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If The Fed Continues This, "There Won't Be Any Active Managers Left In 5 Years"

As the dash-for-trash continues in US equities, Neuberger Berman sums up the state of investing currently, "there has certainly been little reward for owning high-return, superior business models that are conservatively financed," as Bloomberg notes, Fed policy has had the “unintended consequence” of boosting the stocks of companies with heavy debt and little or no earnings. Typically after a recession, such companies lose out to firms that generate more cash and have better balance sheets; this time, no “Darwinian” shakeout happened and low-quality stocks ruled. Managers say they haven’t changed, the market has. The Fed's QE/ZIRP world has artificially inflated prices of lower-quality U.S. stocks, punishing those who focus on businesses with the best fundamentals, "if the next five years are the same, there won’t be any active managers left."

 

As Bloomberg reports, only twenty percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, and 21 percent topped the indexes in the five years ended Dec. 31, according to data from Chicago-based Morningstar...

Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals. At the same time, the relentless climb of prices across equity markets has left them with few chances to sniff out bargains or show what they can do in more-volatile times.

 

“In straight-up markets you don’t need active managers,” D’Alelio said in a telephone interview. “If the next five years are the same, there won’t be any active managers left.”

 

...

 

“We have been using the same process to pick stocks for 40 years and we have confidence in it,” Frank Gannon, co-chief investment officer for Royce, said in a telephone interview.

 

In his view, the Fed keeping interest rates near zero for the past six years has had the “unintended consequence” of boosting the stocks of companies with heavy debt and little or no earnings.

 

Typically after a recession, such companies lose out to firms that generate more cash and have better balance sheets. This time, no “Darwinian” shakeout happened and low-quality stocks ruled, Gannon said.

 

“There has certainly been little reward for owning high-return, superior business models that are conservatively financed,” Neuberger Berman’s small-cap stock team wrote

 

...

 

“People speak as if we have gone through a whole cycle,” said Neuberger’s D’Alelio. “Show me a cycle where stocks go straight up with no corrections.”

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As Baupost's Seth Klarman recently noted,

A value investor’s task in 2014 was made more difficult by these loose money policies and the resultant tide of bullishness.

 

For six years and counting, optimists have been relentlessly rewarded, and skeptics punished.

 

Our caution continues to be an ongoing and unavoidable drag on current investment performance. We remain determined to avoid speculation, while maintaining our disciplined, long-term orientation.

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