There is a mystery afoot in the stock market, one that should concern anyone who invests in actively managed mutual funds.
The mystery boils down to this: Most of these funds appear to be deliberately ignoring much of the research about how to beat the stock market. Presumably the managers know all about this research. They just choose to go in a different direction.
This odd situation is the focus of a recent working paper from Martin Lettau and Paulo Manoel of the University of California, Berkeley, and Sydney Ludvigson of New York University. Their paper asks, “Where are the value funds?” and points out that there are virtually no funds on the U.S. market that actually hold only cheap stocks, even among the funds that label themselves as value investors.
The same contrariness holds true with other factors that academics have found to be important in determining investment returns. For instance, researchers have demonstrated that investors can benefit from momentum strategies that buy stocks that have shot up in recent months. But most funds don’t appear to take advantage of this anomaly either.
The researchers conclude that their survey of actively managed U.S. mutual funds reveals “that these funds do not systematically tilt their portfolios towards profitable factors.” And, no, the researchers don’t understand why.
-- Ian McGugan
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
MTY Foods Group Inc. (MTY-T). MTY operates restaurant franchises, including Thai Express, Country Style and Extreme Pita, and has a market capitalization near the $1.5-billion mark. MTY stock has provided shareholders with a strong 28-per-cent average annual total return over the previous 36 months. The company’s stock has been oversold four times in the past three years according to RSI and a significant price rallied followed on each occasion. There are only two index members trading at attractive, oversold Relative Strength Index levels below the buy signal of 30 – Uni-Select Inc. and MTY Foods Group Inc. Scott Barlow takes a look at the stock (for subscribers).
Small-cap stars on the rise: The little-known TSX Venture stocks with eye-popping returns
In the small-cap space, you can tap into the kind of growth that gets the pulse racing. But it’s also part of the equity ecosystem that’s home to future incumbents of mainstream investing. On Thursday, the TSX Venture Exchange released its annual Venture 50, showing the fastest-growing stocks in the Canadian small-cap ranks. The group of listings, featuring cannabis companies, emerging tech names and junior resource stocks, generated an average return of 94 per cent last year – a mark that no company in the S&P/TSX Composite Index managed to match. The average stock in the Canadian large-cap index declined by 13 per cent in what was a difficult year for stocks globally. Tim Shufelt reports (for subscribers).
TFSA or RRSP: Which one is a better choice for you?
The registered retirement savings plan (RRSP) is one of the best-known tax shelters available to Canadians, particularly in the weeks before the annual contribution deadline, which is March 1 this year. But financial experts say a tax free savings account (TFSA) is often a better choice over the long run. The problem is, many people don’t know what make a TFSA different from an RRSP. A report by Bank of Montreal estimates that 32 per cent of Canadians are in that camp. David Paddon from The Canadian Press explains.
Buffett’s Suncor bet to revive investor interest in Canadian energy
Berkshire Hathaway Inc.’s reinvestment in Suncor Energy Inc. highlights the benefits of being an integrated oil company and could revive investor interest in the languishing Canadian energy sector, fund managers said. The move is also seen by some as a wager the energy sector could benefit from a change in the guard in oil-rich Alberta, which has an election this year. Berkshire’s new 0.7-per-cent stake in Suncor, valued at $488-million at current prices, is already worth 23 per cent more since Berkshire bought it in the previous quarter. It comes more than two years after it sold, for $618-million, a 1.4-per-cent stake it had bought in 2013 and added to in 2015. Reuters reports.
Short sales on the TSX: What bearish investors are betting against
Despite the sharp rally in TSX stocks since Christmas, short sellers’ bets as of mid-February remain elevated. This should be a concern for market participants, given academic research has found that heavily shorted equities tend to underperform over time. Larry MacDonald takes a look at the stocks investors sold short the most.
Others (for subscribers)
Others (for everyone)
Ask Globe Investor
Question: I’m a 60-year-old retiree and would like to invest my RRSP with low-fees and a yearly return of 5 to 7 per cent – what would you recommend?
Answer: Even the most reasonable investment return expectations have to be reality-checked these days.
Sounds like an easy one, right? Wouldn’t a good low-fee balanced mutual fund or exchange-traded fund work, or a diversified portfolio of stocks and bonds?
Possibly, but I have concerns.
For one thing, this reader didn’t offer any information about risk tolerance or other retirement savings. That 5-per-cent to 7-per-cent average annual return would require a portfolio with a significant weighting in stocks, probably well more than 50 per cent. The level of investor consternation about the 8.9-per-cent decline by the S&P/TSX Composite Index last year suggests a lot of people may not be comfortable with a portfolio heavily tilted to stocks.
When you add a substantial bond weighting to a portfolio, you reduce price swings and risk on both the downside and upside. The Canadian bond market’s three-year average total return (price changes plus bond interest) was 1.9 per cent for the period ending Dec. 31. The Canadian stock market made 6.4 per cent, while the U.S. market made 8.6 per cent in Canadian dollars.
Investing in low-cost exchange-traded funds would mean fees of roughly 0.25 per cent or less – that’s for individual ETFs or balanced ETFs, which give you all the elements of a diversified portfolio. Add the cost of buying and selling ETFs through an online broker and you still have a modest overall cost of investing. But is this reader cut out to handle a portfolio of ETFs? My sense is that some people are not, much as they’d like to give ETFs a try.
A robo-adviser can make good sense for the aspiring ETF investor who needs help, but there’s an added cost of as much as 0.5 of a percentage point on top of ETF costs. This will further weigh on those targeted 5 per cent to 7 per cent gains.
The bottom line here is that 5 per cent on an average annual basis might be a more realistic target for a 60-year-old RRSP investor than 6 per cent or 7 per cent. Overshoot on your return expectations and all kinds of things can go wrong – you get too aggressive, you sell at a market low and then you’re too afraid to buy back in.
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
David Rosenberg will share his biggest conviction for markets right now.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Click here share your view of our newsletter and give us your suggestions.
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Gillian Livingston