WSJ's Zweig Misfires Touting Latest Back-testing Breakthrough
In fact, the arc of events that follows the discovery of a hot new stock-picking advantage is very predictable :
- A "successful investing strategy" is discovered by back-testing, though the strategy never had any actual money following it;
- Cue the mutual fund sponsors to quickly cobble together products to take advantage of this newly discovered can't-miss strategy;
- The marketing machines are revved up to move fund investors' billions out of their current funds (Target-Date Funds were the last big ruse) and into these new (Quality) funds.
- Fast forward three years when Morningstar rates the first of these to reach their third anniversary: Three Stars (i.e. mediocre).
- Wait for the inevitable gnashing of teeth at the mutual fund houses as Chief Investment Officers and Portfolio Managers pore over their spreadsheets searching in vain for how on earth such WILDLY POPULAR funds could fail to outperform?
- Listen carefully for the quiet snickering of fund sponsors rolling in their management fees, whispering about what new academic research they'll next use to hoodwink a new set of marks, er, muppets, er, investors.
It’s a sad and cynical path and of course the fund sponsors have reaped what they sowed by enduring epic fund outflows from actively managed funds for the past five years.
Toward the end of Mr. Zweig’s more recent column, he seems to hedge his earlier enthusiasm:
There's no rush. Let the funds launch and get seasoned. See whether the managers can deliver. Then wait some more, sitting out the inevitable boom in popularity. Before long, investors will be complaining that quality is overrated and that other investing styles work better.
All good advice. But then Mr. Zweig hedges on his hedge: “Mark my words: At that point you will be able to get quality in quantity.”
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