"Winning Lazy Portfolios Using Fidelity Funds

[ERD50]

Originally Posted by innova

Hey, now this is getting good. *cracks knuckles*

.... You would really need to look at their holdings and construct a fair benchmark to be accurate.

innova, I'd like to question this. Rather than looking too closely at the holdings, shouldn't we just measure volatility, or some other risk factor? A selection of stocks might be more or less volatile than the broad collection of them (one would expect more volatile, but it does not need to be, depending on the picks).

When DJRR was discussing FUNDX in the 'momentum' thread - it looked like M* and yahoo ranked it against MSCI EFA index, not because the holdings matched, but because the volatility matched (or so it appeared).

I agree with your comments,however there is nothing I'd like to see more than for you to be proven wrong. I'd love to find some funds or a strategy that can be duplicated with a proven track record of consistently beating an index on a risk adjusted basis. Nirvana (well, almost - there's more to life than money).

-ERD50

[ERD50]

Originally Posted by Art G

Erd, I really think you are more interested in debating,

well of course I am going to 'debate' about where I put my money. I play devils advocate with myself before I make any investment.

What's the alternative? I should just 'trust you'? No thanks.

But I will look into the American Funds - thanks. - ERD50

[Art G]

Erd, to add, of the 14 American Funds that I would consider "stock funds", only 4 have a slightly higher beta that 1.00, the highest being 1.09

[Art G]

Originally Posted by ERD50

well of course I am going to 'debate' about where I put my money. I play devils advocate with myself before I make any investment.

What's the alternative? I should just 'trust you'? No thanks.

But I will look into the American Funds - thanks. - ERD50

ARRGGHHHH! I never said trust me!!!!! I said give me a better chart to look at.

[FinanceDude]

Originally Posted by innova

Hey, now this is getting good. *cracks knuckles*

It is? Ok, we know your position, care to have an open mind with others that don't share your vision??

The only way to get return is to take risk. However, beta is not the only measure - you should consider the size and value premia as well.

Thanks for the finance lecture, good thing you know so much about my background......... How much alpha is there in an index fund??

I'll give you a surefire way to get s&p returns with less risk: Buy 80% s&p, 20% bond index. If you don't understand how an 80%eq/20% bond position can earn the same return as 100% equities (with less risk), you've got some reading to do.

Good thing to know you're the only person on here that is aware of the Efficient Frontier...........

People place waaay too much value in rating services. Did you know that if you invest in M*-rated funds with 5 star ratings you are quite likely to underperform? Top rated funds are MORE likely than 3-star rated funds to underperform their peers in the following year. And yet, what do investors do? Pile money into the top funds, year after year. Star ratings are a great predictor of past performance!

Good point, and not to be nitpicky, but Vanguard's funds are also on there, so you are saying that Vanguard clients are also "doomed to failure", because they have 5 star funds on there too..........

[eridanus]

Originally Posted by Art G

Selecting the S&P 500 means your only criteria is to pick the 500 biggest stocks. No consideration over results or whether or not the company makes money.

Nah, the S&P 500 isn't simply the largest stocks. A committee picks what goes into the S&P and they got it wrong in the dotcom era.

How the S&P 500's bad bubble-stock picks cost investors billions. - By Daniel Gross - Slate Magazine

"Despite perceptions, the index is not a passive investment vehicle. Instead, S&P is constantly choosing new stocks and booting old ones."

[innova]

innova, I'd like to question this. Rather than looking too closely at the holdings, shouldn't we just measure volatility, or some other risk factor?

I see your point, but let me ask: If you compare holdings and do apples-to-apples, isn't the return and risk(volatility) both explained? IE.. if we compare 72% LG/28% INT with s&p 500 alone, we expect a different risk (and thus different return). If they are matched (compared against 72%s&p/28% INT) , risk/return should be similar, with performance differences due to turnover, expense ratio, loads, etc... right?

I agree with your comments,however there is nothing I'd like to see more than for you to be proven wrong. I'd love to find some funds or a strategy that can be duplicated with a proven track record of consistently beating an index on a risk adjusted basis.

