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Thoughts On The Market

edited February 7 in Other Investing
Each week, Mike Wilson offers his perspective on the forces shaping the markets and how to separate the signal from the noise. Listen to his most recent episode and check out those of his colleagues from across Morgan Stanley Research.


  • MS is strange in that its strategists are among the most cautious, but several of its funds are very aggressive. These MS funds have been hit badly in the current market that peaked in Feb 2021 for hype, and Nov 2021 or yearend for the rest. One can say that this independence of MS fund managers from MS strategists is good, but others can say if MS managers don't listen to MS strategists, should others?

    GMO is also known for saying that its fund managers don't follow its big talking heads (Grantham and Inker) but GMO has suffered.
  • +100 @yogibearbull - I don't understand it.
  • edited February 7
    Mutual funds have prospectus mandates. If your fund says it invests in equities in its prospectus, you as a manager are going to invest in equities, regardless whether you think the market is overvalued or not. There are some legal issues regarding prospectus definitions managers must follow, but more often there is also just institutional, investor and employment pressures to folow the fund's basic guidelines. If the fund has growth in its name, you are going to buy growth stocks or face "career risk." This is why it is rather interesting to see how much of managers' own money they put in their funds. Whether the strategist says something about your fund's chosen sector or investment style is immaterial to the fund's manadate and the manager's job.
  • edited February 7
    Not a critique of anybody here -

    Personally, if M* says a manager invests $1M+ in a $B AUM fund, it does not impress me. More often than not a Manager's yearly compensation from the fund far exceeds their investment in the fund. (Some fund managers start a fund with $5M of their own money and I can treat that as constituting informational value.)

    Mutual fund prospectus mandates are usually very broad. Even when they say small cap, they can still drift to the edge of mid cap or into micro cap.

    Why some managers are found not to do a better risk management job than the rest of us? They suffer from the same human limitations as the rest of us. Moreover, obtaining knowledge and acting on it are entirely different skills.

    IMO, it is better to find managers that do a better job than others. As an aside, I am willing to give managers a pass for their performance in 2020.

    As an example, I would say David Giroux does a good risk management job. Of course, he has to contend with the size of PRWCX, a limitation.
  • Moreover, the reported data on fund manager's investment in his/her fund has several issues:

    1. Manager may be running lot of other internal/external money in that strategy and the reporting often misses that. There was a long discussion elsewhere about Giroux not having much in PRWCX, but I dig up data from Price SAI (a huge combo document) that he also runs much more in that type of strategy and indeed has lot of his personal money in that strategy that M* didn't pick up in its reporting of PRWCX.

    2. If a young manager is running a bond fund, it may not be reasonable to expect him/her to have lot of money in the fund. Likewise, an older manager running a hot growth fund may not have lot of money in that fund.

    3. Some firms with trading stocks encourage managers' investments in firms' stocks, and that can skew the data.

    However, if a fund manager has $0 in his/her fund, that is a problem. But a reasonable amount relative to manager's salary is OK.
  • edited February 7
    Agreed, the manager investment should be more specific as for experienced managers $1 million isn’t much, but I think many investors would be surprised to learn how many managers don’t even invest that much. Moreover, whenever any regulator suggests creating a $5 million or $10 million band for investment disclosure, the industry fights it tooth and mail. In fact, they fought the original disclosure requirements, an irony as many managers look at insider ownership at stocks they’re considering as a key indicator and would surely be angry if that ownership disclosure was taken away. Still, given how few managers eat their own cooking in a meaningful way, the $1 million threshold is significant. The younger and less experienced the manager, the more meaningful it is as that $1 million is potentially a more significant part of their net worth.

