Some Active beats Indexing

[unclemick]

Quote:

Originally Posted by gcgang American Funds says low fees, manager ownership can save actively managed funds "On a ten year monthly rolling return, American Funds beat the large cap index 100% of the time." Article says that funds with low expenses and high management ownership beat indexing. Nice to see as I've owned select American Funds for 30+ years.

Keeping the new Wife and switching her American funds to Vanguard Index funds as taxes permit as they are a mix of tax deferred and and taxable.

heh heh heh - a multi year operation.

[Running_Man]

Quote:

Originally Posted by MasterBlaster The key word being "some" here. If you take the ~10,000 or so mutual funds over time some small percentage will inevitably have great performance. If you sell your index fund and invest in this fund will you be better off some decades out ? Can they do it for 30 years straight ? Is past prologue ?

Can you tell me what is “the” index fund to compare against. What is the return that an index investor should have received over the last 30 years? This is my biggest complaint against indexers, they claim that indexing is the way to go, yet really most are just sector bettors who disguise underperformance as “tracking error” or “temporary return divergence” for the style selected at the moment and any over performance as proof of index superiority. To understand what an index investor should be investing in is nigh impossible and allows the “Index” advocates to pick pretty much any style at a point in time to “prove” the point indexing can’t be beat. For proof they look at active funds after the fact then backtrack what the proper “index” to compare to is and post that as proof of index bettering. As to do in advance and there is a refusal. I believe right now there is pretty close to 30,000 index funds and companies that will create an “index” for you if you want to create your own.

Oh let’s do what the world’s biggest index booster, Swedroe says, he tweets every day about how index investing is vastly superior to active investing, sorry he will not post a fund for comparison of returns in advance, though if he wants to disprove an active investing technique he picks an index allocation after the fact, if you want one in advance for results you can expect, you need to pay 1% of your investment balance annually and he will special design a set of index funds for your very own that is sure to outperform anyone that dares think they can go alone in the investing world. Of course that cannot be compared to anyone else’s results because your index funds were specially designed for your factors and you of course are unique just like your investment portfolio. But what the index your should be tracking yourself against will be provided at the end of the year.

Of course Warren Buffet, who got rich by investing also states that index investing is the only way for individual investors to go, but of course all his money is managed ..... actively by him and paid advisors he hires.

Look at Bernstein one year he is advocating 75% stocks then after 2008 he advocates 20 years of cash in the bank, yet he believes in “indexing” and actually has real clients. Amazing....


Most people are index investors and the variations of results is immense. I have one simple goal, I am trying to beat inflation over the long term with my bond income and dividends. If I do that I am happy with my results. I could care less what an “index” investment returns for comparison purposes. I do include index funds in my portfolio at times, primarily either the S&P500 or VTI but I do that for market exposure and to keep from having to follow too many stocks and having to decide which to sell as I use the index to balance off the market exposure.

I think in general the average population does not truly understand what risk is as they believe by being in “indexes” that risk over the long term is eliminated. With the federal reserve now actually targeting stock market returns as a gauge of success in policy making, this has the makings for another disaster and angry crowds of uninformed investors down the road. Deflation seems to be seeping in as a long term fact of life and so therefore income from investing is going to eventually also be effected. For now fixed income just continues to drop in yields, pretty soon you’ll be paid to take a loan and have to pay to “save” with a bank.

[nun]

Quote:

Originally Posted by Running_Man Can you tell me what is “the” index fund to compare against. What is the return that an index investor should have received over the last 30 years?

There are obviously lots of benchmarks, but many people would point to the CRSP Market Indexes and the Barclays US Aggregate bond index as they are what some popular Vanguard funds track.

