Anyone using Institutional Money Managers

[eytonxav]

Does anyone have experience or comments on using institutional money managers who special in specific equity asset classes? Usually, these accounts require a minimum investment size of $100K and based on the information that was provided to me, it appears that their performance has consistently surpassed the corresponding index for almost every period of performance (QTR, YTD, 1-3-5-10 YR periods).

It was recommended to me to invest $400K between 4 firms that special in these particular asset classes:

Large Cap Core (S&P 500)
Large Cap Value (Russell 1000 Value Index)
Mid Cap Core (Russell Midcap)
International (MSCI EAFE)

I have also shown the indexes that their performance was benchmarked against and again they appear to have outperformed the indexes across all performance periods. Although these managers do not cover the waterfront from a diversified portfolio perspective, I would use other funds to cover those areas (eg small cap, REIT, etc.) Given this type of performance, I am having a hard time seeing the downside to this approach. The performance benchmark comparison was after costs which are about 1.6%. Any thoughts

Doug

 

[Jarhead*]

Doug:

This reply will probably sound obvious, and "pithy", but an extra 1.4 % in annual costs will eat up a lot of gains.
My guess is also that they probably use "loaded" funds that will add to costs.
In any case, we don't know ahead of time if they will beat the indexes in the future, but we do know that you will be paying an extra 1.4% premium to find out.
Over a long period of time, that amounts to a huge difference.

 

[eytonxav]

Actually they manage a portfolio of stocks which are actively managed (no funds are being used loaded or no-load). Again, the performance comparison versus the indexes was after the fees had been applied, so given that why would I be concerned about the 1.4% cost over a .2% index cost if the historical performance is superior? Maybe I am missing something, but this seems to be a reasonable approach to me.

 

[elb]

Personally, I find it hard to believe an actively managed portfolio has consistently beaten its benchmark, accounting for fees and taxes over 10+ years and that it will continue to do so in the future.  Especially "across all performance periods." But thats just me.

 

[charlie]

DFW, you would be betting that RTM will not
overcome these managers eventually. I agree
with Jarhead that the extra 1.4% load will be hard
to overcome over the long haul. Why take the
chance?

Cheers,

Charlie

 

[JOhn Galt]

I agree with Charlie. Why take the chance?

JG

 

[brewer12345]

Hmmm, well, I am going to go out on a limb and disagree with the majority. There are plenty of managers that beat the indexes long term (Dodge & Cox, anyone?). However, I would not be jumping at this opportunity anyway.

What you are being pushed toward is nown as a "separate account". The problem you are likely to face is that with all of this active management, you are probably going to get hit with a lot of tax liabilities from trading, compared with almost none with index funds/ETFs. You also face the risk that performance may degrade over time.

If you really want to hire excellent managers that can consistently beat the indexes, you either need access to the best and most expensive managers (who probably run hedge funds). Alternatively, you could hire excellent managers for a lot less money by going to the likes of Dodge & Cox, etc. who have a long track record of thrashing the indexes for a lot less that 160BP a year.

 

[johnblake]

In a world of random stock pickers there would still be many that would beat the long term averages, even after bias for fees. How do I know whether or not Cox & Dodge's performance is statistically significant?

 

[REWahoo]

How do I know whether or not Cox & Dodge's performance is statistically significant?

The fund is Dodge & Cox, and you can make your own determination of significance by doing your homework starting here: http://www.dodgeandcox.com/

REW

 

[unclemick]

Dodge and Cox Stock - 12.25% since inception. Vanguard 500 Index - 12.38%. Dodge and Cox has blown the barn doors off Index 500 the last ten years - Recency being what it is.