Investors may baulk at weak US earnings
Stocktake: Proinsias O'Mahony looks at the markets
“Given the contrarian nature of this indicator, we remain encouraged by Wall Street’s ongoing lack of optimism,” said Merrill.
Historically, when the indicator has been below 50, total returns over the next 12 months have been positive on every occasion, with median 12-month returns of over 30 per cent.
Don’t bet on six weeks of data
Track the market via a cheap index fund, or try and beat it with an actively managed one?
“When the going gets tough, active comes up trumps,” headlined FTAdviser last week, citing “evidence” that active managers “are worth the extra cost”.
The evidence? Active man- ager outperformance going back as far as, er, May 22nd.
We wouldn’t get too excited over a six-week period of outperformance – not when there is data going back decades that confirms that active funds consistently underperform. In the US last year, 80 per cent of active managers of mid-cap funds underperformed their benchmark, as did 66 per cent of small-cap mangers and 63 per cent of large-cap managers. The figures are similar for the last three- and five-year periods.
Some managers will outperform, of course, but it’s difficult to know who – picking yesterday’s winners doesn’t work. S&P data shows that, of the more than 700 funds in the top quartile of performers as of September 2010, just one in 10 were still there two years later.
The stats are similar for the UK, Europe and further afield.
Sometimes it’s worth going to the ‘Dogs’
Buying the world’s worst-performing stock markets is a recipe for outsized returns, says a new study.
Using data for 45 national indices, the study examined a mean-reverting strategy it termed “Dogs of the World”. Allocate one-fifth of one’s funds towards the five worst-performing indices over the past year, and hold for five years.
At the end of years two, three, four and five, the same percentage is invested in the five-worst performing markets over the previous 12 months. Every year after that, the oldest holdings are replaced by the five worst performers.
Returns were much more volatile, but also much better. $1 invested in 1997 was worth $2.94 in 2012, compared to $1.69 if invested in the MSCI world index.
The study is at goo.gl/nq2TV