Happy 5th Anniversary, Bull Market!

That’s right, it’s the Wood Anniversary for the market, which hit bottom on March 9, 2009. Since then, it has come roaring back – the S&P 500 is up 174% for the 5-year period (that’s price change only, not total return). Not too shabby.

The WSJ has a nice article here showing the anniversary in five charts. According to one of the charts, this rally is the second-best since WWII (beaten only by the S&P’s 228% gain from 10/82 through 10/87). The article’s author thinks there is still room to go in the market recovery, saying that investors’ confidence in the rally will continue to fuel stock market inflows.

No one knows what the future will bring where the market is concerned, but the present is a far cry from five years ago. Happy Friday, happy bull market anniversary, and here’s to five more years!

Sarah DerGarabedian, CFA
Portfolio Manager

The Best Man for the Job is…a Woman?

I was pleased to read yet another article supporting the importance of women in portfolio management. The article (found here) cited a recently released report which found that an index of hedge funds managed by women outperformed the HFRI Global Hedge fund Index over a 6.5-year period. During that time, the female-managed fund index rose 6%, while the HFRI declined 1.1%. Of course, the sample size was relatively small, as only about 125 of the 10,000+ hedge funds have female portfolio managers. Still, the data seem to support the notion of gender diversity in investment management. There have been many articles written about how men and women differ in their approach to investing, indicating that women investors on average have a performance edge on men.

Many theories abound as to why this might be the case. Some of the most popular theories are that women tend to be more risk-averse (less testosterone) and are therefore less likely to take risky bets that don’t pay off. Another theory is that women lack “over-confidence” leading them to trade less, which has shown to contribute to outperformance. This particular article also suggested that these women hedge fund managers took a longer-term view compared to their male counterparts, which paid off over the time period in question.

Fortunately, Parsec is ahead of the curve when it comes to gender diversity in the investment management arena. Three of our five CFA charterholders are women, and are active members of our Investment Policy Committee. We don’t really know the reasons behind the findings in these studies, but some of the theories described above make sense to us. At Parsec, we don’t see this as a gender issue, just good investing. Our philosophy has always been one with a long-term view that eschews market timing and excessive risk-taking. While this approach doesn’t guarantee outperformance, it is a prudent way to invest for retirement, and we do know the research supports that.

Sarah DerGarabedian, CFA
Portfolio Manager

Investing Like a Psychopath (or at least like a Vulcan)

I recently read an article by Morgan Housel about the detrimental effect emotions and memories have on investing behavior (you can read it here). Not surprisingly, people tend to recall bad memories more easily than good ones, and seek to avoid experiencing those emotions again. When such behavior interferes with investing, you get something called loss aversion. Housel explains it like this:

“The market falls 50% in 2008 and early 2009. That hurts. Then it rallies 130% over the next few years, recouping all of your losses and then some. This feels OK, but not nearly good enough to ease the shock you felt from the 50% crash, which was emotional and memorable. You remember the crash much more vividly than the ensuing rally, and you change your portfolio to make sure you never suffer through a crash again. You buy bonds, hold a lot of cash, and swear off stocks for good. We’ve seen quite a bit of this behavior over the last few years. And we know it comes at the expense of long-term performance.”

A study conducted on people whose brains suppress emotion (due to the presence of a lesion on the brain) found that they did not suffer from loss aversion, and were able to make rational decisions that resulted in a higher payoff. One of the study’s authors referred to these people as “functional psychopaths” since their choices were unaffected by emotions (personally, I think “Vulcan” would have been a bit less insulting, but perhaps this guy is the only scientist on the planet unfamiliar with Star Trek).

In addition, “our memories of emotional experiences tend to get rearranged and distorted, so much so that some of what we remember never actually occurred.” (I think the author must be acquainted with some of my extended family members – I am all too familiar with this phenomenon.) So what is an investor to do? Housel provides the same advice as that given to dieters – keep a journal. It’s easy to say you’ll be a rational investor (or a healthy eater) but far more difficult in practice. The best way to remain accountable is to keep an accurate history, refer to it, and learn from it.

Live long and prosper.

Sarah DerGarabedian, CFA
Portfolio Manager

Stating the Obvious

Once again, an article on Bloomberg.com has inspired today’s topic – women matter.

I know, it seems obvious, but this has been a recurring theme in the press lately. I have read several articles in financial industry magazines about how advisors can attract more female clients. One article actually said there was more to it than just putting out fresh flowers in the office. And this is news?

It’s a well-intentioned article, but it just seems a little ridiculous. I’m not denying that there are differences between the genders, but I tend to believe that everyone appreciates a financial advisor who listens, asks valid questions, treats them respectfully, and makes them feel valued, regardless of gender. I would certainly hope that advisors treat all of their clients this way – I know we endeavor to do so in our practice.

The article on Bloomberg.com that caught my eye was also female-centric, but it was about a Dutch private equity fund founded by three women. The fund invests in companies with a balance of male and female top executives, citing research by McKinsey & Co. that found companies with the highest percentage of women directors made a 41% greater return on equity than companies with all-male boards. What I found especially interesting was that the fund is not doing this to “serve the cause of women,” as one of the founders said, but because they think companies with gender-balanced management perform better on average, a belief that is backed by more than one study.

I have to admit I am pleased to see greater efforts being made to include women, whether it’s as potential clients or as vital members of a company’s senior management. Women have something to offer! Who knew?

Sarah DerGarabedian, CFA
Director of Research