A case for Active instead of Index

[gcgang]

https://www.americanfunds.com/pdf/mfcpwp-028_capidea913.pdf

While I know this will brand me a heretic on this board, above link seems to make a compelling case for some (one in particular) active managers.

The idea of suffering less when the index goes down is particularly appealing.

Full disclosure - I've had $ with this organization for 30 years. I did not have to pay the sales charge as shares were purchased thru a company plan. Now I've retired, I have enough with them that additional purchases are not subject to the charge due to the "ROA breakpoint".

While I would incur no tax hit to change investments in my IRRA, it doesn't seem to make sense to change to indexes, assuming the funds still meet my objectives. Right?

 

[RunningBum]

The idea of suffering less is appealing, but there's no guarantee of that in the future. Their funds could drop more than an index in the future.

The numbers look good, but if I was inclined to invest or stay with them I'd be looking at the following:

- Are they comparing all of their funds, or did they cherry pick the good ones?

- Are there funds they have closed that weren't performing as well that weren't included?

- You already mentioned the sales charge, which is a whopping 5.75% for those who do have to pay it. It's tough to find, but I'd be making sure my 401K doesn't have any hidden fees. Specifically, when they claim a certain % gain for the year, does my account for that fund actually match that % gain?

If their numbers hold up, there's no reason not to stay with them. Watch for fund manager changes. If their version of Peter Lynch steps down, the fund may not do as well going forward.

 

[unclemick]

Hmmm - I suppose I should follow this thread/do some diligent research. American funds came along with the new wife.

No rush - a Boglehead and an ex widow with American fund IRA can co-exist in bliss for a while.



heh heh heh - There is also a variable annuity fund with a 6% rider they desperately are trying to get long time holders to drop.

 

[dtbach]

Well, looking at Vanguard Wellington and Wellsley over the last decade or so seem to have done better than most index funds and with less volatility.

 

[Bestwifeever]

A company of actively managed funds provides a compelling case for using actively managed funds? That's crazy talk!

 

[MRG]

I think the OP has a unique situation. They are in American Funds without the expected load(front or back), and the dreaded 12b1 fees. If I've misunderstood please let me know.
I think it's just fees, returns, and comfort with your AA.

Best wishes,

MRG

 

[gcgang]

As far as I know,this is ALL of their equity funds, for as long as they have been in existence, and there have been no "mistakes" covered up.
Again, as far as I can tell, my returns have been the same as the published numbers.
The fact that they are promoting their track record, I don't take as a negative, just a fact. That this record goes back so far, seems to lend more credence to it.
They do echo some of the themes of indexing, saying that expenses make a difference. Their A class shares, which I own, although higher than most indexes, are well below mutual fund averages.
I've considered blowing the funds up and investing directly in individual equities to eliminate this expense, but it would be very hard to do competently, especially w/r/t small cap and international securities.
They don't use a single manager, nor is their style to use a committee. They divide the portfolio up among several different individual managers, lessening the risk of having either a star manager leave, or one manager totally screw up. They pay the managers based on long term performance versus the indexes and their peers, I believe.
The advisor that set the plan up always said that if he had to disappear for a decade and wanted to have his money looked after, this is the investment management company he would use.

 

[ERD50]

Well, looking at Vanguard Wellington and Wellsley over the last decade or so seem to have done better than most index funds and with less volatility.

Yes, it is a bit ironic that with the general acceptance of indexing here, that Wellington-Wellesley are also popular. I would guess that they are 'lightly' managed, not swinging for the fences, so that might help consistency?

But for the normal investor, if they need to pay a 5% front end load, that's something to overcome.

Here's a comparison that I won't claim is fully apples to apples, but I would suppose that American Fund AMPCX would be close to a general stock ETF like SPY. The W's might have benefited from their bond holdings, but FWIW, here's a comparison, divs re-invested (total return), since May 2001. In order, best to worst, Wellesley, Wellington, SPY, AMPCX.

A better comp might be - what funds would you pick from American to mimic a low cost index of 75/25, and comp that to the indexes.

PerfCharts - StockCharts.com - Free Charts

-ERD50

 

[gcgang]

I'm not impressed by their bond funds, and I probably should be using the IRRA to rebalance. The IRRA custodian allows up to 30 free trades per month. I've bought a little closed end BIT and some mortgage REITs, HTS and CMO, but don't like bond funds, generally. For that matter, don't like bonds given current interest rates, so I'm along for the ride for now with these stock funds. Maybe I will increase cash and reduce the funds.

 

[MRG]

ERD50,

Pictures worth a thousand words or dollars.

