Wednesday, January 2, 2013

The Race is Over, The Race Begins Anew


The Race is Over, The Race Begins Anew

After 252 trading sessions, money managers have completed the race against their respective benchmarks for 2012.  If they’ve beaten the index, there’s a sense of accomplishment. If they lagged the index, there’s an urgent need to craft a letter that will excuse the lack of performance.  However, there’s not much time to celebrate or lament, as the case may be, because the markets have reopened and the game has begun anew.  Money management is one of those odd pursuits where the end of the race merely marks the beginning of a new one. 

Investment Session (1995)

In fact, today may be an especially challenging day for equity managers.  Congress’s last minute fiscal fix has translated into instant euphoria in the equity markets, which is probably bad news for a lot of money managers.  As I’m writing this post, the S&P 500 is up about 1.8%, and most managers are, in all likelihood, already behind the index.  I’d guess that many portfolio managers went into the New Year holiday with 5% or 10% cash because it looked like we wouldn’t have legislation by this morning.  This means that even if their stocks matched the market, the overall portfolio is only up about 1.6%.  With 251 more trading sessions to go in 2013, they’ll be chasing the market.

However, explaining last year’s performance will be the main activity in the coming days and weeks.  If a money manager beat his benchmark in 2012, his letter or presentation to his investors will laud his investment acumen and highlight the key securities that led the way to superior performance.  When you receive the good news, you’ll see no mention of luck, even though good luck was the key contributor to the successful outcome.

If an investment manager trailed his benchmark, a frantic search began early this morning.  The manager has to find one or more reasons why his failure to beat the market wasn’t his fault.  If certain sectors of the market did particularly well, he’ll argue that it wouldn’t have been prudent to have so much exposure to that sector.  If small capitalization stocks did better than large ones, he’ll point out that he was supposed to own big companies.  And if big companies did well, he’ll suggest that the valuations were too high to justify owning those stocks.  The data can be sliced thousands of different ways, such that the failure to perform can be ascribed to factors completely beyond the control of the money manager.

Copying machines will soon get a workout and millions of color ink cartridges will be drained.  You’ll be buried in an avalanche of pie charts, bar graphs, and line graphs that demonstrate the credit due the minority of winning managers, and absolve responsibility from the majority of managers who lost the race.  Of course, if you were invested in an index fund, you can avoid all of this silliness and simply enjoy your 13.4% gain for 2012 (less some small fees), and you’ll wonder what 2013 will bring.

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