celera cracks genetic code - iese · celera cracks genetic code april 6, 2000 ... expected, said sg...

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Celera cracks genetic code April 6, 2000 By Staff Writer Martha Slud Biotech stocks soar on news company finishes first phase of gene mapping NEW YORK (CNNfn) - Biotechnology company Celera Genomics Group announced Thursday that it completed the first step in unlocking the human genetic code, a scientific milestone that researchers say will bring about a revolution in understanding mankind's molecular makeup and developing medicines. The news sent biotech stocks soaring. Stock in Celera, a division of Rockville, Md.-based PE Corp., catapulted 30 points, or 26 percent, to 145 on the New York Stock Exchange, on top of a more than 50 percent bounce a day earlier. The biotech sector rallied Wednesday after President Clinton made comments about patent protection for gene-mapping companies that reassured Wall Street about the intellectual property rights of many young firms. Meanwhile, the Nasdaq Biotech Index, which tracks about 200 companies, climbed about 7 percent Thursday, as Celera's announcement helped re-ignite investor excitement in the turbulent biotech sector. The American Stock Exchange biotech index, made up of about a dozen companies, rose about 9 percent. The mapping of the human genome - a breakthrough also sought by the publicly funded Human Genome Project -- is considered a major scientific advance that will provide researchers with new insights into what role genes play in causing disease. Scientists hope that, when armed with this knowledge of how genes work, they will be able to develop powerful new drugs to treat cancer, Alzheimer's disease and other maladies, based on a person's individual genetic makeup. Celera said Thursday that it had completed the first phase of the project by sequencing one person's genome - the complete collection of human genes. Now the company will turn its attention to assembling and ordering the data through sophisticated computer techniques, a process expected to take several months. After compiling this genetic catalogue, scientists hope to be able to chart each gene's function. “This is a very exciting milestone in Celera's short history," J. Craig Venter, Celera's president, told CNNfn. "This is the beginning of a new era of research." Celera began sequencing the human genome last September, promising to finish the mapping project well before similar efforts by the Human Genome Project, an international consortium. Using a so-called "shotgun technique" of identifying pieces of DNA, the company has speeded up the mapping process. Celera -- the name comes from the Latin for swiftness -- has said that speed is of the essence in charting the genome, because it is the first step in helping drug makers develop better products.

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Thursday's announcement came several months earlier than Wall Street had expected, said SG Cowen's biotech analyst Eric Schmidt, who raised his rating on the stock to "strong buy" from "buy." "The company has hit a very difficult scientific milestone ahead of schedule," he said. "I think that gives investors some confidence." Tangible results may be years away Experts caution that while the developments mark a major scientific breakthrough, it likely will take years for genomics research to show tangible results in terms of new drugs on the market. Celera generates revenue by selling access to its gene database to academic researchers and pharmaceutical and biotech companies, each of which pay subscription fees of about $5 million to $15 million per year. Schmidt said that now that the company has sequenced the genome, it should line up more subscribers to its database. "I don't see how you can be really serious about drug development ... and not have access to the cutting edge database out there," he said. A volatile sector Like many biotech stocks, Celera shares have gone on a wild ride in recent months. Shares have rocketed from a little over $7 in 1999 to $276 earlier this year, sparked by news that the company was nearing completion of charting the human genome as well as increased investor interest in the sector as a whole. Industry analysts say the biotech bull run over the past few months was fueled in part by a new wave of investors who discovered the genomics field after many of their Internet investments lost their luster. However, Celera stock quickly slid from its highs last month after President Clinton and British Prime Minister Tony Blair issued a statement suggesting that genomics findings should be made freely available to researchers, raising questions about the future of scientific findings made by private companies. Other stocks also took a beating. But on Wednesday, Clinton soothed many investors by clarifying his comments, saying that genomics companies that discover something with a "specific commercial application ... ought to be able to get a patent on it." The two-day biotech rally has helped push up biotech shares - but the stocks are still well off all-time highs set last month. As of Thursday afternoon, the Nasdaq biotech index was trading down about 20 percent from its all-time closing high hit in early March. However, the index is up about 20 percent since the beginning of the year. Other big biotech gainers Thursday included Sequenom Inc., which jumped 11-1/4 to 44-3/4; Genome Therapeutics, which gained 5-1/8 to 28-7/8; Human Genome Sciences Inc., up 9-1/2 to 106-1/2; Millennium Pharmaceuticals, which added 27-13/32 to 170-3/4 and Incyte Genomics, gaining 15-7/8 to 110-1/2.

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Bayer not liable for drug injury March 19, 2003 CORPUS CHRISTI, Texas (Reuters) -- A jury decided on Tuesday that Bayer AG was not liable for injuries an elderly man claimed were caused by recalled cholesterol drug Baycol in the first of more than 8,000 lawsuits faced by the German company. The court victory could help Bayer's position as it tries to resolve pending cases that could cost it billions of dollars in damages. "This will put Bayer in a stronger position when they talk about settlements in the future and could make settlements quicker," said analyst Andreas Theisen of WestLB Panmure. The jury rejected claims that Bayer should pay $560 million in damages to 82-year-old Hollis Haltom, a decision that sent Bayer's stock up nearly 40 percent. Bayer warned last week that damages from Baycol cases could exceed its insurance coverage if plaintiffs prevailed, and analysts estimated the company's total liability could reach $10 billion. "We believe it is a vindication of Bayer and its position all through this litigation that it acted responsibly when developing and marketing the drug, and finally with its decision to pull Baycol from the market," said Philip Beck, Bayer's lead attorney. No negligence found Haltom, who developed a potentially fatal muscle disorder called rhabdomyolysis after taking Baycol, claimed Bayer was negligent in the way it sold the drug. After three days of deliberating, the 12-member jury determined that Baycol's design and marketing instructions were not defective. The victory may be particularly telling for Bayer because Texas juries are considered sympathetic to plaintiffs in personal injury cases, analysts said. "The Corpus Christi jurisdiction is a plaintiff-friendly one, so it is a good case for them to win and it sets a precedent for future cases," said J.P. Morgan analyst Colin Isaac. Baycol, known as Lipobay outside the United States, was withdrawn from the market in 2001 after more than 100 deaths were linked to the drug. About six million patients took Baycol. Beck said the "vast majority" of the 8,400 cases filed against Bayer involved no adverse side effects and the company would not pay settlements to patients who suffered no injury.

