Gyrating for a living
I don’t have the stomach to look at my retirement account portfolio often when the stock market plunges and spikes in the kind of investment turbulence that has marked this summer. I’m not alone.
Individuals experiencing those gyrations can look at their paper losses, take a deep breath, and buy more at lower prices (bargains on sale!) or stop the bleeding and sell (I surrender!). Most, like me, don’t do anything very dramatic. But almost everyone harbors doubts about their choices.
So how do professional investors deal with the kind of turbulence that drives prices sharply lower? The unsatisfying short answer: It depends, based on what kind of an investment product a manager directs and the expectations of its customers.
In the case of stock mutual funds, which remain a staple of retirement and other individual accounts, most managers go looking for a limited number of bargains but have few incentives to make dramatic moves in search of big gains or to run away from a sinking market to dampen losses.
“One thing that helps me as a professional investor is that I’m in the market every single day, so I don’t have to make that in-or-out decision - I’m there,’’ says John Roth, who manages the $7.9 billion Fidelity Mid-Cap Stock fund and the $1.8 billion Fidelity New Millennium fund. “I also have a lot of assets, so I can’t do anything too rash.’’
I’ve talked to many mutual fund managers in situations like this over the years and contacted a few others, including Roth, in recent days to ask how they dealt with this summer’s unsettling market volatility.
Those managers almost always repeat two themes. First, they look harder at companies they own to make sure the idea behind the investment still makes sense. Then most managers run lots of computer screens looking for stocks they’ve always liked and which have suffered losses even steeper than the market’s overall decline.
Jeffrey Constantin, who manages the $3 billion MFS Massachusetts Investors Growth fund, has been looking for bargains all summer but estimates that less than 5 percent of his portfolio has turned over this summer. “This happens on the margin with small trades,’’ he says.
Most managers are judged on their performance compared against a benchmark index that corresponds with the objective of their funds, which could focus on the broad market, mid-size stocks, growth equities, foreign investments, or any other slice of the investment world.
Managers who lose money in a bad overall market but match or beat their benchmarks are graded well. That arrangement doesn’t encourage excessive risk-taking in plunging markets.
The Fidelity Mid-Cap fund lost 10.5 percent between July 7 and the end of August, but performed better than its benchmark, which was down 13.3 percent. Fidelity New Millennium (down 8.3 percent) and MFS Investors Growth (off 9.1 percent) both beat their benchmarks over the same period.
Some managers, such as Roth, disagree that being measured against a benchmark reduces the appetite for risk in a sinking market. “I need to strive to beat the index as much as I can,’’ he says. “I look at this as an opportunity.’’
All that is true. But the double-whammy of losing money and falling behind a benchmark at the same time is a scenario no fund managers wants to think about. I’m convinced it makes a difference in a sinking volatile market.
Another problem for managers who want to jump at the chance to buy a favored stock suddenly available at a steep discount: What are they going to buy the shares with?
Funds rarely spend down available cash to buy more stocks in that uncertain environment. So managers must sell some stocks to buy others, but nearly everything was falling hard during this summer’s rocky market. The tricky opportunity involves selling one stock that taken a hit in order to buy another that has lost even more ground .
“Often you’ll be trimming your best outperformers even though they may be down in an absolute sense to fund an incremental addition to a stock idea that’s down by much more,’’ says Constantin.
Fund managers feel the pressure just like individual investors when markets get rocky. Their measured response to turbulence is a good model for most of us small fries.
Steven Syre is a Globe columnist. He can be reached at firstname.lastname@example.org.