Income Inequality: Media Reports Mislead

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On the menu today: the return of active management, how COVID-19 affects trust in scientists, lessons from Japan, and another SPAC.

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: the return of active management, how COVID-19 affects trust in scientists, lessons from Japan, and another SPAC.

A Mutual Fund Renaissance?

For years, as money flowed from actively managed investment vehicles (i.e., mutual funds and hedge funds) into passively managed exchange-traded funds, stock pickers justified their existence by warning that passive strategies would fare poorly in a high-volatility environment. Recent performance data suggest they may have been right: More than 40 percent of large-cap mutual funds beat their benchmarks this year, according to Goldman Sachs Research.

Specifically, those funds with the “highest conviction” stock picks did best against indexes, and “return dispersion,” which measures the variance in performance among fund managers, recorded its highest level in a decade. In other words, for the first time in ten years, it paid to pick stocks. That’s due in large part to the returns of managers who took long positions during the COVID-19 sell-off.

A sizeable chunk of those returns came from large tech companies, but going into 2021, mutual funds are unwinding their positions in the growthy “FAANG” stocks and buying “cyclical” businesses in the industrials, health-care, and financial-services sectors. These companies tend to perform best during periods of strong economic growth and inflation. On the other hand, active funds have less exposure to Apple, Amazon, and Microsoft now than passive vehicles. And those fund managers still betting on technology tend to hold more cyclical information-technology companies such as Mastercard and Adobe, as opposed to consumer-internet stocks.

Active managers are also betting on “value” stocks, those with relatively low valuation multiples. Much like actively managed funds, value stocks have fallen out of favor since returns dropped off following the 2008 crisis. In both cases, it’s too soon to tell whether the resuscitation will lead to a renaissance, but there are signs of optimism.

Though markets have broadly recovered from the COVID-19 sell-off, equity mutual funds saw their biggest monthly inflows in over a year this month. These funds have still seen net outflows for 2020, but positive vaccine developments and a generally improving macroeconomic environment could be a boon to managers betting on macro-sensitive businesses.

With the October U.S. purchasing managers’ indexes in both services and manufacturing recording their highest levels in more than ten years, the U.S. economy appears positioned for a healthy recovery. In the meantime, all eyes are on the Food and Drug Administration, which meets in just over two weeks to decide on emergency-use authorizations for vaccine developers.

Around the Web

Another politician starts a SPAC. This time it’s Democratic primary candidate John Delaney. Soon Blackrock will have ETFs of SPACs started by politicians (one for Republicans, one for Democrats).

Robin Harding on Japanification:

“What had been regarded as Japanese problems are now faced more or less by Europeans,” says Hiroshi Nakaso, the former deputy governor of the Bank of Japan. “I’m not saying I’m convinced Europe will follow Japan’s path but Japan’s experience certainly offers hints.”

Economically, those lessons include the vital importance of maintaining public confidence in central bank policy, and the need for a strategy to generate economic growth. More broadly, Japan’s decades of experience offer a template for how a society can live with low interest rates. Large parts of the developed world are likely to emerge from the coronavirus crisis with economies in that same position.

Mayhem in Chinese bonds:

Chinese authorities moved to calm unease that has sent yields on riskier debt to their highest in nearly two years.

Beijing will “investigate and deal with fraudulent issuance, false information disclosure, malicious transfer of assets, misappropriation of issued funds and other illegal activities,” the committee said over the weekend after meeting.

Random Walk

It’s been a banner month for the medical profession. Two American companies delivered effective COVID-19 vaccines in record time, and a number of highly promising therapeutics are in the late stages of development. Despite that success, we shouldn’t assume that Americans will have greater trust in medical researchers or any other scientists, according to a new National Bureau of Economics Research working paper:

It is sometimes said that an effect of the COVID-19 pandemic will be heightened appreciation of the importance of scientific research and expertise. We test this hypothesis by examining how exposure to previous epidemics affected trust in science and scientists. Building on the “impressionable years hypothesis” that attitudes are durably formed during the ages 18 to 25, we focus on individuals exposed to epidemics in their country of residence at this particular stage of the life course. Combining data from a 2018 Wellcome Trust survey of more than 75,000 individuals in 138 countries with data on global epidemics since 1970, we show that such exposure has no impact on views of science as an endeavor but that it significantly reduces trust in scientists and in the benefits of their work. We also illustrate that the decline in trust is driven by the individuals with little previous training in science subjects. Finally, our evidence suggests that epidemic-induced distrust translates into lower compliance with health-related policies in the form of negative views towards vaccines and lower rates of child vaccination.

— D.T.

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