Bill Gross Recently wrote a post about his cat Bob, mourning the loss of a long-time feline companion. Bob followed along wherever Bill went, ever-present, alert and on-guard.
Bandit, one of my two cats, is different. He is a large, black, neutered male. He does not guard anything. Instead, his habit is to lie on the floor right in the middle of the traffic pattern, staring vacantly into space. (Some cats are smart. Not Bandit.)
If you watch Bandit, he seems inactive. Observing his size and girth, you might suspect that his fat has compromised his mobility.
Until he moves. Suddenly, the huge, quiet beast is transformed into a flying ball of fur, a black blur scampering up the stairs chased by the dog, or hurtling around the family room, leaping over furniture and sometimes smashing glassware, in pursuit of our older and smaller cat Millie. (Millicent T. Katt, for those not on a first-name basis.)
Bandit’s apparent inactivity is an illusion. He is simply waiting for his moment, keeping his energy in reserve until some silent alarm goes off in his dim, strange brain, telling him it is time to go. Sometimes I think we should have named him Barkley, after the Round Mound of Rebound who once played for the 76ers. Like Sir Charles, Bandit may look fat, but he has serious hops.
They say pets come to resemble their owners, and vice versa. And maybe not just in appearance.
Bob was quite a lot like his owner Bill Gross, who runs PIMCO, one of the largest bond managers in the world. PIMCO pursues investment advantage within the opportunity set of fixed-income, continuously looking to add a basis point here, two hundredths of a percent there, making the advantages of size, perspective and trade execution gradually accrue returns for their investors.
At our little firm (we run less than one-third of a billion dollars, while PIMCO runs over $2 trillion), we are asset-allocators, like Jeremy Grantham of GMO or Rob Arnott of Research Affiliates. Our advantage is not continuous but episodic. As investors, we spend lots of time sitting and pondering, observing the markets, back-testing different approaches.
But like Bandit, sometimes we move in a hurry. We may react to a threat, when the barking dog of over-valuation chases us partially out of a frothy asset class. (Tech, anyone?) Sometimes we chase the black-and-white cat of investment opportunity, over-loading a cheap asset class in pursuit of gains. Often, we believe our allocation moves may offer both lower risks and higher potential returns.
It is rare when our portfolio adjustments are immediately rewarded. Like the other asset allocators named above, our advantage is usually both delayed and discontinuous. If we buy emerging markets because we think them cheap, it is rare that they begin to out-perform right away. Much more likely is a continued decline.
Sometimes we move quickly, sometimes we wait, and sometimes it is the markets that change fast. But when our results do show up, they are often significant and abrupt. Here is a recent example. For the year ending February 28, U. S. large-cap growth substantially out-performed value, driven in large part by tech stocks:
S&P/Citi Value: +21.88%
As you can see, growth had almost a 7% advantage over value. Since we were (as usual) over-weight value, these numbers drove under-performance by the U. S. equity portion of our target portfolio.
But things changed abruptly in March. For the month of March 2014, Large Cap U.S. Growth declined -2.51%, while Large Cap U.S. Value advanced an almost perfectly symmetrical +2.52%, a net swing of 5%. Through last Friday’s close, April saw growth down 3.8% and value down 2.2%. In a bit less than six weeks, a year’s worth of advantage for growth stocks has been reversed.
Of course, any amount of short-term performance surplus or deficit cannot prove a long-term performance advantage or lack thereof. Certainly, I’m not suggesting that these recent numbers demonstrate the likelihood of a continued trend of value out-performance.
What I will observe is that the benefits of asset allocation, when they manifest, often do so significantly and will little prior warning. Let’s enjoy them while they last.