[NW-Bound]

Quote:

Originally Posted by Running_Man Can you tell me what is “the” index fund to compare against. What is the return that an index investor should have received over the last 30 years? This is my biggest complaint against indexers, they claim that indexing is the way to go, yet really most are just sector bettors who disguise underperformance as “tracking error” or “temporary return divergence” for the style selected at the moment and any over performance as proof of index superiority. To understand what an index investor should be investing in is nigh impossible and allows the “Index” advocates to pick pretty much any style at a point in time to “prove” the point indexing can’t be beat. For proof they look at active funds after the fact then backtrack what the proper “index” to compare to is and post that as proof of index bettering. As to do in advance and there is a refusal. I believe right now there is pretty close to 30,000 index funds and companies that will create an “index” for you if you want to create your own. Oh let’s do what the world’s biggest index booster, Swedroe says, he tweets every day about how index investing is vastly superior to active investing, sorry he will not post a fund for comparison of returns in advance, though if he wants to disprove an active investing technique he picks an index allocation after the fact, if you want one in advance for results you can expect, you need to pay 1% of your investment balance annually and he will special design a set of index funds for your very own that is sure to outperform anyone that dares think they can go alone in the investing world. Of course that cannot be compared to anyone else’s results because your index funds were specially designed for your factors and you of course are unique just like your investment portfolio. But what the index your should be tracking yourself against will be provided at the end of the year. Of course Warren Buffet, who got rich by investing also states that index investing is the only way for individual investors to go, but of course all his money is managed ..... actively by him and paid advisors he hires. Look at Bernstein one year he is advocating 75% stocks then after 2008 he advocates 20 years of cash in the bank, yet he believes in “indexing” and actually has real clients. Amazing.... Most people are index investors and the variations of results is immense. I have one simple goal, I am trying to beat inflation over the long term with my bond income and dividends. If I do that I am happy with my results. I could care less what an “index” investment returns for comparison purposes. I do include index funds in my portfolio at times, primarily either the S&P500 or VTI but I do that for market exposure and to keep from having to follow too many stocks and having to decide which to sell as I use the index to balance off the market exposure. I think in general the average population does not truly understand what risk is as they believe by being in “indexes” that risk over the long term is eliminated. With the federal reserve now actually targeting stock market returns as a gauge of success in policy making, this has the makings for another disaster and angry crowds of uninformed investors down the road. Deflation seems to be seeping in as a long term fact of life and so therefore income from investing is going to eventually also be effected. For now fixed income just continues to drop in yields, pretty soon you’ll be paid to take a loan and have to pay to “save” with a bank.

Eh, indexing is the PC thing to safely say nowadays.

Plus, my index beats your index. And then, my rebalancing method is superior to yours.

[Gone4Good]

Quote:

Originally Posted by Running_Man To understand what an index investor should be investing in is nigh impossible and allows the “Index” advocates to pick pretty much any style at a point in time to “prove” the point indexing can’t be beat. For proof they look at active funds after the fact then backtrack what the proper “index” to compare to is and post that as proof of index bettering. As to do in advance and there is a refusal.

I'm not sure what you're suggesting.

The research that shows Indexing beats active management does use historic data. And it does try to match a broad index against the category of stocks manged by the fund.

Is there some other way to benchmark an investment professional?

If we benchmark a small-cap fund against the total market, and the small cap fund outperforms, does that mean the manager added alpha or did he simply ride a small cap rally?

[ERD50]

Quote:

Originally Posted by Running_Man ... I think in general the average population does not truly understand what risk is as they believe by being in “indexes” that risk over the long term is eliminated. ... .

Is that really what they think? That's not my impression. I think the average population sees the stock market as 'risky' and maybe even a Wall Street con-game.

But it matters little to this group of investors what the average person thinks. For example, many of us use credit cards, pay off the balance on time and in full each month, and earn the rewards. It has no bearing on us that maybe the average person carries that debt and pays high interest and fees each month.

I certainly don't think indexes eliminate risk. They merely reduce stock specific risk through easy diversification, and eliminate the risk that I picked a hot or cold active manager.

I feel you are building straw men to knock down. And like Gone4Good, I'm not sure what your alternative is, or what your benchmark would be?

