1 / 29

the slides - PowerPoint PPT Presentation

  • Updated On :

February 4, 2010 1. Do Not Try to Time the Market Flows to Equity Funds Related to Global Stock Price Performance Source: Investment Company Institute The Danger of Trying to Time the Market 15 Year Average Annual Returns (1994-2008) 15 Year Average Annual Return 6.5% 1.9% -3.7 %

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'the slides' - Ava

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Slide1 l.jpg

February 4, 2010

Slide2 l.jpg

1. Do Not Try to Time the Market

Flows to Equity Funds Related to Global Stock Price Performance

Source: Investment Company Institute

Slide3 l.jpg

The Danger of Trying to Time the Market

15 Year Average Annual Returns (1994-2008)

15 Year Average Annual Return






Stayed the course Missed Best 10 Days Missed Best 30 Days Missed Best 60 Days Missed Best 90 Days

Investor Profile

Source: Standard and Poor’s, Davis Advisors, and Vanguard Investment Strategy Group. The market is represented by the S&P 500Index.

Past performance is not a guarantee of future results.

Slide4 l.jpg

There is Also a Selection Penalty

Quarterly Flow into Growth and Value Funds, and the Nasdaq’s Close


Net Flow (bil)

Total Flow

Growth: $363b

Value: $96b

Source: Strategic Insight

Slide5 l.jpg

Average Stock Fund Return vs.

Average Stock Fund Investor Return



Average Annual Return

The “Investor Behavior”



Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (July 2008) computed the “average stock fund investor” returns by using industry cash flow reports from the Investment Company Institute. The “average stock fund return” figures represent the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model.

Slide7 l.jpg

The Advice of Warren Buffett

A short quiz: If you plan to eat hamburgers throughout your life and are not

a cattle producer, should you wish for higher or lower prices on beef?

Likewise, if you are going to buy a car from time to time but are not an auto

Manufacturer, should you prefer higher or lower car prices? These

questions, of course, answer themselves.

But not for the final exam: If you expect to be a net saver during the next

five years, should you hope for a higher or lower stock market during that

period? Many investors get this one wrong. Even though they are going to

be net buyers of stocks for many years to come, they are elated when stock

prices rise and depressed when they fall. In effect, they rejoice because

prices have risen for the “hamburgers” they will soon be buying. This

reaction makes no sense. Only those who will be sellers of equities in the

near future should be happy at seeing stocks rise. Prospective purchasers

should much prefer sinking prices.

Slide8 l.jpg

3. Rebalance Yearly

During this period, an annually rebalanced portfolio provided lower volatility and higher return

Slide9 l.jpg

4. Diversify, Diversify. Diversify

  • Few Places to Hide During World Wide Recession

  • But Safe Bonds (e.g. U.S. Treasury Bonds) and Gold Helped

  • While Correlations Have Risen There Have Been Large Differences in the Returns of Different Asset Classes

Slide10 l.jpg

Time Varying Stock-Bond Correlation

Moving three-year stock-bondreturn correlations

Long-term average

Data: 10Y Treasury return is calculated from 10Y Treasury yields. Yields are originated from FRB website. Domestic stocks: 1926-1970 S&P 500 Index (monthly reinv); 1971 – 4/22/2005 Dow Jones Wilshire 5000 Index; 4/22/2005 – present MSCI US Broad Market Index

Slide11 l.jpg

Diversification Into Emerging Markets Helped During the Lost Decade







Emerging markets

Annual growth rate

for the decade: 10.1%

Developed markets

Growth rate: 0.2%

‘00 ’01 ’02 ‘03 ‘04 ‘05 ’06 ’07 ’08 ‘09

Sources: MSCI and Bloomberg

Advantages of diversification rebalancing and dollar cost averaging l.jpg

A Lost Decade? Decade

Value of $100,000 invested on January 1, 2000

50% bond,

25% U.S. stock,

25% international stock

With $1,000 monthly contributions

And annual rebalancing

Advantages of Diversification, Rebalancing and Dollar-Cost Averaging








S&P 500 index

’00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ’08 ‘09

Source: Vanguard Adjusted for inflation.