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Bayer said it would continue to pursue its policy of trying to compensate anyone who experienced serious adverse effects from Baycol, but the company would not settle with plaintiffs they believe were not harmed by the drug. "We have a great many cases we are discussing right now in terms of settlement and I'm hopeful this will cause some plaintiffs' lawyers to reassess and to accept our invitation to negotiate settlements," Beck said. More settlements could come Bayer so far has settled with more than 500 individuals for about $150 million and is in talks to settle hundreds more. It had offered a settlement to Haltom but the patient decided to pursue the trial. Next on the horizon for Bayer is a case in Minnesota, where plaintiffs' lawyers are seeking class-action status for several thousand patients who claim they were injured by Baycol. Haltom's attorneys said they would continue to fight for people they believe were injured by Bayer's handling of Baycol. "This matter is far from over," the law firm of Mikal Watts said in a statement. Analysts said the decision bolstered Bayer's claims that it acted responsibly in its marketing of the cholesterol drug. "The verdict has got to be a big boost for Bayer, but it's just one case out of the way," said Barbara Ryan, a pharmaceuticals analyst for Deutsche Bank Securities. Ryan said many other plaintiffs would be asking "what Bayer knew and when they knew it," in terms of potential safety concerns about Baycol. Documents presented during the trial appeared to show that Bayer executives knew about the safety problems with the drug even as they extended their marketing efforts and introduced a higher dosage into the U.S. market. Attorneys for Haltom, who received double the recommended dose for someone starting on the drug, said in closing arguments Bayer put profit ahead of the safety of Baycol patients. But the jury rejected that assertion. Bayer's shares in Germany jumped 39 percent to 14.30 euros after the jury's verdict was announced. Prior to the ruling, Bayer's shares had lost two-fifths of their value since the beginning of the year on fears about the Baycol liabilities.

49% of wealthy parentsinterviewed by US Trust say itis important to leave a financial

June 23, 2011 5:26 pm

By Alice Ross

Investing in... the US

What is the fund?

Melchior North American Opportunities, an open-ended Sicav based in Luxembourg and managed by Peter Kaye at Dalton StrategicPartnership.

Why should I buy it?

Tom Becket, chief investment officer at PSigma, the UK wealth manager, says it is important for US investments to have specialistexposure, to increase the chance of beating the index. The Melchior fund looks for earnings surprises in special situations – and Kayebelieves recent upgrades by US analysts to 2011 and 2012 earnings show that his strategy is working. The fund has outperformed theS&P 500 by nearly 10 per cent over the past 18 months.

Why shouldn’t I buy it?

There might be no earnings surprises after all, or the manager might fail to uncover the best ones. Also, this kind of strategy worksbetter in a bull market, where surprises are more likely to be on the upside. If you believe the US economy is going into a sustained bearmarket, an earnings surprise strategy could leave an investor with significant underperformers. Becket warns that, as a result, this fundis one of the riskier he recommends to clients.

........................................................................................................................

A surfeit of analysis

The accepted wisdom among investors is that beating the US market is not easy. The reason? Too many analysts.

According to Collins Stewart, the stockbroker, just 9 per cent of large-cap funds in the US have managed to outperform the S&P 500over the past seven years.

Wealth advisers complain that the market is “overanalysed” and “overtrawled” by investors – a stark contrast with emerging markets,where well-managed companies with plenty of cash on the balance sheet might still slip under the radar.

There is probably some truth to this. Too much analysis means it is difficult for anything about a companyto go unnoticed, which is what active fund managers love to uncover. The industry thrives on findingundervalued companies – deciding that you know something the rest of the market does not.

Many wealth advisers suggest just buying an exchange traded fund to cover the US market and not even

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inheritance to their childrenSource: US Trust Insights onWealth and Worth, based on asurvey of 457 people with $3mor more

5.2m – Number of millionairehouseholds in the US, making itthe world’s highest, followed byJapan, China, the UK andGermanySource: BCG 2011 GlobalWealth Report

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bothering to try to find an active manager who can outperform consistently. There is something to be saidfor this strategy in the UK, too. Recent research by Thames River Multi-Capital in London found that only16 out of 1,188 funds it analysed had produced consistent top-quartile returns in the past three years.

However, others believe the problems with the US market have been overhyped. Russel Kinnel, director ofmutual fund research at Morningstar, the data provider, in the US, says comparing fund performance

with that of the S&P 500 is not fair, as most US actively managed funds have a bigger weighting to small caps than the index.

But he believes the main reason that funds lag behind is the difference in costs – a huge drag on performance over time.

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The road aheadBy Aris Vatis

The US equity market is one of the broadest, deepest and most global stock markets in the world. While many commentators believe italso to be the most efficient, a significant number of mispriced opportunities remain.

The decision by Standard & Poor’s to cut its ratings outlook for the US in April was not a surprise.Markets had been concerned about the fiscal situation in the US for some time. However, Congress hasbecome more serious about dealing with the budget deficit.

US equities benefit from diverse exposure to markets across the globe, especially emerging markets. TheUS market is also growing much faster than other developed markets, while it does not seem to sufferfrom the structural problems seen in Europe.

I am finding opportunities in the mobile internet and tablet device market, driven by the development ofsmartphones and tablet computing. The Obama administration plans to connect virtually all Americans to the “wireless web” in fiveyears. Already, billions are being invested in the country’s communications infrastructure. An example of a mispriced opportunity inthis sector is Qualcomm, a leader in mobile phone semiconductors that is expanding into the tablet market.

Having cut costs, corporate America has become leaner and meaner, with a renewed focus on productivity. Despite a still-tenuoushousing market and high levels of unemployment, corporate earnings will help support economic growth in the coming year.

The writer is manager of Fidelity Investment Funds American fund

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Investing tip

Follow small caps in times of economic growth. They have tended to be the largest beneficiary of upswings in the US business cycle overthe past decade, anticipating the last two upturns long before their large-cap counterparts, according to research from Russell Indexes.

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Nasdaq Confirms Bearish Pattern, Dow And S&P 500 Follow Oct. 16, 2012 │ Capturetrends

Disclosure: I am short DIA, SPY, QQQ, IWM. As a trader, I am often long or short in multiple stocks and other co-related asset classes such as foreign exchange and futures.