Hey, same here. We both know however that as soon as such a strategy was known it would be arbitraged away and you couldn't count on it for long-term results.

we know your position, care to have an open mind with others that don't share your vision??

I try, I really do. I just haven't found any evidence that suggests I'd be better off picking active funds for the long term.. and I've found mounds of evidence to the contrary. The very fact that I'm here discussing means I'm interested in what you're saying.. I just disagree and try to state my case why.

good thing you know so much about my background......... How much alpha is there in an index fund??

I have to assume this means you are a financial advisor. Historically, folks in your profession have to learn such economic topics as EMH, Cap-M, Fama-French, etc as part of your coursework/examinations.. however, it appears the majority of practioners do not apply what they've been taught and instead engage in market-beating attempts. I find that ironic.

I'll let Bernstein engage you on the topic of alpha:
Efficient Frontier

but Vanguard's funds are also on there, so you are saying that Vanguard clients are also "doomed to failure", because they have 5 star funds on there too

Not 'doomed' to fail, but likely to fail - if your measure of success is to outperform your peers. Point here is that funds that outperform are extremely unlikely to continue to do so, year after year. This includes Vanguard's funds.

[Art G]

Sure, the S&P is constantly removing stocks AFTER they have underperformed. Now THAT'S a great formula for a mutual fund company. BTW, if you ever talk with most managers at mutual fund companies and ask them where their money goes, it's usually to the funds that underperformed the year before. So in essence, an index fund is doing the opposite of what most managers would suggest.

[FinanceDude]

Hey, same here. We both know however that as soon as such a strategy was known it would be arbitraged away and you couldn't count on it for long-term results.

DFA seems to have the closest model to that so far.........

I try, I really do. I just haven't found any evidence that suggests I'd be better off picking active funds for the long term.. and I've found mounds of evidence to the contrary. The very fact that I'm here discussing means I'm interested in what you're saying.. I just disagree and try to state my case why.

I just look at risk differently than others do.

I have to assume this means you are a financial advisor. Historically, folks in your profession have to learn such economic topics as EMH, Cap-M, Fama-French, etc as part of your coursework/examinations.. however, it appears the majority of practioners do not apply what they've been taught and instead engage in market-beating attempts. I find that ironic.

I don't engage in marketing beating attempts, but then again most of my clients are looking not to take full market risk, since they already have achieved financial success, and don't need to beat the market or what have you. What they don't have is the ambition or willingness to take FULL reponsibility for managing their own money.

[FinanceDude]

Originally Posted by Art G

Sure, the S&P is constantly removing stocks AFTER they have underperformed. Now THAT'S a great formula for a mutual fund company. BTW, if you ever talk with most managers at mutual fund companies and ask them where their money goes, it's usually to the funds that underperformed the year before. So in essence, an index fund is doing the opposite of what most managers would suggest.

Gotta love that S&P stock selection committee, how can I get on that

[FinanceDude]

BTW, the S&P is "float weighted", not "purely" market cap weighted, but the top 10 stocks still make up 20% of the index average, so I'm not sure its a very good "index" at all any more.

[innova]

But I will look into the American Funds - thanks. - ERD50

Watch out for loads

One positive thing I can say about AF is that compared to their peers their operating expense ratios are definitely on the lower end. If one could find a way to purchase them without the loads it would be a reasonable choice.

Even for me, a hardcore indexer, active funds play a role. For example, in my 403b I am forced to use active funds to target certain areas of my AA because there either aren't any passive funds available period, or my plan doesn't give me the option.

One should still focus on expenses though - high expense funds are very strongly correlated with poor performance.

[innova]

BTW, the S&P is "float weighted", not "purely" market cap weighted, but the top 10 stocks still make up 20% of the index average, so I'm not sure its a very good "index" at all any more.

Agree.

I use TSM instead of s&p 500 as it has fewer of those issues.