    As for risk control, the point Yogi is making regarding suitability proves the other point I made. If you’re a 22 year old bond fund manager, you’re going to invest in bonds even if you think bonds are dramatically overvalued and your personal portfolio is 100% stocks and you invest nothing in your fund. And if you’re a growth stock manager, you’re going to buy growth stocks even if your own portfolio is 100% cash and you think the market will crash. Sure, prospectuses often provide leeway for risk control, but in practice it rarely happens. And with good reason if you consider that many funds are designed to stick to a portion of the style box for financial advisors to build bespoke portfolios for clients and for specific allocations in 401ks. The best place to find such risk control is in flexible allocation funds and boutique funds where the manager owns the fund company and has complete control over the firm so he/she won’t be fired if that defensive positioning is wrong.
  • What LB said.


    >> ... if M* says a manager invests $1M+ in a $B AUM fund, it does not impress me. More often than not a Manager's yearly compensation from the fund far exceeds their investment in the fund. (Some fund managers start a fund with $5M of their own money ....

    ... huh. How much do you think these guys make? Danoff may make $15M and Giroux close, presumably, but I expect the vast majority of even successful managers do not make what you might be thinking here, and a mil in one's own fund would be pretty impressive.
  • edited February 8
    Even moderately successful managers are making more than $500K annual. A million dollars isn't really a big deal for a manager to swing. Analysts make $300 - 400K annual.
  • We have different definitions of what constitutes a big deal even when one is well-paid.
  • edited February 8
    “How much do you think these guys make?” I do not have to think. I have first hand knowledge.

    I will redirect to my previous statement - it is better to find managers that do a better job than others. How they invest their own money or how much money they make is not particularly useful information for me and detracts me from staying focused. If you find that information useful, by all means gather and use.

    After investing for 10+ yrs, I continually use fewer and fewer indicators. When I started, I learned a lot of rules of thumb from M* and Vanguard articles but no longer use many of them, including manager investment or ER. It is possible all information provided in those articles is statistically significant - so, no knock on them.
  • >> first hand knowledge.

    Ah, okay. Well, me too. (Roughly.) Oldtimers in the Boston area, but also young'uns (meaning under 40, over 30).

    @LewisBraham, do you know of research in this area? I see a study from 20y ago showing positive correlation, also one somewhat later ditto (rather cross-purposes hed):

    “It really doesn’t make any sense,” said Vern Sumnicht, chief executive of Sumnicht & Associates, which manages $300 million for clients.”The manager [without any shares] obviously doesn’t believe in what he’s doing.”

    And sure, not a hard rule.
  • Imo manager skin in the game while good to know isn't a very useful metric for the reasons called out by yogi.
  • There have been a number of studies showing that manager investment does matter, although how much it matters varies by fund category for I suspect the reasons Yogi described regarding, say, bond fund managers. Here’s one I found just now:

    But the one statistic that has been shown to matter consistently to future outperformance is the one generally least discussed on this board—fees. There are legions of studies showing how much it matters in almost every fund category except I think one or two small-cap ones.
    Yet discussing the research here raises a larger question as the posters haven’t been talking about performance but “risk control.” For most managers if their fund category is down 30% and they’re down 25%, that is actually deemed a victory from the point of risk control, but I doubt some of the posters here think that way. They say they want funds that don’t lose money but funds like that are often the least exciting and largely overlooked. FPA New Income comes to mind. The problem is people often want the best of both worlds, something that goes up 15% a year and never goes down, I.e, a fantasy or a fraud. I know people here are more sophisticated than that, but there is still that desire lurking beneath the surface of every investor.
    One thing many studies show is that performance chasing generally doesn’t work, but sadly performance is the statistic most cited pretty much everywhere, including here.
  • @LewisBraham, you are the voice of reason in this discussion. Thanks for your input.
  • @Lewis
    Good callout on investor psychology around upside gains with no downside pains. This is why I prefer Sortino ratio over Sharpe ratio when evaluating fund historical performance.