The slowdown in the economy is finally affecting the markets with the Nasdaq 100 giving a clear bearish signal. A number of economic reports have been showing a growth deceleration, but the stock markets kept rising as the Federal Reserve eased money supply.

Let us look at the reports that have been showing a slowdown. The biggest is gross domestic product (GDP) growth, which fell from 4.1% in the last quarter of 2011 to 2% in the first quarter of 2012 and 1.3% in the second quarter of this year. This is surely a sharp deceleration.

The other big number is what the Bureau of Labor Statistics calls "U-6," which includes total unemployed plus all persons marginally attached to the labor force and total employed part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. That number has stubbornly stayed above 14% for a very long time. These people are unable to robustly spend and invest, which has a negative effect on the stock markets and the economy. The market is also looking at the looming fiscal cliff and the possibility of higher taxes, especially on dividends and capital gains. These have put dampeners on the stock market.

Reflecting the deteriorating economic situation, the Nasdaq 100 formed a bearish head-and-shoulders chart pattern. In fact, in 2007-08 the S&P 500 formed a head-and-shoulders

pattern and the rest is history. Similarly, when the markets bottomed and rallied after March 2009, a bullish inverse head-and-shoulders pattern was formed.

Hence, when a major index forms a head-and-shoulders pattern or the inverse, it is time for investors to sit up a take notice. When the pattern is formed in the midst of a slowing economy and stubbornly high unemployment, it is something that must not be ignored.

The other two major indexes -- the S&P 500 and the Dow -- did not form a head and shoulders, but they did form other bearish patterns. However, the Nasdaq 100 is more important to spot a reversal of the bullish trend, as it has been the

strongest of the three indexes. We will show you later in the article why the Nasdaq is the strongest, but for now let's look at the chart patterns.

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We are looking at the QQQ, the ETF that tracks the Nasdaq 100, which is the top chart in the image and shown by the yellow line. You will notice the head and the left and right shoulders on the chart. Also notice that the neckline has been broken. The break of the neckline in the head and shoulders confirms the chart pattern and the uptrend reversal. Stockchart.com's Chart School states that a head-and-shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal.

To track the S&P 500 we are looking at the ETF SPY. Notice that the SPY, shown on the middle chart, has made a lower high and a lower low. In an uptrend, the market makes a continuing series of higher lows and higher highs. A higher low happens when a latest low in price is higher than the previous low, and a higher high happens when latest high in price is higher than the previous high. When that trend reverses, the market first makes a lower high and then a lower low as shown by the SPY chart.

Now let’s move to the Dow; to track the index we are using DIA. Notice that DIA made a double top, which is bearish, and made a lower low. A lower low confirms the double-top formation.

The gathering clouds on a fundamental level -- which include slowing GDP growth, persistently high unemployment, the fiscal cliff, and potential tax increases -- combined with confirming bearish chart patterns should be a warning sign for bulls.

Finally, the reason we looked at the Nasdaq 100 to provide the reversal of the uptrend is because that is the strongest index. We call it the strongest as the index rose nearly 150% from its March 2009 bottom, while the S&P 500 rose about 95% and the Dow rallied about 92%. It is clear that the Nasdaq 100 was leading the markets up, and when the leader loses steam the laggards fall with it.

Trading Strategy

We'd wait for a rally in price to short. In case the QQQ reaches its downtrending neckline, we'd short with a stop above the neckline. If the neckline is broken, the next place to short would be near the right shoulder, with a stop above it.

For the SPY, the downtrend line is the first area to short with a stop above it. If the rally continues, the next level would be the last high in price.

January 12, 2009, 5:17 PM ET

ByMarketBeat Staff

William Power writes:

A stock-market predictor that is right 79% of the

time would usually be considered a godsend,

especially these days.

But for the quirky market-forecasting device

known as the Super Bowl Predictor, that

percentage is actually a comedown. While the

indicator has predicted the direction of the stock

market accurately after 33 of the 42 Super Bowls,

but it used to work a lot better than it has lately.

Now, based on the results of the weekend’s football games, the Predictor is predicting something that

would make most stock investors’ hearts race: It is forecasting an “up” year for stocks in 2009.

Here is how the indicator works (remember, there is little or no science to this at all; it’s just for fun):

When an “original” National Football League team wins the big game, the market rises for that year; but

it falls when the winner is a team that joined the NFL because of the league’s merger with the American

Football League in 1970.

Since all four teams left in the playoffs — Philadelphia, Arizona, Baltimore and Pittsburgh — have their

roots in the old NFL, the market is supposed to rise in 2009. (Yes, the Baltimore Ravens “count” for the

NFL side since the team’s roots trace to Cleveland and the “original” Cleveland Browns, though fans can

debate that connection; meanwhile, Arizona traces to the old, “original” St. Louis Cardinals.)

Problem is, despite the astonishing success rate of the Predictor, it failed in 2008 as badly as long pass

thrown by a Wall Street geek. The New York Giants’ win was supposed to make the market go up. But

upon further review …

“Last year was a failure for the good old Super Bowl Predictor. Like a lot of things, it didn’t work last

year,” admits Robert H. Stovall, strategist for Wood Asset Management in Sarasota, Fla., who has long

tracked the Predictor. If the New England Patriots had won last year as was predicted, it would have

flashed a “sell” signal and the Predictor would have been the only thing that worked in markets last year.

The failure is probably fitting, says Mr. Stovall, a Giants fan.

“Nothing seems to be working anymore” in the stock market, he says. He notes that the performance of

the Predictor has slipped below 80% for the first time in his memory-which is pretty long for the

82-year-old Mr. Stovall.

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“Used to be, I was only happy when it was over 90% performance, and when it was still above 80% I

was pleased,” says Mr. Stovall. “But certainly 79% is still far above a failing grade.”

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March 30, 2012

By PAUL SULLIVANIF there is one warning label that seems to have little effect, it is the one on the bottom of a

securities prospectus: “Past performance is no indication of future results.”

Yet investors regularly ask for a mutual fund’s track record over one, three, five years or more

before putting their money in. Sure, the fund may keep going up, and the past performance is

an indicator. But what happens if the fund starts to drop? Should the investor sell, or hang on

because the fund did well in the past?

A report released this week from Barclays Wealth and Investment Management, “The Science

and Art of Manager Selection,” aims to lay out the risks of trying to read past performance into

future returns when selecting active managers — as opposed to passive management of your

money through index and exchange-traded funds.

