Managed Fund Risks

mickeyd · 11-24-2006, 10:10 AM

This is one of the main reasons that I now steer clear of managed funds. I have invested in managed funds over the past years but no more. I'm just not smart enough to figure out who is stealing from me via high ER and who is not so I just threw in the towel several years ago and went all-index. Not sexy, not dramatic, not stimulating, just steady.

Quote:

Many investors are passive and accepting of poor fund management. When they should make a fuss, they rarely do - even when things go horribly wrong, as they did between 2000 and 2003 during the dotcom crash. But when investors keep their mouths shut about bad fund management, this opens up the potential for fund managers to take advantage them. In this article, we'll show you why you should play an active role in understanding and evaluating your portfolio, even if it has been performing well.

http://www.investopedia.com/articles...6/fundrisk.asp

mathjak107 · 11-25-2006, 09:41 AM

if your beating what you would have got in your index fund whats the difference?.
if your not than its an issue

im very happy with my managed funds over the last 20 years and have not gone indexing at this point. as long as im ahead of the averages long term im happy even if im paying about .70 on average

. . . Yrs to Go · 11-25-2006, 09:58 AM

The reasons to avoid managed funds are limited only by the length of time you spend researching / thinking about the issue. Among the many reasons to avoid managed funds:

1) Generally much higher expenses: Academic research has consistently shown a very high negative correlation between fund expenses and investment returns.

2) Style creep: Fund managers tend to migrate their investment style or strategy over time. This can disrupt your personal asset allocation strategy, increasing portfolio risk by reducing planned diversification. A common example is your large cap fund manager moving assets into small & mid cap stocks to chase the recent outperformance of small companies.

3) Higher tax expenses: All of the trading the portfolio manager does to chase returns can generate taxable distributions which reduces the after-tax returns of the fund.

4) Higher trading costs: Similarly, the portfolio will incur commissions and pay bid/offer spreads when they trade the portfolio. These "hidden costs" (they don't show up in the funds expense ratio) have also been shown to be highly negatively correlated to investment returns.

5) Fund manager risk: The risk that your fund manager sucks is very high. By definition, only 50% of fund managers can beat a properly defined average in any given year before accounting for expenses (both explicit and hidden). In practice, far fewer can overcome the expense drag and the majority will under perform. The probability you will pick next year's winner is a long shot and the odds diminish toward zero over long periods of time.

6) Inability to assess fund manager risk: There is no art or science in successfully picking a fund manager who will beat the odds by beating the index. Nearly all measures used to assess a fund are backward looking (historic returns, volatility, Sharpe ratio (or other similar metric), portfolio turn over, etc) and therefore have limited if any predictive power. Picking a fund based on these measures is akin to driving by looking only at the rear view mirror. Fund expenses are somewhat predictive but only in a negative sense (expense ratios only tell you the amount by which your fund is likely to underperform in the years ahead).

7) High switching costs: Even if you're lucky enough to pick one of the few funds to outperform, what do you do when the lucky successful fund manager retires? Imagine you were lucky insightful enough to invest in Fidelity Magellan under Peter Lynch. Since Lynch's retirement, Fidelity's flagship fund has been a perennial stinker. Do you sell Magellan and incur huge tax expenses to buy the next "winner" or do you avoid the tax hit only to bleed to death year after year through negative alpha? Remember that most people's investment horizon extends 30-60 years, or more. How many portfolio manager's will the fund go through during your investment life? Even if you manage to pick a good one, how on earth can you have any insight into the one who replaces him (maybe as early as this year!).

mickeyd · 11-25-2006, 10:04 AM

Quote:

im paying about .70 on average

I'm down to about .15 ER on average

bosco · 11-25-2006, 10:42 AM

Quote:

Originally Posted by mathjak107

if your beating what you would have got in your index fund whats the difference?.
if your not than its an issue

im very happy with my managed funds over the last 20 years and have not gone indexing at this point. as long as im ahead of the averages long term im happy even if im paying about .70 on average

MODERATOR!! can he get away with saying this

?

next thing you know, he'll be advocating market timing!!

HERESY!!! bad boy!!!

**REWahoo** · 11-25-2006, 10:49 AM

Quote:

Originally Posted by bosco

MODERATOR!! can he get away with saying this

?

Although he's skating on thin ice, he made no mention of annuities or holding a mortgage in retirement. I think we will let this one slide.

REW, who admits to having 90% of his portfolio in managed funds with an ER of .40...

FinanceDude · 11-25-2006, 11:22 AM

Quote:

Originally Posted by bosco

next thing you know, he'll be advocating market timing!!

HERESY!!! bad boy!!!

That's a stretch..........

Buit since he was profiled in Fidelity Magazine, perhpas we could learn something

mathjak107 · 11-25-2006, 01:16 PM

ha ha you guys are almost as funny as i can be.

mathjak107 · 11-25-2006, 01:18 PM

they may let it slide but im sure its duley noted right on the permanent record card.

mathjak107 · 11-25-2006, 01:21 PM

im not quite sure of your points though.. if your paying extra in er to beat the indexes or un-managed funds and your beating them by more than the additional er , than the slightly extra er is worth it. i have averaged almost 13% over the last 20 years, with less risk than even the s&p500 to me the extra 1/2 % er seems well worth it .

