Professional Fund Manager's Erratic Behaviors

Saturday's Wall Street Journal featured an article about a Lehman fund manager, Jon Brorson, fretting over the recently monthly performances of the market indices, his fund, and what can be gleaned of US economic activity.

The article states, in part,

"Mr. Brorson's worries served him in May. Then, he shifted toward "defensive" companies whose sales tend to hold up in all kinds of economies, such as drug makers, food producers and electric utilities. His May move was gutsy -- and right. The Dow got to within 81 points of its record and then fell 8% into July.....Now, as it rises, he's fighting the trend again. .... His travails over the past two months show just how hard it is even for dedicated pros to call the turns. It's especially hard at times like these when investors are debating whether a shifting economy will change stocks' direction."

I see in this echoes of 'the broad market has it wrong' attitude, as he holds and waits. In fact, I can identify with the sentiment.

However, I also note how Brorson makes snap calls on fuzzy, unclear economic information. In effect, betting on the come. Then people judge his guess for the month.

If this is really the stock in trade of the average fund manager, I wonder how any of them develop consistent track records.

Wait! They don't, for the most part! The number of public fund managers who consistently beat the S&P is incredibly small. Forget doing it every year- even most years, it's unattainable on a consistent basis. Maybe this monthly micro-managing suggests why that is the case?

I would imagine that the kind of guesswork, based upon shifting, often wrong economic insights and confusing data, cannot be sustained for more than, say, a year. That is, if it is just a string of lucky guesses.

For instance, recently, many investors seemed to be worried that softening home prices will drag the economy into recession. However, just a few days ago, the Wall Street Journal carried an article by one of its reporters, Greg Ip, which noted the following,

"The overwhelming majority of mortgage debt and home-equity loans are held by Americans in the upper half of the income range. Households in the top 10% of income hold 42% of the value of home-equity lines of credit."

Thus, much of the risk of real-estate-related bad debt is overstated. This is the type of economic information that seems to go unnoticed or misinterpreted.

It's one of the reasons I don't buy and sell portfolio positions every month. Even supposedly firm economic data can mislead, e.g., the infamous, but nonexistent, spring 2005 "softening." Now, it is the 'recession,' or imminent 'soft landing,' in the face of continued economic data suggesting continued healthy growth.

Jon Brorson's concerns are ones I share. But I just don't see how changing one's strategy and spontaneously attempting to take advantage of a short-term economic will o'the wisp can lead to consistently superior total return performance over the long term.