Category: Economy

Have Active Managers Received a Bum Rap?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

In a November 4^th ChannelChek.com article titled “Taking Stock of Index Funds,” we highlighted how stock index funds and exchanged traded funds (ETFs) now hold more assets than the traditional actively managed funds, with passive funds making up 50.2% of the US stock mutual fund pie, while actively managed funds made up 49.8%. One of the key tenets from market observers in the rise of index funds and ETFs is that actively managed funds historically underperform. Only 23% of all active funds topped the average of their passive rivals over the 10-year period that ended in June 2019, according to Morningstar.

 

In a fortuitous circumstance, the most recent Financial Analysts Journal (Fourth Quarter of 2019) contains an article titled “Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds.” (Cremers, Fulkerson, and Riley). The authors reviewed the past 20 years since that is when Mark Carhart published a landmark study on mutual funds, with a conclusion that the data did “not support the existence of skilled or informed mutual fund portfolio managers.” Cremers, et al review of the 20 years of academic research, however, “suggests that the conventional wisdom is too negative on the value of active management.”

Following, we highlight some of the authors’ findings. (We refer readers to our November 4^th article for a Bull and Bear Case on Index Funds.)

 Conditions Have Changed aka The Free
Market Works! Competition, in the form of index funds and ETFs, has caused changes on the active management side over the past 20 years. Specifically, the average mutual fund expense ratio has declined significantly. The asset-weighted average expense ratio for actively managed equity funds fell from 1.06% in 2000 to 0.78% in 2017.

 Active Portfolio Managers Do have Skill! One of the criticisms of active managers is that few have skills in excess of costs. Recent research raises questions about this conclusion, however. Recent research has found that many active managers have significant observable skills, that those skills create real value for investors, and that those skills persist over time. For example, almost all academic papers measure the skill of an active manager as the net alpha of the fund, which is the return of the fund after fees compared with a benchmark. But the choice of the benchmark model and the quality of data available for analysis using that model have a large impact on conclusions about the net alphas of funds and, in turn, on conclusions about the skill of active managers. Several studies have considered the impact of the benchmark model chosen and highlighted the limitations of current models for evaluating the value of active management and showed that common performance measures often underestimate the value of active management.

 Timing Play a Role. Puckett and Yan (2011) found that many estimates of stock selection skill are downwardly biased because the quarterly fund holdings data used in most studies do not account for interim trading, although other researchers have come to the opposite conclusion.

 What is the Appropriate Model for
Evaluating Fund Performance? Mutual funds are commonly evaluated using the multifactor model of Carhart (1977). But the factors used in the Carhart model may not be the appropriate set. Harvey, Liu and Zhu (2016) and Hon, Xue, and Zhang (2017) identified hundreds of potential pricing factors that could be used, and the choice of factors has a significant effect on the conclusions about fund performance.

 Impact of Constraints. Most research models assume active managers are unconstrained and able to allocate assets optimally to maximize risk-adjusted returns. In practice, however, managers operate under a number of constraints that may affect their decisions and their ability to create value for investors. Among the most notable constraint is a need to provide daily liquidity for potential redemptions and the need for regulatory compliance. Numerous researchers have demonstrated how the need for liquidity generates real costs for individual mutual funds and can negatively affect mutual funds as a whole and the overall markets. Regulatory compliance, such as frequent portfolio disclosure lowers mutual fund performance by making it easier for other investors to front run trades.

 

Conclusion

 Recent academic research presents many varied viewpoints regarding the value of active money management. What does seem to stand out from the recent research is that the old rule that active managers underperform after fees and few managers have skill in excess of costs is not quite as black and white as earlier research would indicate. Investors would be wise to look past the headlines to take a more nuanced view of the value of active money management.

Why are basic material industries suffering despite government help?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

In the 2016 election, President Trump ran on a platform of bringing back basic material industries such as coal, energy, and steel.  He followed up on his pledges by loosening environmental restrictions and placing tariffs on imports.  Specifically, the Trump administration reversed Obama’s Clean Power Plan that would have shifted power generation from coal to natural gas.  The administration opened additional federal land for drilling, approved new oil and gas pipelines and rolled back automotive fuel economy (CAFÉ) standards in order to help the energy industry.  The administration enacted a 25% tariff on steel imports from all countries except for Canada and Mexico to bring back jobs to steelworkers.  Now, after some initial success, these core industries are reporting lower profits, stock prices are down, and employment levels are falling.  Do the president’s actions represent an investment in this country’s future that will eventually pay off (Bull Case)?  Or, have the president’s actions backfired (Bear Case)?

Thursday, November 7, 2019

Kelly Services Inc. (KELYA)

What Was Behind the Disappointing 3Q19 Results?

Kelly Services Inc is a provider of workforce solutions and consulting and staffing services. The company’s operations are divided into three business segments namely Americas Staffing, Global Talent Solutions (“GTS”) and International Staffing. It provides staffing solutions through its branch networks in Americas and International operations and also provides a suite of innovative talent fulfilment and outcome-based solutions through GTS segment. Americas Staffing generates maximum revenue from its operations.

Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to full report for price target, fundamental analysis and rating.

• Miss on top and bottom lines. Kelly Services reported 3Q19 revenue of $1,267.7 million and adjusted EPS of $0.37, this compares to $1,342.4 million and $0.56, respectively, last year. We forecast $1,345 million and $0.51, respectively. The miss was due to revenue declines across all three operating segments.
  
