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stock screen, screening 2.0, investing, warren buffett, peter lynch, dreman

As if we needed another study to spell this out, S&P published a recent study (.pdf) that undermines the hot money chasing performance in the mutual fund industry.  The study shows that very few funds demonstrate persistence — the ability of asset managers to consistently achieve top-quartile or top-half performance.

The amazing take-away from the study:

Over the five years ending September 2009, only 4.27%
large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile ranking over the same period.

Couple of things here:

  • Not one large-cap or mid cap fund maintained top quartile ranking.  Should investors just use large cap and mid cap indices for their exposure here regardless?
  • While still posting rather poor results, there are twice the percentage of small cap funds achieving top-half performance than large caps.  There still seems to be significantly more value in active portfolio management in the small cap arena.

The study’s ultimate takeaway:

Our research suggests that screening for top-quartile funds may be inappropriate.A healthy plurality of future top-quartile funds comes from the prior period’s second, third and even fourth quartiles. Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.

Compare that to the findings of Jagannathan, Malakhov, and Novikov in “Do Hot Hands Exist Among Hedge Fund Managers?”:

We find evidence of persistence in the performance of funds relative to their style benchmarks. It appears that on average more than 25% of the abnormal performance during a three year interval will spill over into the following three year interval.

[Hat tip: Pragmatic Capitalist]

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Bloomberg beefing up reflects good things for financial industry

I’ve written about previously (here and here) about Bloomberg’s expansion bloombergand eventual dominance of financial media from news to data and consumer.  The WSJ reports today that indeed, Bloomberg is forecasting a respectable 10% growth rate for 2010 and plans to add an additional 1300 employees.

The revenue gains would come largely from a projected increase of 12,000 subscriptions to the Bloomberg Professional service, which provides data, analytics and news geared to financial-services professionals.

Bloomberg’s revenue for last year was estimated at $6.25 billion, according to a person familiar with the matter. Based on that estimate, the new projections would push revenue to nearly $6.9 billion this year.

Growth is good for Bloomberg and ostensibly, the media giant is seeing increased demand for its terminals from institutional investors — a sign that things are picking up on Wall Street and Stamford, CT.

With the recent acquisition of BusinessWeek and content sharing deals that land Bloomberg content on the WaPost and beyond, Bloomberg is turning up the manheat on Dow Jones.

Be afraid, be very afraid.

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Recommendation for Tradestreaming from Cliff Wachtel, Chief Analyst, Ava FX

As part of our service to our readers we occasionally point out books that are uniquely worthwhile. Here’s one, Zack Miller’s Tradestream Your Way To Profits.

Finally, here’s a one-stop guide to the Internet for investors and traders.

This is one of the few new investment books that any serious investor or marketer of financial services truly, truly must read, likely to become the definitive guide to using financial social media to improve investment performance. I’d been looking around for something like this, and now, here it is.

All serious investors and traders realize that they need guidance, and that there is a lot of great advice on the internet, much of it for little or no cost.

Few would dispute that they’d be more profitable following the moves of proven experts.

The trick is to sift through the vast online universe to locate the best sources.

The idea is simple enough, but it took someone with deep expertise in online media, financial planning, and fund management to distill the best the Internet has to offer.

The book provides an overview of how changes in the internet, financial research, social media and online content have given us unprecedented access to some the best investment advice. It then examines 8 different strategies for using online investing resources and provides practical advice for how to implement these 8 approaches, which are:

  • Expert Bloggers: How to access the best blogs for new ideas
  • Imitate Proven Stars: How to build a portfolio made of the top picks of your chosen gurus.
  • Join Expert Communities: How to locate and use online communities to identify and monitor professional or amateur experts.
  • Online Resources For Monitoring Crowd Sentiment.
  • Screening 2.0: How to create screens suing the same parameters as the pros.
  • Tracking Insider Moves
  • Tracking Rumors
  • Non-Financial Online Resources

The summary chapter’s look at how the Internet is changing the financial services industry is a must read for those interested or working in the field.

As an analyst who covers forex, commodities and bonds in addition to equities, I only wish that there wasn’t such a heavy concentration on resources for the equities markets, though the focus is understandable given that stocks have a much more established online presence.

However, the ecosystem of online resources for these other markets is growing.

Can we look forward to a follow up volume covering these markets? — Cliff Wachtel, Chief Analyst, Ava FX