MRG

 

[yakers]

I am quite a fan of index funds and DW holds VG Wellsley & Star & Wellington funds. But I have followed American Funds a bit, I am on the investment committee of a fraternal organization and they hold some American Funds, IMHO they are one of the very few loaded funds I would consider owning. And if I owned them already (paid the load and probably have capital gains) I would hold them.

 

[bUU]

As far as I know,this is ALL of their equity funds, for as long as they have been in existence, and there have been no "mistakes" covered up.

How could we know that? Generally, new funds that fail are never made public.

 

[NW-Bound]

Well, looking at Vanguard Wellington and Wellsley over the last decade or so seem to have done better than most index funds and with less volatility.

Yes, it is a bit ironic that with the general acceptance of indexing here, that Wellington-Wellesley are also popular. I would guess that they are 'lightly' managed, not swinging for the fences, so that might help consistency?

Wellington and Wellesley are balanced and also active funds. Balanced because they hold both stocks and bonds. Active because their equity portion is just a subset of the S&P500, which the managers chose according to what they perceive to be a better value than the entire market.

Competition to Wellington and Wellesley includes Dodge & Cox Balanced, a longtime and well respected fund.

In order to measure the performance of the active balanced funds, one cannot compare them to the S&P. He needs to construct a portfolio consisting of S&P to represent the equity portion, with the bond portion represented by some bond index funds. The ratio between stocks and bonds then must match the same ratio as the fund manager states in his fund objectives. The evaluator then tries to do periodic rebalancing between stock and bond, like the fund managers do.

I am sure some posters here are doing the above themselves. How they do against the above balanced funds, I wonder. Even if the method is the same, just the timing of the rebalancing may impact results. A lot is still left to chance. Skill and luck are always involved to some degree.

 

[nun]

The pdf starts out with a bar chart that shows that most active managers lag the index and then goes on to say that American funds are one of the few to have consistently beaten the index. I have no idea how they are coming up with those figures, but it might well be true, it's perfectly possible to beat the index. The thing is who knows if that will be the case in the future. The guaranteed thing about actively managed funds is that their fees will be a drag on your return.

 

[eta2020]

Vanguard and American Funds are Twins — Like DeVito and Schwarzenegger - Focus on Funds - Barrons.com

I hand over money to Vanguard because I understand it not because it performs better than American Funds.

 

[nun]

Competition to Wellington and Wellesley includes Dodge & Cox Balanced, a longtime and well respected fund.

In order to measure the performance of the active balanced funds, one cannot compare them to the S&P. He needs to construct a portfolio consisting of S&P to represent the equity portion, with the bond portion represented by some bond index funds. The ratio between stocks and bonds then must match the same ratio as the fund manager states in his fund objectives. The evaluator then tries to do periodic rebalancing between stock and bond, like the fund managers do.

I am sure some posters here are doing the above themselves. How they do against the above balanced funds, I wonder. Even if the method is the same, just the timing of the rebalancing may impact results. A lot is still left to chance. Skill and luck are always involved to some degree.

I have money in Wellesley so I'm not 100% indexed. It's returns are good and the fees are very low for active management. It would be interesting to see how Wellesley's performance would look if instead of 0.25% fees it had 1% or 1.5%. I bet it wouldn't be quite the star of the show anymore.

 

[frayne]

Fine, whatever works for you.

 

[FinanceDude]

Well, even Bogle himself said the ONE mutual fund company outside of Vanguard he likes is American Funds. OP is not paying sales or 12b-1 fees. So his costs are in the 50 bp range. Not the worst case scenario ever presented..........

 

[photoguy]

I love that they state "a large accounting firm performed an objective validation of our methodology to ensure accuracy." This is so reassuring.

 

[ERD50]

Wellington and Wellesley are balanced and also active funds. Balanced because they hold both stocks and bonds. Active because their equity portion is just a subset of the S&P500, which the managers chose according to what they perceive to be a better value than the entire market.

Competition to Wellington and Wellesley includes Dodge & Cox Balanced, a longtime and well respected fund.

In order to measure the performance of the active balanced funds, one cannot compare them to the S&P. He needs to construct a portfolio consisting of S&P to represent the equity portion, with the bond portion represented by some bond index funds. The ratio between stocks and bonds then must match the same ratio as the fund manager states in his fund objectives. The evaluator then tries to do periodic rebalancing between stock and bond, like the fund managers do.

I am sure some posters here are doing the above themselves. How they do against the above balanced funds, I wonder. Even if the method is the same, just the timing of the rebalancing may impact results. A lot is still left to chance. Skill and luck are always involved to some degree.

All true. Like I said, that wasn't really meant as apples-apples, more as reference points.

