Some Active beats Indexing

[NW-Bound]

Quote:

Originally Posted by ERD50 ... I don't think the W's do a strict rebalancing - they seem to have some magic something. I don't think their performance can be duplicated with merely rebalancing a few index funds...

These are truly active funds. Their managers have been on video interviews posted at Vanguard stressing that they are stock pickers, not indexers. More than having only 40% in stocks, Wellesley definitely has a conservative stance in regard to P/E; most if not all of its holdings therefore are dividend-paying stocks. I would be surprised to see any of the high P/E growth stocks in Wellesley. Even so, Wellesley surely churns its holdings. Its annual portfolio turnover is 60%. It does not get that high by mere rebalancing.

Wellington's stock picking style is more aggressive. Hence, its daily price fluctuations are often a lot more than those of Wellesley, relative to the 1.5x higher equity AA (60% stock).

PS. Neither of these two funds beat the market every year, or even a 60/40 (Wellington) or 40/60 (Wellesley) index strategy. However, in the long run, long meaning decades, they match the S&P long-term growth, but without the volatility. What they trail in go-go years, they make it up by crashing less in recessions.

[rdy2go]

Just to see how well American Funds are doing vs the S&P 500 over the last ten years, I went to Yahoo Finance and did a comparison chart of three large American Funds to GSPC (S&P500). Personally, I am letting Wellesley and Wellington handle my retirement money and Wellesley is kicking Wellington's butt so far this year.

GSPC- (S&P 500) +63.2%
AMRMX - (American Mut Fund) +28.75%
AGTHX - (Growth Fund of America) +27.46%
AIVSX - (Inv. Co. of America) +4.77%

[Gone4Good]

Quote:

Originally Posted by REWahoo Ah, but then we'd have to forego chickenheartedness and find the courage to rebalance when the fit hits the shan like it did in 08/09.

It is funny how everyone is a stouthearted hero when the market is roaring but once we experience a little downturn like earlier this year and all of a sudden you start seeing threads pop up about going to cash and how the market looks like 1932.

heh-heh-heh as some are known to say.

[ERD50]

Too tedious to embed all the quotes, but I think anyone can follow along by looking back a few posts:

Quote:

Originally Posted by youbet They seem to do OK, but, as you say, index funds are better! ...

Did I say that?

Studies show that few actively managed funds beat their indexes, and the ones mentioned by the OP appear to have failed as well. That's why I said 'why bother' with that fund.

Quote:

Originally Posted by youbet Dunno. Minority of what? What are the numbers? What indexes would they lag? That always seems confusing. And as the Wellesley managers make changes, such as tweaks to the duration of the bond portion, do you change the indexes you'd compare to at the same time? How do you do that?

I'm sure you are familiar with the many studies that show only a minority of actively managed funds beat the indexes, and fewer still do it over longer time frames. I google it from time to time, to see if it still holds, and it always seems to.

As far as which index to compare, I look at that in a pragmatic way, rather then the technical way you are describing. I may chose to invest in X or Y. But that doesn't mean my choice Y has to attempt to duplicate every move and allocation that X does. It's just a choice, and we will see how it plays out over time.

Quote:

Originally Posted by youbet The overwhelming majority of my equity investments are in broad based, common indexes such as TSM or S&P 500 or MSCI Developed, etc. But I'm never quite sure if I've optimized the percentages or even picked exactly the right ones. For example, do you prefer the market completion index to the mid-cap index? Or the Schwab 1000 index to the S&P 500 index? That's why I have my son's $$$ in actively managed balanced funds which target a typical AA for his age and personal situation. I don't want to make the choices for him and be responsible for timing rebalancing.

I'm never sure if I've optimized anything either, and don't worry about knowing the un-knowable. One segment (mid-cap, small-cap, etc) will do better here and there, but who knows going forward? Over time, things seem to even out. I'm happy (maybe even dumb and happy?) with a loose AA based mostly on SPY and a Total Bond Index fund.

I don't follow your 'broad brush' comments in other posts. If we are talking about active versus passive funds in general, well that is a broad brush view, no bones about it. Then there was the specific American Fund - not broad brush, a comparison to SPY, as an example.

Vanguard's Wellesley and Wellington specifically have done amazingly well over the long run. I'm puzzled by that - if it was knowledge based, why isn't it repeated by more active funds? Do they really have the 'secret sauce'? Can it be taught to the next managers (seems so, they've been on a long run)?


PerfCharts - StockCharts.com - Free Charts

Slide the bar to the full 15 years, and Wellesley is impressive.

-ERD50

[rdy2go]

Looking at that chart makes me want to dump Wellington! Wellesley has done a great job, hasn't it!

[dallas27]

It's all very simple. Do you want to try to be the hot superstar and take the risks of not being the "one", or do you want a guarantee at being the benchmark itself which is the measuring stick by which hotness is even measured.


Sent from my iPhone using Early Retirement Forum

[youbet]

Quote:

Originally Posted by dallas27 It's all very simple. Do you want to try to be the hot superstar and take the risks of not being the "one", or do you want a guarantee at being the benchmark itself which is the measuring stick by which hotness is even measured. Sent from my iPhone using Early Retirement Forum

Which single benchmark do you have 100% of your investments in? Are you in, say, 100% S&P 500 so that you can be "guaranteed" at being the benchmark itself?

[youbet]

Quote:

Originally Posted by ERD50 Slide the bar to the full 15 years, and Wellesley is impressive.

Yep, sure is. That's why you won't see me on the "all actively managed funds suck" bandwagon. Some do seem to do OK.

I insist on no-load and relatively low ER funds whether they are actively managed or passively indexed. I don't insist on an "index only" approach. (Although my portfolio is dominated by index funds.)

I like Wellesley. I like the balanced funds available in my 401k. Those are simply a mix of S&P 500, Int Developed and Total bond indexes in various AA's which they actively rebalance for you. ER's are very competitive vs single category index funds too.

My "broad brush" comment was simply expressing my observation that it's common on this forum and on the Boglehead forum to think of "actively managed funds" as all having front end loads, high ER's, 12b-1 fees and dumb as a stump management. And that index funds are all based on broad indexes (TSM, Developed International, etc.). In fact, some actively managed funds, like Wellesley or some target funds or balanced funds, have no loads, no 12b-1 fees, reasonable ERs and apparently competent managers. And some index funds are based on very focused indexes tracking focused, non-diversified market segments that could lead investors far astray from overall market performance.

I noticed in the nice chart you presented that you compared Wellesley and Wellington to the S&P 500. When you evaluate the performance of your own portfolio, what single index do you use? Also the S&P 500?

Do you consider yourself as having a true passive index fund based portfolio (a few broad based index funds you hold passively for the long term only rebalancing periodically) or do you consider yourself as having an active portfolio based on index funds but where you tweak AA from time to time and even trade some individual stocks and focused index funds and that sort of thing?

Edit: I went and looked at one of the actively managed funds within my 401k to refresh myself on exactly what it's holding and the goal/strategy. It's called "Balanced Fund I."

Quote:

48%S&P 500/12%MSCI EAFE ND/40%BC Agg TR --- ER = 0.044 --- No load

It basically holds three index funds (available separately if you wish) and actively rebalances for you. The prospectus says they might modify the AA incrementally but only with prior announcement.

I left this fund a number of years ago because I wanted to call the exact AA myself and include some small and mid cap exposure and a bit more international. So far, drats, my blend (all indexes) hasn't done as well as the actively managed fund I left mainly due to international and small cap lagging large cap. Soooooo....... Ya never know.

[ERD50]

Quote:

Originally Posted by youbet ... My "broad brush" comment was simply expressing my observation that it's common on this forum and on the Boglehead forum to think of "actively managed funds" as all having front end loads, high ER's, 12b-1 fees and dumb as a stump management. ...

I won't re-quote it all, I'm pretty much in agreement across the board, just a few points...

(Just kidding a bit here - in case that doesn't come across: ) I think maybe your 'broad brush' comment is a bit too 'broad brush' itself! Yes, you have a point, but then again, there are a lot of Wellesley and Wellington fans here (not sure about BogleHeads, I don't spend much time there, unless someone links from here - though I do like their 'wikis').

Quote:

Originally Posted by youbet ... I noticed in the nice chart you presented that you compared Wellesley and Wellington to the S&P 500. When you evaluate the performance of your own portfolio, what single index do you use? Also the S&P 500?

I've actually gotten pretty laid back about all this over the years, so let me explain that first. My first step in 'laid-backish-ness' was noting how portfolio survival rates were pretty similar over a broad range of AAs ( ~40/60 ~ 95/5). The range of ending portfolio values widens with increasing equity exposure, but survival is similar. So that led me to not worrying much about any specific AA - go for a walk instead!

