Neil Irwin Says Fund Managers are Too Dumb to Breathe

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Saturday, 16 February 2013 09:17

He may well be right. His story is that the yield on junk bonds is currently lower than the earnings yield on stock. Irwin tells readers:

"The stock market’s earnings yield is 6.6 percent, which is actually higher than the 6.1 percent that junk bonds are yielding. Buyers of junk bonds are tolerating lots of risk and not even being compensated. That suggests a market that is somehow out of whack. And there’s a quite plausible case that the Federal Reserve’s quantitative easing policies are part of the story. With the Fed buying billions of Treasury bonds and mortgage backed securities, those who would normally buy those assets have to buy something else. But it’s easy to imagine that this doesn’t affect all assets equally. Investors normally inclined to buy bonds may not be willing to move that money into stocks, but will buy junk bonds, even if the prices seem unfavorable."

The big story here is that last sentence:

"Investors normally inclined to buy bonds may not be willing to move that money into stocks, but will buy junk bonds, even if the prices seem unfavorable."

Okay, so we have people controlling funds with billions or even tens of billions of dollars who can't figure out that they should move from junk bonds to stocks even when current prices suggest that the stocks provide a much better risk/return trade-off. Given that almost all of these people were buying into the stock market in the late nineties, when price to earnings ratios crossed 30, and that almost none of them saw the housing bubble in the last decade, Irwin's observation is entirely plausible.

This does raise the question as to why the people who manage money funds earn many hundreds of thousands of dollars a year and often many million? If a fund manager just holds bonds rather than stocks out of habit then this person clearly has few skills. Rather than paying someone millions of dollars to cost a fund big bucks in virtually guaranteed losses isn't it possible to find some high school kid who could be paid the minimum wage. After all, if we don't expect people who manage funds to have any investment skills why are the jobs so highly paid?