One could also take the view, that rather than comparing to an investor trying to duplicate the actions of a managed fund, one could just say "what would I invest in if I didn't choose one of those managed funds - how would it do w/o any extra tweaking?" In some ways, that is a better comp, as in both cases, the investor isn't doing any extra work. It's back to the age-old question - does active management pay?

So here's another chart, some for ref, and some a bit more apples-apples. I compare the Dodge & Cox Balanced with Wellesley, the Vanguard 'already retired' fund (~ 30/70 AA), and SPY for ref.

To my eye, D&C Bal tracks much closer to SPY than Wellesley, with what appears to be a slight lag and bit less upside volatility (look at the last half of 2007). Wellesley appear to pull ahead of them all, with less volatility. Even if I eyeball the Target Retirement fund with a tilt towards SPY, it does not pull it up that much.

The profile on D&C Bal says they can vary stocks from 25% to 75%. That seems like a lot of latitude to come up with something that tracks so close to SPY.

Wellesley really is quite impressive, IMO. If you move that slider anywhere from 5 years to the max 13 years, it is steadily in the lead, yet the volatility is much smoother than SPY. It has lagged some the past 5 years, but that would be expected during a Bull market. Market Timers and PE10 watchers take note!

PerfCharts - StockCharts.com - Free Charts

-ERD50

 

[NW-Bound]

... one could just say "what would I invest in if I didn't choose one of those managed funds - how would it do w/o any extra tweaking?" In some ways, that is a better comp, as in both cases, the investor isn't doing any extra work.

It's back to the age-old question - does active management pay?

I think we agree that it's a 2-part question: what does "balance" itself bring to the table, and what does "active" get you?

A balance portfolio will have less volatility. But over the longer term, we would expect to get less return relative to 100% stock. Or is it so?

I am too lazy now to show a chart from Morningstar, where I compared the performance of Wellesley to VFINX (S&P500) from 1980 to the present time. Why 1980? That was the date that I started my full-time career, and had extra income to invest. It was also the start of the 2-decade long bull market.

Again, anybody can go to Morningstar to make a plot for himself, but as I recall, Wellesley trailed the pure equity portfolio in 1980-2000, but then made up for it in the 2000-2012 (the lost decade for stock), and ended up roughly about the same after 30 years. That's impressive!

A patient investor would get rewarded. But in real life can one sit on his hands for 20 years, while his brother kept bragging about his hot stocks? It is tough!

And then, I was looking at two portfolios that were not added to, nor withdrawn from for 32 years. During the accumulation phase or the spending down phase, the results would not be the same. We need to remind ourselves of that too!

To my eye, D&C Bal tracks much closer to SPY than Wellesley, with what appears to be a slight lag and bit less upside volatility (look at the last half of 2007). Wellesley appear to pull ahead of them all, with less volatility. Even if I eyeball the Target Retirement fund with a tilt towards SPY, it does not pull it up that much.

The profile on D&C Bal says they can vary stocks from 25% to 75%. That seems like a lot of latitude to come up with something that tracks so close to SPY.

That took me by surprise too, to see their bond component does nothing to damp out the volatility.

 

[NW-Bound]

I had to revisit Morningstar web site to make the VFINX vs Wellesley plot to see again for myself. And I have a correction to make.

Wellesley only trailed the S&P index in the decade of 1990-2000. Here's the relative performance, if one invested $10K on 9/30/1980, then reinvested all dividends and cap gains. The exact dates were all on 9/30, the way Morningstar presented the results.

Year	S&P	Wellesley
1980	$10K	$10K
1990	$35.6K	$36.7K
2000	$208.4K	$137.4K
2013	$309.3K	$352.4K

Again, these are 2 static portfolios. If you add or withdraw from the account during the 3 decades, your mileage will vary significantly.

 

[walkinwood]

I believe you can increase your chances of success with actively managed funds by doing some screening for size, expenses, level of diversification & yes - even past performance.

However, you also get some lemons.

Over the years, I have had some active funds that have performed well - better than their relevant indexes - and they're still in my portfolio.

But I have had quite a few (way more than the ones I kept) that performed well for a while and then started trailing the indexes - sometimes, by a big margin. And those are not in my portfolio any more - and a few don't even exist.

So now, rather than take a chance, I only select index funds when I have the need to add a new fund.

 

[NW-Bound]

BIG APOLOGY!!!

Due to old age, or probably onset of dementia, I showed the performance of Wellington MF rather than Wellesley in the table in the earlier post.

A corrected table will be posted, along with some other info.

 

[nun]

Wellesley has low fees for an actively managed fund. Would it be a stand out if you have to pay 1.5% rather than 0.18%?