Slide13 l.jpg

5. Costs Matter Decade

Source: Lipper data for all General Equity funds

Slide14 l.jpg

Costs Matter Decade

Actively-Managed mutual funds with low costs outperform funds with high costsDecember 31, 1994 through December 31, 2009


Net Return to Investors


Source: Lipper data for all General Equity funds

Slide15 l.jpg

6. Use Index Funds Decade

  • Markets are reasonably efficient

  • But even if they are not efficient, indexing is an optimal strategy

Slide16 l.jpg

Distribution of returns Decade


Better than the market

Below the market




= Market Performance

Investment Performance is a Zero-sum Game

Slide17 l.jpg

Indexing works Decade


Below the market

Better than the market




8% = Market Performance

Impact of costs

After Costs, Active Management is a

Negative-sum Game

Slide18 l.jpg

Large-cap Equity Funds Versus S&P 500 Index Decade

Percentage of large-cap equity funds outperformed by S&P 500

Periods ended December 31, 2008

Sources: Lipper, and Vanguard.Past performance is no guarantee of future results.

Slide19 l.jpg

The Odds of Success: Returns of Surviving Funds Decade

Mutual Funds 1970-2009 Compared with S&P 500 Returns

  • Number of equity funds

  • 358

  • 2009 119

  • Nonsurvivors 239



Number of equity funds








Annualized Returns 1970-2009

Sources: Lipper and Vanguard.

Slide20 l.jpg

Percentage of Actively Managed Bond Funds Outperformed by the Benchmark

10 years ended December 31, 2008

Source: Morningstar, Barclays Capital and The Vanguard Group.

Slide21 l.jpg

It’s Down to One the Benchmark

Of 14 funds that beat the Standard & Poor’s 500-stock index for nine

consecutive years through 2007, only one continued that feat last year.

2008 return (prelim.)


M&N Pro Blend Max S

S&P 500 (with divs. reinvested)



Amer Funds Fundamental A

Target Gr Alloc A



Lord Abbett Alpha Strat A

T. Rowe Price Spect Grth



JPMorgan Small Cap Gr A

Hartsford Cap App HLS 1A



AIM Capital Development A

Columbia Acorn Select Z



T. Rowe Price New Era

Fidelity Select Natural Res



Jennison Natural Res B

Fidelity Adv Energy T

Ivy Global Natural Res A



From: The Wall Street Journal, 1/5/09

Slide22 l.jpg

Satellite the Benchmark1

Satellite 2

Index core

Satellite 3

Potential Advantages of Core-Satellite Approach

Core portfolio (indexed investments)

Low costs vs. active management

Lower risk budget versus active management

Diversification (broad indices)

Close tracking of benchmark performance

Satellite portfolio (active investments)

Take “bets” to enhance returns (add alpha)

Higher costs versus indexed management


Require strong selection skills

Can use illiquid assets

Slide23 l.jpg

Despite Decades of Uncertainty the Long-Run Trend of the Stock Market Has Been Up





16 Years


25 Years

Slide24 l.jpg

Valuations Are Moderate Stock Market Has Been Up

Shiller PE Ratio

(S&P 500 Real Price/10-Yr Average Real Earnings

Source: Robert Shiller website

Slide25 l.jpg

Median Ten-Year Annual Compound Total Returns from Historic Stock Market Has Been UpP/E Deciles 1926 to 2008







Return (%)





Stocks Cheap

Stocks Expensive

Slide26 l.jpg

Diversification Again Stock Market Has Been Up

The Home Country Bias

U.S. ≈ 40% of World

Emerging Markets Are Growing Faster than Developed Markets

China‘s Growth Has Been Unprecedented

China Likely to Surpass Japan

Yuan is Severely Undervalued

Slide27 l.jpg

China’s GDP as a Percent of World Total* Stock Market Has Been Up

Source: Historical Statistics for the World Economy – Angus Maddison, ISI.

*Adjusted for purchasing power parity

Slide28 l.jpg

China’s Strengths Stock Market Has Been Up

  • Underdeveloped Center and Western Regions

  • Tremendous Human Capital

    • Educated

    • Hard Working

    • Entrepreneurial

  • Government Policy Promotes Growth

  • Strong Fiscal Balance

Slide29 l.jpg

Assessing China Through Low-Cost ETFs Stock Market Has Been Up

  • FXI vs. YAO

  • HAO

  • Closed-end Funds