Equity Management More Important Than Ever Before

In the years 2010-2012, investors around the world poured nearly $700 billion into bond funds, while taking nearly $300 billion out of stock funds. That was then, this is now. Today, more investors view the bond market as abnormally risky and are concerned that recent bond losses could deepen if interest rates continue to rise. ZIRP (zero interest rate policy) has come at the expense of savers and conservative investors, among them are retirees and captive insurance companies. Without an ability to find a risk-free return, much less a low-risk return, many investors have moved and continue to move into riskier assets in order to generate some returns.

  >> Read Our Year End Update: 2013 in review: US Stocks win the race


Best Year Ever For Stocks Over Bonds

PIMCO's flagship Total Return Fund (PTTRX) is down -1.4% year-to-date. The S&P 500 is up 28.2%. With bond yields at historic lows, higher-than-normal volatility, and uncertainty about eventual tapering of the US Federal Reserve's quantitative easing program, investors are concerned about their bond assets in a rising rate environment.

In a note to clients, BofA Merrill Lynch strategist John Bilton wrote, "3Q13 earnings season may have left many investors with a rather 'hollow' feeling; but it’s hard to deny that 19% total returns in stocks, when bonds are on course for their worst year since 1987, makes for a tidy performance from stocks this year (chart 5); and if SPX closes 2013 at 1750 and US 10y yields at 3%, stocks will have beaten bonds by 37% in total return terms – the highest differential in 40 years."

equity management flows

Fund Flows Say All Eyes On Equity Management

According to Strategic Insight, equity funds and ETFs are on track to attract $450 billion in 2013, more than the past 4 years combined. "This is the year for stock mutual funds. Investor confidence continues to trigger higher stock fund flows," commented Avi Nachmany, Strategic Insight’s Director of Research. In the month of October, equity mutual funds and ETFs overall experienced inflows of $60 billion while bond mutual funds and ETFs experienced net redemptions of $15 billion.

A Game of Musical Chairs

Perhaps the greatest challenge facing investors currently is that the strong stock performance this year is not driven by human irrationality as it was during the internet bubble. Rather, investors are moving to risk assets because of coordinated policy moves by the Federal Reserve, the Bank of Japan, the European Central Bank, and Bank of England. While current policy is maintained, investors will be rewarded for playing in the equity pool. However once the music stops, will investors be scrambling to sit down in a finite number of chairs? 

As we wrote in "Is the Bear (Market) Coming Out of Hibernation?," since the 1950s, there have been 10 bull markets with an average duration of 4 years. With the market nearing 4 3/4 years into its bull run, investors have one eye on the exit door. So it all boils down to equity management.  As we enter 2014, it just might be worthwhile to not only look in the rear view mirror to see how your equity manager performed in the past 12 months but to check how he/she performed in 2000 and 2008.

Luckily, the music has not stopped, yet.

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photo credit: David Paul Ohmer via photopin cc

With the market now 4.5 years into its bull run, investors have one eye on the exit door.
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About the Author: Andrew Wang

Andrew Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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