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A Manager Says the Market Rally Is Pure Junk

Plus, expense ratios go up for Alliance Bernstein, and more.

Morningstar Analysts, 06/22/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

Turner's Quantitative Investing Team recently released a research piece on the bear market. Below are a few insights that we found interesting:

* The smallest and cheapest--and, according to its quantitative model, the most fundamentally unsound--stocks performed best since the market bottomed in March. In the Russell Microcap Growth Index, the stocks ranked in the lowest quartile for the factor of market capitalization--stocks with market capitalizations of less than $26.5 million--returned 93.49% from March 6 to May 8.

* In the wake of the bear market, small stocks priced at $1 or less accounted for about 25% of the small-cap benchmarks' weightings, compared with the historical average of 5%.

* Stock indexes plummeted more than 50% from their peak in October 2007 to March 2009, erasing 12 years of gains. The only time the stock market had fallen harder was between August 1929 and June 1932, when the S&P 500 Index lost more than 83% of its value.

* In November 2008, nearly one in 10 stocks traded below the value of their per-share holdings of cash--a greater proportion than even in 1932, when the market was at its lowest point in history.

Turner ended the piece with this strongly worded statement (nota bene, small-cap fund investors):

"In our analysis, this rally was an atypical, perverse phenomenon, a statistical fat tail, an investing anomaly. We doubt that any time soon we will encounter a stock-market rally that so lavishly rewards The Uninvestables--stocks with prices and market capitalizations that are so low that we and other institutional investors can't touch them."

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