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Even fund managers can’t identify future outperformers

Even fund managers can’t identify future outperformers
Robin Powell
Prof. Raghavendra Rau – Cambridge Judge Business School

One of numerous studies showing how hard it is to identify, in advance, a fund that will outperform over the long term, was conducted by Cambridge Judge Business School in 2014. What the researchers wanted to find out was whether fund managers themselves can spot talent in each other, and perhaps benefit by copying what talented managers do.

“As a normal investor, someone who is not a fund manager, how do I find a good fund manager? What I do is maybe look up his rankings, maybe look up his portfolio holding, maybe I’ll say that this manager has been the best manager over the last two or five years, consistently beating his benchmark over the last few years. So, but what other information do I have? Not very much. But fund managers are in the same business, they hang out with each other, they go to Pubs together. They may not discuss their trades, but you talk to people and you can figure out pretty fast who are smart people and who are not smart people.”

It seems logical to think that if anyone can identify a future star manager it should be their peers. But the Cambridge study found that fund managers are as bad at spotting talent as the rest of us.

“It turns out, according to our study, that the people who copy are pretty much what you call desperate fund managers. They are managers who have not done very well. They have suffered an outflow of funds over the last year. They have funds that have underperformed, they have usually large fees. So now here is the problem: You’re a fund manager in a pretty bad state. You have no money to spend on research, you have no money to hire an analyst of your own. What do you do? Wouldn’t it be possible to find superior fund managers and just copy their trades? But how do you pick? Who do you know is a superior fund manager? What you should see are that the fund managers whom you copy don’t necessarily have good performance before you copy them, but they should have good performance after you start copying them. That means you identify the people whose public information will not tell if he’s a good fund manager or not, but private information will say if he’s a good fund manager or not. We don’t find out. What we find is: Copycats copy funds with good past performance. They copy funds which are exactly the kind of funds that you and I would copy with no information about these funds at all.”

This is yet more evidence trying to pick future winner is a thankless task. Far better not to try it at all, and simply aim to capture market returns by indexing. Thanks for watching.

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Asset Growth, Investor Positioning and China Market Turmoil

Deutsche Bank – Synthetic Equity & Index Strategy – Asia
Asia-Pac Monthly ETF Insights – Asset Growth, Investor Positioning and China Market Turmoil

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Data in this report is as of 31st July 2015

Global ETP assets on track to pass $3 trillion mark soon

Global ETP assets stand at $2.94 trillion at the end of July, on track to reach $3 trillion mark. In our “ETF Annual Review & Outlook” published at the beginning of the year, we projected the industry to pass $3 trillion milestone in 2015, reaching $3.2tn at the year end in our base case scenario. It took the industry 19 years to reach the first trillion dollar, but 4 years to hit the second trillion dollar mark, and may take only 2 years to pass the third trillion dollar mark. On a YTD basis, global ETP market is up by $222bn or 8.2%. Asia-Pac listed ETP assets closed the month at just under $240bn with 18.6% YTD gain, highest among all the regions, driven by record monthly inflow to ETFs listed in China.

Global investor positioning: prefer DM, Europe and Japan, shy away from EM

We see clear trend from recent ETF flow that investors favor DM, especially Europe and Japan, while bearish across the board in EM. Based on ETFs listed offshore, global investors put over +$800mn into Japan focused ETFs over the last month. Almost all EM Asia countries saw redemptions: China, Taiwan and India focused ETFs recording -$448mn, -$189mn and -$127mn outflows.

These trends are likely to continue in the near term. The growth momentum is robust in Europe, while EM countries will continue to be under pressure as the Fed may hike rates as soon as in September. In addition, on Aug 11, China depreciated the fixing rate of RMB by 2% against USD, which may cause further outflows to Asian EM countries. India has attracted $3.4 bn inflow in 2015 YTD, while we saw the first monthly outflow in July. It is worthwhile to watch if this is the beginning of a new trend.

