Alpha Power Investing NewsletterJanuary 16, 2014
2013 - What a year! The S&P 500 was up 32% and many mutual funds exceeded 40%.
As a result, investor pessimism is fading fast. Less than 14% of investment advisors are bearish - a record low. Money is pouring into last year's hottest funds, under the belief that the best performing funds will continue to hit home runs. This behavior always follows big up years and always leads to disappointment in the future.
Every year, Standard and Poor's publishes its SPIVA report. SPIVA stands for Standard and Poor's Indices Versus Active. This report looks at how actively managed mutual funds stack up against their benchmark indexes. It also addresses the issue of the persistence of past performance in mutual funds.
S&P Dow Jones Indices is one of the world's leading index providers. S&P's index research team conducts numerous, unbiased studies on a broad range of issues which impact mutual fund investors in today's marketplace. SPIVA tracking reports of top performers show the percentages of funds that remain in the top-quartile or top-half rankings over three- and five-consecutive-year periods.
The SPIVA report shows how hard it is to stay at the top. Of the 692 equity funds that were in the top quartile as of September 2011, only 7.23% managed to stay there at the end of September 2013. Breaking it down, 5.28% of the large-cap funds, 10.31% of mid-cap funds, and 8.15% of small-cap funds stayed in the top quartile.
For the three years ended September 2013, 19.25% of large-cap funds, 20.1% of mid-cap funds, and 26.8% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. Random expectations would imply a rate of 25%.
Looking at longer term performance, only 7.71% of large-cap funds, 0.88% of mid-cap funds and 9.9% of small-cap funds managed a top-half performance over five consecutive 12-month periods. Random expectations would predict a repeat rate of 6.25%.
The latest SPIVA report does not depart from the long-term trend of previous reports. Investors who expect top performance to continue would have to be very lucky to win that bet on any particular fund or group of funds.
Prudent investors should keep in mind that the stock market has always been cyclical and will always move to extremes in either direction. Long periods of uninterrupted gains suck in the na´ve, ignorant, envious, and greedy multitudes that create excesses of risk sufficient to set off the avalanche that eventually wipes the slate clean again and returns stocks to their rightful owners. Today's optimism is approaching a near-certainty that the Fed will continue to support the market for years to come, making serious risk a thing of the past. This is not good news for buy-and-hold strategies which have to endure whatever the market dishes out on the inevitable downside of the cycle.
Sincerely yours,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Disclosure: Past performance is not a guarantee of future performance.
© 2014 Alpha Investment Management, Inc.