Indexing still all the rage?

[utrecht]

All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term. People were flabbergasted by one fund that beat the SP500 year after year (7 years in a row I think it was). I forget the name but I think Bill Miller was the portfolio manager.

Anyway, Im not sure thats the case anymore. I dont hear that advice thrown around every day now like it used to be 10 years ago. It seems that more and more funds with long histories are starting beat the index more and more as long as they have low expenses (Vanguard, Fidelity).

The biggest portion of my retirement funds are in Fidelity Contrafund and Fidelity Low Price stock which have handily trounced VFINX the past decade.

My 457k account has beaten SP500 (VFINX) each and every year for the past 8 years that Ive been following it this closely and it wouldve done better without the percentage VFINX that I have.

Ive been wanting to sell something and diversify further recently and all of the sudden I'd rather sell VFINX than FCNTX or FLPSX. I still have about 33% of my total porfolio in either SP500 index funds or SPY stock and thought I would never sell it (until withdrawal time)

Thoughts?

[unclemick]

Well now - going into 15 yrs of practicing ER - and still in posession of my Curmudgeon Certificate courtesy of this forum - here's my grumpy 2 cents:

Who beat who over what period performance wise is about as useful as a pitcher of warm spit. Starting in 1966, fresh out of college - there hasn't been a year since(with great hindsight) some fund/stock/s or portfolio hasn't beat the crap out of what I owned at that point in time. I was always chasing performance - charging into the future by looking in the rear view mirror. After a reasonibly long and expensive period or er 'education' I reluctantly came to the view that I should own the simplest lowest expense stock/bond/cash mix reflecting my place in the accumulation/decumulation(aka retirement cycle) and not sweat the small stuff.

I'm sure there is some academic lit. out there that covers this.

heh heh heh - now I do have a small hormone condition so I have a few 'good stocks' on the side which I expect any day now like the Saint's in the Superbowl to take me to victory. But if the Saint's don't make this year or my stocks falter - it won't derail my retirement.

Target Retirement 2015 - party on! .

[lsbcal]

Those 2 funds have very good recent records, congratulations. They shouldn't really be compared to VFINX which is a large blend fund. For the last 3 years Morningstar classifies FLPSX as mid-blend with a category rank (lower is better) of:
2005 56%
2006 19%
2007 62%

FCNTX (Contrafund) is classified as large growth with category ranks of:
2005 3%
2006 14%
2007 19%

I'd rather have a portfolio made up of these 2 funds then VFINX. That's because I like large growth for right now and have overweighted with Vanguard Primecap. But when the pendulum swings back towards large value hopefully Contrafund (or Primecap) will be nimble enough to do that too.

[lsbcal]

Originally Posted by utrecht

Ive been wanting to sell something and diversify further recently and all of the sudden I'd rather sell VFINX than FCNTX or FLPSX. I still have about 33% of my total porfolio in either SP500 index funds or SPY stock and thought I would never sell it (until withdrawal time)

Thoughts?

Here are some more thoughts which are free and maybe not worth anything. These days I'm tending to favor active funds for the large caps and indexing for the mid and small caps. So for midcaps I'm using VIMSX Vanguard Midcap fund. I'm tilting the small caps to value but haven't got a full postion yet because I'm afraid we're going to have a poor economy for some time, just my guess. For large caps I've got DODGX Dodge & Cox for large value and Vanguard Primecap for large growth. I've got my 5% equity "opportunistic" money in Primecap too. For equities I also have international funds with a U.S. to intl weighting of 2:1.

So that's just me. But whatever you do you should take all your equity positions regardless of which accounts they are in and put them into Morningstar X-Ray to see whether you have a total stock market type portfolio (with weights of large/mid/small = 70/20/10) or something else. Also you might want to pick an international/US weighting that you can live with for some time.

[Dawg54]

Originally Posted by utrecht

All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term. People were flabbergasted by one fund that beat the SP500 year after year (7 years in a row I think it was). I forget the name but I think Bill Miller was the portfolio manager.

Legg Mason Value Trust(LMVTX) is the name of the fund. Old Bill has taken on the chin this year. Down over 20%. I think I read a couple of months ago he was buying banks. Looks like he jumped in a little too soon.

[lsbcal]

Yes, LMVTX went from top of the large blend category to dog. Here are it's ranks for 2001 to 2007: 75, 17, 1, 23, 53, 99, 99. And year to date it's also a 99. It's lost over 36% in the last year. Personally I could never consider buying it since it's ER is 1.68%.

Practically by definition you'll never see VFINX in the bottom of it's category and the ER = 0.15%.

[FIREdreamer]

Since I believe that both managed funds and index funds have their advantages, I happen to own both to edge my bets I suppose. Index funds have the advantage of consistently capturing market returns (which is great in up markets), and the managed funds have the flexibility to reallocate their portfolio to reflect new market conditions (which can give them an edge in down markets). My two main managed funds are VG Wellington and Fairholme.

[clifp]

I know Fairholme has recently reopened. I also know that has a fair amount of Berkshire.

I am considering it why do you like it?

[walkinwood]

Congratulations on picking winning funds in the past. Since most funds do not beat their relevant indexes, you've done well.

Now, with the example of Bill Miller in front of you, do you feel confident you can pick the winning funds for the future? If so, go for it. If not, an index fund at least gets you the market return.

[lsbcal]

Fairholme kind of rang a bell. I saw an interview on Morningstar with the manager. If you go here there is probably a link to the interview:
Fairholme Report (FAIRX) | Snapshot

[FIREdreamer]

Originally Posted by clifp

I know Fairholme has recently reopened. I also know that has a fair amount of Berkshire.

I am considering it why do you like it?

I like(d) it because:
1) of their large exposure to Berkshire
2) research driven investment strategy focusing on just a few stocks (it is not a diversified fund).
3) because, when I bought it several years ago it fit nicely in my asset allocation (though since then I have noticed that the fund's category is often shifting. It was large growth when I bought it, then it became mid blend and now it is large blend...).
4) at the time it was highly rated by Morningstar (and it still is).
5) It typically keeps a large amount of cash on the sidelines which can limit the losses in a down market. Also, the fund's relatively low beta appealed to me.
6) the reasonable ER of 1%, no load, could be purchased in my VG brokerage account.
and of course:
7) past performance...

[gryffindor]

Not surprising that indexing hasn't worked as well recently since the traditional indexing principles are weighted towards large caps which haven't done as well recently.

That being said, I think the real debate on active vs. passive is less on large caps which are highly transparent and more in the the international / emerging markets which aren't as transparent as the US but necessary for the investor to have increasing exposure to -- since that's where most of the economic growth will occur.

More important than the active vs passive is getting the asset allocation right IMHO.
I think many individual investors are 5-10 years behind in thinking about their asset allocation and looking in rear view mirrors than looking ahead. Harvard University's endowment allocation to US equities has shrunk from 80% (1980) to 12% (this last year). Those guys are pros with an outstanding track record of managing billions. And in times like these getting a more robust asset allocation really protects from negative volatility.

[innova]

More important than the active vs passive is getting the asset allocation right IMHO.

Exactly right. 90+% of returns are derived from the AA decision alone. Also, costs matter.

Harvard University's endowment allocation to US equities has shrunk from 80% (1980) to 12% (this last year).

What is your point here? That US equities are no longer desirable?

Chances are the switch has been made partially because there are more sub-asset classes to invest in now that weren't readily available in the 80s, or those 'geniuses' are engaging in market timing. If that is the case, I urge you to compare Harvard to Yale, whose asset manager is a hard-core buy and hold proponent and has done extremely well.

Not surprising that indexing hasn't worked as well recently since the traditional indexing principles are weighted towards large caps which haven't done as well recently.

Sorry, I'm going to continue to pick on you. MOST indexes are indeed cap-weighted, which buys stocks according to their market weight. There is no evidence whatsoever to say indexing hasn't worked well. There are index funds which cover broad markets, sub-assets, and even distinct sectors/regions. For example, my small-cap value index fund has no large caps, but is still cap weighted in the small-cap space.

Index returns reflect the market, so a statement such as 'indexing hasn't worked well' is really saying the 'market hasn't been well'. No kidding.

I know Fairholme has recently reopened.

Why do funds reopen? Ask yourself that question carefully before you proceed in investing in high-cost funds. A hint: Perhaps assets under management have tanked due to redemptions and the fund manager needs another ferrari...

managed funds have the flexibility to reallocate their portfolio to reflect new market conditions

So if your risk aversion says you need to hold cash/bonds, just hold cash/bonds in the right place and avoid the extra expense of the managed fund. You are betting that your manager has insight the rest of the market does not. Holding that cash in down times does cushion the fund against steeper losses AT THE COST of missing out on gains when the market recovers. If you want to decrease volatility, don't market time, just hold an appropriate amount of fixed assets / cash.

Finally, to the OP:

All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term. People were flabbergasted by one fund that beat the SP500 year after year (7 years in a row I think it was).

7 years is hardly long-term. It is expected that in the wide array of funds that someone whose fund should not be compared against the s&p500 will beat it. If on the other hand you look at the holdings of these so-called index killers, you'll see they are holding foreign funds, emerging markets, etc. The comparison is false, and the performance is all but guaranteed to not persist.

You could theoretically beat a well-diversified index portfolio (note that I didn't say the s&p500) by constantly switching from one hot fund to another over your 20-year period, but that would require you to be lucky dozens of times. Fat chance.

[RonBoyd]

See, for example:

Quantitative Evaluation of ‘Lazy Portfolios’ - Seeking Alpha

or this link(s) mentioned in the above:

Max Money Blog - Stretch your dollar and grow your nest egg. » Lazy Portfolios Roundup: Part 1
Max Money Blog - Stretch your dollar and grow your nest egg. » Lazy Portfolios Performance Numbers

[utrecht]

Originally Posted by Dawg52

Legg Mason Value Trust(LMVTX) is the name of the fund. Old Bill has taken on the chin this year. Down over 20%. I think I read a couple of months ago he was buying banks. Looks like he jumped in a little too soon.

I dont believe thats the correct ticker symbol. According to morningstar, thats Legg Mason Value Prime. Its had a different manager since 3/31/06 and its returns in the early part of this decade arent the same as the one Im talking about. If it is the same fund, then obviously changing managers makes it an entirely different fund.

[utrecht]

"7 years is hardly long-term. It is expected that in the wide array of funds that someone whose fund should not be compared against the s&p500 will beat it. If on the other hand you look at the holdings of these so-called index killers, you'll see they are holding foreign funds, emerging markets, etc. The comparison is false, and the performance is all but guaranteed to not persist.

I know that 7 years isnt that long, that was just an example. Let me rephrase my question. My 457k has 5 funds avail to me in the "large cap" section. Fidelity ContraFund and Fidelity Spartan US Equity Fund (Sp500 index fund) are among them.

For the portion of my 457k account that is allocated to large caps, isnt it time to get away from the SP500 index fund? Contrafund has proven it can beat the index over the short and long term.


Its beaten it in every time period. YTD, 1 yr, 3 yr, 5 yr, 10 yr and since inception (more than 40 years ago). Yes I know that the fund doesnt only hold Sp500 stocks. It is allowed to hold some international stocks and a small percentage of other things like cash, slightly smaller cap stocks or whatever, but the point is that the manager (s) obviously know what they are doing and know when to move small portions of the portfolio at the right times, overweight certain stocks ect, to get better returns than the Sp500 index even though it still covers the large cap portion of your AA.


You could theoretically beat a well-diversified index portfolio (note that I didn't say the s&p500) by constantly switching from one hot fund to another over your 20-year period, but that would require you to be lucky dozens of times. Fat chance."

I know that. Im not talking about switching back and forth to chase the hot fund. As I said, I only have 5 large cap funds avail to me within my 457k and I wouldnt touch the other 3 not mentioned here. I have only 3 "mid cap" funds avail and dont even have a mid cap index fund avail so FLPSX is the obv choice there.

I do have about 15% of my total portfolio in VFINX and another 18% in SPY in a taxable account and Im thinking of selling it to diversify to other asset classes. In the past if I was going to diversify further, I wouldve sold something else. Thats all Im saying.

[FIREdreamer]

Originally Posted by innova

So if your risk aversion says you need to hold cash/bonds, just hold cash/bonds in the right place and avoid the extra expense of the managed fund. You are betting that your manager has insight the rest of the market does not. Holding that cash in down times does cushion the fund against steeper losses AT THE COST of missing out on gains when the market recovers. If you want to decrease volatility, don't market time, just hold an appropriate amount of fixed assets / cash.

That's not at all what I am talking about when I said that "managed funds have the flexibility to reallocate their portfolio to reflect new market conditions". I am not talking about a fund manager going all cash in a crisis. I am talking about reallocating the equity portfolio among various equity sectors. For example a managed fund could slash their exposure to financial stocks and increase their exposure to energy stocks for example if the manager sees fit. An index fund can't do absolutely nothing to avert losses, even if the manager knows financials are going to hit a brick wall. So yes I am betting that my fund manager will have some insight in the market that I don't have. I understand there is a manager risk but I am willing to take that risk.

