3 Changes in American Investing that the Crisis Brought

The financial meltdown 10 years ago had long-lasting effects that aren’t going away.

The bottom of market plunge that accompanied the worldwide financial crisis reached its 10th anniversary over the weekend, on March 10. For good or for ill, it produced three major changes in US investments. And most think this trio of altered behavior is going to be with us for some time.

The 2008-09 global financial crisis “changed people’s thinking about investing,” said John W. Rogers, chairman of Ariel Investments. Amid more stock market volatility, the folks who buy stocks and the ones who issue them are acting differently than before Lehman Brothers collapsed, which touched off the worst economic catastrophe since the 1930s.

The steep plunge the market endured, down 56% from its  peak in 2007, was bound to mess with the national investment psyche. In the 1920s, even shoe-shine boys were investing in stocks. But come the 1929 crash and the ensuing Great Depression, attitudes changed. For a couple of generations, stocks were avoided by many. By 2008, this had changed and half of US households were in stocks, mainly through workplace 401(k)s.

The crisis and the slow recovery that followed produced these three major shifts in the investing world:

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The Push into Passive. Time was that investors put their money into individual stocks or actively managed mutual funds. But people noticed coming out of the crisis that active management had fared far worse than index funds. And that index outperformance has continued to be the case.

So active equity funds are bleeding money as investors redeem and transfer the dollars into passively managed funds, especially ones tracking the S&P 500 index.

According to Morningstar data, passive US stock funds have increased their market share to 48.1% as of the end of 2018, from 45.7% the year before. And new money has bypassed active funds for index alternatives. Over $150 billion got pulled from active funds over all categories, and almost double that went into passive funds.

Investor Skittishness. Even when the market has climbed higher, like in 2017 and thus far this year (last week excepted), investor emotions have “been on a roller coaster,” as Delta Investment Management observed in a note to clients.

Individual investor purchases of funds have swung wildly—down in 2015 and 2016, up in 2017, down in 2018. Meanwhile, insiders and institutions have kept on steadily buying into what is the second-longest bull run in history.

Buybacks Balloon. And then there are buybacks, which are a decision of companies, not individual investors, although those investors are happy to sell their shares back to the issuer at a premium to market. Quarterly buybacks topped $600 billion last year. And it is not retreating.

Companies simply believe that their excess cash is put to better use supporting the share price than building new factories or hiring new workers, who may not be needed. Why? Because who knows when the economy will take another dive.

Once burned …

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World’s Largest Sovereign Wealth Fund Cutting Volatile Energy Stocks

Norway wants to reduce portfolio’s vulnerability to oil’s tendency to crash.

Norway’s nearly $1 trillion sovereign wealth fund, the Government Pension Fund Global, will be letting go of a chunk of its energy holdings.

The fund, which recently posted $56.6 billion in losses due to 2018’s equity volatility, has wanted to ditch nearly all of its oil and gas assets since 2017. Since a majority of its net worth is in this area, the Finance Ministry decided that was too much. Instead, it plans on the divestment of 150 “upstream” oil and gas companies, worth about $7.5 billion. Those holdings account for 1.2% of all the fund’s equities, and less than 1% of the entire portfolio.

The upstream businesses focus on exploration and production. Cairn Energy, Anadarko Petroleum, and Chesapeake Energy are some of the companies that will be removed from the portfolio.

The goal is to reduce Norway’s susceptibility to ever-volatile oil’s price risk, according to the Ministry. Oil has a tendency to plunge in price, as happened in 2015 and 2016. Divestment, it believes, would open more ways to diversify the fund’s portfolio.

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“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline,” said Minister of Finance Siv Jensen. “Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.”

It is now up to parliament to approve the decision. If approved, the upstream firms will be phased out “over a longer period,” said the fund.

“The Government follow the intentions in our advice from 2017,” said Deputy Gov. Egil Matsen. “By removing exploration and production companies, the goal is to make the government’s wealth less vulnerable to a permanent drop in oil prices.”

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