@dryflower, the studies along these lines do not model the reality correctly and so come up with incorrect conclusions when they generalize it.
Imagine, if you were to conduct a similar study of multiple choice test scores of all high school students over a number of tests with no selection criterion, you may conclude that the test scores across all students were determined more by luck than skill because random answering shows similar distribution. Or if there was skill that you could not reliably select students that had skill or that they showed no persistence or if it did it was because those students studied more broadly than others (took more risk). :-)
Studies that lie behind this indexing cult usually follow the same cyclic argument as follows, including the study linked in the other thread.
1. In the aggregate over all funds, the active funds do not perform over index funds.
But wait, you say, I do not select funds by throwing darts and there are a lot of bad funds. So what if I select the good funds?
2. Even if you were somehow able to select good funds they do not show persistence over time. So, it is futile.
But wait, you say, you require the fund to beat the index every year or in two consecutive periods and consider it a fail even if the fund underperforms in one period by a mere 0.5% while it gained by 2% in the previous period. So, it isn't necessary to be persistent in YOUR definition for the fund to do well over time.
3. But active funds in general do not beat indices over time. See 1 above.
See the cyclic argument?
I am waiting for somebody to do a simple study. Find the cumulative performance over a reasonable period of time of active funds selected with multiple criterion available at the beginning of the period and see if any of the criterion select for over performing funds with statistical significance. This is what models reality better. If none of the selection criterion comes out with a reliable way to select a fund, then there is a good case to make against choosing active funds
Because reality is complex, choosing a mathematical or statistical model to draw conclusions from is not trivial and requires some simplifying assumptions. That can lead to incorrect conclusions in the general case.
As a very simple example of incorrect modeling leading to incorrect conclusions, consider @mjg's charming anecdote in another thread of using probabilities to make shooting decisions in basketball (not to pick on @mjg here).
On the surface, it looks perfectly reasonable. The math is correct. So, the conclusion of going for 3 pointers should be valid, right? It might be, if the opposing coach is a total idiot as might happen in a junior team of 12 year olds. However, it does not apply in general because the reality is different for that simple modeling to apply.
When you have two opposing teams making strategic decisions in a zero sum game, it needs to be modeled with game theory rather than simple probability to reflect what happens in reality better. Game theory applied to this suggests that the fixed point equilibrium reduces the efficacy of the 3 pointers to a level where it provides no advantage over a 2 point attempt.
The plain English translation is that, if the 3 point tries start to win with higher probability in successive games, the opposing team will start to guard against 3 pointers more, which leaves them vulnerable to 2 point attacks and so a higher probability doing that, etc., until an equilibrium is reached.
So real world coach decisions are much more complex relying on luck and skill to outplay the other teams based on the players, how they are playing at that moment, probability of refs in that game to be lenient towards fouls in that game, the strengths or weaknesses of the opposing coach, etc. Good coaches do this by intuition and aren't helped by a probability calculator to consult. It is not just luck either.
Good fund managers and good coaches have a lot of things in common. :-)

FYI:
Regards,
Ted
http://www.marketwatch.com/story/investors-dilemma-performance-or-risk-2014-04-21/print?guid=8C9EF6D2-C95C-11E3-A72F-00212803FAD6

MFO Members: For what its worth department, the linkster's asset allocation at age 77.
Regards,
Ted
Money Market: .18%
Mutual Funds: 10.3% (All Equity Funds)
Individual Bonds & Preferred Stocks: 13.02%
Stocks; 76.5 %

Thanks for sharing, Ted. How many stocks do you own? Assume just a handful considering your philosophy of concentrating on best ideas. You certainly seem
to have a good feel for the market and the ability to keep a regular eye on your
investments.

@Ted. Ha! Pretty much "All In" looks like. You're a better man than I.
It's been 356 trading days since market dropped below 200 day average...and then only for 3 days.
It's been 683 days since we've spent any extended time (2-3 months) below 200 day average...back in fall of 2011.