[Nords]

The answers to your question are well-documente: statistics, benchmarks, survivor bias, and fund bloat.

Originally Posted by utrecht

All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term. People were flabbergasted by one fund that beat the SP500 year after year (7 years in a row I think it was). I forget the name but I think Bill Miller was the portfolio manager.

Bill Miller hung on just long enough to vanquish a coin-flipping monkey and then got his record stuffed down his throat. I think he's at least as good as Peter Lynch and maybe in Buffett territory but his downfall was not closing the fund soon enough. The guys with the best world-beating records are the ones who don't have to accept new contributions.

Originally Posted by utrecht

The biggest portion of my retirement funds are in Fidelity Contrafund and Fidelity Low Price stock which have handily trounced VFINX the past decade.
My 457k account has beaten SP500 (VFINX) each and every year for the past 8 years that Ive been following it this closely and it wouldve done better without the percentage VFINX that I have.

I don't follow mutual funds anymore so I don't know the answer to this question-- how closely do Contrafund & Low-Price Stock and your 457 resemble VFINX or the S&P500? My funds have beaten the snot out of double-inverse leveraged beever-cheeze future credit swaps, but nobody cares because they have nothing in common. Most fund's comparisons to the S&P500 are about as meaninful as apples vs oranges. Before you decide on a fund you'd want to check how well it matches the "benchmark" that the fund company is shouting about.

Two other things to think about:
- Funds that don't outperform are usually quietly merged or shut down. The funds you're reading about have survived this "survivor bias" and so the number of funds "beating" the S&P500 is artifically inflated by not counting the carcasses strewn along the trail.
- As soon as an active manager meets with success, they're flooded with performance-chasing dumb money. At that point it doesn't matter how smart or how well-staffed they are-- it's a race to get the money invested before the fund's returns sink to the rates of the money-market accounts that the new contributions are piling up in. It's hard to believe that a manager would continue to thoughtfully research a stock and patiently wait months for an entry point when billions are piling up in the corner and the manager's bosses are tapping their feet with impatience. See my earlier comments on Bill Miller.

How many funds have you heard of that completely close, not just to new investors but to all new contributions? Even rarer, how many have liquidated some holdings and returned the profits to investors in order to return to a more reasonable size?

Originally Posted by utrecht

Ive been wanting to sell something and diversify further recently and all of the sudden I'd rather sell VFINX than FCNTX or FLPSX.
Thoughts?

Yeah, why do you want to sell anything and diversify further?

If your asset allocation was good enough last month, should it be good enough next month?

I'm asking the devil's advocate questions because you're seeming to be sucked in by the active-passive debate (and other classic marketing tricks) while not saying much about where your current AA is, what your new AA needs to be, and why it needs to be that way. Maybe it's better to pick the AA and then see what funds are appropriate.

[Tadpole]

Originally Posted by FIREdreamer

That's not at all what I am talking about when I said that "managed funds have the flexibility to reallocate their portfolio to reflect new market conditions". I am not talking about a fund manager going all cash in a crisis. I am talking about reallocating the equity portfolio among various equity sectors. For example a managed fund could slash their exposure to financial stocks and increase their exposure to energy stocks for example if the manager sees fit. An index fund can't do absolutely nothing to avert losses, even if the manager knows financials are going to hit a brick wall.

I have been wondering since it happened - why did they choose Chevron and BofA to go into the DOW in a year where Chevron was probably at it's top and BofA losing value? Not that the sectors shouldn't be represented but it does seem that the decision was a bit late to the party.

So yes I am betting that my fund manager will have some insight in the market that I don't have. I understand there is a manager risk but I am willing to take that risk.

I was listening to a Congressional hearing on speculation driving home from work and caught an "expert" who was making a case that fund managers, in an attempt to keep customers happy, chase momentum sectors while inadvertently bubbling those sectors. Not speculation but profit chasing. If so, and a manager isn't careful, you also have bubble-pop risk.

[Marquette]

Originally Posted by Tadpole

If so, and a manager isn't careful, you also have bubble-pop risk.

Just as dangerous to a portfolio as condom-pop risk.