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Voices: Asset managers are blinded by their anger

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The most popular genre of financial commentary these days is complaining about the U.S. government and the Fed. And there is lots to complain about, from the effectiveness of the government’s $3 trillion economic rescue package, which mostly involves direct bailouts to corporations, to the Fed’s unlimited quantitative easing. People are angry that these moves just perpetuate future moral hazard, which is good for commentators because anger sells newsletters and other forms of financial commentary. But it doesn’t help people make money.

That may sound unseemly — making money off a crisis — but the job of a money manager or newsletter writer is to make money for clients, not engage in political philosophy. Consider that 85% of active large cap money managers have consistently underperformed their benchmarks over the last 10 years. There are lots of reasons for the poor performance, but I suspect a good part of it has to do with money managers investing with their hearts, not their minds.

It’s rather straightforward. If you think an ETF of junks bonds is going up because the Fed is buying ETFs that hold junk bonds, then you should also buy it. But lots of money managers refuse to do so, because they personally disagree with what the Fed is doing. They wrongly let their personal feelings get in the way of the investment process.

Of course, this has always been true to some degree. Commentators have made bashing the Fed and government an art form, well beyond the gold bugs who have always been in favor of abolishing the central bank. But what we seem to have right now is some form of economic socialism, with markets becoming less free and more manipulated by government programs and the Fed. The question is, do people just want to grumble about creeping socialism, or do they want to learn to anticipate the moves of policy makers and profit from it?

Besides, predicting what policy makers are going to do is a lot easier than predicting what the stock market is going to do. The Fed and the Trump administration have a well-defined reaction function: They will avoid being embarrassed at all costs. The Fed doesn’t care much about real capital, but rather it cares about reputational capital and its perception of omniscience.

The type of market commentary that merely protests what the Fed is doing without proposing an actionable solution isn’t market commentary, it’s polemic. There are plenty of well-known financial writers that have built their careers on doing little more than complaining. I don’t see the utility, other than to enrage or infuriate people. The government and the Fed have been the biggest driver of asset prices for a long time, so it seems odd to stop trying to predict the actions of policymakers right at the moment they matter most.

As an investor, you shouldn’t care whether what the Fed is doing is right or wrong, only that you can predict it. This is all similar to my feelings on socially responsible investing, in that people shouldn’t get caught up in the morality of whether some stocks are good or some stocks are bad, only that some stocks will go up and others will go down. In effect, what people are doing when it comes to the Fed is another form of ESG, in that whatever the central bank touches is bad and whatever it doesn’t is good. As a result, many people completely missed the rebound in a handful of mega-cap stocks, when they were the clear beneficiary of government action. I was guilty of this with cannabis stocks a few years ago. I refused to invest in them on moral grounds, which means I missed out on a gigantic bull market. I now regret doing that.

Analysis of their performance — and fees — may reveal some surprises.
April 27

The same was true for the couple of years before this pandemic, when investors were plowing money into index funds and corporate share buybacks were approaching $1 trillion a year, accounting for much of the gains in the stock market. Indexing and buybacks were distorting prices, the theory went, so it was immoral to profit from those distortions — I guess? Many money managers let their feelings about buybacks get in the way of rational decision making, and they underperformed for years.

Money managers have a duty to their clients. Full stop. They shouldn’t let their attitudes or personal beliefs stand in the way of security analysis. It doesn’t matter if you feel what the Fed and the Trump administration are doing is distasteful, you have to put your personal feelings aside and buy something. After doing so, you can call your congressman.

Bloomberg News