    While manager skin does have some signal value, the challenge here is separating the signal from the noise. I.e. A 30 year old bond fund manager having no skin is noise. I don't know how old Cathy is but if she is in 60's let's say and has no skin in ARKK that is noise too imo.
  • edited February 8
    LB thank you for the link.
    "There’s nothing more profitable than a market inefficiency you know about and most other people don’t!"
    The cat is out of the bag !
    I guess my comment was a bit late as article was from Aug. , 2019.
  • edited February 8
    A most interesting article indeed, tks Lewis for posting it. I liked Sharpe's quote about data torture but the subtle jabbing across all three gentlemen was enjoyable too!
  • Enjoying the thread, good comments!

    Additional thoughts:
    * Isn't risk/reward the same as "sell down until you sleep comfortably at night? You could jam all the numbers, ratios you want but isn't that what it comes down to?

    *Does it matter if your investment in a mutual fund goes down 5% one day and you lose the equivalant of your annual grocery spend that day but overall it is very small % of your wealth? Hold on, sell, what to do? I've been reading a new book, Money Magic, Kotlikoff, great book, suggests the more money you have the less risk you should take in the stonk market??

    * is there a difference between having 85% cash/15% aggressive, ARKK? vs a balanced the black swan approach better?

    *Is there a difference between looking at what fund mgr has/doesn't have invested in a fund and a "wealth advisor" who has a fraction of your wealth advising what you should do with your wealth? Are you better off with the person with some grey in his hair and has seen things or the younger person who isn't jaded from past experience?

    *what else do we have to go on besides looking at past performance...reading tea leaves as to what might happen going forward, trend following...where the puck will be ala The Great Gretzsky? (I was just in a building yesterday where the late Mr Rumsfeld used to work...the "Unknown, unknowns"...I guess you could apply that to one really knows what will happen or are there some who can make better guesses than others?


    Baseball Fan
  • So is examining the Sharpe Ratio along with examining the standard deviation for a fund still a valid exercise?
  • edited February 8
    I think standard deviation matters a great deal, in particular recent standard deviation, as recent volatility levels may persist. But looking at the numbers without further analysis is a mistake. Why did the volatility or lack-of-volatility occur, and do the same conditions that caused that exist now or are things different? The Sharpe ratio is interesting to look at in the past, but is as the article points not an indicator of the future in the aggregate. But it can provide clues to do further research. Oh, this manager has a high Sharpe/Sortino ratio and handled bad market conditions well before. What did he do to handle those bad conditions? Are the same conditions in existence today? Consider, in March of 2020 we had a pandemic crash in which the world had to switch to virtual distance employment. No surprise, tech stocks and growth funds held up well in that environment and funds with growth tilts had high Sharpe ratios coming out of that crash.. Do the same conditions for market volatility exist today? Not exactly. Inflation and interest rate worries seem to be driving volatility more. Growth stocks with high valuations don't fare well historically as rates go up.
    *what else do we have to go on besides looking at past performance.
    As I already stated, fees, fees, fees. That expense ratio is like a toll road and the manager is generally going to collect it no matter what. Say you have an index fund with a 0.03% expense ratio and it metaphorically is a $3 toll road you could drive on or there is another road run by a fund manager with a 1.50% expense ratio charging $150 to drive through. That other $150 toll road better be 50 times smoother, safer or faster than the $3 one or you're losing out.
  • edited February 8
    I know you're using the toll road fees as an analogy but this analogy is applicable to passively managed like funds only, not actively managed funds.

    The other metric of a 1.50% ER fund being 50 times better than a 0.03% ER fund isn't applicable either imo.

    What matters I believe is after fee performance (after accounting for risk, category etc..)

    If one has access to a crystal ball that can see 10 years and the following were the choices what would most people pick?

