Another Passive Vs. Active Article - Baron's

[HI Bill]

If You Still Own Actively Managed Stock Funds, Get Ready for Some Bad News:

https://www.barrons.com/articles/if...bad-news-51579691701?siteid=yhoof2&yptr=yahoo

Some quotes:

"Just 29% of active U.S. stock fund managers beat their benchmark after fees in 2019. That declined from 37% of funds beating their benchmarks in 2018, the average success rate over the past 15 years."

"Finding a winner, based on past performance, is proving maddeningly hard. Only 12% of the 1,999 actively managed funds that beat their benchmark in 2019 went on to top their index in 2020. And only 11% of all active funds topped their index for two or three consecutive years from 2017 through 2019."

FWIW, I consider this historic 'proof' of the need for diversification, and to generally avoid active fund managers. Just throwing this out there, not looking to debate!

 

[pb4uski]

I have one lonely managed fund.... all the rest are index. I am willing to buy managed funds for asset classes where I think smart management can add value... in my case international equities.... but all of my domestic equities are index funds.

 

[Qs Laptop]

If You Still Own Actively Managed Stock Funds, Get Ready for Some Bad News:

https://www.barrons.com/articles/if...bad-news-51579691701?siteid=yhoof2&yptr=yahoo

Some quotes:

"Just 29% of active U.S. stock fund managers beat their benchmark after fees in 2019. That declined from 37% of funds beating their benchmarks in 2018, the average success rate over the past 15 years."

So 37% of fund managers have beaten their benchmarks for the past 15 years? I know they are not necessarily the same managers but I consider that to be pretty good odds.

"Finding a winner, based on past performance, is proving maddeningly hard. Only 12% of the 1,999 actively managed funds that beat their benchmark in 2019 went on to top their index in 2020.

Excuse me?

And only 11% of all active funds topped their index for two or three consecutive years from 2017 through 2019."

OK, but how many beat the benchmark in say, 15 of the last 20 years?
How about 12 of the last 20 years?
What was their overall return in those 20 years vs. 20 year of the benchmark?

Isn't that really the issue here? Overall returns over a long horizon?

 

[OldShooter]

... I am willing to buy managed funds for asset classes where I think smart management can add value... in my case international equities.... ...

This seems atypical behavior for you. How have your foreign stock pickers done against their benchmarks over, say, five and ten year periods? Trust but verify.

... Isn't that really the issue here? Overall returns over a long horizon?

Of course, but rather than pick at the Barron's piece, you should search for and read a sampling of the S&P SPIVA reports comparing active to passive and giving ten and fifteen year comparisons. Those reports have been coming out every six months for close to twenty years and they are all the same: Over long periods a single-digit percentage of active funds beat their benchmarks. Like 5%.

There is older data, too, like Nobel prize winner Michael Jensen's 1967 PhD paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153). From the abstract: "The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance."

When you have read the SPIVA reports, do a similar search for the S&P Manager Persistence reports which examine whether successful managers' results "persist" in future periods. Those reports are all the same, too. No persistence beyond what you'd expect from random results. That is really the killer: Winners can't be predicted.

The situation here is that no amount of skill can predict the results of a random process, which is basically what stock market behavior is these days. It hasn't always been that way. It wasn't in the days of Ben Graham and of Warren Buffett's early successes. That's why belief in the existence of market skill seems so intuitive and hence hard to shake.

 

[pb4uski]

This seems atypical behavior for you. How have your foreign stock pickers done against their benchmarks over, say, five and ten year periods? Trust but verify ....

1 year..... 21.91% vs 21.51%
3 years.... 9.20% vs 9.87%
5 years.... 6.80% vs 5.85%
9 years.... 5.82% vs 4.47% (most available)

ER..........0.39% vs 0.11%

 

[pb4uski]

Finding a winner, based on past performance, is proving maddeningly hard. Only 12% of the 1,999 actively managed funds that beat their benchmark in 2019 went on to top their index in 2020.

Excuse me?

I emailed the author and asked if I could borrow his crystal ball and that he should go wake up his editor. His response:

We’ll fix it. Thanks for the catch.

 

[OldShooter]

1 year..... 21.91% vs 21.51%
3 years.... 9.20% vs 9.87%
5 years.... 6.80% vs 5.85%
9 years.... 5.82% vs 4.47% (most available)

ER..........0.39% vs 0.11%

Well, that's not too bad. These are total return numbers?

Are you picking sectors? Which ones? It looks like something has fallen out of favor in the past few years though.

 

[capjak]

Two active funds that used to be very popular (before the popularity of Index Funds) was Vanguard Wellesley and Wellington.

 

[pb4uski]

Well, that's not too bad. These are total return numbers?

Are you picking sectors? Which ones? It looks like something has fallen out of favor in the past few years though.

Yes... total return. Comparison is to VTIAX.... managed fund is international small-cap mostly in Eurpose and the Pacific.

 

[REWahoo]

Two active funds that used to be very popular (before the popularity of Index Funds) was Vanguard Wellesley and Wellington.

Made me look. I'd say they were both still very popular - although nowhere near the $540B size of the Vanguard 500 Index Fund.


Wellesley has grown from $41B in assets under management at the end of 2015 to $60B currently.

Wellesley has grown from $87B in assets under management at the end of 2015 to $113B currently.