Indexing Can Be Good. So Can Active Management (Ronalds)

Tuesday, September 20th, 2011

The passive (indexing) vs. active management question is a polarizing debate, but it shouldn’t be. The bottom line is that both strategies have merit when they’re done right.

As Morningstar USA’s President of Fund Research (Don Phillips) notes, credible voices within the index community are being drowned out by a vocal fringe – the indexing extremists. In an article first published earlier this year, Phillips suggests these individuals grossly overstate the indexing case, and that “many of the fund world’s recent stumbles – the misguided expectations surrounding leveraged and inverse ETFs and the poor performance of many commodity products – have come under the indexing banner.” This coming from someone who admits that indexing is a good way to invest and acknowledges to holding much of his personal assets in index funds.

There’s a paragraph in the middle of the article that’s particularly telling as to the state of the debate (in the US, at least):

“At some point, however, many index fans went from making the honest and helpful argument that indexing is good to making the hyperbolic and divisive case that anything other than indexing was not only bad, but also morally suspect. Extreme index supporters went from asserting that indexing beats the average fund to implying that it beats all funds. Ironically, they’ve advanced this claim during a decade when indexing has experienced unusually weak results. For the 10 years through the end of 2010, the Vanguard 500 Index fund placed in the 49th percentile of the large-blend category–hardly in keeping with its perceived dominance. The dichotomy between the facts and their assertions hasn’t humbled the true believers, however. Their words have grown more extreme, as seen in a recent statement from an ETF provider that likened active fund managers to big tobacco companies, claiming that active management was as dangerous to investor wealth as tobacco is to our health.”

As a proponent of active management (undexing), I found Phillips’ article refreshing, although I’m sure it will raise the hackles of many indexers. If nothing else, the ongoing discussion is sure to be entertaining.

Tags: Active Management, Assertions, Commodity Products, Dichotomy, Don Phillips, ETFs, Extreme Index, Extremists, Fund Managers, Index Fund, Index Funds, Index Investing, Indexing, Large Blend, Management Question, Morningstar, Percentile, Personal Assets, Poor Performance, Tobacco Companies, True Believers, Vanguard
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U.S. Equity Market Cheat Sheet (July 4, 2011)

Sunday, July 3rd, 2011

U.S. Equity Market Cheat Sheet (July 4, 2011)

The figure below shows the performance of each sector in the S&P 500 Index for the week. All ten sectors made gains. The best-performing sector for the week was energy which increased 7.17 percent. Other top-three sectors were technology and consumer discretion. Consumer staples was the worst performer, up 2.87 percent. Other bottom-three performers were utilities and healthcare.

Within the energy sector the best-performing stock was Marathon Petroleum which rose 13.29 percent. Other top-five performers were FMC Technologies, Halliburton, National Oilwell Varco, and Valero Energy.

Strengths

• The footwear group was the best-performing group, up 13 percent on the strength of its single member, Nike. The company reported fiscal fourth quarter earnings and revenue above the consensus estimates, and it raised its fiscal 2015 revenue target to a new range of $28 billion to $30 billion, up from its previous target of $27 billion announced in May 2010.
• The casinos & gaming group gained 12 percent on strength in its largest member, Wynn Resorts. The Macau government said Friday that Macau’s gaming revenue in June increased 52.4 percent year-over-year.
• The trucking group was up 11 percent, led by its single member, Ryder Systems. The firm announced this week that it had secured agreements to lease 87 heavy-duty trucks powered by natural gas.

Weaknesses

• The retail computer & electronics group underperformed, gaining less than 1 percent. The group’s largest member, Best Buy, lost 1 percent.
• The tobacco group also underperformed, rising 1 percent. Two members of the four-member group declined less than 1 percent. The government recently announced rules which will require tobacco companies to place unpleasant graphic health warnings on their packages.
• The food distributor group underperformed, up 2 percent, led by its single member, Sysco.

Opportunities

• There may be an opportunity for gain in merger & acquisition transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• The end of quantitative easing on June 30 might result in a weaker economy.

Tags: Best Buy, Consensus Estimates, Consumer Staples, Fmc Technologies, Food Distributor, Fourth Quarter Earnings, Gaming Revenue, Graphic Health, Health Warnings, Heavy Duty Trucks, Macau Government, National Oilwell Varco, Performing Group, Retail Computer, Revenue Target, Ryder Systems, Tobacco Companies, Tobacco Group, Valero Energy, Wynn Resorts
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