Second step was the studies that showed that the highly revered (and seemingly helpful sell high-buy low approach) process of re-balancing really made no/little difference either, and sometimes hurts (selling into a long, slow bull)! So that led me to not worrying much about rebalancing - spend some time on a hobby instead!

All the other sector divisions seem to just rotate in/out - can I really help myself by picking some specific blend? Or will I hurt myself? Take a nap instead!

I've become pretty much an Alfred E. Neuman - "What, me worry?" type when it comes to all this.

So bottom line, there are other things that drive my choices. I'm pretty aggressive, 70/30 ~ 85/15 I guess (have not even checked in a while). I keep some fixed, am moving towards total bond index rather than some bond sectors I had before, but to me that's just details, no worries. For my equities, SPY is my default, and I don't worry much about looking at anything else. Though last year I did move much of my fixed and SPY to BRK in my taxable account to reduce divs, so that I could maximize my ROTH conversions before pension/SS come into play.

Throw in a few testosterone plays along the way for good measure. That's about it.

-ERD50

[ERD50]

RE:
http://stockcharts.com/freecharts/pe...WIAX,VWENX,SPY

Slide the bar to the full 15 years, and Wellesley is impressive.

Quote:

Originally Posted by rdy2go Looking at that chart makes me want to dump Wellington! Wellesley has done a great job, hasn't it!

Considering the targets for Wellesley is something like (going from memory here) 40/60, and Wellington is 60/40, the performance difference isn't all that great, and I would have expected Wellington to lead over the long run.

Wellesley certainly has done a great job. Again, it really makes me wonder why more active managed funds aren't doing this well. Did the managers sell their soul at the crossroads?

-ERD50

[ERD50]

And just for yucks, look at this chart:

PerfCharts - StockCharts.com - Free Charts

(again, select ALL for the time frame). The total time frame is a bit shorter due to the life of some funds, so SPY actually does a bit better than VWIAX in this snapshot.

VWIAX = Wellesley; VTINX = Retirement Fund (30/70); and vbtlx - Total Bond Fund

But just eyeball a balance of SPY and VBTLX, and VWIAX sure looks to outperform that blend. VTINX doesn't seem to be getting the full benefit of 30% equities? It seems to hug the bond fund pretty close?

Just eyeball stuff, you could download the numbers from Yahoo and make your own charts - I'm gonna go run some errands instead!


-ERD50

[Chuckanut]

Quote:

Originally Posted by ERD50 PerfCharts - StockCharts.com - Free Charts Slide the bar to the full 15 years, and Wellesley is impressive. -ERD50

PSSSSTTTTTTT...... Wellesly. We need some t-shirts made with that printed on them.

[ERD50]

Quote:

Originally Posted by Chuckanut PSSSSTTTTTTT...... Wellesly. We need some t-shirts made with that printed on them.

That would be perfect for the occasional meet-ups that some have had! Sure would be easy to pick the er-org member out from the crowd!

-ERD50

[Chuckanut]

Looking at a few charts I get the impression that for the last years, Wellesly's big advantage was not being clobbered in the 08-09 crash. While it went down it went down a lot less than the other funds. These other funds then took quite a while to catch up with Wellesly.

From what I can see Wellesly management is very good at taking a bit more risk ** to get this much extra benefit ****. In other words, they seem to have a very good risk/reward ratio.

[Gone4Good]

Quote:

Originally Posted by ERD50 Slide the bar to the full 15 years, and Wellesley is impressive.

A good chunk of that 15-year outperformance comes from simply missing the tech meltdown at the start of that time period.

Not trying to take anything way from Wellesley and Wellington management. There was tremendous pressure on fund managers to load up on the bubble stocks so as not to fall behind their competitors. So kudos to them for missing the aftermath.

It does beg the question, though, of how badly they lagged prior to the 2000 rout. If they didn't, or not that much, that would be a truly impressive display of market timing on their part.

I recall investing during that time and it was no secret that the equity market was silly (e.g. Palm's 10% float trading at higher market cap than 3M who owned the other 90% of Palm giving all of 3M a negative net worth). But who had the cajones to short Palm even though it was so clearly "easy money"? Not me.

But skipping the rally, and missing the tumble, was a pretty easy thing to do for stock pickers who weren't chasing momentum.

