Shabby's Wellesley

[VanWinkle]

Actually, here is the bottom line from Nobel laureate William Sharpe of Stanford: "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs."

An important point here is that "costs" are not limited to fund fees. There are trading costs of course, but the biggest cost is probably the cost of taking and abandoning large positions. Ask prices move up for large buyers and Bid prices move down for large sellers. Read "Flash Boys" by Michael Lewis to understand the worst case.

Here's the 1991 paper: https://web.stanford.edu/~wfsharpe/art/active/active.htm Just three pages and well worth investing a little time to understand.

Sure it does. How can you be wrong about your personal preferences? It's not a lot different from folks who allocate a small percentage of their portfolio to stock picking, knowing that it's pretty much like going to the casino. And ... about 30% of actively managed funds beat their benchmarks every year. So your chances of winning are at least 30%.

I keep it in a tax deferred account, so the only tax consequence is internal in the fund. I have to keep some equities in my IRA for balance of my allocation. I agree there are other costs inside an active fund, and have studied this in the writings of William Sharp and countless books I own and have read. Thanks for the reminder of being wrong 70% of the time.

VW

 

[Running_Man]

And that great University - Stanford that William Sharpe represents as a Nobel Prize winner invests how ----- Active management individuals who select - individual securities which do not even have to be liquid. From the Stanford University 2017 Investment report managing 37 billion dollars. Oh and the goal is 5 percent of the fund withdrawn in eternity.

In order to preserve desired risk-return characteristics as market conditions change, SMC exercises discipline in managing asset class exposures and frequently re-balances the portfolio back to its policy targets. Policy targets are revisited only once per year, though changes to exposures within asset classes occur more frequently as market opportunities evolve. By marrying disciplined portfolio management with an appreciation of the changing bottom-up opportunity set, we hope to generate attractive risk-adjusted returns.

SMC primarily relies on carefully chosen external partners to select individual securities, allowing Stanford to benefit from specialized knowledge in asset classes that reward superior active management. While our partners pursue a range of investment strategies, all share a common belief in fundamental investment that incorporates exhaustive quantitative and qualitative research on specific and analyzable opportunities.

In total around 600 billion dollars is listed in endowment funds for colleges in the United States. Nearly all of that money is actively managed. All those Nobel Prize winners for passive management and still these universities use an active management approach --- why in the world could this be?

 

[OldShooter]

... why in the world could this be?

Obviously -- it's a plot. Better put on tinfoil hats now and watch for black helicopters. But I'm not interested in debating with you.

 

[bmcgonig]

Obviously -- it's a plot. Better put on tinfoil hats now and watch for black helicopters. But I'm not interested in debating with you.

Because you don't have an answer? It's a good question.

 

[samclem]

In total around 600 billion dollars is listed in endowment funds for colleges in the United States. Nearly all of that money is actively managed. All those Nobel Prize winners for passive management and still these universities use an active management approach --- why in the world could this be?

Because you don't have an answer? It's a good question.

I'd suppose only the folks at these institutions know why they choose active management. Lots of folks buy lottery tickets, too, but we shouldn't think it is financially advantageous just because it is popular. The more important question is: Does it produce alpha? Apparently, it does not, at least not consistetly and as a group.


Are the people running these institutions, or these endowments, stupid? Certainly not. And some have access to investments that "normal" investors do not, which can be a double-edged sword.


ETA: A Vanguard paper on this subject
A more detailed study on endowment performance. Bottom line: Endowment performance is explained by well-known factors we all understand (risk, etc). Stock-picking skill is not indicated.

 

[bmcgonig]

I'd suppose only the folks at these institutions know why they choose active management. Lots of folks buy lottery tickets, too, but we shouldn't think it is financially advantageous just because it is popular. The more important question is: Does it produce alpha? Apparently, it does not, at least not consistetly and as a group.


Are the people running these institutions, or these endowments, stupid? Certainly not. And some have access to investments that "normal" investors do not, which can be a double-edged sword.

It actually does produce alpha for the top 5 endowments. Between 1.3-2.8%/yr.


https://caia.org/aiar/access/article-1160

"It also
confirms that the top performing and elite Endowment Funds

generate alpha of 1.3% to 2.8% per year, which is consistent with

other academic research on Endowments"

 

[samclem]

It actually does produce alpha for the top 5 endowments. Between 1.3-2.8%/yr.


https://caia.org/aiar/access/article-1160

"It also
confirms that the top performing and elite Endowment Funds

generate alpha of 1.3% to 2.8% per year, which is consistent with

other academic research on Endowments"

Yes, sorry, I added a link later that discusses that. The private equity and hedge fund investments of these elite endowments did produce higher returns (and that's the >only< thing they did that worked--their other investments not stellar), but we can't know if they produced alpha without knowing the risks inherent in them. That data is not available.


