Despite investor concerns, stock markets have delivered substantial returns so far this year. Through last month, the S&P 500 returned more than 16% and the EAFE (Europe, Australasia, Far East) index delivered more than 10%. This growth has been in the face of investor withdrawals from equity mutual funds. So if mutual fund investors are selling, who is buying?
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Investors have redeemed $32 billion more than they have invested this year, which should have depressed stock prices. But a $300 billion tidal wave of stock buybacks stemmed any downturn.
Corporations have amassed a lot of cash, so we could see a continuation of stock repurchases. That means stock prices may continue to rise even though employment numbers remain low, since companies are buying back shares rather than investing in growth.
In the United States, large companies outperformed small ones in the first nine months of 2012. Infrastructure stocks have disappointed, lagging the total market and carrying higher risk. Health care has dominated in risk-return, financials have recovered, and core stocks have stood still.
Outside the United States, markets have lagged the U.S. market overall, but emerging markets returned a stellar 22%. Japan turned in the worst performance, value stocks have been the most volatile with the highest return, and growth stocks lagged. That’s a contrast with the U.S. market, where growth stocks have led.
My July prediction that U.S. growth stock managers would underperform their benchmark while value stock managers would outperform turned out to be right on target.
For a more in-depth look at the year to date, including graphics, see the full version of my market commentary at PPCA Commentaries
The full version also contains a bonus: two exhibits you can use to obtain an accurate and unbiased ranking of the performance of your portfolios.
I have also included an update on the effect new fee disclosure requirements are having on target date funds. Some fund companies have converted to low-cost, passive investments, including ETFs. But investors still need diversification, and diversifying assets such as real estate and commodities command high fees. We are working on an implementation of the patent-pending Safe Landing Glide Path
that would provide broad global diversification for an all-inclusive cost of 25 basis points. The magic is low-cost alternative collective investment funds that are generally only available to trust companies and large pension plans.