• Challenging Quarter. U.S. top line was negatively impacted by a slow uptick in the restructured branch operations network and a…
  
  

  
  

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This Company Sponored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Are Strong Earnings a Sign that Economic Concerns are Unwarranted?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

With 70% of the companies in the S&P 500 having reported September-quarter earnings, an impressive 76% have reported results above expectations as announced by Factset.  This is above historical averages.  In aggregate, results have been 3.8% above the consensus estimate.  Nevertheless, concerns remain.  Are the quarter’s results a sign that things are better than expected (Bull Case) or are there enough cracks to point out growing economic and political concern (Bear Case)?

How do hurricanes like Dorian impact the economy?

(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the “Balanced” section)

Hurricane Dorian was the most powerful storm on record to hit the Bahamas and is tied for the highest winds of an Atlantic hurricane ever recorded at landfall. The Category 5 major hurricane wreaked havoc on the Bahamas with gusts of up to 220 mph and storm surges topping 20 feet. On Grand Bahama, the storm raged for what must have been an unimaginably hellish 24 hours straight. At least 70,000 people have been left homeless. Weeks after the storm, 1,300 people are still missing. Currently, officials can confirm that the storm claimed 52 lives, but tragically, the total death count likely will be much higher.

In the wake of devastation from Hurricane Dorian, Floridians and the rest of the Eastern Seaboard have been left with a terrifying thought: “That could have been us.” And it’s true. Early forecasts had put Florida right in the crosshairs of Dorian’s destructive path. If that were to have happened, what would’ve been the cost to us? It seems callous to put a price tag on a tragedy like Dorian, but determining the cost of these hurricanes can inform policy and justify infrastructure spending. Calculating the cumulative cost of natural disasters can help us decide how much we should invest in hurricane preparedness, how much we should set aside for our rainy (and windy) day fund, and how much aid we should provide our neighbor nations.

Hurricanes Do More Damage than What’s on the Surface

In the wake of hurricane season, many people only think about the physical path of destruction these natural disasters leave behind. From property damage to death, hurricanes have a lasting impact. Hurricane Dorian became a monstrous category 5 that devastated the Bahamas. The death toll as of September 10^th totaled fifty, and it’s still climbing. Parts of Grand Abaco still are not fully accessible, except by helicopter. Over 60% of homes were completely destroyed, leaving thousands homeless.

Aside from physical aftermath of a hurricane, many economic impacts exist as well. The Congressional Budget Office estimates that government costs for hurricane damage is near $30 billion per year and gradually increases each year. Whatever government agencies do not pay out for damage, the remainder is covered by state and local governments, insurance companies, and the individuals affected. This article features some of the commonly overlooked economic disruptions resulting from a hurricane.

Local Business Disruption. Local businesses typically shut down prior to the storm and days to weeks following the impact, depending on how severe. Closing doors means days where sales and production are low to none. Many small companies that shut down cannot reopen for extended periods of time due to unexpected damages. If the damage is far beyond repair, such as the damage done by Hurricane Dorian, these small businesses are not able to open their doors again. Among these are typically restaurants and other small service businesses.

Commodity Prices. Natural disasters, especially hurricanes, can have a huge impact on commodity prices. A perfect example of this is Hurricane Katrina’s destruction to the refineries in the Gulf.  More than 50% of the gasoline consumed by the U.S. passes through those refineries. Consequently, gas prices rose, and the transportation sector saw shrinking margins as they had to increase their rates.

Financial Services. Regarding investments, companies such as insurance have to pay out millions to their insured clients following a hurricane. The large payouts take a toll on their earnings, which is then reflected in the stock price. Many small companies are not prepared to take on these payouts all at once. Portfolios or ETFs with companies that are directly affected may not see positive returns for many quarters.

Property Value. When hurricanes sweep through certain areas and leave long-term damage, the property value of the homes decline. An expensive neighborhood a couple of miles away from an area that was leveled by a hurricane will see a decline in the property value because the surrounding area is no longer up to value. Other factors that can negatively impact property value are the number of business that had to close or schools that are no longer functional.

With our highly integrated economy, almost every sector will see a direct or indirect impact from a hurricane. Besides the infrastructure damage, many people may not see the economic consequences beyond that. From largecap companies to smallcap local business and restaurants, almost everyone can feel the impact. Commodity prices are affected, financial service groups have to payout millions, and the property value of homes in these areas often decline. So when it comes to preparing for a hurricane, besides the bottled water and extra snacks, remember to take a look at your portfolios and surroundings to properly prepare for the worst possible scenario.

 

 

Sources:

https://www.npr.org/2019/09/05/757858192/in-bahamas-officials-assess-generational-devastation-from-hurricane-dorian, Brakkton Booker September 5, 2019

https://www.thebalance.com/hurricane-damage-economic-costs-4150369, Kimberly Amadeo June 25, 2019

https://www.investopedia.com/financial-edge/0311/the-financial-effects-of-a-natural-disaster.aspx, Mary Hall August 30, 2019

Will the Longest Economic Expansion in History Continue?

Job growth in the United States slowed more than expected in August. The U.S. labor market has been a key positive player amid weakening global economic data, but the most recent report is shaky. The Federal Reserve is expected to cut interest rates again this month to keep the expansion on track. 

Are the Trade Troubles Coming to an End?

For the past two years, President Donald Trump has been battling China in an attempt to create a mutually beneficial trade relationship. The two sides have continued to create significant disagreements in this drawn-out dispute, which has caused issues for both economies. Yet the markets have surprisingly bounced back each time. The increase has spiked investors’ confidence, but they are still waiting on a final deal.

The inverted yield curve: what does this really indicate?

(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the “Balanced” section)

The news of an inverted yield curve has been lingering around market news headlines for days. For reference, an inverted yield curve occurs when long term rates are less than short term rates. It typically indicates that the chance of an economic recession in the future is high. With those headlines glooming over the average investor, it is important to know what the inverted U.S. yield curve represents, and what the warning signs indicate.