Home' Trinidad and Tobago Guardian : December 31st 2015 Contents DECEMBER 31 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
INVESTMENTS: YEAR IN REVIEW | BG11
By themselves, neither is very popular.
But together, perhaps, they can win
some fans?Stock-picking mutual funds,
which investors have been fleeing, are
increasingly bulking up on bank stocks
in hope of beating index funds and
luring back dollars.
That, plus other trends from around the mutual-fund
Banking on banks
Actively managed mutual funds are struggling. Most
have fallen short of the Standard & Poor s 500 index
for years, and the reason to pay their higher fees is for
the chance to beat index funds. Only 27 per cent of
large-cap core mutual funds beat the S&P 500 this
year, as of December 9.
To improve their returns and lure investors back,
stock pickers are increasingly betting on stocks of banks
and insurers. Large-cap core mutual funds have an
average of 17.8 per cent of their portfolios invested in
financial stocks, according to a review by Goldman
Sachs. That s 1.65 percentage points more than S&P
500 index funds have.
That may not sound like a big difference, but it s
the sector where active managers most differ from
index funds, by far. The next-biggest "overweight" by
actively managed funds is in the industrial sector. Man-
agers have 0.68 percentage points more of their portfolios
there than index funds do.
The emphasis on banks is part of a broader approach
to take advantage of rising interest rates, now that the
Federal Reserve has raised short-term rates for the first
time in nearly a decade. The Fed s move earlier this
month, and expectations for more increases, give banks
cover to charge more for credit cards, auto loans and
other products, which should help their profits. Higher
rates should also help insurers, allowing their vast bond
holdings to produce more income.
At the same time, fund managers have also lightened
up on stocks that, conventional wisdom says, would
be hurt by rising rates. They own fewer real-estate
investment trusts, utilities and telecoms than index
funds do, for example. These kinds of stocks pay high
dividends, and the thought is demand for them will
drop as income investors gravitate back to bonds.
Doing good and doing well
Actively managed mutual funds have been hemor-
rhaging dollars generally, but one niche within stock
picking has remained consistently popular.
Socially responsible mutual funds have drawn more
investment dollars than they ve lost in every 12-month
period going back to late 2013, according to Morningstar.
They attracted US$2 billion in net investment over the
year through November, for example. That s in stark
contrast to the US$163 billion that actively managed
US stock funds lost as a group over the same time.
Investors like that these socially conscious funds
consider whether companies are helping or hurting
the environment, promoting good corporate governance
or reducing income inequality. These factors could ulti-
mately help protect or hurt companies profits over
the long term, proponents say.
"Our numbers show that sustainable investing has
become part of the mainstream," said Lisa Woll, chief
executive of the Forum for Sustainable and Responsible
Investment, which also goes by the name US SIF. Hun-
dreds of funds incorporate environmental, social or
governance factors in their investment strategies, US
SIF has a list of them on its Web site.
AP's Stan Choe
If Mr Market flummoxed you in 2015,
don t worry. There s always tomor-
row. Wall Street saw the eurozone
narrowly avert disaster as Greece
agreed to another bailout, China s
stock market fall off a c/liff and
energy stocks suffer. Meanwhile, many
healthcare companies and tech stocks con-
tinue to roll.
What will the new year bring?
To give you a little assistance in navigating
the investment world, here s what some
long-time market experts will be watching
begin to recover
"No one is working on the assumption
that things are getting better in Europe,"
says Art Hogan, chief market strategist and
director of research at Wunderlich Securities,
headquartered in Memphis, Tennessee. "We
could end up with an upside surprise from
the European economy."
He notes that despite much drama, Greece
"didn t fall into the Mediterranean," and the
European Central Bank is adding stimulus
to the broad eurozone. The economy there
may not be as bad as some think.
If things across the pond do pick up, it
will be good for US stocks. The combined
countries of the European Union make up
the largest economy in the world, according
to World Bank data. If EU growth picks up,
it would benefit the world economy, includ-
ing the US.
About half of the revenues of the com-
panies in the Standard and Poor s 500 index
come from outside the United States. If
there is no improvement in Europe s econ-
omy, then the S&P 500 is projected to have
combined earnings per share of around
US$126 in 2016, Hogan says. "If we see
Europe improve, then it s US$130."
If the market-price-to-earnings valuation
stays similar to what it is now, then those
increased earnings would mean that the
S&P 500 would rise around nine per cent
next year. And there would be dividends on
top of that, he says.
Oil markets are
seeking a bottom
One area that is making many investors
nervous is the oil market. Prices for crude
have dropped from more than US$100 a
barrel to less than US$40.
"I want to see if we find stabilisation in
the energy market," Hogan says. "What
matters is that we see an end to the pre-
He says that s important, at least in part
because the oil market is seen as an impor-
tant bellwether for the health of the global
He s not the only one who s looking closely
at the oil patch. "We already know that
there is a lot of stress in the energy sector,"
says Jurrien Timmer, director of global macro
at Fidelity Investments in Boston. "If the
stress continues in the energy sector, that
tells me there will be ongoing stress in the
He says he gets a more precise read on
the level of that stress by looking at credit
spreads on high-yield bonds of energy com-
panies. The credit spread measures how
much more interest such companies must
pay to borrow money than the US govern-
Credit spreads of high-yield bonds of
energy companies are more than double
those of the broader junk-rated market. If
the spreads in the energy sector become
narrower, than it should be clear that bond
investors are more optimistic for the energy
patch. That would be a good sign for the
broader stock market.
Will the dollar
Timmer says he ll also be watching the
strength of the US dollar. "All else being
equal it will go up, because financial con-
ditions are getting tighter," he says. But that
will have consequences around the globe.
Most notably, a rallying dollar will put
pressure on China to devalue its currency,
he says. That will then have a further effect
of pressuring emerging market countries to
lower the value of their currencies so that
they can remain competitive in the inter-
However, devaluing a currency presents
other problems, notably capital flight. That s
where investors pull their money out of a
country in the wake of a falling currency.
It isn t good for longer-term economic
growth for such economies.
Other sectors to watch
One sector that has shown market lead-
ership in the past year has been healthcare,
but that might be coming to an end shortly.
"Both parties---Republicans and Democ-
rats---will be gunning for healthcare," says
Michael Gayed, portfolio manager at New
York-based investment advisory Pension
Partners. "Republicans will want to repeal
Obamacare, and Democrats may want to
Gayed says investors may find relief in
bank stocks, which will likely benefit from
the Federal Reserve s decision to slowly raise
interest rates. Banks make money by lending
money to customers at a higher rate than
they borrow it.
Theoretically, the rising interest rate envi-
ronment should be beneficial to financial
stocks, Gayed says. If borrowing costs of
longer-term loans rise faster than the Fed
hikes the short term cost of borrowing,
banks could do really well. US News
In this Friday, December
5, 2014, file photo,
Solomon works at his
post on the floor of the
New York Stock
Exchange. Investors are
rushing out of junk
bonds, spooked by the
closure of a mutual fund,
in December 2015, that
focused on some of the
yielding bonds. The
shutdown comes on top
of fears that more
defaults are on the way,
and it's led investors to
rush for the exits in a
corner of the market
that doesn't handle such
Mutual fund trends:
are banking on
What market pros will
be watching in 2016
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