Investors are asking the wrong question when they argue whether active or index funds are

better, said Aaron Gurwitz, chief investment officer at Barclays and one of the authors of the

report. “The question is, Can you identify managers who are going to perform well in the

future?” he said. “If you can’t, you should be in an index fund. If you can, then you should select

managers the way we do.”

The report highlights a basic problem in investing — that the obsession with recent returns

hurts long-term performance. Psychologists and behavioral economists call the phenomenon

the recency bias, and it is not confined to investing.

“We’re like pattern-finding machines,” said Terrance Odean, professor of finance at the Haas

School of Business at the University of California, Berkeley. “If lightning strikes and something

falls off the table, we think the lightning caused it. Or worse, the book falls and lightning strikes

and you think the book caused it.”

But searching for patterns does not add up to a good investing policy. “The investor who is in

the market and is constantly seeing patterns better have a good day job,” Mr. Odean said.

In a paper in 2008, “All That Glitters: The Effect of Attention and News on the Buying Behavior

of Individual and Institutional Investors,” Mr. Odean and a co-author, Brad M. Barber, a

finance professor at the Graduate School of Management at the University of California, Davis,

found that individual investors were more likely to buy a stock if they saw something about it in

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the news or if it had a high one-day return. The two professors attributed this to how difficult it

was to do detailed analysis on thousands of stocks before buying one.

But how can investors be broken of their habit? The Barclays paper advocates a mix of what its

authors call the art and science of picking active managers.

The art refers to the idea that the ability of most mutual fund and hedge fund managers to

outperform their indexes peaks and then declines as more money comes into the funds.

(Private equity managers have better luck because they are essentially repeating the same

strategy with different companies.)

David Romhilt, the head of manager research and selection at Barclays and the lead author of

the report, said active managers went through four phases: start-up, growth, maturity and

decline. He sought to identify those managers in the second phase, growth, because that is

when they have had enough success with their strategy but not so much success that money has

poured in and changed how they invest.

One example of this life cycle is Bill Miller, the chairman and chief investment officer of Legg

Mason Capital Management. He outperformed the Standard & Poor’s 500-stock index from

1991 to 2005 with his Value Trust fund. Then, for five of the next six years he either

underperformed or significantly underperformed the benchmark.

The Barclays report does not address individual managers, but its authors say the decline

should not be shocking. As assets grow, managers have to take enormous stakes in single

companies or diversify into too many different securities. The fund loses the nimbleness it once

had.

Of course, there are mitigating factors. The study found that employee-owned firms where

managers have a large portion of their wealth tied up in the funds have a better chance of

avoiding the bloat that leads other funds to focus on increasing assets rather than managing

money.

“When you talk about the manager and the nature of a fund, it goes a long way to humanizing

the manager,” Mr. Gurwitz said. “It helps investors realize these are sociological organizations,

not long lists of numbers.”

As for the science of evaluating managers, Mr. Romhilt said his team looked at four criteria:

investment process (which counts for half the weight), organizational structure (25 percent),

past returns (25 percent) and due diligence, which a manager either passes or fails.

“A performance track record is not a leading indicator,” Mr. Romhilt said. “We intentionally try

to raise our guard if the performance is so good. The managers should have an investment

process or an institutional structure that is better than we normally see.”

In 2007, he said, he looked at an international growth fund that was in the top 1 percent and

attracting interest from many of the firm’s clients. He said the manager had 80 percent of the


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fund in cyclical commodity stocks, but Mr. Romhilt was more curious to hear about the

investment process.

“I went into this meeting thinking I would get an incredibly deep thesis on world commodity

markets and I was expecting to be blown away,” he said. “That was wholly not the case with this

manager. He had very well-known, supply-and-demand, emerging-markets’ consumption

stories. It wasn’t anything that someone with access to the Internet couldn’t have put together.”

Mr. Romhilt concluded that the strategy was simply market timing. And it turned out he was

right. While the fund had been successful on the way up, it got the timing wrong on the way

down when demand for many of the commodities it was invested in dried up in 2008.

The other side of the recency bias is knowing when to exit, even if the returns have been good

for years. Mr. Romhilt said he regularly reviewed managers with one big question in mind:

Would he pick them again today? He said he could tolerate short-term losses as long as the

fundamental strategy had not changed. But when there are signs like a rapid increase in assets,

excessive concentration in one company, high turnover or a change in investment style, he said,

those should signal the investor to stop putting in more money or exit immediately.

This conversation is not always an easy one, since just as investors have a tendency to get into

something at its peak, they are loath to sell while an investment is still doing well.

But the authors of the Barclays report make their point with everyone’s favorite measure:

returns. Mr. Romhilt said that their way of selecting active managers increased returns by 3

percentage points over the relevant benchmarks before fees and 1 to 2 percentage points after

fees.

“That’s how we’re trying to be accountable in the process,” he said. “That doesn’t mean all our

clients got 3 percent. They don’t all listen to us, or they apply different strategies.”


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FEATURE OF THE WEEK January 14, 2013 12:03 am

Market research: Jeffrey Pontiff and David McLean

By Rebecca Knight

A reliable way to spoil a market-beating investmentstrategy is to publish an academic paper about it,according to research by David McLean, a visitingprofessor at MIT Sloan School of Management.

Prof McLean and Jeffrey Pontiff, a professor of financeat Boston College’s Carroll School, examined 82strategies that were shown to predict stock returns in68 papers published in finance, accounting and

economics journals*. They found that once these papers were published, the average strategy’sreturn fell by more than 30 per cent. This may be due to these papers attracting the notice ofsophisticated quantitative investors who trade on a given strategy, which corrects the marketmispricing that made it profitable in the first place. Prof McLean discusses his research:

What sparked your interest?We had wondered if the investment strategies outlined in

academic papers worked outside their original samples. It was an interesting question, but itwas a daunting prospect to replicate so many strategies. During the summer of 2011 we did [theempirical work for] about a dozen of the strategies. We saw that the predictability was a lotweaker from the original sample to post-publication.

And what did you discover?We found that the average strategy’s return declines by 35 per cent after an academic paper hasbeen published. In other words, if you are an investor trading on a strategy outlined in anacademic paper that promises an additional return of 5 per cent per year, you should expect toget only 3.75 per cent in the years after that paper is published.

