Dave Ramsey said what??...

[ats5g]

I only want to invest with the no-load active funds that offer rebates for underperforming their benchmarks.

Until then I'll stick with indices & ETFs.

 

[Merlin]

I am able to buy American's Washington Mutual without a load in my 401k. Washington Mutual is the only American I have any experinece with.

Here is the performance record for Washington and Vanguard Value Index, both Large Cap Value Funds:

American Funds Washington Mutual A

YTD 11.00%
1-yr 6.28%
3-yr 10.31%
5-yr 6.4%
10-yr 9.41%

Vanguard Value Index Fund

YTD 13.29%
1-yr 15.1%
3-yr 16.8%
5-yr 9.56%
10-yr 9.63%

 

[saluki9]

I am able to buy American's Washington Mutual without a load in my 401k. Washington Mutual is the only American I have any experinece with.

Here is the performance record for Washington and Vanguard Value Index, both Large Cap Value Funds:

American Funds Washington Mutual A

YTD 11.00%
1-yr 6.28%
3-yr 10.31%
5-yr 6.4%
10-yr 9.41%

Vanguard Value Index Fund

YTD 13.29%
1-yr 15.1%
3-yr 16.8%
5-yr 9.56%
10-yr 9.63%

You should also consider that AWSHX only takes about 85-90% of the risk that VIVAX does.

 

[rockyj]

IHere is the performance record for Washington and Vanguard Value Index, both Large Cap Value Funds:

<performance numbers snipped here>

I never listen to Dave Ramsey but the reference to American Funds (of which I recently purchased a few) and subsequent discussion has piqued my interest. Perhaps this should be the start of a separate thread (or has been beaten to death in a previous thread), but to add add some performance numbers for comment:

Several American Funds (recently purchased)
(September 30 - 1, 5 and 10 year, reflecting max 5.75% sales charge - larger purchses reduce sales charge so numbers would be proportionally higher):

Growth Fund of America AGTHX 3.18 8.86 12.41
Income Fund of America AMECX 6.75 9.20 9.51
Washington Mutual Inv. Fund AWSHX 6.27 6.4 9.41
Capital Income Builder CAIBX 7.76 10.71 10.73
Capital World Growth & Inc CWGIX 10.59 14.87 13.09

A couple of no-load active funds I've held for a long time:
(September 30 - 1, 5, and 10 year - no slaes charge)

Dodge and Cox Stock 14.61 14.06 14.47
VG Healthcare 13.25 9.77 16.85


Some VG Index Funds for Comparison (all of which I hold):
(September 30 - 1, 5, and 10 year - no sales charge - all investor class not admiral)

VG 500 Index 10.63 6.85 8.51
VG Total Stock Mkt Idx 10.25 8.45 8.56
VG Value Index 11.56 9.56 9.63


A couple of VG income/value/dividend active funds:

VG Wellesley Income Fund 7.61 6.77 8.92
(because I see it mentioned here a lot)

VG Windsor II 10.99 9.88 10.51
(because I own it)

Without getting specific about asset allocation, and admitting that I've probably got
a more complicated mix of funds than many would advocate, I take an approach
that includes core index fund holdings (across several asset classes, mostly equities) and a roughly equivalent amount of active bets (similarly diversified across asset classes). I do an ocassional fund xray to keep track of overall asset allocations. During accumulation I use new funds (mostly DCA into 403b and Roths) to keep asset allocations in line with my targets. I imagine I'll simplify holdings as I approach withdrawal phase (or tire of tinkering).

Anyway, it seems to me that, given the 10 yr numbers above (and the relative longer term consistency of returns for some of the better established funds and companies (those with committee approaches, not star managers that can leave)), that there is case to be made for active funds in an overall portfolio (assuming the obvious - reasonable expenses, turnover, etc.). Loads clearly are another issue and much more suspect (despite my recent American purchase). In general, the active funds I've been holding have done well over time (too soon to tell on the American additions).

I'm not trying to data mine in the above, just using most recent numbers for several funds related to the discussion. I also realize that the diversified funds above don't correspond to the indices on which the index funds are based, but no one buys the index itself, just available funds. And, yes, small caps and foreign have been on a tear and some of those are in some of the diversified active funds above, and I didn't cite the comparable index funds. Nevertheless, what I'm really interested in are anyone's thoughts on (and experiences with) the general approach of diversification not only among asset classes but also across a carefully selcted mix of index and active funds.

 

[justin]

Nevertheless, what I'm really interested in are anyone's thoughts on (and experiences with) the general approach of diversification not only among asset classes but also across a carefully selcted mix of index and active funds.

Up until 1.5 years ago, I invested only in American Funds (primarily Growth Fund of America, Capital Income Builder, and Washington Mutual Investors Fund, with a little New Perspective and AMCAP fund).

The expense ratios are generally fairly decent, even with the 0.25% 12b-1 fee. I got into a lot of them at the $100,000 breakpoint load level (3-3.5%?).

I switched my investing to primarily index funds or active funds with very low expense ratios about 1.5 years ago. All my future investment dollars are going to these index or low cost actively managed funds.

Over time, my American funds will become a smaller proportion of my total portfolio. And I don't consider the Am Funds in my asset allocations for my index/low cost portfolio. So, yes, I do diversify between actively managed and passively managed funds.

If I was able to do it all over again knowing what I know now, I would have picked some actively managed funds at Vanguard with no loads and slightly lower expense ratios.

Now my dilemma is whether to sell the Am Funds mutual funds and switch over to Vanguard funds to save ~20 basis points/yr in expenses.

 

[FinanceDude]

Up until 1.5 years ago, I invested only in American Funds (primarily Growth Fund of America, Capital Income Builder, and Washington Mutual Investors Fund, with a little New Perspective and AMCAP fund).

The expense ratios are generally fairly decent, even with the 0.25% 12b-1 fee. I got into a lot of them at the $100,000 breakpoint load level (3-3.5%?).

I switched my investing to primarily index funds or active funds with very low expense ratios about 1.5 years ago. All my future investment dollars are going to these index or low cost actively managed funds.

Over time, my American funds will become a smaller proportion of my total portfolio. And I don't consider the Am Funds in my asset allocations for my index/low cost portfolio. So, yes, I do diversify between actively managed and passively managed funds.

If I was able to do it all over again knowing what I know now, I would have picked some actively managed funds at Vanguard with no loads and slightly lower expense ratios.

Now my dilemma is whether to sell the Am Funds mutual funds and switch over to Vanguard funds to save ~20 basis points/yr in expenses.

I have owned American Funds for 20 years and have never been sorry. They are the ONE fund company John Bogle said he would invest in if no-loads were not available...............

 

[justin]

I have owned American Funds for 20 years and have never been sorry. They are the ONE fund company John Bogle said he would invest in if no-loads were not available...............

I noticed that, too. I figure if they pass John Bogle's sniff test, then they can't be too bad. We'll see how asset bloat affects their performance. Supposedly they have a multi-portfolio management system (at least for Growth fund of america) where the total fund assets are sort of split into different pots of money with a manager managing each pot of money separately, and one pot of money being managed by the analysts and by committee.

 

[saluki9]

I noticed that, too. I figure if they pass John Bogle's sniff test, then they can't be too bad. We'll see how asset bloat affects their performance. Supposedly they have a multi-portfolio management system (at least for Growth fund of america) where the total fund assets are sort of split into different pots of money with a manager managing each pot of money separately, and one pot of money being managed by the analysts and by committee.

They manage all of their funds that way

 

[justin]

They manage all of their funds that way

Do you have an opinion as to whether this should reduce the impact of asset bloat on their performance?

 

[saluki9]

Do you have an opinion as to whether this should reduce the impact of asset bloat on their performance?

On the equity side, I don't really think it does. It depends on whether you think asset bloat affects whether alpha generating opportunities are available at all, or just to one specific analyst or manager. When you have a fund as large as growth fund of America or Capital Income Builder, etc there are just so many large cap stocks to consider and it gets very hard to take a position large enough to move the fund as a whole. I don't think that having one manager or 10 is going to change that. When it takes $1,000,000,000 of any security to make a 1% position in your fund you're going to wind up with something akin to a closet index fund. It certainly is a larger factor in small cap offerings. I also believe that the team approach makes it much harder to analyze the fund for manager changes.

On the fixed income side I don't think asset bloat is as big an issue as long as you're talking about a general fund like Income fund of America. In theory a larger asset base should make it harder for the managers of the High Income Trust, but that has not happened yet.

