The Business Roundtable, a group of CEOs of nearly 200 major U.S. corporations, gave a new definition of the "purpose of a corporation."Marketsread more
Stocks rose sharply on Monday as Treasury yields rebounded, quelling fears of a possible recessionUS Marketsread more
J.P. Morgan estimates the average annual tariff cost per household will be $1,000 with the new round of Trump's tariffs.Marketsread more
Since its IPO 15 years ago, Google has become more and more powerful. Today, that power is being highly scrutinized.Technologyread more
Sequoia's Michael Moritz says that direct listings worked for Spotify and Slack and will become more common for companies with "courage and intelligence."Technologyread more
Shares of embattled utility PG&E plummeted after a judge ruled that a jury can decided whether it should pay up to $18 billion in damages.Marketsread more
The attacks come after state and local ransomware attacks in New York, Louisiana, Maryland and Florida resulted in the loss of significant sums.Technologyread more
The New York City police officer who used a chokehold on Eric Garner in an encounter that ended with Garner's death has been fired, New York City Police Commissioner James...Politicsread more
These are the stocks posting the largest moves midday.Market Insiderread more
The president said the Fed has been hampered by a "horrendous lack of vision" and said it should institute 100 basis points worth of reductions in its benchmark rate.Marketsread more
"I think if yields roll over and start slipping, we may see renewed pressure on stocks," UBS' Art Cashin says.Marketsread more
A new report should put active managers out there at ease. It makes the case that intellect is not at fault for their chronic underperformance against the S&P 500.
It's the S&P 500's fault.
"In this note we offer investors a break some may need—they are being compared to a moving target, and that target is hard to beat," wrote Adam Parker and his strategy team at Morgan Stanley in a report titled, "Why Is Active Management So Difficult?"
Active managers could use the empathy. Less than a third of equity mutual fund managers beat their benchmarks over the past decade, according to Morningstar.
The reason why the S&P 500 is a difficult index to top is because turnover is very high, working against long-term managers' strategy to hold stocks for several years.
States the report:
"Ten percent of the companies in today's index are different since 2011, 17 percent are different since 2009, and fully half the companies are different since 1999. Said another way, at least half the companies in the S&P 500 today were not in the S&P 500 when your average portfolio manager started running a portfolio."
When stocks are removed because of a takeover or significant price drop, they are replaced by companies with much faster earnings and revenue growth. That too artificially favors managers with a growth focus and works against value managers who may hold onto stocks with underperforming fundamentals.
"Quite naturally then, with faster prior revenue and earnings growth, and higher margins, the stocks added to the index typically have performed much better over the few years before their inclusion. This would indicate that the new stocks have very good price momentum relative to the existing or removed stocks. In fact, on average, stocks added to the S&P 500 have outperformed those in the index or those removed by more than 10 percent per year over the last five years."
What's more, when an addition is made by the index committee at Standard & Poor's a totally different stock from a different sector than the old member is added, hurting fund managers not allocated enough to that specific industry, contends Parker.
"This bias to higher growth stocks has led to a dramatic shift in the sectoral composition of the index. The fraction of S&P 500 stocks in health care has almost doubled in the last 20 years, from 6 percent in 1994 to 11 percent by the end of 2014."
Some investors have a lack of sympathy for their peers, making the case that the weak performance by active managers is for much different reasons.
"The real reason active management fell off the cliff last year is that there are fewer suckers in the market. As mom and pop adopt passive strategies, there are fewer mistakes being made by amateurs trading stocks which skilled pros used to be very good at harvesting," said Josh Brown, CEO of Ritholtz Wealth Management and author of The Reformed Broker blog.
Regardless of the reason, Parker has some advice for those looking to up their game against the benchmark.
"One possibility is to avoid S&P 500 companies that have slowing growth, low margins and poor price momentum," he wrote.
If only it were that easy.