Stocktake

Low volatility not always a good sign

AUGUST tends to be a boring month, trading volumes slipping as investors take their holidays. But even by that standard, this month has been a real snoozefest.

Volumes are on track for their lowest month since December 2007 and the Vix, or volatility index, recently fell to 13.7 – a six-year low. One commentator noted that the Dow’s recent eight-day trading range – 128 points, or just 0.98 per cent – was the narrowest since at least 1950.

Has risk disappeared or is this complacency? Low volatility tends to augur well for stocks, says blogger Eddy Elfenbein. In the past, the SP 500 has returned 14 per cent annually when the Vix fell below 13; above 13, those returns fell to 3 per cent annually.

It’s been different more recently, however. The Vix has fallen below 15 on four occasions in 2011-2012, and all proved near-term market tops, with subsequent market falls ranging from 6 to 19 per cent.

Give me lucky fund managers

IFG says its new active lifestyling portfolio is “set to outperform the average Irish pension fund by 42 per cent”. Why? As back-testing shows it outperformed by 42 per cent over the last five years.

Alas, it’s not that simple – past performance, future results and all that. This column recently referred to a Standard Poor’s report on US fund performance in the past decade. Just 5.97 per cent of the top large-cap funds between 2002 and 2007 maintained a top-quartile ranking over the next five years. Top performers over three years were most likely to be in the bottom quartile over the next three years.

A small minority of managers do consistently outperform, but outperformance is usually explained by luck.

Merrill sees rise in investor confidence

FUND managers’ general inability to trump the market means Merrill Lynch’s monthly survey of global money managers has long been a contrarian’s goldmine.

“Survey finds investors displaying growing conviction in growth,” Merrill’s press release was headlined last March, just as global equities topped out. By June, however, markets had tanked and the survey found investors “at most pessimistic since summer 2011”. Average cash balances had hit 5.3 per cent, the third-highest on record.

Markets promptly soared.

The latest survey, released last week, finds that while there has been a huge upward swing in the percentage expecting the global economy to improve, and an easing of euro zone debt fears, cash levels remain high at 4.7 per cent. Any level above 4.5 per cent triggers a buy signal, said Merrill, providing the juice for further buying of global equities.

Bain of truth about Romney’s success

US REPUBLICAN presidential candidate Mitt Romney chaired “one of the most amazingly profitable and successful investment companies in history” while heading Bain Capital, the New York Times once said.

Not really, says the Wall Street Journal’s Brett Arends, who has written a new ebook that analyses Bain’s much-vaunted returns.

Arends estimates that investors earned between 17 and 25 per cent annually. That sounds great, but the greatest secular bull market in history was under way. Ordinary index investors enjoyed similar returns, without the outsized risks.

Stay on trend

FORGET the fundamentals – the trend is your friend. That’s the conclusion of a UK study which tested technical trend-following strategies in the US markets.

It examined a variety of “fairly simple” and common rules, such as exiting markets when they fell below their 200-day average. These rules were then compared to common fundamental valuation strategies based on dividend yields, earnings yields and so on.

The academics found the “simple fundamental metrics” to be “far inferior to the technical rules over the last 60 years of investing”.

See iti.ms/OrxG0r.