Insights on recent China market turmoil viewing from ETF angle

In July, activities related to China focused ETFs elevated amid volatile equity markets. ETFs listed in China (onshore) saw +$7.6bn inflow driven by government purchases. The monthly trading volume registered by onshore China ETFs stood at.$150bn and $125bn for June and July respectively vs. the $90bn YTD monthly average and 2014 average of $25bn in 2014. Volume in US listed leveraged/short China ETFs increased dramatically indicating investors use these tools to profit from the volatile market. Inflows to inversed ETFs reveal investors are bearish about the market. Among offshore China ETFs, we have seen continuous inflows to the H-share ETFs vs outflows to the A-share ETFs. This trend is likely to continue as we see over 20% upside potential this year in H-shares, predicted by our China strategy team.

China ETFs provided liquidity and acted as price discovery tool during the period of large number of stock suspensions (at the peak about 50% of the stocks in China suspended). Another recent example is GREK, an ETF tracking Greece continued to trade in the US during the closure of Greece market.

Product launches – Leveraged/short, China sectors & currency hedged

13 products were launched in Asia-Pacific, and 3 new APAC focused ETFs in the US and 1 APAC focused ETFs in Europe. The main themes of the new product launches include leveraged/short, China/sectors, and currency-hedged ETFs.

Risk Off to Risk On

ETFS Multi-Asset Weekly – Risk Off to Risk On

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Highlights

Historic accord on Iran deal paves way for lower oil prices.

Positive Chinese data, Q2 earnings and central bank meetings help fuel equity rally.

Declining commodity currencies underscore growth path divergence within major developed economies.

With Greece’s survival in the EU extended, and Greek banks partially opening today cyclical assets rallied. However, banking restrictions remain after being shut for three weeks and the ECB has injected €900m worth of fresh liquidity taking the country’s emergency liquidity assistance to €89.9bn. With Grexit fears easing and the US ready to raise rates later this year, gold has fallen out of favour and its price fell sharply today. However we believe that rate rises will be gradual and are more than priced-in to gold already and we are clearly not out of the woods on the Greek saga.

Commodities

Historic accord on Iran deal paves way for lower oil prices. The landmark deal of the six world powers with Iran to ease nearly a decade of sanctions in exchange for restricted nuclear enrichment activity is expected to apply further downward pressure to the price of oil. The International Energy Agency has said that Iran has at least 17m barrels of crude oil stored at sea ready to be shipped to an already oversupplied global market. In addition Saudi Arabia reported its crude oil production hit a record 10.6m barrels a day in OPEC’s latest monthly oil report. Meanwhile, US Crude stockpiles remain almost 100m barrels above the five-year average for this time of the year according to U.S. Energy Information Administration. We believe that after an initial correction, high cost oil producers will cut back on production paving the way for price increases in the future.

Equities

Positive Chinese data, Q2 earnings and central bank meetings help fuel equity rally. China dominated the data landscape with better-than-expected annual GDP (7% vs consensus expectations of 6.8%), industrial production (6.8% vs 6%) and retail sales (10.6% vs 10.2%) figures. Although viewed with skepticism, the releases helped reverse some of the losses on major global equity bourses. The Q2 earnings season added further momentum as 60% and 70% of the companies that reported earnings so far beat estimates in Europe and US, respectively. Central bank comments in the US and UK echoed the possibility for a rate rise on the back of improving economic data. While in Europe ECB president Draghi confirmed the asset purchase program was proceeding smoothly and helped allay investor concerns over Greece’s exit.

Currencies

Declining commodity currencies underscore growth path divergence within major developed economies. The Canadian dollar declined nearly 2.5 per cent against its US counterpart on the back of rate cut by the Bank of Canada and downward revisions in its growth forecasts. The Pound advanced to its highest level against the Euro since 2008 although there was no change in policy underlined in this week’s Bank of England monetary policy meeting except the Bank of England governor Mark Carney’s warning of a possible rate rise to reflect economic momentum. Looking ahead weaker dairy prices and lower CPI reading in June lead us to expect a rate cut by the Reserve Bank of New Zealand by 25bps to 3.00% this week. Antipodean currencies, AUD &NZD, are likely to remain under pressure as long as negative sentiment pervades the outlook for China.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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