    Fund A 10Y performance 5%, fees 0.03%
    Fund B 10Y performance 10%, fees 1.50%

    For a starting balance of $10K, after 10Y Fund A balance will be $16,242 and Fund B balance will be $22,609

    Note that I'm not arguing for or against passive investing, just the math of expenses and compounding

    As a personal aside, for more than 15 years I had hard cutoffs for ER, I would look at any fund that exceeded my thresholds but I now believe that is an error and that some fund managers do indeed earn and overcome expense drag.
  • Similarities without cause-effect relationship may be just coincidental. For MPT, this means that one can have confidence in similar MPT stats when sufficiently high correlations exist. So, comparing beta, Sharpe Ratio, Sortino Ratio are meaningful only when correlations are sufficiently high. It is easy to produce examples with similar MPT stats with low correlations that don't mean anything.

    Unfortunately, M* has overdone this by creating 127 categories in the US alone (more elsewhere) and most M* data is applicable within its categories. As users, we don't have control over aggregating M* categories - e.g. we cannot aggregate LC-growth, LC-blend, LC-value into a simple LC, or other combos. Lipper fund categories, at least as reported in Barron's, are poor for bond funds.

    As for Sharpe Ratio vs Sortino Ratio, I have found that in most cases, fund rankings by Sharpe Ratio and Sortino Ratio are similar, i.e. funds with high Sharpe Ratios also have high Sortino Ratios, etc. It is also known that adding bonds will increase both ratios, and optimization on either of those ratios will produce strange results for a mix of stock, bond, blend funds. But their utility remains in assessing similar funds.
  • edited February 8
    I use the sub-type field in MFO screener to group and compare. I think there are less than 10 values in that field so makes it a lot easier vs. like you stated M* and Lipper fund categories which can become mind bogglingly complex.
  • edited February 8
    It is also known that adding bonds will increase both ratios, and optimization on either of those ratios will produce strange results for a mix of stock, bond, blend funds. But their utility remains in assessing similar funds.
    Again context matters. Since about 1980 or 82, interest rates have been in a long-term downward trend, with a few blips upward at various times. Bond prices have gone up long-term as a result, moving inversely with rates. It would be interesting to see--perhaps "interesting" is not the right word--what would happen if we had a long-term upward trend in rates. I don't think that will happen, but if it did, it would be "interesting." Also interesting would be a sudden rate shock where rates went up a lot in a very short time.

    There are indeed managers who earn in excess of their expense ratio drag. The problem is--and perhaps the raison d'être for this site--is knowing in advance which managers those will be. I don't necessarily think past performance stats or even past risk stats, which one could argue are fruit of the poisonous tree being derived from performance stats, are necessarily the best indicators of that future outperformance. And as you've observed, the bare fact of the matter is the higher the expense ratio, the greater that hurdle is for the manager to overcome to beat the market and his/her peers. It's possible, but one must have a lot of confidence in the manager to begin with and increasing confidence the greater that hurdle is. That's where I think just looking at these numbers doesn't really help. They are a starting point perhaps, but not an end point.
  • >> I would look at any fund that exceeded

    not is dropped here?
  • edited February 18
    I just listened to Cathie Wood talk on CNBC Half Time Report. She said more than 50% of her net worth is invested in the ARK funds. Can not say too many fund managers can claim that level of personal conviction, FWIW. (As an aside, of all the things she talked about, I understand fixed income and her statement about interest rates makes me think she uses hyperboles to make her points. Not sure if that is also indicative of her thought process or just public posture / marketing.)
  • edited February 21
    CWood, hyperbole ? bwahaha
  • edited February 19
    Jeremy Grantham was on Barron's roundtable today and his take on the market was extra bleak.

    He believes we're in a "super bubble" about to burst and something that has only occurred 3x in the last 100 or so years.

    -S&P 500 to fall 50% to 2500 in his opinion.

    -"Today, well over 40% of the Nasdaq is down 50% from their highs" - suppose he's referring to the death cross.

    His Recommendations?
    - Have cash for next few years
    - Avoid US stocks except high quality
    -Blue chips are the way to go, but avoid US
    -Go International, they are normally overpriced
    -EM like Japan, Growth
    -Oh and avoid US stocks

    Those are his "thoughts" on the market.
  • grantham. the sky is falling. again. at some point, he'll be correct, like a broken clock.
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