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S&P active versus passive funds
Old 03-15-2012, 08:12 AM   #1
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S&P active versus passive funds

Here is a brief summary of the latest S&P comparison of active vs managed fund performance (SPIVA) from Index Funds Advisors. The article shows broad 2011 and 5 year results, domestic and international and addresses some myths about index funds. Spoiler below: things continued as before - 70-80% of active funds (depending on category) failed to beat their benchmarks.

Percentage of Active Funds Outperformed by Benchmark
Calendar Year 2011 5 Years Ending 12/31/2011 Domestic Equity Funds 80.5 71.6 Real Estate Funds 76.2 70.2 International Equity Funds 63.8 70.8 Fixed Income Funds 74.6 82.1

You can read the details at S&P but that requires a bit more digging.
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Old 03-15-2012, 01:49 PM   #2
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Not surprising, but good to see some quantitative evidence. I use indexing. The one place I think active may be "better" is for a high-risk, high-reward client...you can really push a high-beta investment if you actively manage it. For those who think they can "get rich quick" on a sector or stock, go for it.

Anyone who bought Apple looks like a genius today.
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Old 03-15-2012, 02:26 PM   #3
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Indexer through and through here.
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Old 03-15-2012, 06:23 PM   #4
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I'm not smart enough to be able to beat the market. I've settled for the plain vanilla passive boring Vanguard index selections. BUT, the rest of my life is jumpin' and anything but boring.
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Old 03-15-2012, 08:41 PM   #5
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Rick Ferri weighed in on his blog, too:
SPIVA Spikes Mutual Fund Managers Again
Quote:
The tenth anniversary of the SPIVA Scorecard is more bad news for mutual fund managers who try to beat the markets. They’re just not doing it; not anywhere, anyhow, or anyway in any asset class, sector, or style. This is the harsh reality of actively-managed fund results, and one more reason to own a diversified portfolio of low-cost index funds and ETFs.
The SPIVA report states in unabashed language that, “There are no consistent or useful trends to be found in annual active versus passive figures. The only consistent data point we have observed over the five-year horizon is that a majority of active equity and bond managers in most categories lag comparable benchmark indices.”
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Old 03-16-2012, 08:09 AM   #6
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Questions:

1. What about the 20-30% that do beat the S&P500 benchmark?

2. Is it legitimate response to choose certain active management funds because of the diversification they bring, or perhaps they hit non-standard asset classes?

Does anyone here use an active fund? What about VWINX or VWELX?
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Old 03-16-2012, 08:22 AM   #7
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Quote:
Originally Posted by target2019 View Post
Questions:

1. What about the 20-30% that do beat the S&P500 benchmark?
The problem is spotting these "20-30%" in advance. I can't. Can you?
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Old 03-16-2012, 08:25 AM   #8
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Quote:
Originally Posted by target2019 View Post
Questions:

1. What about the 20-30% that do beat the S&P500 benchmark?
They would be great choices if they were the same funds year after year. The lack of consistency in picking winners is the Achilles heel of managed funds.

Quote:
Originally Posted by target2019 View Post
2. Is it legitimate response to choose certain active management funds because of the diversification they bring, or perhaps they hit non-standard asset classes?

Does anyone here use an active fund? What about VWINX or VWELX?
+1

Some managed funds do make sense. The low expense ratios, auto rebalancing, "set and forget" convenience of some target retirement and balanced funds (like the the two Vanguard funds you mention) have a lot to recommend them. They can also have another real benefit as audrey1 pointed out yesterday:

Quote:
Originally Posted by audreyh1 View Post
Some people use balanced funds to keep them a little more isolated from market variations. This is a perfectly good solution for many folks as long as they can truly leave the portfolio alone and not try to second-guess the fund manager. Vanguard Wellesley Income Fund VWIAX, a well-respected balanced fund of about 60% bonds/ 40% stocks, is currently yielding about 2.96% in the Admiral Shares (the lowest cost version of the fund).
Disclosure: I'm long on VWIAX and VWENX
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Old 03-16-2012, 08:31 AM   #9
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Probably 75% of equity holdings in indexes. Articles/threads like this just confirm it for me. Yeah, genius if you bought Apple, which I considered. Instead I just buy their products. I remember about 10 years ago when both my kids switched to Apple, and then signed for UPS delivery of Apple to next door neighbor. Should have acted on instincts I guess. however, I gave up buying individual stocks after got creamed with tech bubble. Now its mainly S&P index, although my international funds tend towards the actively managed.
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Old 03-16-2012, 08:53 AM   #10
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Quote:
Originally Posted by target2019 View Post
Does anyone here use an active fund? What about VWINX or VWELX?
Yes.

40% is in Wellesley, 50% in Target retirement funds in Fido and VG. (10% in I-Bonds and other cash accounts)
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Old 03-16-2012, 08:56 AM   #11
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Vanguard has an interesting article, of which I understood about half, which talks about the factors affecting active managers under or over performing benchmarks. It covers two ten year periods, the one prior to '99 and the one prior to '08, as examples.

https://personal.vanguard.com/pdf/icract.pdf

"In this analysis we have demonstrated that the volatility in the percentage of funds outperforming
a given benchmark is directly related to underlying trends in the markets. The number of active managers in each style box, and the differences in the style
and size characteristics of those managers’ portfolios, will explain a significant portion of outperformance
or underperformance versus a benchmark. In the
end, to arrive at a conclusion as to whether active management or indexing is a “better” investment strategy requires that an investor focus on the rationale for active management. Active management offers the opportunity to outperform a given bench- mark, but at the cost of higher average expenses, potentially significant tracking error, and the risk
of underperforming. Indexing does not offer the ability to outperform a benchmark, but as a result
of low expenses and low tracking error relative to a benchmark, an indexed strategy has outperformed many similarly positioned active managers over
the long term."

