Evaluating Active Managers’ Recent Performance and Downside Participation

Posted by Dana Funds Investment Team on Jun 14, 2019 9:10:08 AM

In S&P Dow Jones Indices’ most-recent annual report of active managers’ relative performance against their benchmarks, 2018 was a continuation of the same theme that has prevailed for much of the past decade: active managers struggled to beat their passive counterparts1. This included the fourth quarter when the S&P 500 fell over 13%. Many investors assumed active managers would shine during the long-awaited risk-off environment and were surprised when this didn’t play out accordingly.

“What’s different about 2018 was the fourth quarter volatility,” Aye M. Soe, a managing director at S&P and one of the authors of the report, told CNBC. “Active managers claimed that they would outperform during volatility, and it didn’t happen.”2

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Chart of the Month - How 2019 Volatility Stacks Up Against Prior Years

Posted by Dana Funds Investment Team on May 15, 2019 2:23:57 PM

Just when we were getting used to some tranquility in the markets, U.S.-China trade tension reared its head again. While nothing compared to the dramatic volatility of late-2018, the chart below illustrates the recent pop in the VIX Index.

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A Tour of the World’s Economies and a Case for U.S. Equities

Posted by Dana Funds Investment Team on May 10, 2019 9:35:04 AM

It seems like the fourth quarter’s stock market selloff just happened yesterday, but we’ve already had a full recovery. Things have changed quite a bit - especially the Fed backing-off its intentions to continue raising rates. Let’s take the pulse of major world economies to see where things currently stand.

China is a good place to begin, since it’s the second-largest economy in the world - larger than the economies of Japan, Germany, and India combined. Most believe the economic statistics that come out of China are manipulated by their government. How else could Chinese GDP stay in such a narrow band between 6.4% and 7.0% for the last four years? The Chinese stock market may be a better indicator of economic health, and the Shanghai Shenzen stock index is near the same level it was four years ago. Many believe that the Chinese economy could get a big boost if the trade dispute with the U.S. is settled, but we have our doubts. It has gone on for a year now, and many U.S. companies have found ways to diversify their supply chains and lower their exposure to China. There is no reason they would put all of their eggs back in the China basket even if the trade dispute is resolved.

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How Successful Equity Investors Avoid Common Pitfalls

Posted by Dana Funds Investment Team on May 2, 2019 3:27:36 PM

Over the years, you may have noticed certain traits of successful equity managers, and certain other traits of managers that have disappointed. Here are some common characteristics we frequently see among equity money managers who have created strong long-term risk-adjusted track records for their clients.

Image Source: Explara.com


  1. Limiting big drawdowns. As we mentioned in a previous blog (The Arithmetic Behind Drawdowns and Recoveries) bouncing back from a big drawdown can take years, and the arithmetic is not in your favor (i.e. It takes a 25% gain to recover from a 20% loss). Buying undervalued stocks can help with this; their multiples tend to be lower which can help limit the downside.
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What’s Trending? ESG Investing

Posted by Dana Funds Investment Team on Apr 17, 2019 10:06:54 AM

Wayne Gretzky, the great hockey player, said, “I skate to where the puck is going to be, not where it has been.” This quote certainly applies to Environmental, Social and Governance (ESG) and Socially Responsible Investing (SRI) investing.

Are you skating in the right direction?

The total US-domiciled assets under management using SRI strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, an increase of 38 percent. This represents 26 percent—or 1 in 4 dollars—of the $46.6 trillion in total US assets under professional management.

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What a difference three months can make….

Posted by Dana Funds Investment Team on Apr 12, 2019 11:52:27 AM

With the turn of a calendar, it appears all fortunes have changed for the better. 2019 has had a great start with the S&P 500 Index recovering from last year’s sell-off and rallying more than 13%, its largest first quarter gain since 1998. The sell-off, at the end of 2018, no doubt brought bargain hunters back to the market, softened the Fed’s stance on rate increases, and subdued fears of a near-term recession. Most of the recovery occurred in January. By mid-February, concerns returned about China trade disputes, Brexit, the Fed, and an inverted yield curve; but the S&P 500 Index continued higher, adding another 3.5% during the second half of the quarter. The Index now trades with a 16.3x forward price-to-earnings ratio and appears to be in line with historical averages given the current market environment. An improvement in earnings estimates may be necessary to see the market move materially higher from here.

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The Arithmetic Behind Drawdowns and Recoveries

Posted by Dana Funds Investment Team on Apr 4, 2019 10:37:32 AM

Most advisors and investors have at some point stumbled upon Warren Buffet’s “rules of investing.” The first two rules are especially memorable:

Investing Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1.
-Warren Buffet

Seems like a simple idea, but tough to implement unless you’re buying lower-risk, low-return securities. The main takeaway is that in order to compound capital effectively, it requires not destroying capital in the first place.

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Why Equal-Weighted Positions Can Help Minimize Drawdowns

Posted by Dana Funds Investment Team on Mar 29, 2019 2:11:01 PM

The majority of actively-managed equity funds that exist today utilize conviction-weighted position sizes. The reasoning behind this approach is that the portfolio managers managing these funds believe they have an edge by overweighting their favorite stocks relative to the funds’ benchmarks. It’s common for concentrated portfolios (say, fewer than 40 holdings) to have around 25%-30% in their top-five holdings.

In theory, the practice of allocating relatively larger amounts of capital into a team’s best ideas makes sense, assuming it’s a skilled team. But in reality, the psychological biases of team members often result in unnecessary risks, such as heightened “idiosyncratic risk”. Also referred to as unsystematic risk, idiosyncratic risk is endemic to a particular asset such as a stock and not a whole investment portfolio.1 As a manager increases the active weight of any particular position, this introduces more room for excess performance, but it also increases idiosyncratic risk and diminishes the benefits of diversification.

Consider this hypothetical, yet realistic, scenario.

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ESG: High Demand and Strong Performance Despite Market Volatility

Posted by Dana Funds Investment Team on Mar 13, 2019 4:18:14 PM

ESG, or Environmental, Social and Governance, investing has garnered much attention since the Global Financial Crisis. Increasing numbers of investors are striving to align their investments with their values, and many have sought-out various forms of ESG investment products in order to accomplish this. Despite early concerns that these investments would not keep up with traditional benchmarks, a wide range of reports1 have indicated that investing in sustainability has not only kept up with, but in many cases exceeded, the performance of traditional investments.

However, there has been one nagging concern that critics of ESG like to bring up: most of the performance being analyzed has taken place during a 10-year bull market. Sure, ESG has performed well recently, but what about when the market drops? This would surely prove that ESG investors are leaving something on the table by avoiding lucrative-but-irresponsible companies, right?

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Spearheading Change: Principles for Responsible Investment

Posted by Dana Funds Investment Team on Mar 7, 2019 8:39:00 AM

Bringing Sustainability to the Heart of Capital Markets

In late 2018, Fiona Reynolds, CEO of the PRI (Principles for Responsible Investment), delivered a speech at the G20 meeting in which she encouraged global policy makers and regulators to clarify the need for all long-term investors to incorporate ESG factors in their investment processes. In other words, she proposed that ESG factors formally be included as part of investors’ duties and fiduciary responsibilities.

So what is the PRI and how is it having an effect on global ESG policy?

The PRI is an independent organization working to define and encourage responsible investing around the world, with the mission to put sustainability at the heart of the capital markets. The principles themselves revolve around the practice of incorporating environmental, social and governance (ESG) factors in investment decisions and active ownership.

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