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Mighty macro

There was an interesting article in the American financial press that I came across recently. It seems that a noted stockpicker was blaming his recent underperformance on “a tidal wave of macro forces”.

Certainly, there have been more than a few instances of bottom-up merchants being unseated by recent market behaviour but this particular manager described the current art of stockpicking as an exercise in futility. Strong words indeed.

It happens that exchange traded funds are playing an increasing role in portfolio construction for a wide range of managers these days, so his comments were hardly encouraging for the large contingent wedded to the active management camp.

Indeed, greater use of derivative instruments seems set to widen the range of options available to users of these index-tracking vehicles.
Yet, carried to its ultimate conclusion, a market entirely driven by passive forces must surely lack efficiency.

However, it is not the rise of the computer as fund manager that has been threatening the active brigade. Rather it is thematic investing. Or at least, that is the opinion of the disadvantaged stockpickers that contributed to this particular piece of investigative journalism.

It seems that many managers eschew even fundamental research these days, preferring to rely on jumping on board macro themes as they develop.

In case this sounds like just an excuse being proffered by hitherto star managers that are travelling through a rough patch, it is worth noting that a number of leading US fund management groups have launched macro-theme-driven mutual funds recently, including Goldman Sachs.
Not, of course, that this approach guarantees success. It seems that the world of investment remains as tricky as ever.

What is clear, though, is that some tried and tested approaches have suffered hugely in the market turmoil ushered in by the credit crunch and subsequent recession. The situation has yet to regularise itself, with the result that some managers are choosing to exit the business, citing the difficulties of establishing successful strategies.

It seems that many managers eschew even fundamental research these days, preferring to rely on jumping on board macro themes as they develop’

This will create oppor-tunities for some but it hardly makes the business of fund selection any easier for investors and their advisers.

Investment has always been a dynamic business but the experience of the immediate past underscores the very real changes that have taken place in a comparatively short space of time. The increasing use of derivatives, faster communications, a shrinking world in terms of economic independence – all have contributed to greater volatility, more asset performance correlation and less certainty over outcomes.

The changes that are just around the corner in terms of regulation of advice will add further pressure.

Meanwhile, domestic house price falls have moderated, consumer confidence in the US has improved and Ireland is counting the cost of bailing out its banks. All will influence the way in which certain markets move. All might be considered part of the macro themes that are now so influential. And, as is so often the case these days, the signals these and other indicators and developments are sending out are conflicting.

On my desk at present are some interesting tomes that may well provide useful information to share in the future. A leading US fund manager that appears to have successfully sidestepped the traps laid by the macro themes suggests the grassroots experience of corporate America is better than the top-down pessimists are suggesting. And a leading economist asks whether China is in fact the biggest bubble of all. Conflicts again. Oh well, it takes two to make a market.

Brian Tora is a consultant to investment managers JM Finn & Co

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