indexing lagged against 15 largest no load funds

[mathjak107]

this months kipplingers magazine has an article which has some interesting but not surprising results.

out of the 15 largest no load stock funds ranked by dollars , using active management all but 3 beat vangards market index , total market index and international index funds over the last years. even after expenses which ran about .50% -.60% higher in most cases for the active management . the funds beat the index funds by about 2% or more a year over the 10 years the international funds beat the indexes by almost 3-4 % .......


remember folks its not just about low er. its about total performance. its okay to pay a little more in er if it brings you better returns.

[cute fuzzy bunny]

Its also okay to not cherry pick a year or two that produces the results that prove out a theory.

How about a nice 10-20 year run showing how an actively managed fund beat an equivalent index during the same time period?

But its true that its okay to pay a little more to bring in better returns. I just havent seen that happen in a predictable, long term manner.

But do show me wrong!

Quote:

Originally Posted by mathjak107 out of the 15 largest no load stock funds ranked by dollars , using active management all but 3 beat vangards market index , total market index and international index funds over the last years. even after expenses which ran about .50% -.60% higher in most cases for the active management . the funds beat the index funds by about 2% or more a year over the 10 years the international funds beat the indexes by almost 3-4 % ....... remember folks its not just about low er. its about total performance. its okay to pay a little more in er if it brings you better returns.

This happens every year! - The main problem of course is that winners are different every year!

[mathjak107]

the article is talking 5 yr and 10 year average long term returns not 1 year .

the 20 largest funds beat the indexes long term average returns

[justin]

The largest funds are the largest funds for one reason: they outperformed in the past. Everyone looked at their past results, and bought "the winners". The winners assets under management continued to balloon. Look at who was buying these funds 5-10 years ago and what their assets under management were 5-10 years ago. You'll probably see huge cash inflows in the last 2-3 years, which is AFTER when many of these funds outperformed.

Think about the opposite case - those funds that did really horribly in the past. Are people dumping all their new money into funds that morningstar has at 1 and 2 stars? If a fund underperforms an index for a 3 or 5 year period, and on top of that charges you an additional 60 basis points for expenses, you'll probably see net outflows from that fund (or near zero net inflows).

Morningstar has a new tool that lets you view the assets-under-management-weighted performance results between funds. This measure (if Morningstar calculated it correctly) will show you these "hot funds" had a lot of new money coming in in the last couple of years.

[lswswein]

Hi
The article you are referencing is here
http://www.kiplinger.com/printstory.php?pid=6555

The article does not understand the concept of comparing apples to apples. It compares everything to the S&P500 which is not what the funds listed are investing in. S&P500 is Large growth but some of these are investing in small & value areas.

-h

[saluki9]

Quote:

Originally Posted by mathjak107 the article is talking 5 yr and 10 year average long term returns not 1 year . the 20 largest funds beat the indexes long term average returns

Great, please tell us which funds will do this over the next 10

[LOL!]

I am not surprised because one should not be comparing to index funds. One should be comparing to a properly allocated asset allocation with large, small, international equities. You've got to get the right benchmark or it ain't a comparison.

Now that you have teased us, name some names.

Edit: just saw lswswein's post.

Edit: We own 6 of the funds mentioned.

[mathjak107]

i own 6 of them too

[cute fuzzy bunny]

Five and ten year are not long terms. Factoring in the 2000-2002 dive this is a very friendly period to cherry pick some winners out of.

I did own a half dozen of these funds and got out. Still hold one (windsor II) and am looking to get rid of that one in favor of its equivalent index.

The evidence is pretty heavily weighted that in periods of 20+ years, nobody beats the market. But there are options that cost more and create more taxable events, which arent the things i'm looking for.

[Alex]

Aside from the fact that the article doesn't have these funds compared against their correct indexes, unless you are holding all of your assets in tax deffered accounts, the total return doesn't mean much and the 'tax adjusted' return is much more important. Index funds are very tax efficient. Here's a comparison between a few of the funds from the article: From Morningstar:

VTSMX (total market) 3yr 5yr 10yr
Pretax Return 11.26 7.42 8.57
Tax-adjusted Return 10.94 7.07 8.03
% Rank in Category 18 18 17
Tax Cost Ratio 0.29 0.33 0.50

Vanguard Wellington
Pretax Return 10.93 8.94 9.79
Tax-adjusted Return 9.46 7.64 7.69
% Rank in Category 10 7 9
Tax Cost Ratio 1.33 1.19 1.9

PRIMECAP
Pretax Return 12.97 8.42 12.64
Tax-adjusted Return 12.39 8.03 11.71
% Rank in Category 8 11 2
Tax Cost Ratio 0.51 0.36 0.83

Fidelity Magellan
Pretax Return 7.04 3.17 6.99
Tax-adjusted Return 5.41 2.10 5.73
% Rank in Category 65 53 33
Tax Cost Ratio 1.52 1.04 1.18

Fideltiy Growth Company
Pretax Return 11.72 5.58 9.56
Tax-adjusted Return 11.70 5.57 8.63
% Rank in Category 5 12 7
Tax Cost Ratio 0.02 0.01 0.85

Windsor II
Pretax Return 14.40 10.12 10.24
Tax-adjusted Return 13.63 9.42 8.65
% Rank in Category 9 12 17
Tax Cost Ratio 0.67 0.64 1.44


Total Index gets close enough for me. I don't need the risk of performance chasing for 0.5% a year. I'd rather keep it simple.

