield of 7 per cent. Historically, the share price has come under pressure during the fourth quarter. If history repeats itself and the stock price retreats, this could offer investors an attractive entry point. This is a stock to watch. Jennifer Dowty explains.
Teck Resources Ltd. This company rewards nimble investors who can move against the current, selling the stock when times are good and buying it when the outlook is dismal. Today, conditions are excellent for the Vancouver-based miner, and that suggests shareholders should consider departing from this roller coaster of an investment. David Berman explains.
Fidelity plots move into Canadian ETF market
The Canadian arm of U.S. mutual fund giant Fidelity Investments is gearing up to enter the crowded market for exchange-traded funds, with the company on the hunt for an executive to develop ETFs to sell in this country. Fidelity Investments Canada ULC, which manages more than $132-billion in mutual fund and institutional assets in Canada, has been quietly sitting on the sidelines as many of its Canadian competitors have launched in the ETF space over the last year. But in a recent job post, the company said it is looking to hire an experienced vice-president who can create and implement an ETF strategy. Clare O'Hara reports.
Why Apple is a perfect fit for Warren Buffett's value investment strategy
Berkshire Hathaway's recent purchase of Apple shares has revived debate about whether the world's biggest tech company has become a value stock. After all, Berkshire's Warren Buffett made his fortune seeking out undervalued companies with strong fundamentals and dominant industry positions, and it's not hard to argue that Apple meets those criteria. John Reese shares his insight.
If you're thinking about investing in a hedge fund, read this first
In general, actual hedge fund returns have not justified the fees and complexity. As it turns out, the managers have done much better than the clients. Tom Bradley outlines his view.
Three of the best apartment REITs for your income portfolio
John Heinzl loves the idea of owning rental property. Looking after rental property? Not so much. Between deadbeat tenants and hefty maintenance bills, there are too many headaches that come with being a landlord. But for people who want the benefits of owning income property without all the hassles, there's a solution: residential real estate investment trusts (REITs). John Heinzl outlines three of the best apartment REITs to invest in.
Ask Globe Investor
Question: I have yet to invest with a financial adviser and not lose money. I gave up on one after losing 20 per cent of my savings. I then moved on to someone highly recommended who promptly put me in a fund whose manager refused to admit that oil prices weren't going to go back up. Thank God I've got my small pension and my (greatly reduced) Canada Pension Plan. Problem now: we sold our house and are presently keeping the money tucked under the proverbial mattress while we waffle about whom to approach to do something safe with it. All I ask at this point in my life is to find something that will keep pace with inflation! Am I doomed to a life of GIC's earning 1 per cent and savings accounts that pay 0.1 per cent?
Answer: Experiences like yours are not uncommon. Unfortunately, commissioned advisers don't always provide unbiased advice. They may be under pressure to sell you products that generate the highest commissions for them -- not necessarily the best returns for you.
There are a couple of potential solutions. If you have a sizeable nest egg -- say, more than $500,000 -- you may want to look into working with a professional portfolio manager who charges a fee based on a percentage of your assets (usually about 1 per cent) rather than earning commissions from mutual funds or other high-fee products. You can find more information on the Portfolio Management Association of Canada's website (portfoliomanagement.org).
But if you want to keep your fees as low as possible, and be certain that your money is being managed in your best interest, there is no substitute for doing it yourself. I have heard from countless readers who, like you, have had bad experiences with advisers but have gone on to achieve financial success managing their own money. The industry wants you to believe that investing is too complicated to do yourself, but it is actually well within the reach of most people. Many readers have told me that they have done far better on their own than they ever did with an adviser.
I recently wrote a column with tips geared to new DIYers at tgam.ca/2xaRlzD. Also check out my model dividend portfolio at tgam.ca/divportfolio. With the proliferation of low-cost exchange-traded funds and mutual funds, and the wealth of information available on websites such as globeinvestor.com, anyone who is willing to put in a modest amount of work can learn to invest successfully.
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What's up in the days ahead
This weekend, Rob Carrick presents some online investing tools and calculators that can help with your portfolio analysis. And on Monday, Larry Berman will discuss why his favourite market indicator isn't giving investors much to cheer about right now.
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Compiled by Gillian Livingston