Castle Rock Investment Company

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Fixed Income Markets

Active Versus Passive Investment Strategy…Which is Best?

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By Mack Bekeza

Investors have been debating if it is better to have an active investment strategy or a passive one. On one side, investors claim that being active will allow them to capture the best investment opportunities and optimally manage risk. On the other side, investors claim that going passive will help them secure long-term returns while being able to diversify unnecessary risk. Is one side more accurate than the other? We can’t really say. However, we can say that there is one thing that plays a very significant role in this argument…fees!

How do fees affect investment returns? First, let’s review the three common places fees show up in our investments, particularly mutual funds: Sales-loads, management fees, and 12b-1 fees.

How do these fees affect overall investment performance? Recently, Standard and Poor’s conducted research on how fees affect active managers’ performance against their benchmarks and came out with some noteworthy results. For U.S equity funds,       70% – 92% of active funds in their respective categories underperformed their benchmarks[1] over five years, net of fees. In other words, the vast majority of actively managed U.S equity funds underperformed U.S equity index funds over the course of five years[2] after fees. However, only 30-65% of actively managed fixed-income funds in their categories (excluding long term government, high-yield, and emerging markets) have underperformed their benchmarks after fees. International equity funds have also experienced a smaller percentage of their funds underperforming after fees, ranging from 47%-79% in their categories.

So, what does this mean for those who invest in mutual funds? Although there could be a case made that going active in fixed-income has benefited investors, being passive (investing in market index funds) has been more rewarding to investors over the course of five years. Will this trend continue? We don’t know. However, we do know this: index funds have posted better long-term performance than active funds due to having fewer fees and by mimicking the market, rather than trying to beat it.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

[1] Note that the benchmarks in this study are indexes made by Standard and Poor’s, this writing only mentions returns after fees with retail mutual funds, not institutional mutual funds. Here is the study that we are referencing: http://us.spindices.com/documents/research/research-spiva-institutional-scorecard-how-much-do-fees-affect-the-active-versus-passive-debate.pdf?utm_medium=Email&utm_source=Eloqua

[2] Index funds are not the benchmarks themselves, rather they attempt to mimic them.

Water Cooler Wisdom: Second Quarter 2016

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By Mack Bekeza

Is the U.S the only place for long term returns?

Although the United States has experienced one of the best bull markets in terms of duration and returns, investors have been wondering what is next. This past year has not been as invigorating as the prior few years and, on top of that, economists are predicting U.S GDP growth to be at around 1.5% for the next few years. You may have also been hearing from either presidential debates or that “one guy” at the bar that everything is going down the tubes and that we have seen our best days. Are they right? The answer is, we do not know.

What we do know is this, even though the U.S is still considered the safest place for investors, that doesn’t necessarily mean we should only be invested in American securities. Did you know that the rest of world accounts for 95.5% of the human population, nearly 75% of the global GDP, and nearly 60% of the total stock market? On top of that, international securities are not perfectly correlated with the U.S markets so they can be used as a very effective diversification tool for people of all age groups and time horizons. So why don’t people invest outside of the U.S?

There a couple of reasons:

  1. Many people have a bias towards their home country
  2. Many people fear that investing internationally is unbearably risky

To respond to those two reasons, there is nothing necessarily bad about being biased toward your home team but there is also nothing wrong with tapping into other developed countries and even emerging markets such as China and India to name a couple. And for people fearing that going international is overly risky, that is not necessarily true. Although volatility is more prevalent, that does not mean that international securities are a sure way to lose money. In fact, it is the volatility that will allow more buying opportunities which in turn can boost returns for people like you and I.

So despite what happened this past quarter (Brexit, continued negative interest rates in Europe, along with current slow global growth), we should still expand our horizons into the international markets and tap into the opportunities they present.

Attached are a few slides about global markets for the past quarter.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.

Water Cooler Wisdom: Fourth Quarter 2014

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Water Cooler WisdomMajor events at the close of 2014, specifically the fourth quarter of 2014, included: the abnormally low prices of oil; the unique position of the Federal Reserve and the US dollar; US Treasury Rates poised (still) to rise; and American manufacturing ramped up to march on ahead of other world leaders, while an embroiled Europe awaits the coming year.

“Returns and Valuations by Style”

Significantly improved from the previous quarter, overall market growth was strong in the final quarter of 2014; though the annual return was less than half of the growth from 2013’s phenomenal success.

“Energy Price Impacts”

By a landslide, the most compelling story of the closing chapter of 2014 was the low oil prices brought upon by OPEC with ferocious Saudi leadership striving to re-establish control of global oil markets. Oil production outpaced consumption, therefore supply outpaced demand, and led to a build in inventories. The supply is not uniformly distributed, though, and the United States is responsible for the fastest supply growth since 2013; however, consumption in the US did not grow nearly as much, and China continues to contribute to the most global demand growth. Notably, Europe and Japan’s consumption declined.

The population most effected by gasoline prices, of course, is the lowest quintile of the population. If oil production declines, and global demand growth picks up, then oil prices could move higher, but if the demand trends persist, and supply growth remains robust with neither the US nor OPEC yielding any production, then oil prices could move further down. Economists overall are split either way, but most agree that the current low prices are abnormal. The Federal Reserve expects that any resulting deflationary pressure from current low oil market prices will be transitory, rather than permanent, and that the economy will achieve the 2% target inflation over time.

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