MFO Members: For what its worth department, the linkster's asset allocation at age 77.
Regards,
Ted
Money Market: .18%
Mutual Funds: 10.3% (All Equity Funds)
Individual Bonds & Preferred Stocks: 13.02%
Stocks; 76.5 %

I have been advised to go with 20% equity, 50% bonds, 30% short term. Age are 80+78.
Assets are suitable in retirement to cover all estimated expenses to age 95.

I own a little in my Roth IRA. It's basically a bond fund plus a derivative to give you value-tilted stock market exposure, if I understand it right. If you think Bill Gross's bond fund can earn enough return to overcome the management fee, and if you believe in a value tilt, it makes sense as a slightly riskier alternative to an index fund. But it is extraordinarily un-tax efficient, so hold it only in a tax-advantaged account, and the super excess returns of the last 5 years won't be repeated since the glory days for bonds are almost certainly over.

Having chosen to be bonded at the hip to FIDO in my 403b, and facing 0.01% money market returns in the third year of a presidential cycle, with a US stock market that seems fairly to over-valued, and Ukraine, Iran, and China posing concerns, I wondered what others might choose from the following options: FNMIX (are emerging market bonds coming back?) which might offer more return; FFRHX (lower return with some experts claiming these funds aren't as safe as they seem - but FIDO has good bond analysts); FAGIX (high yield, an area which has usually done better than predicted).
These funds have redemption fees of 1% for 60 to 90 days, which shouldn't matter, since funds would only be moved to equities if there were a precipitous decline (and I'd be late to the party anyway). All lost varying amounts in 2008-9, and less in 2011; and I am retiring probably in 3 years, so income would be nice, but I can tolerate some volatility, if I am made whole in 5 to 7 years.
If you feel I have abused the site, keep the castigations brief. I can tolerate more risk than short-term bond funds offer. I'm about 65% in equities across my various retirement accounts, if that colors your answer. My wife and I can probably survive for a year or two on SS income, but she'd be complaining (I actually like beans and rice - with enough spices).

Thanks Old Skeet,
The main criticism I've fallen victim to for referencing this site is the fact that it's "play money". "Show me the money...where are the receipts".
O.K, fair enough.
Call me clueless, but to me this site is no different than any other data point to consider and personally I like the small investor feel the site has. I naturally take it with a grain of skeptism, but I hope everyone does this throughout Internet Investing Land.
Judging by the bold text in the Moosistory section of the site these "calls" are profitable about 50% of the time. To me, Long Term Treasuries (EDV or BTTRX) in a portfolio serve three purposes:
- They provide a coupon return better than cash so long a interest rates remain unchanged.
- They have the potential to be "bid up" as a result of a market correction when other market participants seek a "flight to safety" investment.
- They provide a coupon plus capital appreciation when interest rates fall. Remember Japan...rates could fall further here in the US if deflationary pressures reemerge.
EDV seem like a counter intuitive place to park money right now from a rising interest rate standoint, but as I mentioned above that is not the only scenario to consider. I don't subscribe to The Moose so I can't help paraphase the Moose's decisionmaking process for this switch.
Recently I posted a 5 year chart of BTTRX (Zero Coupon Long Duration Treasuries) and VTSMX (Total Stock Market Index). It appeared to me that a significant divergance exists between these two positions right now. It could go on for awhile, but for no other reason than to rebalance a portfoio I would be selling some of my equity winners (your outperforming equities funds) and buying some fix income (your underperforming fixed income funds).
Nothing wrong with employing basic periodic rebalancing.
Here the chart I was referring to that I created:

FYI:
Regards,
Ted
http://www.marketwatch.com/story/sp-500-marks-longest-win-streak-since-october-2014-04-21/print?guid=22D5B811-BD8D-4774-B163-C607BC77B2F6
Major Stock Indexes: http://markets.wsj.com/us