FinanceDude · 11-25-2006, 11:00 PM

Quote:

Originally Posted by mathjak107

im not quite sure of your points though.. if your paying extra in er to beat the indexes or un-managed funds and your beating them by more than the additional er , than the slightly extra er is worth it. i have averaged almost 13% over the last 20 years, with less risk than even the s&p500 to me the extra 1/2 % er seems well worth it .

Careful...........they're going to think I'm in cahoots with you..........

mathjak107 · 11-26-2006, 03:30 AM

we are the young rebellious ones.

the gray beards should learn from us

bosco · 11-26-2006, 09:48 AM

Quote:

Originally Posted by mathjak107

if your beating what you would have got in your index fund whats the difference?.
if your not than its an issue

im very happy with my managed funds over the last 20 years and have not gone indexing at this point. as long as im ahead of the averages long term im happy even if im paying about .70 on average

if I recall, you are using Eric Kobren's Fidelity Insight. I've subscribed to this same newsletter for at least 15 years and am always amazed at how well his growth model portfolio does. He doesn't beat the market averages every year but long-term he certainly has. This is sort of the opposite of the "party line" here on the board.

Kobren does not pick funds and stick with them. He makes 2 or 3 portfolio adjustments per your and alters the asset allocation to fit his views on the condition of the market, as well as keeps an eye on who the fund manager is.

I haven't used his portfolio consistently, but would be better off if I had. Somewhere I read that asset allocation is a high percentage of investments results. Kobren would probably do well if he selected from a universe of index funds as well.

mathjak107 · 11-26-2006, 09:51 AM

yes i do use eric kobren, been almost 20 years now. its not as much beating the markets every year as alot of the success has been being conservative at just the right times positioning us forthe drops. 20 years of success has taught me what you dont loose is just as important as what you gain and expense ratio's

eric has been getting very conservative again at this point with more than 1/2 the growth portfolio positioned between a fidelity large cap fund and a fidelity real return fund . not sure if i can devulge the names so i wont.

we were similiarly positioned in the early 2,000's with 25-30% in fidelity strategic income fund at that time. that held our worst year down to only minus14%.

a nice gradual shift back into stocks again gave us nice gains with the bond fund cash.

Nords · 11-26-2006, 01:03 PM

Quote:

Originally Posted by bosco

I've subscribed to this same newsletter for at least 15 years and am always amazed at how well his growth model portfolio does. He doesn't beat the market averages every year but long-term he certainly has.

I'd have to see how he fares on Hulbert's newsletter rankings.

mathjak107 · 11-26-2006, 01:31 PM

does hulbert compare by risk vs reward?

never saw his rankings

obviously its easier to score bigger gains increasing risk level to higher beta levels so im curious if he does it by other criteria except gains.

yakers · 11-26-2006, 09:51 PM

Quote:

Originally Posted by mickeyd

I'm down to about .15 ER on average

OK, to "one up" (or one down?) the cost average, try .05% ER.

http://tinyurl.com/sguux

While that is currently available to Govt employees, it was one of the models considered for replacing part of SS. And the risk is really low too.

FinanceDude · 11-27-2006, 11:28 AM

Quote:

Originally Posted by yakers

OK, to "one up" (or one down?) the cost average, try .05% ER.

http://tinyurl.com/sguux
While that is currently available to Govt employees, it was one of the models considered for replacing part of SS. And the risk is really low too.

Too bad 90%+ of us don't get access to that fund............

Don't have any idea why 5 or 10 year Treasuries wouldn't work as a selection of how my SS benefit could be invested............

renferme · 11-27-2006, 02:07 PM

Ok let's compare the S&P500 index fund with Wellington.
Beta for Wellington is .98; for the S&P500 it's 1.0
10 year returns: Wellington 9.81%; S&P500 is 8.56%
YTD returns: Wellington 13.3%; S&P500 14.0%
fees: S&P500 1.8%, Wellington 2.9%,,,,,,,
very even stats, so far.
But here's the big difference:
Since 1999, the S&P500 fund had 3 losing years: 2000 -9.1%,
2001 -12.0%, and 2002 -22.2%, ouch!
Since 1999, Wellington had only 1 losing year: 2002 -6.9%.
.
I'll take the managed Wellington fund over the S&P500 fund any day.
I don't like losing years, especially 3 in a row (2000 to 2002).

same analysis could be done for the Dodge&Cox Balanced and Dodge&Cox Stock funds. If you're in them that's great, if not, too bad, as they are closed to new investors.
.

