How Market Rotation Stole the Alpha in 2014

My post on Friday about how 2014 has been “the worst year for stockpickers in three decades” has generated an epic amount of feedback. I’m not saying anything that everyone doesn’t already agree on – fees are too high and competition is too intense – but it’s a subject that remains incredibly controversial and a sore spot for Wall Street professionals and their clients alike.

In this weekend’s Barron’s – the magazine itself being a Temple to Active Management – columnist Bill Alpert takes on the fact that nearly all stockpickers have underperformed their benchmarks this year. His culprit is not Apple’s outsized gain, the argument made by many others. Rather, he blames the rapid-fire rotations that have rippled through the S&P 500 all year with an assist from Nomura quant strategist Joe Mezrich.

It’s an interesting take (emphasis mine)…

“Managers may be smart enough to pick the right stock,” Mezrich told me, “but the returns are not there.” Ten years ago, a money manager might have levered up to boost returns in a low-volatility environment. But now, leverage is a dirty word. Instead, a lot of active managers seem to have hopped aboard momentum stocks, that is, whichever stocks have risen steadily in prior months. The momentum strategy worked well until March and April, when such stocks got crushed. Mezrich is a close student of investment strategies, and he’s found that no particular style of stock selection is successful for long in the current market; leadership keeps flipping from momentum to value to market-cap stocks, and beyond.

And the market has been even more fickle in rewarding investors for selecting industry sectors, he notes. Utility stocks started the year strongly, for example, then floundered in the summer. Telecom stocks started weak, then rebounded. When Mezrich looked at the stock performance of the market’s 10 broad industry sectors, as defined by the Global Industry Classification Standard of index firms MSCI and Standard & Poor’s, he found that industry leadership has been reversing from month-to-month at a rate unseen in decades of stock-market history. “Even if you’re picking the right stocks in a sector,” he says, “things are moving around so much that your performance doesn’t persist.

I think this leads to even more scrutiny over the fees being paid to active managers – from the largest institutions like Calpers to the Mom & Pop player at home, who now has access to all of this data at the swipe of a smart phone screen. In response, Wall Street needs to sell something else entirely. One early candidate for this substitution appears to be “liquid alts.”.

By the way, if Mezrich’s reason for mass-underperformance is accurate, the question that begs to be asked is What will change this situation and when? Got me, I don’t know.


Stockpickers’ Blues (Barron’s)

Read Also:

The Worst Year for Active Stockpickers in Three Decades (TRB)

Brokers, Liquid Alts and the Fund That Never Goes Up (TRB)

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