Hi Guys,
I am pleased that Jonathan Clements has come home to the WSJ. I missed his commonsense columns that were much more than just investment advice. Welcome back Jonathan.
His reintroductory article to his WSJ audience clearly shows that he will continue exploring life style issues in addition to investment topics. Clements has always believed that financial success is about more than money. In fact that’s the title of Chapter 21 in his most recent book.
The title of that book is “The Little Book of Main Street Money”. I’ve owned a copy for several years. Typical of all Clements writings, it is an informative, breezy and easy read.
I’ve hesitated to recommend it to the MFO membership because it devotes only a minor portion to investment advice. It is not sophisticated in that it covers many broad financial matters in a simplified format. It is a great introductory-like tutorial that might well satisfy the needs of very financially illiterate folks. In closing each brief chapter, Clements provides a short “street Smarts” tips section.
Clements is the only notable financial writer that I have personally met. At least 15 years ago he lived in Metuchen, New Jersey; so did my sister. On a visit, our paths accidentally crossed while walking around a lake in a State park. I believe he initiated a conversation.
We talked a little about investing. The discussion turned to decision making, and the errors that even professionals are guilty of. That allowed me to introduce my favorite sports example of faulty decisions because of not understanding the odds. I’ve told this story on earlier MFO posts, but I’ll repeat it now.
A basketball team is two points behind with seconds remaining when the coach calls a timeout. The question: Should the team try for a 2 or 3 point basket? Given typical shooting percentages, the answer is to go for the 3-pointer. Many coaches do the opposite. Here’s why.
Most teams successfully execute a 2-point shot with 50% likelihood. Given the closeness of the game, the probability of winning in overtime is also 50%. To register a win, both events must happen. Therefore the odds of winning the game are 25% (0.5 times 0.5).
Most teams have shooters who convert 3-pointers at about the 33% level. Therefore, a well-informed coach should always try for an immediate victory given those odds.
Clements really liked that story. Later, it appeared in his columns. Although I can never be 100% sure, I like to assume I influenced his writing in that singular instance.
Best Regards.

@Dex: Rather the buy REM, I suggest you buy it's biggest holding Annaly Mortgage common with a 10.70% yield and the preferred NLY-PC selling slightly below par, with a 7.625% yield. I hold large positions in both.
Regards,
Ted

Good for momentum trades only, not for core holding. Significant risk of capital.
If you are not sure what mortgage REITs are, you may find this article useful (search for REM on Yahoo finance and click through the M* link there if you have problems with the direct link below)
Capital Destruction, Inc.
Not to be confused with regular REIT funds like VNQ, RWR, etc., which don't concentrate in mREITs.
All Real Estate funds should be looked at for total return than just yield because they tend to be volatile with potential loss of capital like equities. They can provide diversification benefits in small amounts to an equity portfolio with low correlations to equities but shouldn't be considered as a fixed income asset because of the yield.

What are you thoughts on REM at this point? Down from its 52 week high and approaching its 52 week lows. The yield is tempting.
Are there other similar yielding funds I should look at.
Thanks

