From big rallies to fallen (bond) kings, we saw it all in 2014

Liquid alts and robo-advice emerge as major stories

Of all the twists, turns and surprises of 2014, cheap oil has to be among the most pleasant. While there is plenty of risk facing the global energy industry and capital markets, it is hard to think about that when you’re filling your tank for two bucks a gallon.
But if collapsing oil prices caught the big thinkers flatfooted, it could be because everyone was too busy prognosticating about stocks, bonds and interest rates.
With that in mind, we offer some of the more dramatic and entertaining swings, misses and distractions of investing in 2014.
In January, Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc., called the equity markets “the best of our lifetime,” which was a pretty bold call considering that the S&P 500 had just logged a 32% gain for 2013.
It’s worth noting that Ms. Sonders covered all bases by emphasizing the elevated risk of a 10% correction, which we haven’t seen in more than three years. The biggest dip this year was 7%, and it was quick.
The looming threat and opportunities associated with robo-advice was everywhere in 2014, and we should expect more of the same in the year ahead.
While some financial advisers worry about competition from technology-based advice platforms, others are adapting. Still others just don’t like the use of the term “robo-advice.”
In the category of Best Display of Petty Bickering Over Nothing, it doesn’t get much better than the rift between Morningstar Inc. and DoubleLine Total Return Bond (DBLTX) manager Jeffrey Gundlach.
The abbreviated version of the story is that after disagreeing with Morningstar’s analysis related to Mr. Gundlach’s investment strategy, DoubleLine ignored Morningstar’s requests for more information for more than two years, at which point Morningstar deemed the $40 billion fund not ratable.
Meanwhile, DBLTX maintains a five-star rating based on past performance, and portfolio assets have risen 15% from $34 billion in July, when the spat first came to light. To be fair, a lot of those inflows have to be attributed to Bill Gross’ unexpected departure from Pimco in September.
Through November, the flagship Pimco Total Return Fund (PTTAX) had logged 19 consecutive months of outflows, including a record $23 billion in September, when Mr. Gross departed for Janus Capital Group Inc.
Proving the power of the superstar manager, which much of the fund industry tried to downplay after his move, the Bond King’s new project, the fledgling Janus Global Unconstrained Bond (JUCTX), grew to $1.2 billion by year end from $13 million when Mr. Gross took over its management.
Wild asset flows related to his departure from Pimco were at least understandable. The same cannot be said for the beleaguered MainStay Marketfield Fund (MFLDX), which became a sad illustration of how not to market and sell a mutual fund.
It’s hard to imagine that the MainStay Investments fund family at New York Life Investment Management is not kicking itself for how it shoveled assets into the global macro long-short strategy after absorbing what was a $3.3 billion fund in October 2012.
At its $21.4 billion peak in February 2014, the fund represented more than a third of the long-short mutual fund universe. By Dec. 28, the fund’s assets had dropped to $11.9 billion and the fund had logged a decline of 11.2% for the year, versus an average gain of 3% in the category.
Speaking of liquid alternatives, the fast-growing category got its first real test during October’s burst of market volatility. Financial advisers learned that in the liquid-alt space, performance dispersion can be far and wide, which puts a premium on ongoing due diligence.
An analysis of the brief spike in market volatility by Goldman Sachs found that the average long-short mutual fund fell 4.1% in the 30-day period through Oct. 15, compared with a 6% decline by the S&P 500 over the same period.
The bond markets seemed to catch everyone off guard in 2014, probably because the Fed was tapering out of its record-setting quantitative easing program and talking about higher interest rates.
It’s hard to imagine now, with the 10-year Treasury bond yielding about 2.2%, but in July there were predictions that the benchmark 10-year could be yielding 4% by Thanksgiving.
As recently as September, with the 10-year Treasury trading at about 2.45%, legendary hedge funder David Tepper predicted “the beginning of the end for the bond market rally.”
On the equity side, advisers should be grateful for not listening to Princeton University economics professor Alan Blinder in May, when he cited dismal first-quarter economic growth as an indicator that the “U.S. economy will be stuck in a hole all year.”
And when the Dow Jones Industrial Average crested 17,000 in July, it was apparently still not too late to jump on board, despite claims of a crisis in confidence.
Six months later, on Dec. 23, the Dow crested the 18,000 mark. That was preceded by four days with one of my favorite quotes of the year, from Theodore Feight, owner of Creative Financial Design: “I’m driving to pick up checks from clients because I want to get them into the market as soon as possible.”
Finally, 2014 provided yet another economic signpost to help guide us through the market cycle ahead.
According to extensive analysis by some people with a lot of time to spare, cursing by top executives is a measurable indicator of bad news. For example, public use of profanity increased during the recession in 2009 and decreased during the recovery.
That’s some gosh darn good work, if you ask me.