A recent piece of research out of David Rosenberg & Gluskin Sheff implies that the market could be losing a major source of fuel for the rally: fund managers.  Rosenberg argues that the average fund manager is now beating the index and therefore wants to “hug the index” and maintain their gains:

The average U.S. institutional fund manager is up 22% for the year, outperforming the S&P 500 by some 400 basis points.  This in turn suggests that there will be incentives to “hug the index” and try to hang on to that outperformance through year end. This in turn suggests that the stock market may end up losing a prime source of buying power — otherwise known as the panicky PM who has been desperately trying to make up for last year’s horrendous performance.

After all, with the retail investors favouring income over capital appreciation, insiders doing more selling than buying by a long shot, the dearth of corporate stock buybacks amidst cash preservation and the era of the short squeeze long behind us, it could well be that buyer exhaustion sets in as the last vestiges of demand for equities — the fund manager — moves to lock in this year’s hard-fought gains.

Rosenberg’s note is a few days old which explains the discrepancy, but nonetheless Morningstar shows that the average large cap fund is up 13.6% YTD while the S&P is up 15.3%.  Credit Suisse shows the average hedge is up just 11.6% YTD.  This jives with the usual data that the majority of fund managers in fact underperform the index.  I am not sure what data Mr. Rosenberg is looking at, but there is certainly more performance chasing to be done in order for fund managers to avoid their usual embarrassment of underperforming the major indices….As for the other data (the fundamentals that actually matter to real asset prices) – Rosenberg is dead on.

Cullen Roche

Bio - Coming Soon.

More Posts - Website

Follow Me: