FCNTX vs SP 500

[tyler-durden]

Hi all,


So I know the active passive debate has been beaten to death but why not beat that dead horse a little more.


As that title to the thread indicates I see the Contra Fund as a prime example where active management with a small reasonable expense ratio clearly outperforms passive index funds.



Full disclosure i use both active and passive funds. Almost all passive in non retirement and a mix of passive and active funds in qualified accounts.


So doing a lot of reading here and on bogleheads it seems like passive management has almost become like a religion of sorts. People see the studies on the 2 styles and once someone's mind is made up on passive thats it, they dont want to hear about anything else. And if it was me recommending a simple 3 fund solution to a friend or relative i would suggest passive index as well as you cant really mess that up.


But back to the title - when you look at The Fidelity Contra funds performance over 1 3 5 and 10 year - vs the SP 500 why would you not be inclined to give that a go.



Someone recommended that fund to me 15 years ago and I've tracked it and invested in it ever since and have followed the fund manager. Seems like an easy decision.


Curious why the die hard passive investors would hold out using something like that? what am i missing or not considering ? again assuming for reasonable diversification into other funds etc for the rest of someones portfolio.

 

[audreyh1]

You can't figure out ahead of time who is going to be the winner, historical performance is no indication of future performance.

I have owned FCNTX in my 401K/IRA since the 90s, and IMO I just got lucky. I'm not particularly inclined to continue holding it in the future, it's simple inertia at this point.

I always keep assuming the best days are behind it, but what do I know?

 

[Marc]

FCNTX is primarily a large cap growth fund. My wife still has some in her portfolio but it seems to match QQQ that we have in brokerage account. FCNTX and two international funds are the only non-index funds we hold; I still think it is a good fund but not necessarily better than a growth index. I used to have very large holdings in Low Priced Stock and Mid Cap Stock but have liquidated those over the last five years choosing index funds. My portfolio is still weighted towards mid and small cap but their are indexes that do that for me.

Marc

 

[VanWinkle]

FCNTX is primarily a large cap growth fund. My wife still has some in her portfolio but it seems to match QQQ that we have in brokerage account. FCNTX and two international funds are the only non-index funds we hold; I still think it is a good fund but not necessarily better than a growth index. I used to have very large holdings in Low Priced Stock and Mid Cap Stock but have liquidated those over the last five years choosing index funds. My portfolio is still weighted towards mid and small cap but their are indexes that do that for me.

Marc

I agree with this assessment and think it should be compared to a growth index, not the S&P 500. Also note the # of stocks is much less than the index, so the risk is higher.

 

[RunningBum]

VPMAX has generally done better than FCNTX. Not in every period, but for the most part it has been better.

Why are you holding out with FCNTX when you could be getting more with VPMAX instead??

Disclosure: I am holding some VPMAX, but a lot less since I sold much of it off at the end of last year. Turns out that was a mistake as it's still outperforming the index, but it's tax inefficiency was causing me problems with the ACA subsidy. I didn't want that without a guarantee it would continue outperforming, and of course that doesn't exist.

 

[MRG]

Been there done that.

I was in a really hot private fund for many years(30+), couldn't go wrong. Buffett wrote about the fund managers.

Then Megacorp had them tilt their holdings to a really hot pharmaceutical company. You're probably aware of them.

That was a nice loss and lesson.

 

[Al18]

FCNTX is one of my holdings and I'm happy with the performance. FYI the retail FCNTX has been closed to new investors for the past few years, because the fund is so large.

 

[RunningBum]

But back to the title - when you look at The Fidelity Contra funds performance over 1 3 5 and 10 year - vs the SP 500 why would you not be inclined to give that a go.

This is kind of misleading too. It makes it sound like the Contra fund has done better at all times, near term and longer, good times and bad. But all of those terms are influenced by the recent bull market, where Contra's great 2017 and 2018 have made up for years where it didn't do as well, at this point in time.

Looking at the last 5 years, the S&P actually did better in 2014 and 2016. If you had looked at the 1 3 5 10 year returns at the end of 2016, the S&P would've been ahead for the 1 & 3 for sure. Can't easily tell about the 5 & 10 from that point. If Contra was such a slam dunk, it should have beaten the S&P looking backwards from any point in time, but it hasn't.

The real point is the one Audrey made, "past performance is no indicator". But even if you want to use past performance, you're kind of cherry picking a favorable time right now, and I can cherry pick a better fund than yours. It's a good fund, no doubt, but not a slam dunk.

 

[45th Birthday]

FCNTX is primarily a large cap growth fund. My wife still has some in her portfolio but it seems to match QQQ that we have in brokerage account. FCNTX and two international funds are the only non-index funds we hold; I still think it is a good fund but not necessarily better than a growth index. I used to have very large holdings in Low Priced Stock and Mid Cap Stock but have liquidated those over the last five years choosing index funds. My portfolio is still weighted towards mid and small cap but their are indexes that do that for me.

Marc

Yes, should be compared to QQQ, not the S & P 500. 15-year Trailing Total Returns: FCNTX: 11.87 QQQ: 12.84

 

[OldShooter]

There was a fairly famous guy named Bill Miller at Legg Mason who beat his benchmark for like ten years. Annointed as a market genius, etc. Then, in two years, he lost more money for his clients than he had made for them since the fund was opened.

IMO too, the S&P is a poor benchmark. It is only US large cap stocks. Better benchmarks include the Russell 3000, which basically tracks the whole US market. Best IMO is the ACWI All Cap, which tracks everything.

Another caution: Are you comparing apples to apples? IOW, are you comparing total return for both? It is very common to see % growth in benchmark prices (ignoring dividends) compared to fund total return. Sometimes it's a mistake because people don't realize it's happening and sometimes in the case of fund hucksters it is deliberate.

 

[Qs Laptop]

Curious why the die hard passive investors would hold out using something like that? what am i missing or not considering ? again assuming for reasonable diversification into other funds etc for the rest of someones portfolio.

Why do passive investment zealots invest in index funds and abhor managed funds?

Willing to accept average returns.

Laziness. "Only need 3 index funds and annual rebalancing."

Aversion to expenses.

Low tolerance for risk.

 

[MichaelB]

Why do passive investment zealots invest in index funds and abhor managed funds?

Willing to accept average returns.

Laziness. "Only need 3 index funds and annual rebalancing."

Aversion to expenses.

Low tolerance for risk.

You forgot to mention at least one reason. "The expense ratio is the most proven predictor of future fund returns". Morningstar wording, not mine. https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure.html

 

[VanWinkle]

Why do passive investment zealots invest in index funds and abhor managed funds?

Willing to accept average returns.

Laziness. "Only need 3 index funds and annual rebalancing."

Aversion to expenses.

Low tolerance for risk.

It is easy to cherry pick funds that are allocated to the hot Growth sector and wonder why everyone is not invested in that fund. Past results are not indicative of future returns. Average returns will beat 90% of the investment returns for all active funds. If you feel lucky, pick the 10% of active that may beat the averages. I like the 90% odds better.
Low cost managed funds are fine, but they usually dial up the risk due to concentrated bets.

(20% of my funds are in one active fund(not growth)

 

[Blueskies123]

FCNTX was the first fund I bought 30 years and I dollar cost averaged into over decades. All my other money is now in index funds but my capital gain is so large in FCNTX I cannot sell. In the future I will slowly sell it off.

 

[OldShooter]

Why do passive investment zealots invest in index funds and abhor managed funds?

Willing to accept average returns.

Laziness. "Only need 3 index funds and annual rebalancing."

Aversion to expenses.

Low tolerance for risk.

Funny. (Is it against forum rules to laugh at the clueless? I don't think my microphone was on.)

... Why do passive investment zealots invest in index funds and abhor managed funds? ...

Because we know that 100% of the research and 100% of the statistical data support this as the winning strategy. Nobel prize winners Harry Markowitz, William Sharpe, and Eugene Fama agree, as do investment luminaries like Jack Bogle, Warren Buffett and Charles Ellis.

... Willing to accept average returns. ...

The statistical data (S&P SPIVA) shows near certainty that over 10 years a passive portfolio will outperform 95% of active managers. If that's "average" I'll take it.

(The statistical data [S&P Manager Persistence] and the academic research [Fama/French and others] tell us that it is impossible to identify the winning 5% ahead of time, so no joy there.)

... Laziness. "Only need 3 index funds and annual rebalancing."...

Actually, we understand what what Warren Buffet has observed: “The stock market is a device for transferring money from the impatient to the patient.”

Re 3 funds, really only one is needed: An equity fund that holds the entire world market. The fixed income side can be handled by buying bonds directly or, if you like, by adding a second fund.

... Aversion to expenses. ...

Actually we understand, as MichaelB has pointed out, that the ONLY valid predictor of fund performance is expenses, which are negatively correlated. So, aversion to expenses? Of course.

... Low tolerance for risk. ...

Well, I have north of 10,000 sports car racing miles at speeds up to 165mph and north of 1,000 flying hours with commercial and instrument ratings, but I don't go to casinos and I don't buy lottery tickets. Adopting a strategy that is statistically certain to lose is not risk tolerance, it is stupidity.

 

[Qs Laptop]

Notice Old Shooter embraced all the reasons I listed.

Willing to accept average returns? Check.

Aversion to expenses? Check.

Laziness--only need 3 index funds? Check. Sorta. Turns out you only need one!

Low tolerance for (financial) risk? Check.

 

[Lsbcal]

...

But back to the title - when you look at The Fidelity Contra funds performance over 1 3 5 and 10 year - vs the SP 500 why would you not be inclined to give that a go.
...

Comparing the Contra fund to the SP500 is not really correct. Currently that fund is a large cap (LC) growth fund as one can see here: http://portfolios.morningstar.com/fund/summary?t=FCNTX®ion=usa&culture=en-US

The SP500 is a LC blend fund. In recent years growth has done very well. That may change to value at some point. I don't follow FCNTX but it may be able to swing towards value if the fall off in growth is not too swift.

It looks like FCNTX has done very well over a long time period and maybe this performance will continue. At 0.74% ER it is not too pricey but one is paying a premium for the active management.

I personally swing some of my portfolio between LC value and LC growth with index funds. Right now that position is in LC growth and has been for 13 months.

 

[golfnut]

Notice Old Shooter embraced all the reasons I listed.

Willing to accept average returns? Check.

Aversion to expenses? Check.

Laziness--only need 3 index funds? Check. Sorta. Turns out you only need one!

Low tolerance for (financial) risk? Check.

Sounds like a winning strategy for the average Joe. Oh wait! Alot of people think they are way above average.

 

[TwoByFour]

The statistical data (S&P SPIVA) shows near certainty that over 10 years a passive portfolio will outperform 95% of active managers. If that's "average" I'll take it.

First, I am a fan of passive investing. I don't have a problem with active investing as long as the investor understands the issues. But the SPIVA data are often misinterpreted. SPIVA compares the annual performance of a fund relative to its benchmark. The result is binary: yes/no it met or exceeded the benchmark for the year. The problem with that is an active fund may fail the SPIVA test in 9 out of 10 years, yet perform spectacularly well in just one year such that the cumulative performance over the 10 year period beats the cumulative benchmark. Most people care about cumulative performance yet that is not what SPIVA is quoted for.

The other thing to note is that all passive funds fail 100% of the time to meet their benchmark. The fund and the benchmark are identical except in one way - the fees. That will always push a passive fund to be slightly less than its benchmark.

Despite the above I invest in passive funds. Reason why is that past performance does not say what future performance will be. Granted, Contra has done very well over the years but I long ago adopted that approach and am sticking to my plan. I am happy with how things have gone.

 

[OldShooter]

First, I am a fan of passive investing. I don't have a problem with active investing as long as the investor understands the issues. But the SPIVA data are often misinterpreted. SPIVA compares the annual performance of a fund relative to its benchmark. The result is binary: yes/no it met or exceeded the benchmark for the year. The problem with that is an active fund may fail the SPIVA test in 9 out of 10 years, yet perform spectacularly well in just one year such that the cumulative performance over the 10 year period beats the cumulative benchmark. Most people care about cumulative performance yet that is not what SPIVA is quoted for.

(not arguing, just trying to understand your point) Taking the five year SPIVA results for example, my understanding is that they are comparing funds' total return for the five year period with the benchmarks' total return. From the 2017YE report: "Over the five-year period, 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks." Isn't that what we want? Maybe I am not understanding your point?

The other thing to note is that all passive funds fail 100% of the time to meet their benchmark. The fund and the benchmark are identical except in one way - the fees. That will always push a passive fund to be slightly less than its benchmark.

Yes. Guilty. I and others sometimes conflate benchmark performance with a corresponding index fund's performance. In our defense, when the active fund underperforms by 1-3 percent, the few basis point fee charged by the index funds is close to negligible.

The guru William Sharpe gave us the definitive words in his 1991 paper "The Arithmetic of Active Management." (https://web.stanford.edu/~wfsharpe/art/active/active.htm) There he says:

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar​

In the real world, however, active managers' shortfall is worse than Sharpe predicts though the reasons are subject to debate.

(IMO every investor should read and understand this paper. It is only three pages and the "arithmetic" involves only adding and subtracting.)

As you obviously know but others may not, costs are not just fees. A big hidden cost is that front-runners are always attempting to identify and exploit managers who are taking or liquidating large positions. So the funds always buy at least a little high and sell a little low. This is a cost where index funds, which trade much, much less, have an advantage.

 

[TwoByFour]

OldShooter - I think quoting cumulative-to-cumulative multi-year performance of a fund relative to a benchmark is the proper comparison rather than percentage of years that a fund failed to meet its benchmark. I believe your quote is cumulative but I often see the percentage cited by people.

 

[ncbill]

Risk-adjusted returns.

Load up on small & large-cap value equity funds and your expected return is higher, because you're taking on significantly more risk than just sticking with a total stock market index.

One should not deceive themselves that they are a "smarter" or "better" investor simply for being rewarded (hopefully) for taking on that extra risk.

 

[OldShooter]

Risk-adjusted returns.Load up on small & large-cap value equity funds and your expected return is higher, because you're taking on significantly more risk than just sticking with a total stock market index.One should not deceive themselves that they are a "smarter" or "better" investor simply for being rewarded (hopefully) for taking on that extra risk.

Yes. A couple of points, though: (1) Making sector bets is not passive investing. It's just another flavor of stock picking with (I agree) consequent higher risk. The same point applies for those who buy an S&P 500 sector fund. (2) Much confusion has has arisen from Markowitz' argument that volatility is risk and vice-versa. Volatility is sometimes risk, especially for entities or individuals who might forced to sell regardless of market conditions. But for Rip Van Winkle sleeping through 20 years of market action, volatility is not risk. Risk is also things like Enron, Sears Holdings, Theranos, etc.

 

[TwoByFour]

Ah yes, the "what is risk" discussion. I often have wondered if volatility and standard deviation got associated with risk more because (1) it was a readily available metric when MPT (modern portfolio theory) was formulated, and (2) it makes a nice alliteration - "risk/return" sounds so much better than "volatility/return". But clearly the damage that happen to a portfolio goes far beyond the standard deviation of market returns. I worry more about how long the market will stay down as opposed to how deep it will go - a 20% flash-crash is far less impactful than a 10% drop that stays down for 2-3 or more years.

 

[OldShooter]

Ah yes, the "what is risk" discussion. I often have wondered if volatility and standard deviation got associated with risk more because (1) it was a readily available metric when MPT (modern portfolio theory) was formulated, and (2) it makes a nice alliteration - "risk/return" sounds so much better than "volatility/return". But clearly the damage that happen to a portfolio goes far beyond the standard deviation of market returns. I worry more about how long the market will stay down as opposed to how deep it will go - a 20% flash-crash is far less impactful than a 10% drop that stays down for 2-3 or more years.

I have read that postwar Economics was desperate to disassociate itself with the soft sciences like sociology, psychology, etc. and that could be done by becoming more mathematical, hence Markowitz' adoption of an incomplete picture of risk and of a clearly inaccurate model of the data as a Gaussian distribution. Given this, the math is nice, neat, and somewhat misleading.

I have Markowitz most recent book "Risk Return Analysis" and in it he still argues that a normal distribution is an adequate approximation to the skewed, asymmetric, off-center, and fat-tailed distribution that is the market. This critically IMO also ignores the fact that in a normal distribution the samples are independent while in the real world we have momentum effects. Seems crazy to me but he is the guy with the Nobel.