NEW YORK (Reuters) - The financial crisis of 2008 was indiscriminate, decimating even the most seasoned investors. But is it enough to label these events a once-in-a-lifetime disaster and resume old investing habits?
Ten U.S. advisory firms with combined assets over $9 billion say it isn’t. They are pooling resources to comb through reams of market data to see what investors may have missed in the run-up to the great meltdown to try to anticipate another one.
They have dubbed their effort the Tactical Think Tank (TTT).
“I know that advisers are looking at what happened in 2008 and saying, ‘If we had a scenario like that again how do I do a better job for my client?’” said Christopher Cordaro, owner of RegentAtlantic Capital, a Morristown, New Jersey-based investment advisory firm and a member of the TTT.
Asset prices fell across the board in 2008, with the S&P 500 posting its worst year since 1937. There were few places to hide, as most markets were badly damaged. Holding diversified assets or hiding in more defensive equities was not enough.
STOCKS FOR THE LONG-RUN?
This effort represents in some way a rethink of the “stocks for the long run” mantra that most money managers clung to even as stocks cratered. Professor Jeremy Siegel, in his book of this title, first published in 1994, showed superior returns for equities over other asset classes when held for decades.
But the last two decades have shown that even 20 years is not a particularly long horizon, and a decade of negative returns can deal a serious blow to an investor’s plans. The TTT is devising strategies to navigate through such tumult.
“The idea (is) that you can find early warning indicators for when the markets are going to misbehave and get a lot more volatile than normal, and all the assets get a lot more correlated than normal,” said Jerry Miccolis, senior financial adviser at Madison, New Jersey-based Brinton Eaton Wealth Advisors, a firm in the TTT.
The TTT will focus on more than a dozen momentum and leading market indicators, including moving averages, and market valuations, as well as changes in interest rates, economic growth, correlations and volatility, to see if patterns emerge that would have helped guide managers better.
Cordaro, for his part, says his firm has already modified its approach. “We’ve gotten more flexible at changing our allocations more and doing it more quickly,” he said.
Given the way retail investors have shunned the stock market since the crisis, fund managers may have to adopt an approach that is not strictly equity-centric.
U.S. investors pulled around $237.9 billion out of stock funds in 2008 through to November 2009 and put $376 billion into safer bond funds over the same period, according to the Investment Company Institute.
Against a backdrop of a stock market that rallied more than 60 percent in just nine months from the lows of March 2009, it shows investors are thinking twice about the risk-return tradeoff in equities.
A SHOT IN THE DARK?
At first blush, it’s hard to see the focus on such indicators as something that hasn’t already been tried. Gobind Daryanani, a consultant chairing of the TTT, said even the group’s members are skeptical they can come up with anything new.
“This kind of a problem has been addressed or looked at by many people over decades, and lots of larger firms have put much more money than we have on addressing these problems,” he said.
Daryanani says the TTT will initially focus on equities, bonds and possibly real estate, with the goal of identifying when tactical moves can be made. He defines a tactical portfolio move as one made after a holding period of around a year. The expectation is that investors will be more flexible and reallocate assets more frequently in portfolios.
“Some things are going to be a little unconventional. It has to be, otherwise we will be repeating what other people have said,” he said. “It’s not as if there is nothing out there; ... I think there is something there.”
If the TTT’s work is fruitful, Daryanani hopes to develop a software tool that could be used exclusively by the group’s members or sold to the wider markets.
But a new approach could be slow to catch on. Fund managers are often accused of institutional conservatism, rooted in the fear of getting things wrong.
Although research by Greenwich Associates, a U.S.-based financial consultancy, shows some European fund managers are reducing their reliance on equities in favor of fixed income it also found that post-crisis “many institutions have come to the conclusion that their strategies were, on the whole, sound.”
“There is an inertia built in because you don’t want to be the only one out there,” said Daryanani.
That may change if the storms of 2008 prove to be a defining generational event, and more investors shun equity investing in its present form.
Reporting by Edward Krudy; Editing by Leslie Adler
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