FINANCIAL MARKET UPDATE 3.29.2022

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

STOCK PICKERS CONTINUED TO STRUGGLE IN 2021

New Data published last week from S&P Global showed active fund managers continued to struggle in 2021. With the S&P 500 gaining 28.7% last year, active funds generally did well on an absolute basis. Comparing their returns with passive benchmarks, however, left a lot to be desired.

A few months ago, we wrote about why active managers struggle to keep up with passive market returns. We won’t rehash all those points again, but you can find that post (Here). At the time, we used data from the semi-annual S&P Index vs. Active (SPIVA) report with data through mid-year to support our case. A few days ago, S&P Global published their latest iteration, containing data through year-end.

As the chart below illustrates, 2021 ranks as the third-worst year for fund managers going all the way back to 2001. In total, 79.6% of domestic equity funds underperformed the S&P Composite 1500, which represents the majority of the U.S. stock market by market capitalization.

Some fund managers will suggest that while they may underperform passive indices, they add value by doing a superior job of managing risk. The data, however, contradicts that claim. As the chart below illustrates, while the vast majority of funds have underperformed over the last three, five, ten, and twenty-year periods, an even larger percentage of funds have underperformed after adjusting for risk!

Finally, you may think it unfair to compare a narrowly focused domestic equity fund to the U.S. market as a whole. Perhaps there is a large swath of funds that are underperforming simply because the slice of the market they are targeting has underperformed. Sadly, this does not appear to be the case. When you group funds by their size and style objective and compare them to narrower and more representative indices, you still get the same result. The vast majority of funds fail to keep up with their benchmarks, particularly over longer periods of time. This is evident in the table below. Large-cap funds, for example, have a horrible track record relative to the S&P 500, with 94% of them underperforming over the last twenty years.

I’m going to borrow the closing of the prior post because I don’t think I can improve on its message.

None of this is to say that investment professionals cannot be leveraged to help people reach their financial goals. Designing an appropriate asset allocation, the mix between riskier equity and more stable fixed income investments is a critical role that can deliver immense value. The behavioral component is also vital. A financial advisor can help keep emotions at bay, allowing clients to stay the course while other investors become overly optimistic or pessimistic. Lastly, while market efficiency generally renders active stock-picking useless, there are ways to use the information held in market prices to enhance returns. Decades of empirical research have identified certain stock characteristics that are readily observable in current prices and have delivered a return premium over time. These include low price (value), low market capitalization (size), and high earnings (profitability). Tilting a diversified portfolio toward these characteristics is a way to improve returns without the high cost and guesswork associated with active stock picking.

WEEK IN REVIEW

  • Mortgage rates have continued their rapid rise as the market prices in a faster than originally expected pace of monetary policy tightening. According to Freddie Mac, the national average for the 30-year fixed-rate mortgage hit 4.42% last week (3/24). That is up from 3.76% at the beginning of March and 3.11% at the beginning of 2022.
  • A report published this week showed consumer confidence increased for the first time in 2022. The increase was smaller than expected, however, and largely associated with a downward revision to the prior month’s figure. The report showed that consumers’ view of the present situation strengthened, but their view six months into the future deteriorated. Rising interest rates and inflation were among the factors making consumers nervous about the future.
  • It is a big week for economic data, and there is a healthy dose of speaking engagements for Fed officials. On Thursday, look for an update to the Personal Consumption Expenditures Index (the Fed’s preferred gauge of inflation), as well as jobless claims. On Friday, we will get the March Nonfarm payrolls report, as well as an update on manufacturing sector activity.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Mortgage Rate Soars Closer To 5% In Its Second Huge Jump This Week (CNBC)
  • U.S. Weekly Jobless Claims Lowest Since 1969; Continuing Claims Shrink (CNBC)
  • When Will Consumer Inflation Breaking Point Be Reached? Here is What the Market Is Monitoring (CNBC)

Investing

Other

  • The Small Steps of Giant Leaps (Farnam Street)
  • Extended Period Overtime is Gaining Momentum (Sports Illustrated)
  • Bill Gates and Blackrock Are Backing The Start-up Behind Hydro Panels That Make Water Out of Thin Air (CNBC)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER, PRINCIPAL

Josh Jenkins is a Chief Investment Officer and Principal at Lutz Financial. With 12+ years of relevant experience, he leads the Investment Committee and specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership, and the division's analytics and operational efficiency. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading Team Oversight
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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