-ERD50

[Gone4Good]

Quote:

Originally Posted by ERD50 For example, many of us use credit cards, pay off the balance on time and in full each month, and earn the rewards. It has no bearing on us that maybe the average person carries that debt and pays high interest and fees each month.

That's a good analogy.

And I'd extend it this way: It's because so many people carry balances at 20% interest that the card companies can afford the eight first class tickets we'll buy with points this year to fly around the world.

In the same sense, it is the hordes of people who believe they can beat the market, or pick managers who can, who pay the cost of keeping markets efficient.

Someone's got to pay for this stuff. It might as well be someone else.

[marko]

Quote:

Originally Posted by Gone4Good In the same sense, it is the hordes of people who believe they can beat the market, or pick managers who can, who pay the cost of keeping markets efficient.

OTOH, back in 1998 my idiot brother who has no idea about anything put an inheritance in Fidelity's Growth Discovery fund. He's outperformed the Dow and S&P nicely over that period.

How did he pick that fund? He liked the name! The proverbial monkey at the typewriter!
He doesn't even know the money is there anymore! (I manage this stuff for him)

Last year, I did a measly 2% and he clocked in at 7%!

Better to be lucky than good I guess.

[Running_Man]

What I am trying to say is index funds are constantly changing what an “index” fund is and claim it is the far superior method of investing, when there is no real investment history for a basis of comparison only theoretical beliefs. On top of that there are so many subsegments of “indexes” that index funds are now in reality replacing stocks with “tracking error” and timing of returns of various subsegments replacing the old lack of diversity risk.

For instance take the CRSP indexes now, they are replacing the old method of indexing because traders, you know those people who cannot possibly beat indexing, would front run the indexes and buy the stocks that were being added to the index and benefit from the jump a stock would have if added to an index or the fall when it was dropped from a major index. Now I saw where Swedroe said this was causing for instance the Russell 2000 to lose about 1 percent per year versus the CRSP method and the new indexing method will be far superior by adding random additions and partial withdrawals from the funds. Now this wasn’t available until 2012 but it is shown as outperforming, even though one could never invest in that matter, other small cap “managed” funds by an additional one percent and it is used for comparison purposes to prove it’s superiority. So a managed fund that was actually able to be invested in is being compared against an index fund whose investing style didn’t even begin until 2012, and the ingenuity of traders to sniff out and front run index investors is assumed to be solved going forward when there is literally billions at stake to be made. In an era when a CFO can hide billions of repurchase agreements at an investment firm such as Lehman in Great Britain for 7 days every quarter and never report the losses from that fund by that method and when found out still no action is taken against any of the principals who did so by the SEC, the ability of powerful investors to front run this index style will most likely continue.

And if the indexes were efficient before who was paying the old 1 percent before, or is this just another “tracking error"

[Gone4Good]

Quote:

Originally Posted by Running_Man For instance take the CRSP indexes now, they are replacing the old method of indexing because traders, you know those people who cannot possibly beat indexing, would front run the indexes and buy the stocks that were being added to the index and benefit from the jump a stock would have if added to an index or the fall when it was dropped from a major index. Now I saw where Swedroe said this was causing for instance the Russell 2000 to lose about 1 percent per year versus the CRSP method and the new indexing method will be far superior by adding random additions and partial withdrawals from the funds. Now this wasn’t available until 2012 but it is shown as outperforming, even though one could never invest in that matter, other small cap “managed” funds by an additional one percent and it is used for comparison purposes to prove it’s superiority. So a managed fund that was actually able to be invested in is being compared against an index fund whose investing style didn’t even begin until 2012, and the ingenuity of traders to sniff out and front run index investors is assumed to be solved going forward when there is literally billions at stake to be made. In an era when a CFO can hide billions of repurchase agreements at an investment firm such as Lehman in Great Britain for 7 days every quarter and never report the losses from that fund by that method and when found out still no action is taken against any of the principals who did so by the SEC, the ability of powerful investors to front run this index style will most likely continue. And if the indexes were efficient before who was paying the old 1 percent before, or is this just another “tracking error"

Is there good research to support that 1% number or did someone just pull it out of thin air?