[ERD50]

Originally Posted by Art G

Erd, to add, of the 14 American Funds that I would consider "stock funds", only 4 have a slightly higher beta that 1.00, the highest being 1.09

Well, I started to look at a few of them. That 5.75% front-end load sure doesn't help the comparison.

After the load, I saw underperformance relative to their index. Sometime even w/o the load.

Here's the first I found that Yahoo matched to the S&P 500 index. It underperformed both w/wo the load in the 1, 3 and 5 year periods. It did manage to outperform in the ten year. How about you do the other 13?

-ERD50

VFINX
1 yr 5.39%
3 yrs 8.49%
5 yrs 12.69%
10 yrs 5.83%


AMRMX with LOAD
1 yr -2.61%
3 yrs 5.90%
5 yrs 10.16%
10 yrs 6.64%


AMRMX before LOAD
1 yr 3.33%
3 yrs 8.02%
5 yrs 11.47%
10 yrs 7.27%

[innova]

Good stuff. This has me thinking...

Where can you get >10 year historical data for American funds? EDIT: FOUND IT:
Files - Passive Investor | Google Groups

Take a look at the backtesting spreadsheet - you can plug in the American Funds data file and construct portfolios.

Would be really interesting to construct apples-apples portfolios and compare. My guess (just a guess, I'll have to examine this later) is that when after-load comparisons are done, American Funds don't look quite so hot.

[Art G]

Originally Posted by ERD50

Well, I started to look at a few of them. That 5.75% front-end load sure doesn't help the comparison.

After the load, I saw underperformance relative to their index. Sometime even w/o the load.

Here's the first I found that Yahoo matched to the S&P 500 index. It underperformed both w/wo the load in the 1, 3 and 5 year periods. It did manage to outperform in the ten year. How about you do the other 13?

-ERD50

VFINX
1 yr 5.39%
3 yrs 8.49%
5 yrs 12.69%
10 yrs 5.83%


AMRMX with LOAD
1 yr -2.61%
3 yrs 5.90%
5 yrs 10.16%
10 yrs 6.64%


AMRMX before LOAD
1 yr 3.33%
3 yrs 8.02%
5 yrs 11.47%
10 yrs 7.27%

ERD...LOL! I can see you've got one heck of an agenda, prove the other poster wrong no matter what the betterment of the board might be. I notice you pick ONE American Fund, and amazingly, it was the one with the worst performance of all.
Of course, even with the load, the 10 year returns were still higher with that one American Fund with a beta of .82.
FWIW, I certainly don't want to tell you which fund to use, but I'd say ANCFX is closest to the S&P index for historical purposes.

[FinanceDude]

Originally Posted by innova

Watch out for loads

Loads are as follows on A shares:

$1 - $24,999: 5.75%

$25,000- $49,999: 5.00%

$50,000 - $99,999: 4.50%

$100,000 - $249,999: 3.50%

$250,000 - $499,999: 2.50%

$500,000 - $749,999: 2.00%

$&50,000 - $999,999: 1.50%

$1,000,000 + NAV

One positive thing I can say about AF is that compared to their peers their operating expense ratios are definitely on the lower end. If one could find a way to purchase them without the loads it would be a reasonable choice.

They don't distribute through non-advisors. You would have to pay a management fee to be able to buy them at NAV, or invest $1,000,000 or more.

Even for me, a hardcore indexer, active funds play a role. For example, in my 403b I am forced to use active funds to target certain areas of my AA because there either aren't any passive funds available period, or my plan doesn't give me the option.

That's smart........

One should still focus on expenses though - high expense funds are very strongly correlated with poor performance.

Which is why I use AF for my MF clients.........

[Art G]

Originally Posted by innova

Good stuff. This has me thinking...

Where can you get >10 year historical data for American funds? EDIT: FOUND IT:
Files - Passive Investor | Google Groups

Take a look at the backtesting spreadsheet - you can plug in the American Funds data file and construct portfolios.

Would be really interesting to construct apples-apples portfolios and compare. My guess (just a guess, I'll have to examine this later) is that when after-load comparisons are done, American Funds don't look quite so hot.

innova, I'll bet you're wrong.