Long term mutual funds much worse than benchmark

[arcyallen]

Quote:

Originally Posted by retire48in2018 I was looking more at criteria as to when to change an actively managed mutual fund. I understand looking at quarterly performance reports, management changes, etc. But, is there a quantitative approach as well? I don’t think it’s a good idea to change every quarter. I do know of some who buy/sell their mutual funds every quarter selecting among the best each quarter. I’ve had a few FA try to convince me of that approach. I could not get a way to simulate that - what would have happened last few years doing that ? It does not “feel” right to be buy/hold but changed the funds every quarter. I adjust AA annually.

I guess that would depend a lot on what you personally think of investing. I personally can't imagine (or recommend) making changes because a fund underperformed for a quarter, year, or even five years. I would, however, make an immediate change if the management style moved away from what I wanted. For me, the only way I'm going to invest in stock based investments is over very long periods of time, Warren Buffet style. If that's not you, that's OK, but you'd need to figure out you.

What FAs are telling your to change every quarter? That is an absolute surefire way to underperform, and it's horrible and I think it's frankly unethical advice. Like, literally, who gave you that advice (if you can share)? How a fund did last quarter has zero bearing on how it'll do next quarter. If the world's greatest investors tell you they don't know what's happening next year, let alone next quarter, I wouldn't trust a fund manager...or an FA...to know either.

What is your thought process when you change your AA every year? What inputs go into making that decision?

Does this answer your question? Or are you looking for more hard and fast numbers based answers?

[Exchme]

OP seems unaware of the tricks of the active fund managers.

The easiest one is an inappropriate benchmark, comparing a higher risk active fund to a lower risk benchmark. So if the fund is high risk, just pick the S&P 500 as a benchmark and voila, outperformance on average.

Next trick - ignore tax inefficiencies of active management. While they can't know your tax situation, you should look before you decide if you are really getting value.

Next trick - Only look at the performance of the underlying fund and ignore the AUM fee taken off the top.

For really unscrupulous types - use the price of the comparison benchmark, ignoring dividends.

For ones giving you the soft soap about long term performance, cherry picking the start date is another golden ticket. Maybe they can show outperformance to the start of the fund, but maybe the last fund closed in failure and then this new one opened, papering over the fact that the strategy occasionally melts down.

Bottom line, Morningstar studies this every quarter and the findings are consistent. Over any 10-15 year period, only a few active managers really beat appropriate benchmarks by enough to cover their own fees and the ones that outperform change over time.

[arcyallen]

Quote:

Originally Posted by Exchme OP seems unaware of the tricks of the active fund managers. ... Next trick - Only look at the performance of the underlying fund and ignore the AUM fee taken off the top. ... For really unscrupulous types - use the price of the comparison benchmark, ignoring dividends.

While there may be plenty of legitimate concerns you may have regarding active funds, I think you're demonizing active fund companies for things they don't do or can't know.

Regarding the first one, you're confusing the payment of the people actually managing the fund money (that would be the internal expense ratio) with the payment the client makes to the FA holding the client's hand - a possible AUM fee. The fund company has zero idea how much any client is paying an FA, let alone all of them. Is it a number for the client and FA to take into consideration? Yes. The fund company? Impossible.

For the second one: Can you give just one example of this happening? Ever? If you do, that's great. I'm EAGER to hear about it. If not, this is just spreading misinformation.

[OverThinkMuch]

Quote:

Originally Posted by Exchme Bottom line, Morningstar studies this every quarter and the findings are consistent. Over any 10-15 year period, only a few active managers really beat appropriate benchmarks by enough to cover their own fees and the ones that outperform change over time.

S&P produces high quality SPIVA reports comparing active to passive investing. They track numerous biases like survivorship and style drift. Their 2021 report shows over 10 years, 86% of active mutual funds underperformed their benchmark.
https://www.spglobal.com/spdji/en/do...21.pdf#page=10

Unfortunately SPIVA tracks underperformance, not outperformance, so I can't cite what fraction of the other 14% tied vs beat their index. But we're talking about 165 surviving funds that either tied or beat their index. I find it very hard to believe only a single digit number beat their index.
https://www.spglobal.com/spdji/en/do...21.pdf#page=12

What is your source of the claim "only a few" beat the index over 10 years?