But even if that's true, it doesn't support your case. Because old research circa 2012 and before still showed managers trailing an index they presumably were gaining an annual 1% advantage exploiting. If anything it proves active management is worse than we thought because somehow they managed to lose that 1% and more some other way.

Now if they were beating the old index, and are now trailing a new index, that might support your argument. But that's not what's happened.

Active managers have trailed indexes since the first researcher tried to measure performance. And they've continued to trail indexes in most of the research that's been done since.

[ERD50]

Quote:

Originally Posted by Running_Man What I am trying to say is index funds are constantly changing what an “index” fund is and claim it is the far superior method of investing, when there is no real investment history for a basis of comparison only theoretical beliefs. On top of that there are so many subsegments of “indexes” that index funds are now in reality replacing stocks with “tracking error” and timing of returns of various subsegments replacing the old lack of diversity risk. ...

In addition to Gone4Good's Q's, I must restate that this just seems like a straw man.

So what if there are many subsets of indexes? I don't give a darn. I stick to the large broad indexes like SPY (or equiv) - when did THAT change (other than a few minor player stocks sliding in/out of that index, based on fairly mechanical decisions). As far as I can tell, that tracks the theoretical S&P500 index so closely I can barely tell there are two lines on any graph.

If I want to invest/trade in a bunch of sectors, that's a lot like market timing, and I just don't care to play. And if you do want to play sectors, I'd still think an index is a reasonable way to do it. You could pick your own stocks, or an actively managed sector fund, and they might do better, might not, and you won't know until after the fact.

So what is the point here?

-ERD50

[Gone4Good]

Quote:

Originally Posted by Running_Man What I am trying to say is index funds are constantly changing what an “index” fund is and claim it is the far superior method of investing, when there is no real investment history for a basis of comparison only theoretical beliefs.

But we do have real investment histories to use for comparison. We have actual index funds with real money invested and real performance histories against which we can judge returns relative to other funds.

Here's Morningstar's analysis of Vanguard's Total Stock Market Index (image attached). It shows VTSMX returns ranking in the top two quartiles of performance in every period (1yr, 3yr, 5yr, 10yr, and 15yr). Tellingly, the longer the term, the higher VTSMX ranks going from 60th percentile performance (i.e. beating 60% of all comparison funds) in one year, to 71st after 5 years, 81st after 10 and 86th after 15 years.

Edit to add: I just checked the same info for Vanguard's 500 Index and also Small Cap index. Here are the 1yr, 3yr, 10yr, and 15yr performance percentiles for each fund;

500 Index: 86th, 89th, 91st, 83rd, 74th
Small Cap: 58th, 75th, 78th, 87th, 71st

[dand76]

I didn't want to create a login account either but searching found this. Click the View/Print button at this link for the American Funds "Active Scorecard" info.

"Results shown do not include sales charge. If a sales charge (maximum 5.75%) had been deducted, results would have been lower."

https://www.americanfunds.com/adviso...htm?lit=355051

[MRG]

Thought Sequoia was one of the active is better than index fund. The recent events didn't feel better to me.

[ERD50]

Quote:

Originally Posted by dand76 I didn't want to create a login account either but searching found this. Click the View/Print button at this link for the American Funds "Active Scorecard" info. "Results shown do not include sales charge. If a sales charge (maximum 5.75%) had been deducted, results would have been lower." https://www.americanfunds.com/adviso...htm?lit=355051

Thanks - On the last page (6), it shows "average annual total returns", and those do include the effect of sales charges. Now, IIRC, "average annual total returns" is a lousy measure, as a 25% drop requires a 33.3% rise to get back to even. So an average of zero could mean flat, or it could mean a string of -25% and +25% years, ending in a loss.