[spideyrdpd]

Talk about shooting the messenger.
I also own a few of these. Many of them in the 401k soon to be a 403b with fidelity.

[ats5g]

Interesting that all the large value funds in the article [DODGX, PRFDX, and VWNFX] all underperformed the large value indices/funds in 2006 [VIVAX, R 1000V, S&P LV, Morningstar LV].

- Alec

[lswswein]

When doing an article like this the "right" way to do analysis would be you compare the funds to their respective indices - use morningstar for the domestic fund analysis and use the appropraite indices from MSCI for the Intl funds. Morningstar is not the right thing to use for Intl because it does not distinguish Value, Growth, hedged etc.

But if you do that analysis I guess you would find that the Index either beats or is really close. And kiplinger would then not be bale to sell any more magazines.

Its very easy to look good for any fund manager when the S&P had over the last 5 yrs only recovered to where it was before. If you just add some Bonds along with any combination of Value, Small or Intl you can trounce the S&P. Lets look at numbers starting in the 1980's and then we can evaluate how many funds stayed within the asset class and beat their Index. Also the funds need to stay close to the index all the time not get a big lead and then lag the index ie we need to look at Morningstar Investor returns also.

very difficult and I guess we might find a couple but that's it

-h

[jazz4cash]

I guess I really don't get it. I didn't think the point of the article was to compare Fund A to Fund B, etc., but just a buy/sell/ hold rating on large no-load funds.....maybe because, presumably they are widely held and lots of folks would be interested. Maybe also because of the burden of managing a mega fund.

[lswswein]

Quote:

Originally Posted by jazz4cash I guess I really don't get it. I didn't think the point of the article was to compare Fund A to Fund B, etc., but just a buy/sell/ hold rating on large no-load funds.....maybe because, presumably they are widely held and lots of folks would be interested. Maybe also because of the burden of managing a mega fund.

The thing which I did not like about the article is this: It is a market timing article - plain and simple. And to support his market timing, he uses junk data. Whatever happened to have an asset allocation and rebalancing and sticking with it. If you follow the article you will stay with all your active managed funds and market time them

The only saving grace about it is the fact that almost all of the less than 1% and atleast the Dodge & cox large is a value shop which doesn't like to churn its funds. The fidelity options are all high turnover along with high expense ratios.
-h

[ERD50]

Wouldn't it also be a better comparison to look at the 15 largest funds at the *beginning* of each time period?

Else, isn't it a form of survivorship bias? We cannot know which funds will be the largest in 5 or 10 years, we can only know which are the largest today. So, if 'large' is our criteria, let's at least back-test with the largest from the start - right?

Like justin said, the ones that did well got more money pumped into them over the years, making them 'larger' - it's a self-fulfilling prophecy!

-ERD50

[jIMOh]

Quote:

Originally Posted by lswswein Hi The article you are referencing is here http://www.kiplinger.com/printstory.php?pid=6555 The article does not understand the concept of comparing apples to apples. It compares everything to the S&P500 which is not what the funds listed are investing in. S&P500 is Large growth but some of these are investing in small & value areas. -h

I'd not discount that too much... if one compares S&P 500 ("500 largest") to Wilshire 5000 ("total market"), it has been proven that the 500 largest contribute something like 75% of the performance of the 5000.

So any "equity" position, IMO needs to benchmarked against S&P, because that is considered a proxy for the market. It is not the whole market, but it's enough to be an apples to oranges comparison.

The comparison should also include funds managed in a similar fashion.

I examine based on holdings as much as philosophy. I own PRFDX, mentioned in the article, and it is my core fund. It owns about 100 companies in the S&P 500 when I examine its prospectus each year. IMO this is what I want- pick around 100 companies to "beat" the index of 500 companies.

Add to that that dividends account for between 66-75% of the S&P 500 30 year performance, and a fund like PRFDX has twice the yield of the S&P 500, I think this is a good way to invest (dividends matter/ dividends rule).

Apples and oranges are both fruits. It's OK to compare them. I happen to like eating both.

[eridanus]

Hmmm.

http://finance.yahoo.com/q/bc?t=5y&s...=m&q=l&c=vtsmx
http://finance.yahoo.com/q/bc?t=5y&s...=m&q=l&c=vfinx

http://finance.yahoo.com/q/bc?t=my&s...=m&q=l&c=vtsmx
http://finance.yahoo.com/q/bc?s=PRFD...=m&q=l&c=vfinx


Can the "active funds are better!" crowd please look into their crystal balls and tell us which funds will have done better than VTSMX over a ten year period ending on January 2017. Thanks.

[ERD50]

Quote:

Originally Posted by eridanus Hmmm. http://finance.yahoo.com/q/bc?t=5y&s...=m&q=l&c=vtsmx http://finance.yahoo.com/q/bc?t=5y&s...=m&q=l&c=vfinx http://finance.yahoo.com/q/bc?t=my&s...=m&q=l&c=vtsmx http://finance.yahoo.com/q/bc?s=PRFD...=m&q=l&c=vfinx Can the "active funds are better!" crowd please look into their crystal balls and tell us which funds will have done better than VTSMX over a ten year period ending on January 2017. Thanks.

Trouble is, those charts (AFAIK) do *not* include dividends. Tough to compare funds over ten years when the divs may be significantly different.

Anyone know of a good charting web site that includes dividends?

-ERD50