Legg Mason exec slams stock market's rapid turnover
Thu Feb 1, 2007 2:45pm ET161
By Herbert Lash
http://today.reuters.com/news/artic...RIDST_0_LEGGMASON-POSNER.XML&rpc=66&type=qcna
NEW YORK, Feb 1 (Reuters) - Rapid-fire trading and indexing have taken over the asset management industry to the detriment of performance, Brian Posner, chief executive of Legg Mason Inc.'s (LM.N: Quote, Profile , Research) ClearBridge Advisors, said on Thursday.
The turnover of stocks in the typical money manager's portfolio was just shy of 120 percent last year, an "incredible phenomenon," Posner said. Between 1960 and 1980, turnover was 20 percent and it rose to 57 percent by the year 2000, he said.
An example of how investors are reacting to events, resulting in rapid trading to the detriment of performance, can be seen when a company releases earnings after markets are closed and trades are executed before a company's conference call, he said.
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"The value of reacting to earnings surprises no longer exists. New empirical data suggests that it's a loser's game," he told a New York Society of Securities Analysts conference.
Posner cited a study by Michael Goldstein of Empirical Research Partners that shows trading on "positive" earnings surprises has waned.
In the past, measured from 1984 to 1989, and from 1990 to 1999, there were relative returns of more than 1 percent on earnings surprises in the first quarter, and 1 percent in the next nine months.
But from 2000 to 2006, he said, citing the research, there have been negative returns of 0.4 percent in the first quarter after a surprise and a decline of 1.28 percent in the following nine months.
"If you try to outsmart the markets over a short period of time, you better be very, very good," Posner said.
The way to make real profits in money management is to become owners and not renters of stocks, he said.
"What is happening now is the tail-wagging-the-dog phenomenon," he said. "Any good PM (portfolio manager) is an anomaly."
The popularity of exchange traded funds among institutions suggests many money managers can't pick a stock, he said.
For example, 50 percent of trading in shares of American International Group Inc. (AIG.N: Quote, Profile , Research) in 2006 was driven by ETFs, Posner said, citing research from Banc of America Securities LLC.
The result is money managers are risk adverse, and hug their benchmarks. He said money management had become a defensive business, one in which the message is "do not mess up."
© Reuters 2007. All Rights Reserved.
Thu Feb 1, 2007 2:45pm ET161
By Herbert Lash
http://today.reuters.com/news/artic...RIDST_0_LEGGMASON-POSNER.XML&rpc=66&type=qcna
NEW YORK, Feb 1 (Reuters) - Rapid-fire trading and indexing have taken over the asset management industry to the detriment of performance, Brian Posner, chief executive of Legg Mason Inc.'s (LM.N: Quote, Profile , Research) ClearBridge Advisors, said on Thursday.
The turnover of stocks in the typical money manager's portfolio was just shy of 120 percent last year, an "incredible phenomenon," Posner said. Between 1960 and 1980, turnover was 20 percent and it rose to 57 percent by the year 2000, he said.
An example of how investors are reacting to events, resulting in rapid trading to the detriment of performance, can be seen when a company releases earnings after markets are closed and trades are executed before a company's conference call, he said.
Reuters Pictures
Photo
Editors Choice: Best pictures
from the last 24 hours.
View Slideshow
"The value of reacting to earnings surprises no longer exists. New empirical data suggests that it's a loser's game," he told a New York Society of Securities Analysts conference.
Posner cited a study by Michael Goldstein of Empirical Research Partners that shows trading on "positive" earnings surprises has waned.
In the past, measured from 1984 to 1989, and from 1990 to 1999, there were relative returns of more than 1 percent on earnings surprises in the first quarter, and 1 percent in the next nine months.
But from 2000 to 2006, he said, citing the research, there have been negative returns of 0.4 percent in the first quarter after a surprise and a decline of 1.28 percent in the following nine months.
"If you try to outsmart the markets over a short period of time, you better be very, very good," Posner said.
The way to make real profits in money management is to become owners and not renters of stocks, he said.
"What is happening now is the tail-wagging-the-dog phenomenon," he said. "Any good PM (portfolio manager) is an anomaly."
The popularity of exchange traded funds among institutions suggests many money managers can't pick a stock, he said.
For example, 50 percent of trading in shares of American International Group Inc. (AIG.N: Quote, Profile , Research) in 2006 was driven by ETFs, Posner said, citing research from Banc of America Securities LLC.
The result is money managers are risk adverse, and hug their benchmarks. He said money management had become a defensive business, one in which the message is "do not mess up."
© Reuters 2007. All Rights Reserved.