David Snowball's October Commentary Is Now Available @PBKCM, it's a very good point but I think you're leaving out a couple of points that I'd love to have your perspective on. First, as long as 20 cents of every new dollar in the stock market goes to passive and 80% of that goes to market cap weighted passive, there's a lot of momentum behind the continued success of market cap indices. Unfortunately, saying active management is positioned to take advantage doesn't help at all with choosing one or more of the thousands of active managers.
Mark Hulbert wrote an article in May (
marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24) based on S&P research suggesting the chances of picking an active manager who can beat their benchmark was
5% over the last 1
5 years. In the best category, global equity, there was a 17% chance.
When the tide finally changes how high do you think the chances will be for someone to actually pick one or more managers who can beat their benchmark, market cap weighted index? And how many of those will be able to outperform to an extent that gets them out of the hole they're in now?
Second, I wonder a lot why the discussion tends to be dominated by active and passive with the assumption that passive means market cap weighted. If we start with an assumption that you're right, that market cap weighting is distorting the weighing machine but the scale will eventually win, why should we expect active managers to do better than other forms of passive, like equal weighting or factor based? I know other forms of passive are subject to the same argument as market cap weighting, but if one day everyone gives up on market cap passive and decides to put their money in dividend weighted passive, they might outperform 9
5% of active managers for the next 1
5 years.
Just for the record, I have always been and still am almost entirely invested in actively managed funds over passive. I just struggle sometimes with the idea that we're all trying to predict the future, almost no one has been able to do that in a reliable way but everyone who engages in these discussions wants us to believe that its a logical exercise and they have the best logic.
M* Removes All Active Fund Managers And Makes All Funds Passive I've noticed that the Contact Information has been missing for awhile too.
David Snowball's October Commentary Is Now Available Very interesting issue, David. Congrats.
On the Nifty 50 indexing issue, we have certainly considered the effects of indexing at our shop. Despite the growing number of smart beta products, over 80% of the AUM of all passive index funds remains invested in cap-weighted products.
Cap-weighted products are by nature momentum-based investments. When momentum is in vogue (such as we saw in the Nifty Fifty era), these products can perform well. But over time, we feel cap-weighting is a terrible way to invest.
We studied the Dow, the S&P 500 and Russell 1000 over time. It turns out that Fama's size effect works well in these larger cap indexes. Over time, there is a size penalty for the biggest companies of the index, and a size premium for the smaller companies of the index.
Bill Ackman wrote in his letter to shareholders in January 2016 that 20 cents of every new dollar invested in the stock market comes via a passive index-tracking fund, and that number grows every year.
Think about this: for every dollar that goes into SPY, 12 cents goes into the largest six stocks of the Dow. For every dollar that goes into XLP, 13 cents goes to Procter & Gamble. Similar story for the other sector ETFs.
Ben Graham wrote that the market is voting machine in the short run, and a weighing machine in the long run. That in the long run, the best businesses attract the most market capital. And that's the way it used to work before ETFs.
Now, the market is hit with a blizzard of crazy votes, and it is throwing the scale off. The largest companies aren't the largest because they are the best. They are the largest BECAUSE they are the largest (and get hit in the face with ETF inflows whether their business fundamentals justify it or not).
We believe actively traded mutual funds are in the best position to take advantage of the opportunities presented by passive indexing.
Keep up the good work, David.
Investors Need 8.9% Real Returns From Their Portfolios @bee EDV is a bit unusual in that it holds a portfolio with an extremely high duration. You've got a good idea in looking at zeros (like the AC target date funds) for other vehicles with high duration. (That's because for zeros, duration equals maturity; normally with LT bonds, duration is much less than maturity.)
But since BTTRX is a target date fund, its duration gets shorter and shorter. Its 202
5 target date means that it now has an 8 year duration. Even a decade ago it started with just an 18 year duration.
If you just need a 10 year history (and not all of 2016), you can try using PTTRX. Identical
5 year return to EDV. Over the earlier part of EDV's lifetime, it did a little better. It was more stable in 2008 (not rising quite as much) and 2009 (not falling quite as much), and outperformed in 2010.
Other long duration funds didn't track EDV nearly as well (i.e. were not nearly as wild) over 2008-2009. Maybe WHOSX (duration ranged between 16 and 23 years over the past decade) would be a passable substitute if you need to cover all of 2006.
Investors Need 8.9% Real Returns From Their Portfolios As I have expressed before, IMO; one may continue to name the ongoing markets since the big melt as still feeling the effects of policy(s) and that "this time is still different" and thus the "mean regression chart line" is progressive/dynamic, not static and has the baseline in "float" mode. The 2008/2009 market melt was/is an overwhelming shift in the financial marketplace that is still impacting and discovering its future path.In other words, jolts to the market come along that can take years to work their way through. There may or may not be an ultra long term static "mean regression chart line", but at least for these multi-year periods, it's dynamic.
Even assuming an ultimately constant mean, because of these jolts it seems one needs an extremely long time frame to compute that average - say 100 years or more, in order to include the jolt of the Great Depression, or maybe 1
50 years back to the panics of the late 1800s, or ... At some point you're essentially averaging the entire "modern" history of the stock market.
More info from the 1928-present NYU/Stern data set I've cited (this table was in the spreadsheet, they're not date ranges I selected):
Period S&P 500 3 mo Treas 10 Yr Treas
1928-2016 11.42% 3.46% 5.18%
1967-2016 11.45% 4.88% 7.08%
2007-2016 8.64% 0.74% 5.03%
. The S&P
500 is up "only" about 1
5% YTD. If it ends 2017 up 20%, that would raise arithmetic mean of 2007-2017 just to 9.68%. If you're a believer in a constant long term mean, that suggests that recovery from the 2008 jolt still has years to go.