 

[wildcat]

Nevertheless, what I'm really interested in are anyone's thoughts on (and experiences with) the general approach of diversification not only among asset classes but also across a carefully selcted mix of index and active funds.

Sparky -

In my opinion this question or thought is mostly debatable on the issue of time horizon, risk and performance. I do believe active funds can reduce risk and in some cases outperform the market over short periods of time whereas the index funds continuously buy stocks regardless of current/future market conditions.

The difficulties and questions you have to really ask yourself is whether the added expenses (be sure to add turnover to that list) make the fund worth holding and whether or not you can select one of the funds - out of 8,000 - that will outperform.

Personally, my investment time horizon is very long, volatility is not an issue and I do not see the point of holding actively managed funds. The longer the horizon, the greater the chances are your actively managed funds will underperform. On top of that, add the fact that they have to handle huge inflows of dollars from investors. Not my cup of tea.....

 

[rockyj]

Thanks, all, for your opinions on the "active/index diversification" question. The potential for bloated funds to become closet index funds (albeit with higher expenses) seems worth keeping an eye on, and of course there have been some previous stellar examples of that problem. What I don't quite understand there is how the $1,000,000,000 stake (for %1 of the bloated fund, as saluki9 points out) compares with the total market capitalization and/or other relevant securities that would be available for purchase (and hence the number of potential buying oppotunities available for astute managers). It's clearly an enormous amount of money for me to comprehend, but if the market is large enough, then the approach of adding managers may indeed scale with the bloat. I guess we'll see on that count.

 

[saluki9]

Thanks, all, for your opinions on the "active/index diversification" question. The potential for bloated funds to become closet index funds (albeit with higher expenses) seems worth keeping an eye on, and of course there have been some previous stellar examples of that problem. What I don't quite understand there is how the $1,000,000,000 stake (for %1 of the bloated fund, as saluki9 points out) compares with the total market capitalization and/or other relevant securities that would be available for purchase (and hence the number of potential buying oppotunities available for astute managers). It's clearly an enormous amount of money for me to comprehend, but if the market is large enough, then the approach of adding managers may indeed scale with the bloat. I guess we'll see on that count.

Here is how it applies. If you're going to one of the very very few successful active managers you have to find stocks that the market has somehow (despite the thousands of analysts) undervalued. On top of that, besides finding it (before any of the other managers find it) you actually have to buy it for your fund. Now, if the stock is really that great, you would want to load up on it right? Otherwise, what is the point of buying a stock thats 10,15, or 20%+ undervalued if you aren't going to buy enough of it to make a difference in your fund? I mean, who cares if your hot pick doubles if its only 0.5% of your portfolio?

Well, when you have a $100,000,000,000 fund, you have several big problems

1. You need $1,000,000,000 of a stock just to make up 1% of your fund

2. To accumulate enough of that stock without the entire world knowing about it you have to be buying pretty big stocks with large float.

3. Almost by default you have limited yourself to the securities which have THE MOST analyst coverage, making them the least likely to be undervalued.

This is why you can tell that most active managers don't really believe in active management. If they did their portfolios would be

1. Smaller in total size

2. Hold far fewer positions than most do.

I forgot the exact number, but the average active fund holds something like 200 stocks. Do you really think the fund manager can make a good case for 200 stocks? Of course not, but most managers are far more worried about negative tracking error than they are with positive tracking error. The truth is that most of the really good active managers (there are some) don't outperform every year. They need patient investors which is why so many of them have gone to hedge funds where they can force their investors to be patient by limiting the timing of distributions.

 

[wildcat]

The truth is that most of the really good active managers (there are some) don't outperform every year. They need patient investors which is why so many of them have gone to hedge funds where they can force their investors to be patient by limiting the timing of distributions.

Exactly. Or B) they close the fund and prevent additional money from coming in. I know of a few good boutique shops with solid, actively managed funds but most are now closed after the run up in the market and are now saddled with 20-30% cash (plus a concentrated portfolio of 40-50 ideas) which they intend to use when things look cheap again. Those are the types of actively managed funds that in my opinion could reduce volatility and enhance performance in shorter durations. Then there is always a small chance they may be able to stay ahead of the index funds over long durations. For the most part, very few active funds match that description and have that kind of control over their fund.

 

[rockyj]

Thanks for your replies on asset bloat and market cap question. Points well taken.