Top 10 Investment And Economy Stories Of 2011
2011 will also be remembered for the proliferation of exchange-traded products, the surprising health of U.S. bonds, an explosion in commodity prices, a slowdown in the emerging-markets run-up, and advances in behavioral finance theory. Here are some of the highlights from the year in Advisors4Advisors:
1. Advisors Report Light Call Volume From Worried Clients Since The Downgrade. After Standard & Poor’s downgraded the U.S. credit rating in August, most advisors had prepared their clients by discussing volatility and adjusting portfolios for market risk after the 2008-2009 fiscal crisis. Many clients, in fact, were eager to take advantage of any downturn by investing further.
2. Signs Emerge Showing Growth In China May Be Slowing More Quickly Than Expected. We began warning advisors of the slowdown in China’s growth as early as March. Sluggish auto sales, lagging exports and waning corporate forecasts provided early signals.
3. Clients Will Value Your Listening Skills Even More Highly Than Your Investment Returns. Understanding what clients want from advisors became more important than ever in the wake of the 2008-2009 fiscal meltdown. This survey provided important insight into what clients need from their financial advisor.
4. How Advisors Can Apply The Principles Of Behavioral Finance To Help Clients Move Forward. Theorists continued to make advances in the field of behavioral finance, an area that advisors should understand well. The Allianz Global Investors Center for Behavioral Finance issued a white paper to help advisors overcome the paralysis and fear among investors caused by the 2008-2009 fiscal crisis. Behavioral Finance In Action lays out a step-by-step plan for advisors to overcome these barriers, offering insight into the behaviors of both investors and advisors.
5. New Research Challenges Belief That Small Caps Boast Higher Risk-Adjusted Returns Than Large Caps. A landmark study came out in September challenging the long-held belief that small-cap stocks outperform large-cap stocks on a risk-adjusted basis. The opposite is true, according to Gary A. Miller and Scott A. MacKillop of Frontier Asset Management, who show that large-cap stocks have actually outperformed small caps on a risk-adjusted basis since 1926. This study has profound implications for advisors and investors who routinely overweight small-cap stocks in search of higher returns.
6. New Study Supports View That Stock Market Is More Predictable Than Random Walk Theory Suggests. A Norwegian professor published a study that takes issue with the random walk theory and supports the idea that stock prices do revert to a mean over time. Portfolios of smaller capitalization stocks and higher book-to-market ratio stocks exhibit evidence against the random walk theory over extended periods, from medium-term horizons to very long-term horizons, according to economics professor Valeri Zakamouline of the University of Agder. The study provides powerful evidence that the market is predictable over the long term, and over the medium term within the small-cap sector.
7. ETF Trends: Which Sectors Offer The Most Potential For Financial Advisors. The number and types of ETFs continued to proliferate in 2011. In January we provided insight into which sectors were most likely to produce positive opportunities in the coming year, highlighting technology, biotech, commodities and emerging markets.
8. Using Alternative Investments To Reduce Volatility In An Uncertain Market Environment. As volatility became the No. 1 issue among investors in 2011, advisors began using alternative investments for long-term strategic allocation rather than as alpha generators. In this interview with Advisors4Advisors, Laura Thurow, senior vice president and co-director of private wealth management research for Baird, said advisors could take a conservative approach to alternative investments with a multi-manager or multi-strategy approach.
9. Hedge Fund Managers Steer Clear Of European Banks, Warning Of Insolvency. As the year winds down, all eyes are on the European zone, watching to see if policymakers contain the debt crisis. This story provides insight into the latest thinking among top hedge fund managers, who are moving away from investments that involve European banks.
10. Investors Who Stuck With Asset Allocation Throughout The Downturn Fared Better Than Those Who Fled Stocks. This July story offers reassuring statistics about the benefits of long-term asset allocation and diversification that advisors could share with their clients. It highlights the results of a Russell Investments study on market timing that shows how much better investors who stuck with a 60/40 index strategy did than those who fled to cash or Treasuries after the 2008 crisis.
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