Wreaked by the Crisis
January 12, 2009
“Nothing is so simple that it cannot be misunderstood”
Gypsey Teague, Author
As we begin 2008 performance reviews we expect some heads will fly, and some deserve it, but we need to be especially careful this year about our judgments of success or failure. The economic crisis has wreaked havoc on style indexes, causing S&P and Russell to disagree, and distorting sector compositions, especially allocations to financial stocks.
Yes, it’s true that a loss in excess of 30% might be judged a winner, but perhaps it should not. As usual, it depends on the style of the investment manager, but these are unusual times. The leading indexes are showing contradictory results. S&P shows Growth outperforming Value, while Russell shows just the opposite, Value outperforming Growth. The reason for this disagreement is that neither Russell nor S&P have Core, and this has distorted their results, so be forewarned.
Our definition of “Core” is the stuff in the middle, between Value and Growth. Our style definitions are mutually exclusive and exhaustive, making them excellent for style analyses, both returns-based and holdings-based. Core tends to shine when investors lack conviction, unsure about which style to emphasize. Large core has defended best in 2008, losing “only” 29%, versus 32% and 45% losses in large Value and large Growth, respectively. Any tilt toward Core should benefit performance, so aggressive Growth managers should do worse than typical Growth managers, and ordinary Value managers should do better than deep Value managers. It’s easy to confuse style with skill but difficult to make good decisions once this mistake has been made. Hues of Value and Growth matter a lot in 2008. Comparisons and evaluations to off-the-shelf indexes only make sense for index huggers; for liberated managers we need to customize the benchmark by blending styles that are mutually exclusive and exhaustive.
Also, peer group classification biases should be particularly pronounced in 2008 performance rankings, with most Value managers outperforming their indexes and most Growth managers trailing their indexes. This is not skill, or lack thereof. It is style.
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