Quote:

Originally Posted by ERD50 Considering the targets for Wellesley is something like (going from memory here) 40/60, and Wellington is 60/40, the performance difference isn't all that great, and I would have expected Wellington to lead over the long run. Wellesley certainly has done a great job. Again, it really makes me wonder why more active managed funds aren't doing this well. Did the managers sell their soul at the crossroads? -ERD50

That surprised me too. But if you look at Wellesley's portfolio mix, the bond portion is intermediate corporates. If you add Vangaurd's int-corp index to the graph, the relative performance makes a bit more sense.

Corp bonds have done really well over the past 15 years. Much better than I would have thought.

But still, there are periods where a 60% holding of corp's seemed like it should have held them back more than they did.

So, yeah, it looks like the guys and gals at Wellesley are earning their paychecks.

[golfnut]

I try to look for good performing funds (with at least a 15 yr history) with low exp. ratios. I have a mix of index and active (mostly Vanguard with a few Fidelity funds).

It's like going to Vegas and staying at budget hotels (index funds/low cost active funds) or 5 star hotels (high cost active funds). One will come home with more money staying at the budget hotel.

Just can't fathom why people invest in high expense ratio or front loaded funds.

[Running_Man]

Or you could look at how SDOG has performed against the S&P500 or the stocks I have owned through most of the time period from 2012. I am not sure what index corresponds to holding individual stocks managed at 25% of a portfolio, though I did recently sell HRL for replacement with ACN due to valuation concerns

PerfCharts - StockCharts.com - Free Charts

[NW-Bound]

Quote:

Originally Posted by Gone4Good A good chunk of that 15-year outperformance comes from simply missing the tech meltdown at the start of that time period. Not trying to take anything way from Wellesley and Wellington management. There was tremendous pressure on fund managers to load up on the bubble stocks so as not to fall behind their competitors. So kudos to them for missing the aftermath. It does beg the question, though, of how badly they lagged prior to the 2000 rout. If they didn't, or not that much, that would be a truly impressive display of market timing on their part. I recall investing during that time and it was no secret that the equity market was silly (e.g. Palm's 10% float trading at higher market cap than 3M who owned the other 90% of Palm giving all of 3M a negative net worth). But who had the cajones to short Palm even though it was so clearly "easy money"? Not me...

The parent company was 3Com, not 3M. I owned 3Com during that time, and watched in amazement the Palm mania.

Also during that time, some MF managers got scared of the tech stock mania, and started to sell to raise cash. Some irate MF holders called in to berate them for doing so. They said they sent in their money to be 100% invested, not be kept in cash.

This shows how hard an MF manager's job is during stock mania periods. You trail the market by selling too early, they call you names. You stay in, and crash along with the market, they call you names. And when the market is bottoming, you want to buy, but people are still redeeming their shares, so where is the fresh money for you to buy?

[NW-Bound]

I have told this story a few times, but it is worth mentioning again.

In 2000, Soros made some bets on some tech stocks, and lost big money. Julian Robertson, another hedge fund manager, shorted dot-coms but was too early. He was wiped out and had to close his Tiger Fund. So, you can go long or you can go short and if your timing is wrong by a month or two you still lose.

And then there's the famed John Templeton. He waited until it was right, shorted some stocks which then went bankrupt and he never did have to cover his shorts. He made $80M for himself, as he already retired then and no longer managed other people's money. It was just a lark for Templeton, as this $80M was puny compared to his billionaire status. He just could not sit still seeing people going stupid over dotcoms.

In an interview afterwards, Templeton said that he liked to "help" people. He explained that when they were desperate to sell he bought from them (at the bottom of market). When they clamored to buy, he sold to them, even if he had to sell short.

Templeton is my hero.

[Mulligan]

Quote:

Originally Posted by NW-Bound The parent company was 3Com, not 3M. I owned 3Com during that time, and watched in amazement the Palm mania. Also during that time, some MF managers got scared of the tech stock mania, and started to sell to raise cash. Some irate MF holders called in to berate them for doing so. They said they sent in their money to be 100% invested, not be kept in cash. This shows how hard an MF manager's job is during stock mania periods. You trail the market by selling too early, they call you names. You stay in, and crash along with the market, they call you names. And when the market is bottoming, you want to buy, but people are still redeeming their shares, so where is the fresh money for you to buy?

Thanks for posting that. I was reading the above 3M reference and thinking I knew somebody owned Palm but it wasnt them. But I was going to accept it because my memory isn't always truthful to me anymore. To further test my memory, if not mistaken I think I lost a little bit of cash playing around with 3Com back in the day, too. Maybe one of those falling knife plays that never work.