What explains this effect?When an academic publishes a paper about a strategy, investors learn from it and trade on thatstrategy. This trading impacts prices, bringing them more in line with fundamental values. Thisprocess also makes the strategy less profitable. It seems the strategies outlined in these paperswere right for their original sample, but once practitioners learnt about them the predictabilityweakens.

Which investment strategies saw the greatest post-publication decline?The returns of strategies that involve larger, more liquid stocks declined by more than 35 percent. This is probably because investors are more likely to act on a published strategy if the cost

©Bryce Vickmark

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of trading in the strategy is low. But when it’s more expensive to trade – smaller, more volatilestocks – investors are less apt to try a new strategy. We found that these costlier strategies keepon getting high, abnormal returns even after the paper [they are outlined in] is published.

Are your finance colleagues dispirited by your findings?There’s nothing that makes the profession look bad. It suggests that academic research affectsthe real world.

Do they ever think, what’s the point?Academics are interested in testing market efficiency and predicting stock returns is one way todo that. The point of these papers is not to claim ‘Hey here’s this great way to make a lot ofmoney’. I think this research shows that markets want to be efficient, but there are costs andrisks associated with getting there, so the market doesn’t end up in a perfectly efficient place.

You say there’s a silver lining to your research. Explain.Our interpretation of these results is that academic research makes financial markets workbetter. Once the papers were published, the strategies did not work as well, suggesting that themarket mispricing has been at least partially corrected. As a result, stock prices are moreaccurate estimates of what companies are worth. You prefer to live in a world where pricesmean something.

*Does Academic Research Destroy Stock Return Predictability? Social Science ResearchNetwork.

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JOURNAL REPORTS

These Conservative Stock Funds Are Popular, but Some Pros Say They Are Now TooPricey

April 6, 2014 4:46 p.m. ET

Journal ReportInsights from The Experts

Read more at WSJ.com/WealthReport

More in Investing in Funds & ETFsThe Smart Way to Tap Investment Accountsin Retirement

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If Divorcing, Divide Investments With Care

When Stocks Dither, 'Buy Write' Delivers

Does slow and steady really win the race?

Investors in recent years have placed heavy bets on "low volatility" funds, vehicles that invest in stodgy,

slow-moving stocks such as utilities and consumer staples—the kind of stocks that weather periods of

volatility well. Over the past three years, investors have put more than $10 billion in low-volatility mutual

funds and exchange-traded funds, many of which were launched after 2010, according to fund tracker

Lipper, a unit of Thomson Reuters Corp.

But now some experts say the enthusiasm for low-volatility

stocks has made them overvalued.

"Low-volatility stocks in general do look quite pricey

compared to the market and compared to where they've

traded historically," says David Allison, vice president of

Allison Investment Management LLC, a wealth-

management firm in Columbia, S.C. "The financial crisis left

investors shellshocked, and the safer stocks have been

very popular." Many low-volatility stocks pay high

dividends, Mr. Allison notes, adding to their popularity in

this low-interest-rate environment.

"If you're buying the lowest-volatility segment of the market," Mr. Allison says, "you're buying some fairly

expensive stocks there."

Anomaly Endangered

Multiple academic studies since the 1970s have shown that low-volatility stocks outperform the highfliers

over long periods, though normally one might expect higher risk to give higher returns. This surprising

result has become known as the low-volatility anomaly.

Researchers have traditionally explained the anomaly in behavioral terms: Investors are drawn to

fast-moving stocks which have potential for spectacular gains, which then become overpriced and

struggle to sustain their high valuations. The slow and steady stocks tend to be overlooked, making them

bargains that are more likely to rise in value.

Now, however, the anomaly may have run its course.

"There's a sense that, at least for a while, the voguish popularity of 'low volatility' as a strategy has

By ANDREW BLACKMAN

High Hopes for 'Low Volatility' Funds - WSJ.com http://online.wsj.com/news/articles/SB1000142405270230382420457...

1 of 3 4/10/2014 6:48 AM

annihilated the low-volatility anomaly," says Matthew Hougan, president of analytics and publications at

ETF.com. The newfound popularity of these stocks, in other words, has driven up their values, so there is

less reason to assume they will keep on outperforming.

A group of researchers studied stock data back to 1925 and found that low-volatility stocks are popular in

recessions but tend to underperform as markets recover and so become undervalued. In the financial

crisis of 2008, valuations followed the predictable pattern. But they have stayed high even as the

economy has picked up and stocks have rallied.

"We found that low-risk stocks are still trading at a premium," says Rodney Sullivan, editor of the

Financial Analysts Journal at CFA Institute and a co-author of the study. "That's the opposite of where

they've been for most of the past 35 years." Mr. Sullivan says that low-volatility investing does have

worth, but that investors should also consider current valuations. "As Warren Buffett and Ben Graham

taught us, you also have to pay attention to the price you pay. Price matters."

Others believe low-volatility stocks are still compelling.

Malcolm Baker, a professor at Harvard Business School and director of research at Acadian Asset

Management LLC in Boston, says that while the volume of low-volatility investing has grown, it hasn't

reached the point where it affects the performance or valuations of these stocks.

Andrew Schlossberg, head of U.S. retail distribution and global ETFs at Invesco Ltd., says: "The

important thing on low-volatility investing is to look at it over a full market cycle. The research has shown

that low-volatility investing can reduce risk in your portfolio and allow you to get adequate return, which is

what everyone is trying to do."

For fund investors considering the strategy, there were recently 37 low-volatility mutual funds and 14

ETFs. The mutual funds had assets of $6.7 billion and the ETFs, $9.7 billion, according to Morningstar

Inc.

Key Distinction

There is an important distinction to note as well. The two largest ETFs, iShares MSCI USA Minimum

Volatility and PowerShares S&P 500 Low Volatility, track separate indexes with distinct methodologies


2 of 3 4/10/2014 6:48 AM

that can make a big difference in performance, says Todd Rosenbluth, director of ETF research at S&P

Capital IQ.

"The PowerShares fund should capture the low-volatility effect better," he says, "but the flip side to that is

that you're taking on more sector risk." That's because the PowerShares fund tracks an index composed

of the least volatile stocks in the S&P 500, and becomes heavily weighted toward sectors like utilities

(recently around 25% of the index, compared with about 3% for the S&P 500). The iShares fund, on the

other hand, tracks an index that places limits on the weightings of each sector. The same divide exists in

low-volatility international-stock ETFs from the two companies, Mr. Rosenbluth says.