[HawkOwl]

Quote:

Originally Posted by OverThinkMuch S&P produces high quality SPIVA reports comparing active to passive investing. They track numerous biases like survivorship and style drift. Their 2021 report shows over 10 years, 86% of active mutual funds underperformed their benchmark. https://www.spglobal.com/spdji/en/do...21.pdf#page=10 Unfortunately SPIVA tracks underperformance, not outperformance, so I can't cite what fraction of the other 14% tied or beat their index. But we're talking about 165 surviving funds that either tied or beat their index. I find it very hard to believe only a single digit number beat their index. https://www.spglobal.com/spdji/en/do...21.pdf#page=12 What is your source of the claim "only a few" beat the index over 10 years?

Good article, but I am confused about this portion. If 86% of actively managed mutual funds fail to beat their index, doesn’t that REQUIRE that 14% tie or beat the index? Isn’t the answer 100%?

Anyway, good reference. I don’t have any trouble believing that only a single digit number or low double digits beat their index AFTER taking into account fees and survivor bias.

Here is a compilation of articles that casts doubt on the idea that an investor can predict which funds will be in that 14%.

https://www.bogleheads.org/wiki/US_m...rmance_studies

[OverThinkMuch]

HawkEye - poorly worded on my part, I've changed that to "tie vs beat" their index. I don't know if 0.1% or 13.9% beat the index out of the total 14.0%. If only 1/4th of the 14% beat, that would still be dozens of funds rather than the cliamed "few funds".

Also, if you're linking directly from the Active Investment forum to the Bogleheads forum, I think you might be in the wrong place. This isn't the place to champion passive investment.

[VanWinkle]

Quote:

Originally Posted by OverThinkMuch HawkEye - poorly worded on my part, I've changed that to "tie vs beat" their index. I don't know if 0.1% or 13.9% beat the index out of the total 14.0%. If only 1/4th of the 14% beat, that would still be dozens of funds rather than the cliamed "few funds". Also, if you're linking directly from the Active Investment forum to the Bogleheads forum, I think you might be in the wrong place. This isn't the place to champion passive investment.

Those that are misinformed can always use some passive investment information to help them make an informed decision before placing their "bets" that an active manager is good instead of lucky. I believe in low cost active management for a portion of my investments. I do not believe in choosing hot funds each year hoping to score an early retirement.

VW

[Rianne]

In 2012 we set our portfolio AA 60/40, variety of stock index funds and bond funds (not managed). Left it there until April 2022 when we sold all bonds funds to laddered CDs and treasuries. Basically a safer hedge than bond funds. No withdrawal, only reinvesting dividends.

Our benchmark from 2012 to date 1/14/2023 has earned us 7.2% per year. How simple is that? The funds were basic VG funds. Mostly total stock market and S&P. IMO, it’s not worth the time to over analyze specific funds. A portfolio manager may move things around, buy and sell different funds chasing growth for a year or two? We listened to Bob Brinker years ago. Following his advice for low cost mutual funds. We’re there. Who wouldn’t grab 7%/year growth?

[VanWinkle]

Quote:

Originally Posted by Rianne In 2012 we set our portfolio AA 60/40, variety of stock index funds and bond funds (not managed). Left it there until April 2022 when we sold all bonds funds to laddered CDs and treasuries. Basically a safer hedge than bond funds. No withdrawal, only reinvesting dividends. Our benchmark from 2012 to date 1/14/2023 has earned us 7.2% per year. How simple is that? The funds were basic VG funds. Mostly total stock market and S&P. IMO, it’s not worth the time to over analyze specific funds. A portfolio manager may move things around, buy and sell different funds chasing growth for a year or two? We listened to Bob Brinker years ago. Following his advice for low cost mutual funds. We’re there. Who wouldn’t grab 7%/year growth?

+1, well said.