Markets

Even Mutual Funds Are Edging Away From Buy-and-Hold Now

The debate over whether buy-and-hold investing makes sense in such an unpredictable market has made its way the mutual fund arena, where managers are increasingly turning a skeptical eye toward the traditional strategy.

Getty Images

While some of the larger funds remain ensconced in longer-term positions with only marginal levels of turnover, others are looking for a prolonged period of higher highs and lower lows that will create advantages for those willing to be more nimble.

The compressed market cycle is part of what what ING Investment Management experts are calling the "next normal."

Such a volatile climate will make it increasingly harder for buy-and-hold investors who like to park their money in positions for years and make only incremental adjustments along the way, executives at the firm said during a media briefing this week in New York.

"Expect more troughs, more volatility if you like—more non-linear behavior," said Tycho Van Wijk, senior investment manager for the ING Global Growth fund. "But do not trust your models very much. Judge every situation on its own."

The encouragement of investors to give their fund managers more leeway is a fairly bold one in the mutual fund world, where managers often give lip service to mobility but sometimes don't follow through.

"We've seen managers we deal with in a lot more discussion about concepts around sell discipline and risk budgets and things that really didn't exist 18 months ago," said Brett D'Arcy, chief investment officer at CBIZ Wealth Management, a San Diego-based risk advisory firm that deals with most high-net-worth clients. "If they had a sell discipline it was more theoretical. That's a change."

At ING, the "next normal" is a tweak on the "new normal" phrase coined by bond giant Pimco to describe a prolonged period of slow growth ahead.

Combining the dynamics of stronger global growth and greater volatility would require investors to be nimble if they want to capitalize on market moves higher and not get stung by drops. ING is a long-only firm so it does not make plays on the market heading lower.

"This could be the next normal," Van Wijk said. "The availability of global information is a very powerful key in understanding what is happening."

The result for the fund is a globally based strategy that focuses not only on individual parts of the world but also on investments that fit within seven broad themes: Economic growth, digital revolution, shifts in demography, changes in consumer behavior, industrial and technological innovation, environmental change and social and political change.

"Give your manager as much flexibility as possible," Van Wijk said.

Some investors appear to be taking the advice, as evidenced if nothing else in the proliferation of exchange-traded funds into the market.

ETFs use a variety of assets that track index performance, but they can be traded like stocks. So even if the ETF itself is a rather static way of tracking an index's performance, the ability for investors to buy and sell them at will essentially allows a trading environment inside of a buy-and-hold strategy.

"There's certainly more interest in tactical allocation. We've seen a growing number of funds doing that," said Russ Kinnel, director of fund research at Morningstar. "Part of the reason ETFs have grown is that they are catering to people who don't want to buy and hold."

The move way from buy and hold doesn't necessarily mean that investors are changing the time frames to meet their goals, but rather are changing tactics.

AP

"Even if you're a long-term investor, given the extremes in the market it makes sense to have increased your turnover," Kinnel said. "There's good reason for long-term investors to create turnover."

To be sure, Kinnel said the turnover numbers still show that many of the dominant funds are sticking to their basics. But he said trends in the ETFs, which now have about $1.03 trillion under management, show that fund managers are adjusting their thinking.

For ING, a tactical shift does not mean a change in the firm's largely bullish outlook for the economy and the stock market.

The company remains overweight on stocks and high-yield bonds as well as commodities. ING remains underweight in US Treasurys in part because of concerns about debt in developed economies.

The key is the economy, but with emphasis on the importance not of how good things are from a historical standpoint but on how much they've improved from the recessionary lows, said Paul Zemsky, ING's head of asset allocation.

The theme fits into the notion that now is not a good time to be stagnant.

"The market tends to respond to the rate of change," Zemsky said. "There's a dichotomy. Those who have focused too much on the level of economic activity have missed the reality, because it's the change in economic activity that is the point."

The rise of developing economies combined with the proliferation of more sophisticated and faster information in the marketplace is making it essential for investors to allow fund managers more leeway in adapting, Van Wijk added.

"Buy and hold is probably not the best strategy," he said. "We decided to let go of the conventional tools. It was a tough step to take but we had to do it."