Monday, January 26, 2009
This may come off as an unpleasant rant. Between a couple of articles I found over the weekend and watching the Consuelo Mack show on PBS I came away with a very low regard for the way some folks do things.
First up was an article from Morningstar about what they got wrong in 2008. I have been writing about how worthless the analysis is for as long as I have been writing. They are a bottom up shop and from what I can tell it is a rare day when bottoms up warns of a bear market. Low PEs and other ratios don't matter when the market is going to rollover into a bear. When the market is going up most stocks go up so a good bottoms up might find stocks that go up more than market but being right about the market would seem to be more important. So with that backdrop Morningstar says the learned a bunch of things in 2008. I would wonder what they learned in 2001 and why that seemingly did not help in 2008.
This article from Seeking Alpha contributor Marc Gerstein posits that collectively the crew at Morningstar is just too young. He believes that experience matters a lot when it comes to navigating the market. I find his take interesting because at 42 I am probably in between his definition of too young and experienced. One reader commented that Morningstar has a bullish bias which hurts them. I don't know if that is true or not but there might be something to the youth angle but I do think it is bigger than that. Look at Larry Kudlow who must be close to 60 either way or Art Laffer or even Brian Westbury (I think Brian is older than me) they are all experienced and all missed this coming in hideous fashion, bizarre really.
This gets me to the Connie Mack show which this week featured Brian Rogers from T Rowe Price and Chris Davis from the Davis funds. Brian's fund the T Rowe Price Equity Income Fund lost 35.8% in 2008 which was the worst year for the fund going back to 1985 "by a lot." He said that when there is a severe credit contraction there are very few places to hide. Even safe areas like utilities were "traumatic." Consuelo asked if there was anything he would have done differently or could have done differently and he answered "no I don't think there is." He said they would continue to focus on good quality companies that have struggled, with good balance sheets and valuations. He then said there are things he would have done differently but he didn't say what.
So I guess the next time the market drops 38% his fund will be pretty close either way? Did he really not know that credit contractions cause problems in the markets? That is the entire idea behind the inverted yield curve.
Chris Davis didn't really distinguish himself with anything he said. He admitted completely missing AIG and underestimating the effects of constrained liquidity. For as long as I have been aware of the fund they have had a colossal weighting to financial stocks. I will concede the following is unfair but somehow when he speaks (and he is on this show as often as anyone) I get the feeling he is reciting someone else's thinking. His is a family business started by his grandfather so maybe that is what I think I am hearing but something just never quite seems right there. Very unfair on my part but that is the sense I get.
In past posts I have mentioned that mutual fund managers are not the asset allocators. It is reasonable for a fund manager to invest all of the money in his fund so this post is a bit of a contradiction but I was dismayed by Rogers' comments and to a lesser extent Davis'. So an active fund manager might be all in but these funds can invest at the sector level in any manner they want so they could have underweighted or avoided financial stocks (financials clearly hurt Davis, not sure about Rogers but JPM, GE and WFC show up in his top ten).
I am so critical here because I think well if I saw something bad coming (but did not correctly guess the magnitude) how did these guys miss it so badly? They both are smarter than I am and that is not false modesty. Davis might say something about the capital gains embedded in the positions (a point made on past episodes of the show) so maybe no one should buy the fund going forward but that would also mean he made taxes the priority which will lead to tears more often then not. Taxes should never be the first priority.
In a video a few weeks ago I made a joke about never wanting to say to someone "I just never saw it coming" and while I'm not sure, it seemed like both Rogers and Davis said they never saw it coming. I'm sorry but I find that inexcusable. I feel much better about being able to say I tried to protect your assets and then explain where it did work and where it could have worked better.