As one who is just getting into funds, going to dump Into a portfolio about 900k from mostly tax deferred accounts just as I retire, indexing seems less volatile and, frankly, easier for a newbie to maintain.
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Old 03-16-2012, 09:27 AM   #12
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Quote:
Originally Posted by target2019 View Post
Questions:

1. What about the 20-30% that do beat the S&P500 benchmark?

2. Is it legitimate response to choose certain active management funds because of the diversification they bring, or perhaps they hit non-standard asset classes?

Does anyone here use an active fund? What about VWINX or VWELX?
A1. As I recall the academic results, it ain't the same guys every year that are in the 20-30%.

A2. In my case, a small yes.

I have VWINX in my small Roth. It is doing much better than my previous choices.

Most of my assets are in Vanguard index funds and ETFs. I slice-and-dice, so they are focused on small cap, value and international.

I do have some managed funds--Vanguard healthcare and Matthews Asian Growth and Income.

No one fund of any kind is more than about 8% of my total.

I also have small positions in 10 energy stocks, each one about 1% of my total.

In the very beginning, I did not know about indexing. Neither did many others at the time. I used managed mutual funds.

When I learned about the value of indexing, I went 100% VFINX for a long time.

When I read about slice-and-dice, I went for a bias for small cap, value and international index funds. I also figured that two long-term trends were worth focusing on: health care and energy. I used Vanguard's managed VGHCX, which has done fine for me, and a Vanguard energy index fund.

I have recently been moving some of my domestic indexing out of bond funds and into dividend indexes.

In the past ten years, I figured that I knew enough about energy to back out of the energy index fund and buy a few individual energy stocks. The index, by definition, has to buy the dogs, too. I figured I could avoid a higher percentage of dogs than an index in this sector. So far, so good. Energy total is only 10% of my pot. I will buy XOM if it ever shows weakness; otherwise, I am standing pat and watching my ten eggs.

I used to rebalance annually, but have slacked off. Otar's suggestion to rebalance every four years at the end of an election years sounds about right to me. See you in December!

I am uncertain what instructions to give my wife in the event of the death of me or my brain. At the moment, it is: Sell everything and put it into VWINX. I am happy enough with the present asset allocation that I may suggest that she could leave it all as-is as long as she wants. The distributions into the MMF should exceed 3.5% indefinitely. After age 70.5 and MRDs are forced, she may want to simplify at that time. At the moment, I am thinking, put the MRDs into a savings account and CDs.

So, that is more information from me than target2019 was looking for. Sometimes it helps me to articulate what I am doing and put it down on paper. My opinions change with time.

WAIT! Here comes one now! BUY GOLD!
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Old 03-16-2012, 11:22 AM   #13
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I am fan of indexing but think this analysis can be a lot more useful. I'd like to see indexing against active funds in say the lowest quartile of expenses. Been a fan of Vanguard's Dividend Growth (.34 expense) and Equity Income Admiral (.22 expense) for quite some time and they have beaten their benchmark. Without the significant expense hurdle, let's see if the managers can provide at least some value and continue their outperformance.
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Old 03-17-2012, 08:04 AM   #14
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Quote:
Originally Posted by seraphim View Post
Vanguard has an interesting article, of which I understood about half, which talks about the factors affecting active managers under or over performing benchmarks. It covers two ten year periods, the one prior to '99 and the one prior to '08, as examples.

https://personal.vanguard.com/pdf/icract.pdf

[edited out article quote]

As one who is just getting into funds, going to dump Into a portfolio about 900k from mostly tax deferred accounts just as I retire, indexing seems less volatile and, frankly, easier for a newbie to maintain.
I think that Figure 8 and the data behind might support a sea change in active management. It is interesting topic with so much opinion. I have to admit I was asking a naive question about the 30% who outperform the index. I didn't realize there was such a dramatic shift, and by 2008 or so there was ashift in the other direction, meaning a 79% outperformance by active managers.
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Old 03-17-2012, 08:40 AM   #15
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Quote:
Originally Posted by target2019 View Post
I think that Figure 8 and the data behind might support a sea change in active management. It is interesting topic with so much opinion. I have to admit I was asking a naive question about the 30% who outperform the index. I didn't realize there was such a dramatic shift, and by 2008 or so there was ashift in the other direction, meaning a 79% outperformance by active managers.
I skimmed the article quickly so I may have missed some key factors but my takeaway is that in during cycles that favor a style (e.g small caps are performing well) managers espousing that style can beat their index. But at other times they lag their index. If that is the case, you need to be able to call the cycles so you can switch into and out of various managed funds to chase alpha over the long run. It gets back to the question of whether we can pick winners (managers or cycles) well enough to beat a simple passive portfolio. I suspect that even in the best case the advantages are pretty small (e.g. less than .5%) so it really boils down to whether you enjoy the hunt. Not for me.
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