So, back to our own investments: If we assume our investing options are closer to the 90% of endowments with "just" hundreds of millions of dollars at their disposal for research, analysis, lawyers, "special opportunity" investments, etc, and if their active management got investment results equal to/worse than passive investments in readily available low-cost ETFs/mutual funds, what should we do?

 

[bmcgonig]

Yes, sorry, I added a link later that discusses that. Still no manager skill evident.

I guess we have dueling research. Mine says they do add alpha. Yours says they don't.

From appendix B of mine.

"Elite institutions and top-performing endowments earn reliably positive alphas relative to simple public stock and bond benchmarks of about 1.7% to 3.8% per year.” (driven by allocations to hedge funds and private equity)"

 

[samclem]

I guess we have dueling research. Mine says they do add alpha. Yours says they don't.

From appendix B of mine.

"Elite institutions and top-performing endowments earn reliably positive alphas relative to simple public stock and bond benchmarks of about 1.7% to 3.8% per year.” (driven by allocations to hedge funds and private equity)"

Right. The paper at my link credits the same sources for the higher returns (investments in hedge funds and private equity), then talks about these asset classes and the difficulty in identifying the risks they take.


But, to an individual investor, it's primarily of academic interest.

 

[bmcgonig]

Right. The paper at my link credits the same sources for the higher returns (investments in hedge funds and private equity), then talks about these asset classes and the difficulty in identifying the risks they take.


But, to an individual investor, it's primarily of academic interest.

The point is that they do generate consistent alpha contra what the academics say.

Yes. Neither here nor there to me personally as an individual investor.

 

[Running_Man]

I'd suppose only the folks at these institutions know why they choose active management. Lots of folks buy lottery tickets, too, but we shouldn't think it is financially advantageous just because it is popular. The more important question is: Does it produce alpha? Apparently, it does not, at least not consistetly and as a group.


Are the people running these institutions, or these endowments, stupid? Certainly not. And some have access to investments that "normal" investors do not, which can be a double-edged sword.

The Swedroe quote is interesting as he charges more than most active funds to invest with him at 1.25%. But I am now convinced that there is no further need to post thoughts on the relative merits of an active management perspective of portfolios. I agree this is a closed subject of discussion.

 

[braumeister]

But I am now convinced that there is no further need to post thoughts on the relative merits of an active management perspective of portfolios. I agree this is a closed subject of discussion.

On this forum?

 

[OldShooter]

... But, to an individual investor, it's primarily of academic interest.

Pun intended?

I actually find it quite interesting to watch as pension funds and endowments' stock market investing continues to go passive. Any internet search will show the trend.

Consider for a moment how you would view passive investing if you were a highly paid endowment or pension fund manager. You're making tons of money, maybe seven figures, and when you get lucky, you get a big bonus.

Would you walk into your bosses' office and explain to them how much more effective a passive strategy would be? I think it would be pretty hard. One highly possible result: "Thanks very much. We have been wondering about that. Do you think that two weeks would be enough for you to teach this rebalancing thing to your assistant before you leave?"

"It is difficult to get a man to understand something when his salary depends upon his not understanding it.” -- Upton Sinclair, 1935​

 

[target2019]

A Wellesley Alternative

1/3 SCHD Schwab 100 dividend fund
1/3 VCIT Vanguard corp etf
1/3 Intermediate treasury

Above is one of the suggestions from B-heads thread.
https://www.bogleheads.org/forum/viewtopic.php?t=210331

SCHD (SCHD Portfolio) is more appropriate, as it has 100 stocks consisting of:

Consumer Staples
22.7%

Information Technolo...
21.1%

Industrials
20.2%

Consumer Discretiona...
11.6%

Health Care
8.3%

Energy
7.0%

Communication Servic...
5.2%

Financials
4.9%

Materials
1.8%

Utilities
0.9%

Since Wellesley is an income fund, it seems more appropriate to have only value stocks, and their qualified dividends for income. S&P 500 is a blend, with more growth than value (I think).

VYM is another high dividend option, with 400 stocks.
https://www.etf.com/VYM#overview