Mutual Fund Performance Jan 29. 2013 | Comments (0)
One of the arguments for selling the Hofmann Forest has been that putting the money in a "diversified portfolio" would yield higher returns for the Foundation and thus, the college. How, though, do you determine which portfolio to invest in?
A common metric might be
to choose the best performer of the previous X amount of
years. However, it has been found since Fama (1965) to Silver (2012), that past performance has no correlation,
let alone causation, with future performance. For instance, Silver found that
some of the best performing mutual funds from 2002 to 2006 were only average
with, or worse, than the market average from 2007 to 2011 (2012). Additionally,
the financial sector is ramped with "herding behavior;" where firms
wait to downgrade a stock or bond until well after issues arose (Buss et al.
For instance, Sorescu
& Subrahmanyam found that even after Enron stock had lost half of its
value, 88% of surveyed analysts STILL considered it a buy (2004). We also saw
this type of behavior with credit rating agencies during the housing boom and
resulting mortgage meltdown (Silver 2012). The reason we see such sporadic
performance in economic forecasting largely has to do with the noisiness of the
available data AND the incentives provided to the actors.
Will there be years when the Foundation and College will be flushed with cash if we sell the Hofmann? Probably. Will there also be years, however, when the Foundation and College will be strapped for cash and be enforced to make drastic cutbacks quickly? Probably. In the long run will it average out and be comparable or better than our current investment? Financially, we really have no idea but what we do know is that the College of Natural Resources at North Carolina State University will cease to be a leader in its field and will be quickly regulated to a second or third tier college for research and educational quality. Why put that at risk?
In conclusion, the sale of the Hofmann Forest does not make sense from a financial standpoint. From a research standpoint, this sale does not
make sense. From an educational standpoint, this sale does not make sense. From
an ecological standpoint, this sale does not make sense. This sale does not
make sense from any standpoint, period.
Buss, J.A., Green T.C., & Jegadeesh, N. (2010). “Buy-Side Trades and Sell-Side Recommendations: Interactions and Information Content.” Emory University. http://www.bus.emory.edu/cgreen/docs/busse,green,jegadeesh_wp2012.pdf
Fama, E.F. (1965). “The Behavior of Stock-Market Prices.” Journal of Business. Vol 38 No 1. http:stevereads.com/papers_to_read/the_behavior_of_stock_market_prices.pdf
Silver, Nate. The Signal and the Noise: why so many predictions fail but some don’t. New York: Penguin Press, 2012. Print.
Sorescu, S. & Subrahmanyam, A. (2004). “The Cross-Section of Analyst Recommendations,” Recent Work, Anderson Graduate School of Management, UCLA. http://escholarship.org/uc/item/76x8k0cc;jsessionid=5ACA605CE152E3724AB2754A1E35FC6A+page-3.