We see this almost every single year and it contributes to the upside bias that tends to show itself in Q4 market performance – all those fund managers who are underperforming (ie, the majority of fund managers) who try to play catch up in the final months of the year and put upside pressure on the markets. The following comes via Jeff Saut of Raymond James, who highlights this phenomenon just about every year:
“It was the rally that left many fund managers behind. Stocks jumped nearly 10% over the summer, defying the expectations of many hedge – and mutual – fund managers who had bet on a decline. They saw a multitude of headwinds from Europe’s woes to the slowing U.S. economy and sluggish corporate earnings. Now, those defensive fund managers are facing what’s known in Wall Street lingo as the “pain trade”; having to buy stocks just to avoid being left in the dust. The longer stocks hold the summer’s gains, the more deeply the pain could be felt, forcing fund managers to start buying. That, in turn, could give stock prices another leg up and potentially generate a virtuous circle for the stock market and even more pain for those on the defensive. ‘A lot of people were waiting for the next big selloff and it never materialized,’ said Dan Greenhaus, chief global strategist at brokerage firm BTIG. ‘There’s going to be that pressure to try and play catch-up and not just merely play along but to gain some outperformance’.”
… Tom Lauricella, The Wall Street Journal (9/7/12)
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.