MY COLLEAGUE Gabriel Chen recently wrote an article highlighting that exchange-traded funds (ETF) had outperformed actively-managed funds like unit trusts by a wide margin last year.
Exchange-traded funds are pools of money raised from investors which aim to invest in baskets of stocks which track widely-watched market indexes, or precious metals like gold which require cumbersome security measures and storage space.
It may come as a surprise that highly-paid professional fund managers, who spend all their time poring over stocks, should underperform the stock indexes.
Out of curiosity, I decided to go one step further, and looked up the Bloomberg data on how the most highly-rated STI stocks at the start of last year actually performed.
The results turned out to be quite startling, and gave the sub-editor the opportunity to put a catchy headline to it: Bull's eye or just bulls ?
Some of the best-rated stocks like those of United Overseas Bank and DBS Group Holdings actually fell in value in the past 12 months, even though STI chalked up double-digit gains.
Better still, some of the least favoured STI stocks among analysts last January like Genting Singapore and Jardine Matheson turned out to be big winners.
I am not suggesting that investors should look for the ugly ducklings among this year’s STI component stocks and take a bet that they will outperform the STI again.
But I suspect that there may be some correlation between the two observations – ETFs outperforming unit trusts and analysts’ judgement getting awry over their most highly-rated calls.
But ETFs – which track stock indexes – reflect the workings of an efficient market, with its price tracking the movement of the index each time it reacts to fresh news affecting the component stocks in its make-up.
For analysts and professional fund managers, the best way to make money is to find gems which have been mispriced as they have been overlooked.
But there is likely to be a time lag to them reacting to any major news break affecting the counters which they are holding.
Like the rest of us, fund managers are also human beings – and their investment decisions may be coloured by emotions too. There may just be a natural reluctance for them to take losses immediately in the event of a negative newsflow.
In the past few months, I have taken a more investment education approach in my columns. The best way to ensure that a Lehman-style rip-off does not recur is to make sure that investors understand the ABCs of what they are getting into. And if even I don't understand a certain investment, despite having tracked the financial markets for the past 25 years, I am sure that most other investors will be in the same quagmire.
The United States (US) Fed has kept interest rates at almost zero for almost two years now – and that is unprecedented in modern history including the dark days of the Great Depression more than 80 years ago.
With so much liquidity awash in the financial system, fears have arisen of the asset bubbles that may spring up in Asia.
As such, I highlighted in Monday’s Cai Jin column that the smart money appears to be switching out of outperforming markets like Indonesia – as measured by the redemptions out of funds investing in Asean markets, and into the depressed markets of Europe and the US, given the perception that regional stock prices may have run ahead of valuations .
But as I suggested in Sunday’s Small Change column, there is no need for investors to fret about missing out of the stock market rally, as there will be plenty of buying opportunities any time a spate of bad news hits the market.
I like the advice from CitiBank that the grind higher must always mount walls of worries.
It appears that the advice may be apt for Citi investors too. After an exuberant run-up which sent Citi’s share price soaring past the US$5 mark last week, disappointment over its quarterly results sent its share price tumbling by 6.43 per cent last night.
Buying the dips may be sound advice. But it is easier said than done.