At any rate, They list "American Mutual Fund" as 6.27% for 10 years. However, even by this measure, VTSMX did 6.93%. A total return chart at Morningstar shows they are similar in total return -

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) Fund Performance and Returns (you need to expand the chart, and add AMRMX for compare).

Why bother? Especially risking a 5.x% load (and it wasn't clear if the effect of FE load was included)?

-ERD50

[youbet]

Quote:

Originally Posted by ERD50 Why bother? -ERD50

Great question! It does make me wonder why folks pay ER premiums to be in Wellesley or Wellington (or similar from Vanguard) when they could just grab a few low cost index funds off the list and over time beat those actively managed funds easily.

[REWahoo]

Quote:

Originally Posted by youbet It does make me wonder why folks pay ER premiums to be in Wellesley or Wellington (or similar from Vanguard) when they could just grab a few low cost index funds off the list and over time beat those actively managed funds easily.

Ah, but then we'd have to forego chickenheartedness and find the courage to rebalance when the fit hits the shan like it did in 08/09.

Well worth it to me, but I definitely understand YMMV.

[youbet]

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Originally Posted by REWahoo Ah, but then we'd have to forego chickenheartedness and find the courage to rebalance when the fit hits the shan like it did in 08/09. Well worth it to me, but I definitely understand YMMV.

Just trying to go along with the spirit of the thread........ You know, all actively managed funds suck. All index funds are purrfect. And there's never a problem picking which index funds, and in what quantities/proportions, to include in your portfolio. That's always totally clear when you're gazing at a list of dozens and dozens of them........

I love it when folks start painting with the broad brush!

Edit: I have my son's IRAs and 401k in actively managed balanced funds (including some Wellesley) for the same reasons you're in Wellesley: he'd never get around to rebalancing or switching indexes with market conditions.

[ERD50]

Quote:

Originally Posted by youbet Great question! It does make me wonder why folks pay ER premiums to be in Wellesley or Wellington (or similar from Vanguard) when they could just grab a few low cost index funds off the list and over time beat those actively managed funds easily.

Yeah, those two are pretty amazing aren't they? They do sure seem to do well 'despite' their managers!

But they certainly are a minority, aren't they? I keep telling myself I should go that route, but I also can't help feeling like if I did, that's just when they'd start lagging the indexes. So rather than move to the exceptions, I decide to stick with my benchmark. History says that's not a good choice, but who knows?

Are all your holdings that would fit that AA in either of those?

edit/add: I see you partially answered that with regard to your son's account. I also have to wonder - I don't think the W's do a strict rebalancing - they seem to have some magic something. I don't think their performance can be duplicated with merely rebalancing a few index funds.

-ERD50

[youbet]

Quote:

Originally Posted by ERD50 Yeah, those two are pretty amazing aren't they? They do sure seem to do well 'despite' their managers!

They seem to do OK, but, as you say, index funds are better!

Quote:

But they certainly are a minority, aren't they?

Dunno. Minority of what? What are the numbers?

Quote:

I keep telling myself I should go that route, but I also can't help feeling like if I did, that's just when they'd start lagging the indexes.

What indexes would they lag? That always seems confusing. And as the Wellesley managers make changes, such as tweaks to the duration of the bond portion, do you change the indexes you'd compare to at the same time? How do you do that?

Quote:

So rather than move to the exceptions, I decide to stick with my benchmark. History says that's not a good choice, but who knows?

The overwhelming majority of my equity investments are in broad based, common indexes such as TSM or S&P 500 or MSCI Developed, etc. But I'm never quite sure if I've optimized the percentages or even picked exactly the right ones. For example, do you prefer the market completion index to the mid-cap index? Or the Schwab 1000 index to the S&P 500 index? That's why I have my son's $$$ in actively managed balanced funds which target a typical AA for his age and personal situation. I don't want to make the choices for him and be responsible for timing rebalancing.