Look Who’s Beating The S&P 500

As we look back on the 2009 stock market we’ll likely long for more inflection points–those moments when the dark clouds let a ray of sunshine peek through and stocks take off. Some investors capitalized on this turn more than others. To see who played the back-from-the-brink rally best, take a look at the table below provided by Zacks Investment Research. Zachs monitors the recommended portfolios of each brokerage and tallies the performance each year. It then compares that performance to the S&P 500.
The Zacks list (below) shows some unfamiliar names at the top. McAdams Wright Regan is a Seattle broker. The return of 56.44% on its recommended portfolio places it in the top spot for the year. McAdams also bested the S&P 500′s 2009 return of 26.46% by an an impressive 30 percentage points. New Constructs, which placed second, is a research firm affiliated with a hedge fund. Goldman Sachs beat the other big investment banks, though given all the political grief Goldman has been catching lately it’s probably happy not to be topping the entire list lest it be seen as a heartless opportunist.

The top 13 ranked brokerages for Year-End 2009 (12-31-08 to 12-31-09) are as follows…

Rank	Brokerage Firm	Total Return	Excess Return vs. S&P 500
1.	McAdams Wright	56.44%	29.98%
2.	New Constructs	48.33%	21.87%
3.	Morgan Keegan	45.23%	18.77%
4.	Goldman Sachs	43.24%	16.78%
5.	Citigroup Global Markets	40.53%	14.07%
6.	Wells Fargo	34.09%	7.64%
7.	Wedbush Securities	33.07%	6.61%
8.	Charles Schwab	32.58%	6.12%
9.	Credit Suisse	31.16%	4.7%
10.	Edward Jones	26.73%	0.27%
11.	Morgan Stanley	25.44%	-1.02%
12.	Bank of America-Merrill Lynch	24.15%	-2.31%
13.	Raymond James	23.16%	-3.30%

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

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mutualfundwinnerpicks

Dalbar, the Federal Reserve and Dr. Krugman Report Zero Wealth Creation For the Last 20 Years

Why is there such a disparity between the gross returns of 7- 8% for the average investor and the net real returns of 1- 2% after fees, expenses, taxes and inflation confirmed by Dalbar, the FRB and by Dr. Paul Krugman.

Rather than bemoan this sad state of affairs and since it is unrealistic to expect expenses, taxes and inflation to be drastically reduced any time soon as some have advocated, a better approach was to find out what controllable factor(s) are responsible for this corrosive drag on performance.

Many fees and expenses are controllable; the trick is to restrict selections to “no-load/no-fee” funds that also beat the S&P 500. These funds incur minimal additional acquisition costs giving the fund investor an initial, but limited, boost in returns.

Why should the average investor be subjected to a 95% chance of zero wealth creation over a lifetime of employment?

Why do current methods of fund selection deny millions of investors access to wealth creation?

Most investigators and writers deny the role of past performance in indicating persistency. Instead they favor factors as: manager’s tenure, low or no loads, low cost ratios, low turnover … to improve persistency.

Our research since 1994 supports the view that performance accounts for at least 95% of persistency while non-performance factors account for no more than 5%. The industry relies on the 5% to explain 95% of the problem.

Using 5% of the solution to a problem no matter how cleverly crafted is like trying to climb Mt. Everest without oxygen.

This is the precisely the current situation.

After analyzing the patterns of hundred of millions of data cells since 1994, the culprit was found. It was adverse selection, which is the systematic selection of more losers than winners usually on a 75:25 ratio basis, caused by an overwhelming number of losers. By reversing these odds, mathematically, many times more winners than losers can be picked.

Consider a container of 10,000 marbles. Each marble represents a fund. Each fund has an equal chance of being selected. Suppose 2,500 funds are winners (funds that beat the S&P 500) and 7,500 funds are losers (funds that do not beat the S&P 500). With millions of selection (investor) trials, there will always be a 3 times greater chance of selecting losers than winners in the precise, predictable 3 to 1 ratio.

Unless the 7,500 losers can be objectively removed from the container, the laws of probability tell us there will always be a 3 times greater chance of selecting loser funds than winners unless a science-based intervention takes place to reverse the adverse selection process.

A winner is defined as a fund whose performance consistently outperforms the Standard & Poor’s 500 Stock Index over time.
A loser is defined as a fund whose performance consistently under performs the Standard & Poor’s 500 Stock Index over time.

There is a widely held belief among financial writers and scholars that past performance cannot guarantee or even indicate future results. This intuitive statement is required by the SEC to appear in every fund prospectus which gives it authority and credence. Yet in reviewing the literature for the past 6 decades not one well-designed study has appeared to prove past performance does “not” indicate future results.

Let’s take a look at some of the underlying principles at issue here.
First, there is the concept of “repeatability” or “persistency”. This is the likelihood that last year’s benchmark returns will repeat in the following time frame. Surprisingly, there is no general agreement among investigators concerning persistency. There is some token agreement that a 1, 2, 3, 4 year benchmark beating returns will repeat in years 2-5 despite the fact that 4-5% of funds do not survive each year. This is the so-called “the survivorship bias”. In selecting funds, the effect of the survivorship bias upon persistency has lately been softened, as it should, by some investigators. However, limiting selections to funds with 10, 15, or 20 years of history would eliminate the bias but impose the much more severe penalty of depriving investors access to many superior performing funds with lesser years of history.

Technical knit-picking aside, isn’t it time the financial services industry stopped relying on unverified anecdotes masquerading as information and begin using solid, proven scientific principles to help fulfill their trusted mission of helping investors create wealth?

Is it any wonder, on average, trillions of investment dollars needlessly produce zero wealth after a lifetime of employment?

Arthur Regen

http://www.mutualfundwinnerpicks.com

http://www.mutualfundwinnersblog.com