Meanwhile, for actively managed funds, he says, avoiding overvalued stocks will be key. "With some

low-volatility stocks being overvalued, that's where active management should in theory come in," he

says. "The managers should be able to rotate into stocks that are lower-volatility but not as richly valued.

The proof will be in the performance, and I think it's too soon to say whether the active approach is better

or worse than the passive approach."

Two actively managed mutual funds, Invesco Low Volatility Equity Yield and the recently launched

Vanguard Global Minimum Volatility, aim to put together a mix of holdings that will be less volatile overall

than their benchmarks. The Invesco fund has a 1.18% expense ratio, whereas the new Vanguard fund

has a 0.3% expense ratio, which is more in line with the ETFs.

Other Options

Other professionals point out that buying funds dedicated to low-volatility stocks isn't the only option for

reducing volatility in a portfolio.

"If someone's currently 100% in equities, and they're looking to reduce volatility, an alternative would just

be to add more short-term bonds or cash to that portfolio," says Philip Straehl, senior research

consultant at Morningstar Inc.'s Morningstar Investment Management in Chicago. "If you look at the

returns of a balanced portfolio over the past four or five decades, it's fairly attractive from a risk/return

perspective."

A final piece of advice comes from Mr. Hougan at ETF.com. Even if the low-volatility anomaly persists,

he says, there will be periods when the market is rising strongly and these funds significantly

underperform.

"The strategy is capitalizing on behavioral biases, and you have to overcome your own behavioral biases

to get the payoff," Mr. Hougan says. "If you're the kind of person who will sell as soon as these

underperform, then you're doomed to buy and sell at exactly the wrong time, over and over again. It

takes the right kind of investor to make them a success."

Mr. Blackman is a writer in Crete. Email him at [email protected].

Copyright 2013 Dow Jones & Company, Inc. All Rights ReservedThis copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For

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Good Reasons Still Exist For Hiring a Stockbroker

By JO!'4ATH,UII CuMEJ'o:TS Stoll Rc,orler

Brokers complain that I spend too much time encouraging readers to make their own Unanclal decisions, when these ama· teur investors are dearly desperately in need of professional help.

My response? When brokers talk about the incompetence or small investors. a lot or Illeirevidence is hogwash. BUI allhe same time. 1 concede thaI almost evel)'body should seek expert assistance at some point. whether it '$ (or a (un-blown financia.l plan or simply to get a will drawn up.

Lor, sIan with some of Ihal dubious evidence !hal'S currenlly mal<Jng !he rounds on Wall Street. Has your broker" told you about the lamous study of Fidelity Magellan Fund that found that more than half 01 Magellan 's shareholders had lost money over IheUfe of the fund?

The Implication Is that Magellan's In· vestors, who typl,ally purchase the fund witlloul using a broker, have lended to buy al mar\rel peaks and sell at market troughs. The problem is, nol only Is !he sludy famous, but it also doesn't seem to exist.

"1 can't find any endence that any such sludy has ever hoen done," says Derek Sasveld. a senior consultant with Ibbotson Associates. a Chicago research lirm.

Have you beard abouI!he sur· vey that showed that large numbers of In· dlvldual reUremenl accounts at Vanguard Group,!he big no-load lund company, are Invesled In munlclpal·bond fundS?

SUcking munis In an IRA is preposter~ ous. or. course, because the tax·free Income (rom the munls Isn't any help in a tcu- sheltered account like an IRA. But It turns out thai the survey Is also preposter· ous. The Malvern, Pennsylvania, fund group says that, among Its more than two million IRA a,eounls. just 209 are In· vested in municipals.

Has yourbrokertold you ahoula Morn· Ingslar analysis that showed thaI. because stock·fund investors were olten in the wrong (unds at the wrong time. these investors did far worse than the stock· fund .verages suggest?

This study does a'lually exist. Bul Morningstar. a Chicago mutual·fund reo search firm. now admits there were prorramrnillgerrors. H recently ran asimUar study thaI fouM that Investors did Indeed ·hurt their returns by Jumping amongslock lunds. But the damage done by this Irad· 'ing was fairly modest, with load ·fund in· vestors suHering slightly more than their no-load counterparts.

The bottom line' Wall Slreet's deroga· tory comments about small investors just aren't justiried. A Jol 01 these people do (Jne on their own. Moreover. by arguing that (lO-It-yourselr Investors earn lackluster returns , brokers imply thaI Ihey themselves can deliver stellar reslJlts .

"Brokers rocuson the one lrungtheycan't doanythingaoout. which is ~rrormancere)aUve lothe market. ,. arf:Ues Meir Stat man, a

finance professor at Santa Clara University in california. The (act ls, like most amatelU' and professional investors. it 's unlikely thata broker win eam market·beatlng returns.

Bul thaI doesn't mean you shoUldn'l Ilire a broker or some other type of financial adviser. Here are fOUf good reasons for gelling professional help: • Occasionally. you will come across estate·planning. tax and other finanCial quandaries that are too complicated to tackle on your own.

"You can't become an expert on mutual funds, asset allocation, estate planning. taxes and retirement planning," says Kurt Brouwer .. an investment adviser in Tiburon, Calir. "Not even a professional can be competent in all those areas. You've got o lot to lose )ere, and aUllle ad·

nce can go a long way." • While some subjecls are horribly complicated, much of investing Is "not rocket science," concedes J.

...... Scot

Arthur Urciuol\, a senior vlce president at Merrill LynCh &< Co. "Bul you've eot 10 devote some time" if you are going to

do It properly. Maybe you don 'lhav. the

time. MayDe you don'l wanllo put in the work. U that's the case, you should pay for the servlces 01 a broker or rwancial plan· nero UJ(e other servtces, usiTlf an adviser is a con·

venience that will cost you. But it can be money wen 'spenl, II you find yourself a top'Rotcb adviser. • Wilh a IIltle eflort and without the help or an adviser, you ought to be able to save enough, manage your debts, pick some decent CUnds and find some low-cost insurance.

But dO you have the righl colleclion of Investments. insurance and estate-plan· ning documents? Have you overlooked something? If you have any doubts, find a broker or rmandal planner who will look ' over your Hnances every so often. to make 5ure your portfoUo Is In eood shape.

Remember, you don', have to enter a year·round relationship with an adviser. Instead. you might use an adviser to get an annual checkup. just as you would a doctor. "U's your money ," Mr. UrciuoU notes. "People need to know how to use advisers. There are a lot or pricing options available." • POssibly an adViser's mosl importanl job is to provlde discipline and hand·hold· Ing.

