Wednesday, December 5, 2012

2012: A Tough Year for Active Managers

Through the end of November 2012, the price of the S&P has risen +12.6% since the beginning of the year.  Including dividends, the total return of the S&P is nearly +15%.

Assuming there are no big negative "surprises" in the next three weeks, 2012 will go down in the books as a good year for the market.

However, this has been a difficult market to be an active manager.

Most of the gain during the year occurred in the first quarter.  Since the beginning of April, the market has traded in a range.  Since the end of March, the price of the S&P is essentially unchanged.

The charge in the first quarter was lead by two sectors:  Finance and Technology. The latter was dominated by the meteoric rise of Apple (AAPL) in the first quarter, which rose by more than +50% in three months.  Since that time, the stock has traded lower:

In order to beat the S&P this year, you had to start out the year with an overweight in Financial, Technology, and Apple - nearly ever other group massively underperformed the broader market indices in the quarter.

Then, however, you would have to nimbly reduce your holdings in Tech stocks (specifically Apple) and go back into the first quarter's laggards.  The latter would include the Energy and Health Care sectors.

Oh, and it would have helped if you were prescient enough to long-suffering telecommunications stocks would suddenly spring to life after the first quarter (and for no apparent reason:  the utility sector which also offers high yield has continued to do poorly).

Here's how Joshua Brown of the blog Reformed Broker put it:

In 2012, there were very few ways to win and lots of ways to lose...

First of all, you had to have come into the year fully-invested, both barrels loaded.  You also had to have been at least equal-weighted to Apple. Thus, if you had a value-bent (versus a growth-bent) to your allocation, you got smoked. The year's gains are front-end loaded, which means if you lagged that January to April run, you almost never had a chance to catch up....

 By September, the performance chase had pushed the market to a new year high, only to suck everyone back in right before the fiscal cliff / global recession zeitgeist started to make itself felt again.  A horrible earnings season in which "uncertainly" punctuated every conversation had ended with a second fakeout for the tacticians to impale themselves on. Just when it looked as though we were finally going to get a real correction and stocks had broken below the 200-day, the unthinkable happened: The light-volume and shortened holiday week saw one of the most incendiary stock market runs of all time.  In three-and-a-half days the S&P had gained back almost the entire correction in a run that seemingly included no one. Apple alone had ripped from 505 to 590 within what seemed like seconds! Forgetaboutit!

According to Merrill Lynch, 34% of active managers in the Core equity category have outperformed the S&P so far this year.  The average return for Core mutual funds is +13.7% vs. +15% for the S&P.