As Market Hits Extraordinary Highs, Money Managers Appear Shell Shocked

I found myself watching Consuelo Mack’s Wealthtrack show this morning. Money managers are virtually all tremendously underperforming the Dow, the S&P and the Nasdaq. The wealth managers on Mack’s program and programs like look out-and-out shell shocked. You can see the same thing virtually any time of day on CNBC or on Fox Business where the message is the same, albeit less polished and full of screaming.

Quite simply, these active managers cannot explain why they have so dramatically underperformed. They are trying to market themselves as about to outperform equity markets, even when at 18x future earnings, just being long the market has become dramatically more risky going forward. Money managers are so under the gun that they are resorting to positions that rely on tenuous arguments, such as the one often voiced that investors now need more exposure to US small caps. They try to ignore the fact that small cap have also moved dramatically higher and bear risk equal to, or greater than, the broader market. They also are playing in emerging market stocks, even though most US managers lack even a cursory knowledge of these areas and a prudent investor would avoid large exposure to emerging markets now more than ever.

Yes, a few money managers will make good calls that will cause their active portfolios to outperform the market over short or medium terms. One or two have already been heavily and continuously exposed to Facebook, Amazon, Netflix and Google over the last several months and years and, thus, dramatically outperformed the market.

Most advisors, however, will not have made the right calls. For every manager who has invested well over the last couple of years, there is one who has bet during that time on Twitter, Tripadvisor, Verizon and CenturyLink. Some have even made tremendously bad trades, like Bill Ackman’s trade on Valeant (or JP Penney beforehand) and doubled or tripled down. While Ackman managed to avoid doing tremendous damage to his portfolio by countering these bets with a handful of good bets, many who are less talented will turn the super wealth into the merely wealthy and the wealthy into poor.

Money managers charge fees (and pass on transaction fees and costs) that, when compounded over any length of time, guarantee not only their own wealth accumulation, but underperformance for their clients. Too boot, there are very few managers who are savvy as to tax implications of their transactions for their customers. Even in a dramatically higher market like we are experiencing today, they might as well ask: “Together with our underperformance, can we interest you in a heavy tax burden and outlandish, recurring fees?”

Given that the market has performed so well for anyone using low cost index funds (and even roboadvisors), now more than ever, active manager are struggling to explain their underperformance (or, even their losses!).

Some will no doubt outperform in the years to come, but you will secure your future and your wealth by turning off Wealthtrack, CNBC and these other shows and avoiding their follies.

My advice is to stick with index funds to the extent that you require exposure to the stock market over the next year or two.