Among Individual investors, "1 don't think the problem is incompetence," says Mal)' Barneby, a direclor 01 the Invesl· ment Management Consultants Association and president of Delaware Manage· ment's retirement-services group. "The problem Is people who don't do anything."

SOme (OlkS just don·t ha\'e 'he disci· pline needed to invest on their own. They spend too much, save too lit tle and panic too easily over their investments' pertor' mance. lC you are in trus camp, you should get help.

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Last updated: May 4, 2014 4:52 pm

By John Authers

Index funds have forced active funds to become more active

ere are two versions of the future of investment management, both overheard last week. The first came from a fellow journalist. Hewas exasperated: “What I want to know is, how do active managers even exist? Everyone’s known for years that they don’t earn their

money. And yet there are even more of them.”

In his judgment, passive investors should have eaten all of the pickings for those fund managers who charge fees in return for attemptingto beat the market. The growth of exchange traded funds has been the biggest development in asset management over the past decade.Active managers showed during the 2008-09 crash that they had no more clue than anyone else how to avoid losses.

And yet Strategic Insight figures show that among US equity funds, more than 75 per cent of new sales each year still go to active funds.Some $2tn of new sales is made by that industry each year. Meanwhile hedge funds, avowedly active, have a record $2.7tn in management,despite lacklustre performance.

The second viewpoint is from Andreas Utermann, the chief investment officer of Allianz Global Investors. He cheerfully predicted that thegrowth of the passive indexers had “given active managers a secular chance to make it big”.

This is counter-intuitive. The story of the year is of flat stock markets, with low volatility and little dispersion in returns between stocks.This makes it hard for active managers to shine. Even if they skilfully choose the best stocks, those stocks may not outperform the marketby enough to cover their management fees.

Yet both men are right that the active management industry remains in bafflingly strong health.

And Mr Utermann argues that the advent of passive management has been healthy for active managers. True, the rise of index funds wasaccompanied by an increase in “herding,” as active managers hugged close to their benchmark index. This minimised the risk of theirunderperforming badly and seeing clients pull their funds out. But as an investment strategy it is impossible to justify.

Now, Mr Utermann says investors have evolved. The presence of indexers as a competitor means that active managers can no longer crowdaround an index, as this way lies commercial death.

Academics have worked out the extent of index-hugging, and how to measure it. “Active share” – the percentage of a portfolio that differsfrom its benchmark index – is now widely followed. Academic research shows that higher active share is associated with higher returns. Soindex-hugging is no longer a way to avoid embarrassment or gain clients.

Mr Utermann adds that returns on bonds and equities over the next decade look set to be low, given historically low yields on bonds, andrichly valued stocks. So the index is unattractive – forcing managers to attempt something different.

Further, as more money goes to passive funds, which meekly buy stocks at whatever valuation the market is offering, then markets growless efficient. Indexers tend to be pro-cyclical, or keep trends going longer. As a stock rises, index funds must buy more of it. That increasesthe opportunities for being counter-cyclical.

Then there is the small-cap effect. Historical studies show that small companies tend to outperform, possibly because the market for themis inefficient. Pre-crisis, as the small-cap effect became more widely known, Wall Street built big research teams to cover the small-capuniverse, and everyone piled in. That made the market more efficient.

Job cuts in the wake of the crisis have turned that around. Investment banks have retreated once again, creating more chances for activemanagers.

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Lords report criticises NHS tax avoiders

So on Mr Utermann’s analysis, index funds have not squeezed out active funds, so much as forced them to become more active – hence thegrowth in hedge funds.

This suggests that we could be heading towards a shape for the investment industry that might actually look after savers while allocatingcapital efficiently. Much money would be held passively (think of them as herbivores), while truly active managers (carnivores) gobbled upthe anomalies they created.

Will it work out like this? There is a better case to buy a concentrated active fund than there is for an index tracker. But there remains aproblem. Markets are not perfectly efficient, but they are far too efficient for many people to beat them regularly. That is why the same fewnames, such as Warren Buffett, always recur when active management is discussed.

This is the ultimate barrier to success by active managers. Many now operating will be unable to clear it. In nature, there are moreherbivores than carnivores. And in investment, active managers have held back the forces of evolution, but it is inevitable, and desirable,that their numbers should shrink over time.

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MARKETS INSIGHT May 15, 2014 6:21 am

By Ralph Atkins in London Author alerts

Both football and bond fans should watch for arbitrage opportunities

he football World Cup will provide a welcome distraction for financial markets if trading is listless when it kicks off in Brazil in justfour weeks. At least the 32-nation competition will see real, fast-moving action. There is another good reason for watching: it could

prove more insightful for bond dealers than imagined.

The 2014 competition should see a global surge in online betting by football fans – with millions of transactions conducted speedily attransparent prices. Economists – and some financial strategists – have spotted that this rapidly growing spin-off of the beautiful gameoffers a laboratory for testing how markets function, and what is needed to trade profitably.

Right now, World Cup football’s unpredictability, excitement and the clear links between team performances and results contraststrikingly with bond markets where nobody seriously doubts that central banks will keep interest rates unchanged at historic lows for aconsiderable time yet.

Betting on ball skills is likely to prove highly profitable for the most knowledgeable football fans. In markets, banks are scaling backtrading in fixed income assets because they cannot make a decent return.

They think it’s all over

Online sports gambling offers insights into how human-driven markets really work because there is a clean “news” stream. Matches aretelevised globally so everybody knows when a goal is scored. Those taking part are knowledgeable and experienced, although there areissues about whether delays in transmission via satellite create unfair opportunities for those with faster technology.

One conclusion from academic studies is that human-run markets can act with ruthless efficiency. In research published recently in TheEconomic Journal, Karen Croxson and James Reade, two Oxford university economists, monitored bets placed with Betfair, an onlineexchange, during more than 1,200 professional football matches.

Odds change during a match; the nearer the final whistle, the more predictable the result. So to identify the impact of goals they lookedat those scored just before half time, when “playing time” stands still but betting continues. They concluded that “prices update soswiftly and completely that the news of a goal is fully digested by the time the break commences, even where the goal occurs justmoments before the end of play”.

What is the relevance for financial markets?

