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Market Update: Apr 6, 2014

John Gorlow | Apr 06, 2014
Monthly Review

Despite choppy global stock markets the S&P 500 Index headed back to record levels at the end of March returning 0.85% for the month. Outside the U.S., the MSCI European stock market Index fell 1.02%, the MSCI Japanese stock market Index lost 1.15%, while the MSCI Emerging stock market Index gained 3.07%. YTD, the European Index returned 2.1%, the U.S. Index returned 1.81%, the Japanese Index lost 5.47% and the Emerging Market Index declined 0.43%.

From a size and style perspective, U.S. value stocks outperformed growth stocks marketwide. Across the size dimension, U.S. large caps outperformed small caps. In foreign developed markets, small cap stocks outperformed large caps and value stocks outperformed growth stocks across all size segments. In the emerging markets, small caps outperformed large caps and growth outperformed value marketwide.

In other markets, the S&P Global REIT Index and the Dow Jones Commodity Index each returned 7% and Gold gained 6.71%.

Investment-grade municipal bonds, as measured by the S&P National AMT-Free Municipal Bond Index, returned 0.09% for March and 3.37% for the quarter. Lower-rated municipal bonds qualifying for the S&P Municipal Bond High Yield Index returned 0.76% in March and 6.03% for the quarter.

As for the long end of the Gov’t bond market, as measured by the S&P/20+ Year U.S. Treasury Bond Index, it returned 0.76% for the month and 8.24% YTD, making it the leading overall Index in the first quarter. In regards to the short end, the S&P 1-3 Year U.S. Treasury Bond Index was down 0.11% MTD and returned only 0.15% YTD.

The S&P U.S. Issued Investment Grade Corporate Bond Index returned 2.90% YTD, just 0.07% behind the 2.97% YTD return of the S&P U.S. Issued High Yield Corporate Bond Index.

In the Media

Hedge Funds or “Hedge of Darkness”
Business Week

Bloomberg reports that hedge funds returned on average 7.4% last year compared to the S&P 500's 30% gain. Adding insult to injury, the underperformance of hedge funds over this period is even greater once the customary 2% management fee and 20% performance fees charged by hedge fund managers are taken into account. Further, Industry groups that report hedge fund returns rely on voluntary disclosures by the funds themselves on the returns they generate. Obviously, this creates potential for biases in the data, such as the omission of poor returns or the dropping out of the returns of failed or discontinued funds. Other drawbacks of hedge funds are their illiquidity, the relative lack of oversight, the additional costs of leverage and derivatives and, again the substantial fees. Truth be told, big money can be made from hedge funds but only if you happen to be the one running it.

The Wolf Hunters of Wall Street
The New York Times
An Adaptation From ‘Flash Boys: A Wall Street Revolt,’ by Michael Lewis

Recent concern over “high frequency trading” (HFT) has called into question the fairness of the practice. Many HFT strategies such as front running and price manipulation introduce market inefficiency that impacts the markets ability to operate and gives some market participants, those with more resources than others, an unfair advantage over their competitors. Wall Street does not always use technology for the greater good.  Although some HFT strategies do increase market efficiency by providing greater liquidity such as narrower spreads, faster executions, and lower explicit costs to those who need it, a high level of regulatory control remains imperative to ensure that markets operate ethically.

The Oracle of Omaha, Lately Looking a Bit Ordinary
The New York Times

When the media raises the subject of beating the market through astute stock picking, the name Warren Buffett is usually cited. Ironically, in four of the last five years, Warren Buffett has underperformed the S&P 500-stock Index. Buffett’s recent struggles underscores the necessity for Index funds — and reminds us of the near impossibility of consistently beating the market. Given the premium investors incur for active management, you would hope that they would get real value in exchange for steep fees— they don't! No wonder interest in passive management has grown significantly in recent years; it is fueled by a growing awareness on the part of savvy investors of the cost advantage and reliability of passive management.

When Bond Funds Think Outside the Box
The New York Times

Unconstrained bond funds can own debt instruments of any type — long or short-term, high or low quality, corporate or government or whatever, in any country and currency — to try to enhance returns. With interest rates near record lows and investors eager to bolster yields, enthusiasm for these portfolios is increasing.  How well are they doing? Not surprisingly, not well. The average nontraditional bond fund returned 0.3 % last year and 1.1 % in the first quarter of 2014. Such unconstrained strategies sum up to high fees and short track records combined with reduced profitably and increased risk when compared to conventional bond funds. Restrain yourself.

Active Fund Managers are Closet Index Huggers
Financial Times

The practice of running an “active” fund and charging an active management fee, while limiting the risk of underperformance by clinging to some Index is a well-kept secret in the mutual fund industry. Investors beware.

Inflation and Interest Rates
Up, up and away
The Economist

Higher inflation may be needed to leave extra-low interest rates behind. At first glance, rich-world central banks are going their separate ways. Cheered by sturdy growth figures, the Bank of England and the Federal Reserve are shuffling toward an exit from easy monetary policy; markets found Janet Yellen’s first Fed statement unexpectedly hawkish. The European Central Bank, in contrast, is tacking looser. On March 25th Jens Weidmann, president of the Bundesbank, suggested that the ECB might need to be more forceful in order to keep the euro-area economy out of the grips of deflation.


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