11-25-2006, 09:41 AM	#2
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks if your beating what you would have got in your index fund whats the difference?. if your not than its an issue im very happy with my managed funds over the last 20 years and have not gone indexing at this point. as long as im ahead of the averages long term im happy even if im paying about .70 on average

11-25-2006, 09:58 AM	#3
. . . Yrs to Go Thinks s/he gets paid by the post Join Date: Sep 2005 Posts: 1,563	Re: Managed Fund Risks The reasons to avoid managed funds are limited only by the length of time you spend researching / thinking about the issue. Among the many reasons to avoid managed funds: 1) Generally much higher expenses: Academic research has consistently shown a very high negative correlation between fund expenses and investment returns. 2) Style creep: Fund managers tend to migrate their investment style or strategy over time. This can disrupt your personal asset allocation strategy, increasing portfolio risk by reducing planned diversification. A common example is your large cap fund manager moving assets into small & mid cap stocks to chase the recent outperformance of small companies. 3) Higher tax expenses: All of the trading the portfolio manager does to chase returns can generate taxable distributions which reduces the after-tax returns of the fund. 4) Higher trading costs: Similarly, the portfolio will incur commissions and pay bid/offer spreads when they trade the portfolio. These "hidden costs" (they don't show up in the funds expense ratio) have also been shown to be highly negatively correlated to investment returns. 5) Fund manager risk: The risk that your fund manager sucks is very high. By definition, only 50% of fund managers can beat a properly defined average in any given year before accounting for expenses (both explicit and hidden). In practice, far fewer can overcome the expense drag and the majority will under perform. The probability you will pick next year's winner is a long shot and the odds diminish toward zero over long periods of time. 6) Inability to assess fund manager risk: There is no art or science in successfully picking a fund manager who will beat the odds by beating the index. Nearly all measures used to assess a fund are backward looking (historic returns, volatility, Sharpe ratio (or other similar metric), portfolio turn over, etc) and therefore have limited if any predictive power. Picking a fund based on these measures is akin to driving by looking only at the rear view mirror. Fund expenses are somewhat predictive but only in a negative sense (expense ratios only tell you the amount by which your fund is likely to underperform in the years ahead). 7) High switching costs: Even if you're lucky enough to pick one of the few funds to outperform, what do you do when the lucky successful fund manager retires? Imagine you were lucky insightful enough to invest in Fidelity Magellan under Peter Lynch. Since Lynch's retirement, Fidelity's flagship fund has been a perennial stinker. Do you sell Magellan and incur huge tax expenses to buy the next "winner" or do you avoid the tax hit only to bleed to death year after year through negative alpha? Remember that most people's investment horizon extends 30-60 years, or more. How many portfolio manager's will the fund go through during your investment life? Even if you manage to pick a good one, how on earth can you have any insight into the one who replaces him (maybe as early as this year!).

11-25-2006, 01:16 PM	#8
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks ha ha you guys are almost as funny as i can be.

11-25-2006, 01:18 PM	#9
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks they may let it slide but im sure its duley noted right on the permanent record card.

11-25-2006, 01:21 PM	#10
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks im not quite sure of your points though.. if your paying extra in er to beat the indexes or un-managed funds and your beating them by more than the additional er , than the slightly extra er is worth it. i have averaged almost 13% over the last 20 years, with less risk than even the s&p500 to me the extra 1/2 % er seems well worth it .

11-26-2006, 03:30 AM	#12
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks we are the young rebellious ones. the gray beards should learn from us

11-26-2006, 09:51 AM	#14
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks yes i do use eric kobren, been almost 20 years now. its not as much beating the markets every year as alot of the success has been being conservative at just the right times positioning us forthe drops. 20 years of success has taught me what you dont loose is just as important as what you gain and expense ratio's eric has been getting very conservative again at this point with more than 1/2 the growth portfolio positioned between a fidelity large cap fund and a fidelity real return fund . not sure if i can devulge the names so i wont. we were similiarly positioned in the early 2,000's with 25-30% in fidelity strategic income fund at that time. that held our worst year down to only minus14%. a nice gradual shift back into stocks again gave us nice gains with the bond fund cash.

11-26-2006, 01:31 PM	#16
mathjak107 Thinks s/he gets paid by the post Join Date: Jul 2005 Posts: 2,430	Re: Managed Fund Risks does hulbert compare by risk vs reward? never saw his rankings obviously its easier to score bigger gains increasing risk level to higher beta levels so im curious if he does it by other criteria except gains.

11-27-2006, 02:07 PM	#19
renferme Recycles dryer sheets Join Date: Oct 2003 Posts: 452	Re: Managed Fund Risks Ok let's compare the S&P500 index fund with Wellington. Beta for Wellington is .98; for the S&P500 it's 1.0 10 year returns: Wellington 9.81%; S&P500 is 8.56% YTD returns: Wellington 13.3%; S&P500 14.0% fees: S&P500 1.8%, Wellington 2.9%,,,,,,, very even stats, so far. But here's the big difference: Since 1999, the S&P500 fund had 3 losing years: 2000 -9.1%, 2001 -12.0%, and 2002 -22.2%, ouch! Since 1999, Wellington had only 1 losing year: 2002 -6.9%. . I'll take the managed Wellington fund over the S&P500 fund any day. I don't like losing years, especially 3 in a row (2000 to 2002). same analysis could be done for the Dodge&Cox Balanced and Dodge&Cox Stock funds. If you're in them that's great, if not, too bad, as they are closed to new investors. .