One lesson is that it is hard to find information gaps that can be exploited; news events are fully priced in almost immediately. If afootball match result is almost a foregone conclusion – such as when Manchester City last weekend won the English Premier League –gambling profits are slender. Similarly, in an era of “quantitative easing” by the US Federal Reserve and other central banks, there islittle advantage in traders being ahead of the game in, say, forecasting US economic performance.

“If I wanted to go against the Fed, I’d want to be absolutely sure that I knew something that nobody else did – because I’d be betting theequivalent of West Ham winning against Man City,” says Steven Major, global head of fixed income research at HSBC. “You need to bewary of people who think they know more than anyone else.”

Match strategies

Even when bond markets (or football matches) are one-sided, betting strategies can still pay off. Football-mad bond market participantsto whom I have spoken find using online betting not unlike their day jobs.

Rather than acting as a traditional bookmaker, Betfair, which has 900,000 active users, is an exchange that allows gamblers to takeeither side of a bet. They can even mimic leverage: to take more risk, you do not just bet on result but the winning goal margin. The besttraders try to spot anomalies in pricing that they can exploit – not “fighting the Fed” but watching out, for instance, for over-optimisticinterpretations of US jobs data.

But volatility in bond markets will be much greater when central banks eventually start raising interest rates. Then, the big winners willagain be those best able to rate the skills of policy makers and the relative performances of economies.

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When it comes to the World Cup, bond traders may have an edge over other football fans. They know, for instance, the opportunitiescreated by “home bias”. The tendency for domestic banks to buy their own government’s debt supported bond prices during theeurozone crisis.

In football, fans bet more heavily on their national team. With websites such as Betfair accessible from Brazil, my tip is to watch forarbitrage possibilities.

Whatever happens there will be serious football upsets next month. Maybe bond markets will turn volatile soon, too.

[email protected]

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Five Things Every Fund Investor Needs to Know

By ANNA PRIOR

Does it pay to stay active?

Actively managed stock mutual funds rebounded in 2009, ending slightly ahead of their no-frills, passive counterparts: index funds. But it was barely enough to make up for their dismal showing the previous year.

So, the perennial active vs. index debate rages on in 2010.

Active U.S. stock funds were up an average 32.8% last year over all, compared with index funds' 31.7%, according to investment-research firm Morningstar. Yet during the market's brisk rebound from its March 9 lows, index funds took the lead, surging 82% as active funds jumped 73%.

Over the course of last year, 48% of active funds outperformed their corresponding Russell index, up from 43% in 2008.

Brian Hogan, president of the equity group at Fidelity Investments, says, "We're in a great stock-picking environment right now. And this bodes well for active management," which is able to identify inefficiencies in the market and exploit them through research, trading and portfolio construction.

But Scott Burns, director of ETF research for Morningstar, says the decision to buy an index fund isn't "saying that you can't beat the market. It's just saying you don't know who will beat the market and that you'd rather keep costs low and have the average rather than risk picking a stud or a dud."

If you're choosing between actively managed and index funds, here are five things to keep in mind -- things an active fund manager may not tell you:

1 A Good Run Will Not Last Forever."Top-tier active managers with long-term benchmark outperformance almost inevitably have periods of three years or more where they underperform," says Bill Thatcher, a senior consultant at research and consulting firm Hammond Associates in St. Louis.

Some of the winners over the past decade lost big in late 2008 and early 2009.

After beating the Standard & Poor's 500-stock index for 15 years, Bill Miller, manager of the Legg Mason Capital Management Value fund, was down 55% for 2008, while the S&P 500 fell 37%. The fund ended 2009 up 41%, but lost more than 67% from the market peak in October 2007 through February 2009.

A $10,000 investment 15 years ago would be worth about $36,173 today. But anyone who jumped in with $10,000 around the peak of the market in October 2007 would have just $5,734.

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"Yesterday's winners are far more likely to be tomorrow's losers," says John Bogle, founder of mutual-fund giant Vanguard Group and a champion of low-cost index funds.

Michael Mauboussin, chief investment strategist for Legg Mason Capital Management, says, "When you see streaks in investing, it's luck and skill combined." Bad luck played a role in the fund's 2008 performance, he says, just as skill played a role in its rebound last year.

2 Expense Ratios Vary Widely.Both types of funds have an expense ratio -- reflecting fees to pay for everything from administrative costs to the portfolio manager. It's expressed as an annual percentage of fund assets, and can range from under 0.1% for an open-end

index fund to more than 2% for some actively managed funds.

On the whole, the expense ratios for actively managed funds are significantly higher than for index funds, with the average being 1.4% for the former and 0.9% for the latter, according to Morningstar.

3 Other Fees Can Add Up.

Then there are transaction and trading costs. These are more likely to be higher for an actively managed fund, which typically does more trading than an index fund. They average about 1.4% or 1.6% on top of the published expense ratio, says Dan Culloton, associate director of fund analysis at Morningstar.

In addition, some funds charge a commission, called a "load," either when you initially invest in the fund or when you cash out your investment.

"Actively managed funds' costs are higher than index funds' costs," says Mr. Thatcher. But "on the whole, active funds' higher costs do not buy you better performance."

4 Short-Term Gains Can Be Taxing.Actively managed funds trade more frequently, so many of the gains tend to be short term, says Stephen Horan, head of professional education content and private wealth at CFA Institute, a nonprofit association of investment professionals. And short-term gains are taxed as ordinary income, with rates as high as 35%.

Index funds, on the other hand, tend to buy and sell less frequently. So more of their gains are long term, and, thus, subject to the lower capital-gains rate, a maximum 15%, Mr. Horan says.

The activities of other investors also can impact your returns and tax situation, says Morningstar's Mr. Burns. If people start heading for the door, as they did in 2008 and early 2009, a fund manager is more likely to sell winners, instead of losers, which could increase short-term capital gains.

5 If It Acts Like an Indexer...Watch out for closet indexers -- actively managed funds that mimic an index -- especially if they are charging high fees.

If a fund is never too far ahead or behind its benchmark index and its correlation is really high with that index, that could be a sign of a closet indexer, says Mr. Culloton. Also, does a fund have hundreds of stocks in rather small positions or do its holdings look the same as the index but slightly rearranged, he asks.



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"If you find a fund that's got all of these traits and it's charging one percent or more," Mr. Culloton says, "you have to ask yourself why."

Write to Anna Prior at [email protected]



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