Fortune Teller

2014: An Extraordinarily Difficult Year for Stock Pickers and Market Predictors

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Fortune Teller

Last year (2014) may someday be considered as the year of the tipping point from active to passive fund management. The Vanguard Group, the world’s largest provider of index mutual funds had record-setting inflows of $216 billion (bringing its assets under management above $3 trillion), according to this Wall Street Journal article by Kirsten Grind. Dimensional Fund Advisors, which is almost exclusively oriented towards passive management, had the second-highest mutual fund inflows through November, according to Morningstar. With respect to exchange-traded funds (which are mostly based on indexes), BlackRock set its own record with over $76 billion of inflows, as shown below. Meanwhile, Pimco continues to bleed cash after the departure of Bill Gross. Over the last year, it has lost over $133 billion from investor outflows. The chart below summarizes the 1-year asset flows and shows how passive trounced active ($328.5 billion of inflows for passive vs. $89.2 billion of outflows for active).


Just how rough has 2014 been for stock picking active managers? According to this Barron’s article, only 39% of all U.S. large-cap mutual funds were ahead of the S&P 500 Index as of December 26th. For mid-cap funds, only 47% were ahead of the S&P 400 Mid Cap Index, and only 43% were ahead of the S&P 600 Small Cap Index.

As for hedge funds, Ms. Grind notes that they lagged behind major indexes in 2014 by a wide margin. We expect to have more details by the end of this week when the major hedge fund index reports its 2014 return. Alternative mutual funds which employ hedge fund strategies also faced a difficult 2014. As Ms. Grind notes in this article, the largest “liquid-alternative” mutual fund (Mainstay Marketfield, MFLDX) has lost more than $5 billion from investor outflows, following some bad bets tied to the global economy. For 2014, the fund lost 12.31%, according to Morningstar.

Another one of our favorite Wall Street Journal writers, Jason Zweig, summarized just how confounding 2014 was for economic predictions:

“In the Wall Street Journal’s January 2014 economic forecasting survey, 48 of the 49 participating business economists expected the yield on the 10-year Treasury note, about 2.9% around the time of the survey, to exceed 3% by year-end with an average forecast of 3.52%.”

It actually ended the year at 2.17%. Their average targeted price for a barrel of oil was $95 (a slight increase from the $92 at the time of the survey) compared to an actual price of about $54. Of the “14 top Wall Street strategists” quoted in this Business Insider article, only four correctly forecast that the S&P 500 Index would end the year above 2,000. As for the pundits who posted their “top ten stock picks” for 2014 such as this one from Kiplinger’s which got an average return of -1.3%, well as Tony Soprano would say, “fuggedaboutit!” 

As usual, Ms. Grind did a terrific job of finding ordinary investors to express their views. One of them said he felt “utterly cheated and violated” by how much he had paid to his longtime broker only to miss out on market returns. She also did a nice follow-up with Montgomery County, Pennsylvania which made a decision in 2013 to move the bulk of its assets into Vanguard’s index funds after some persuasion by Jack Bogle. Since then, the fund has gotten a return of 12.7% while saving about $1.3 million in fees, according to its chairman, Josh Shapiro who has received many inquiries from other pension funds. To summarize, we think that Michael Klein of Corona, California said it perfectly when describing his reason for abandoning stock picking active management: “Active managers can’t reliably beat the market consistently over time.” We see no reason why 2015 will be any different from 2014 in this regard.