Did You Miss the S&P 500's Bottom?

Some managers think the market is pricey again.

The good news for many investors is that the S&P 500 Index has rallied in the past few weeks from its recent low in March. The bad news is that the market may now be overvalued.

We reported back in February the views of two prominent fund managers--Jeremy Grantham of GMO (his firm advises  Evergreen Asset Allocation (EAAFX)) and John Hussman (who runs both the  Hussman Strategic Growth (HSGFX) and  Hussman Strategic Total Return (HSTRX) funds)--who both have good track records estimating market valuations. At the time they were saying that while stocks were cheap (for the first time in years), they had been cheaper before, notably 1974 and 1982. Now that the S&P 500 Index has risen well above its March low of 666 to around 880, both managers see only average returns, at best, going forward.

Jeremy Grantham has reined in his fair value for the S&P 500 Index in the past few months. In a March letter (registration required), he estimated the fair value of the S&P 500 to be around 900. But in his most recent May letter, he puts the benchmark's fair value at 880. The roughly 2% drop in estimated fair value may not seem like a big deal, but it does mean that U.S. equities may not be a screaming bargain any longer.

Hussman recently posted a similar message in his weekly commentary. As of May 4, Hussman wrote, "Market climate for stocks was characterized by modest overvaluation on virtually every measure that does not assume a return to record 2007 profit margins. Most likely, stocks are priced to deliver total returns in the area of about 8% over the coming decade, which is not hostile valuation, but is certainly not strongly compelling, particularly in an extremely overbought and uncorrected market."

BlackRock Names New Bond Fund Managers
Mitchell Garfin and Derek Schoenhofen have been named co-portfolio managers on  BlackRock High Income  and  BlackRock High Yield Bond (BHYAX). They'll work alongside lead manager James Keenan. Former comanager Kevin Booth left the funds (and the firm) to pursue other opportunities. The moves come on the heels of BlackRock's integration with R3 Capital, the hedge fund founded and run by Richard Rieder, former head of global principal strategies at the now-defunct Lehman Brothers. Keenan's team also gained a number of analysts in New York, Singapore, and London as a result of the merger.

Lord Abbett Announces Management Changes on Two Funds
Lord Abbett has decided to separate the portfolio-management responsibilities of retail funds  Lord Abbett Affiliated (LAFFX) and Lord Abbett Large-Cap Value  from those of similar institutional accounts.

Effective July 1, 2009, longtime manager Eli Salzmann will maintain responsibility for the institutional separate accounts but Dan Frascarelli, who joined Lord Abbett in 1990 and spent his first 16 years at Lord Abbett as a research analyst and portfolio manager within the Large-Cap Value strategy, will assume management of Affiliated and Large-Cap Value. In addition to his experience managing Large-Cap Value portfolios, Dan has also managed  Lord Abbett Large Cap Core's  strategy for the last four years.

Janus Loses Pay Suit to Former Portfolio Manager
A Colorado jury has awarded $4.8 million to Edward Keely, a former portfolio manager at Janus. Keely argued that his former employer violated his employment contract by altering his compensation as well as agreeing to a different compensation agreement with another portfolio manager.

The details surrounding the lawsuit (Edward Keely v. Janus Management Holdings Corp., 07-07366, Colorado District Court (Denver)), as reported by Bloomberg, cast an alarming light on the internal dynamics at the investment firm. We have been worried about Janus' corporate culture for some time though. The firm currently receives one of the poorest scores around in our  Stewardship Grade--a D overall and a D for its corporate-culture score. (Premium Members can see the full grade by clicking the link.) In 2007, Morningstar wrote that while compensation-structure changes that Black implemented could better align managers' interests with those of fund shareholders, they also could increase tensions among the historically well-compensating managers if they started making less. In this case, there seemed to be some tension.

Emerging-Markets Funds Rally, but Still Have a Long Way to Go
Many funds in our diversified emerging-markets category are up a lot so far this year. But they still have a ways to go to make up the losses that they suffered last year. For example,  T. Rowe Price Emerging Europe & Mediterranean (TREMX) is up almost 37% for the year to date after a stunning 75.9% loss last year. It has a long way to go to get back to 2008 levels: It would have to post annualized returns of more than 25% over the next five years just to get where it was in the middle of 2008!

 Oppenheimer Developing Markets (ODMAX), which lost 48% last year and is up almost 25% for the year to date, has a lower bar to overcome: It only needs to average around 20% over the next five years to get back to May 2008 levels.

These numbers are a good reminder about why strong downside protection for managers in highly volatile areas of the market, diversification, proper expectations, and not chasing hot returns are important for investors to always keep in mind.

Barclays Plans to Launch Active ETFs
On the heels of the launch of the first actively managed ETF less than a month ago by Grail, Barclays, the largest ETF provider, has joined the crowd by launching active ETFs of its own. The iShares Active Equity Fund will invest at least 80% of its assets in domestic large-cap stocks and would choose from the 1,000 largest companies by market capitalization using a proprietary "portfolio construction and optimization process." A launch date and projected expense ratio are not yet available.

Barclays also announced the iShares Active Fixed Income Fund, which will also be run, at least in part, by a quantitative model. For more details, please see the Barclays filing available here.