There are a couple of different things mixed up in this reporting.
Fidelity ventures is an entity in the family that invests primarily in Series B or later and is not associated with any mutual fund. The money for this venture fund comes from the high net worth individuals working for Fidelity such as fund managers. There are no mutual fund investors involved here.
The investing by some mutual funds in late stage companies with large sums of money at very high valuations has very little to do with venture capital in terms of risk profile and is more like convertible bond/preferred stock investing and it is somewhat of a game being played. It works like this.
Say, you are a fund manager with hundreds of millions of dollars that needs to be put to work and is dragging down your performance sitting in cash. Cash instruments pay very little. Buying more equities in your asset class may increase your Value At Risk more than your limit. You can use part of that money without liquidity needs to get about 8% annual returns with very little risk and a potential to gain 50-100% more with no additional risk. The catch is you need very large sums of money ($150M-$200M per investment).
You find a late stage company that already has established a market (in revenue or users) but needs a large cash infusion to scale up and prepare the company for an exit. Part of this preparation is to create huge valuations for the company to give the impression that it is worth a lot and a huge pool of money to ensure it doesn't run out of money while positioning itself for an exit (acquisition or IPO).
Traditional VCs won't provide this funding because the expected returns for this money in an exit is very low (1x-2x) rather than the 10x-20x VCs invest for. And it ties up a large amount of money in one company. Enter money funds that have large pools of capital and are happy with a 8-10% annual return and an option to realize 50-100% with a few years.
The key for the money fund is to find late stage companies that are not going to go down because they already have a market although they are not ready for an exit in terms of recenue or buyer interest. Even a fire sale exit for the company will likely result in a $100M-$200M transaction which is considered a huge failure these days.
So, you agree to put in money in that range in a late stage financing round with preferred shares that typically have 8% dividends that add on to your equity each year. These shares also have liquidation preferences that put your shares ahead of all others in a sale. So, unless the company goes down or sells for less than the amount of money you put in (but you have selected the company to have at least that much real valuation in worst case scenario), the return of capital is pretty much guaranteed. So, in the worst expected case, you get your money back probably with the 8% returns.
You let the company decide whatever non-sensical valuation it wants which is typically $1B+ at this stage of the company. This high valuation is great marketing for the company to look like it is worth a lot, does not dilute existing investors as you typically get 10% or less equity in that round, and the huge valuation prevents any further rounds which might dilute you or have liquidation preference over you. It is understood by all that this will be the final round of funding for that company. Hence, the huge amount of funding at that stage.
The expected exit us in 2-3 years. So you have a preferred stock that will let you get 8% annual returns with very little risk of losing capital and if the company has a huge exit, you may realize anywhere from 10%-100% returns on that money with your equity stake.
Not a bad investment for a fund with a lot of cash in its hands. You just need a lot of money that doesn't need to be liquid for 3-4 years (you can pool with other funds). The other catch is that there aren't a lot of companies to invest in at this stage and real valuation to guarantee return of capital so there aren't too many of these deals being made but they make headlines when they do because of the funny money valuations.
Yes, there are bubble deflating risks.But this is not really venture investing as people understand it to be.

BobC I apprecaite your comments. I guess my biggest concern is around asset bloat, recognizing that the liquidity in Frontier Markets is a limitation. I am youngish (35) and have no problem holding onto this for decades and look at it as a long term investing theme. However given the size of WAFMX I wish they would at least institute a soft close. Thanks for your thoughts and I do appreciate the focus on middle east and oil with the associated concerns.

I'm not a M* premium member, but I do have an account at TRP.
Here is TRP information page of their tools and resources.
individual.troweprice.com/public/Retail/Planning-&-Research/Tools-&-Resources
It looks like a visitor (once registered) would have access to some of the following tools (M* portfolio manager):
individual.troweprice.com/public/Retail/Planning-&-Research/Tools-&-Resources/Investment-Planning/Portfolio-Manager

FYI:
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=643589

@John Chisum: As the biggest producer of hot air he filled each balloon himself.
Regards,
Ted
Up,Up and Away: The 5th Dimension:

@heezsafe & Other MFO Members:
4/18/14 Copy & Paste: Kirsten Grind WSJ
(Mutual Funds Moonlight As Venture Capitalist)
That mutual fund in your retirement plan may be moonlighting as a venture capitalist.
BlackRock Inc., BLK -0.57% T. Rowe Price Group Inc. TROW +0.36% and Fidelity Investments are among the mutual-fund firms pushing into Silicon Valley at a record pace, snapping up stakes in high-profile startup companies including Airbnb Inc., Dropbox Inc. and Pinterest Inc.
The investments could pay off big if the companies go public or are sold, helping boost fund returns. But, as the recent turmoil in the market for technology stocks and initial public offerings has shown, such deals also carry major risks not typically associated with mutual funds.
"These are unproven companies that could very well fail," says Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. If things go badly for a startup, "there may not be an exit strategy" for the fund fir
Last year, BlackRock, T. Rowe, Fidelity and Janus Capital Group Inc. JNS +1.58% together were involved in 16 private funding deals—up from nine in 2012 and six in 2011, according to CB Insights, a venture-capital tracking firm.
This year, the four firms already have participated in 13 closed deals, putting 2014 on track to be a banner year for participation by mutual funds in startup funding. On Friday, T. Rowe was part of an investor group that finished a deal to pour $450 million into Airbnb, said people familiar with the matter.
Last week, peer-to-peer financing company LendingClub Corp. raised $115 million in equity and debt, the bulk of which came from fund firms including T. Rowe, BlackRock and Wellington Management Co.
Investors put money into venture-capital funds knowing it is a bet that a few untested companies will become big winners, making up for many losers. But mutual funds, the mainstay of the U.S. retirement market with $15 trillion in assets, aren't typically supposed to swing for the fences. Instead, they put most of their money into established companies with the aim of making steady, not spectacular gains.
The risks of putting money into unproven startups were highlighted by the recent slump in technology stocks, which aggravated worries that valuations for pre-IPO companies may be inflated as well.
"We are not at the beginning of the cycle and that's probably the most diplomatic way to put it," says Chris Bartel, senior vice president of global equity research at Fidelity, noting his firm is cautious about investments.
Like other fund executives, he said startup investments represent a small portion of overall assets and that his firm targets companies that are likely to go public or be sold in the near future.
Nothing prevents mutual funds from buying pieces of startups, though the Securities and Exchange Commission limits them to keeping less than 15% of their portfolios in illiquid securities.
Mutual funds have turned to private technology companies as a way to boost investor returns while growth has stalled at larger, more well-known firms, says Mr. Rosenbluth of S&P Capital IQ.
But these deals are more opaque than most fund investments: Fund firms aren't required to immediately disclose such investment decisions to investors, and privately held companies are also more challenging to value, making it more difficult to gauge how a stake is performing.
For startups, fund companies are attractive because they have a longer-term investing horizon than venture capitalists.
Bellevue, Wash.-based startup Apptio has received funding from three mutual-fund companies. T. Rowe was an early investor and Janus participated in the company's recent funding round of $45 million last May, as did Fidelity, according to people familiar with the matter.
Sunny Gupta, co-founder and chief executive of the startup, which helps businesses manage their technology spending, said he was interested in having the fund companies on board in part because he "wanted a different style of investor" that also brought in-depth financial expertise.
Having mutual funds on board also helps on the road to an initial public offering because big-name investors can provide peace of mind to others thinking about taking a stake. With T. Rowe, for example, Mr. Gupta said "there is an incredible amount of brand recognition" on Wall Street.
Similarly, Bill Harris, the chief executive of Personal Capital, a personal-finance and wealth-management website in Redwood City, Calif., said BlackRock's knowledge of the financial world has benefited the startup since the fund company took part in a $25 million funding round last June. Mr. Harris said he hadn't sought out a fund company and that BlackRock had approached him.
The competition among fund companies is driving up valuations of recent deals, said one person with direct knowledge of startups' funding rounds.
The bellwether for the industry is T. Rowe Price, the Baltimore-based fund family that has backed 30 private tech deals since 2009, according to CB Insights.
Henry Ellenbogen, manager of T. Rowe's $16.2 billion New Horizons Fund, put money into Twitter Inc. TWTR +1.33% before it went public, and has since bought shares in other big names including LivingSocial Inc., a daily deals site, and GrubHub Inc., GRUB -4.18% a food-delivery service, according to T. Rowe.
Mr. Ellenbogen's fund returned 49.1% last year, beating its benchmark, the S&P 500, which returned 32.4%, according to fund-research firm Morningstar Inc. He invests only a small percentage of the funds' assets in any one startup and holds about 260 stocks in the fund, realizing that some of the startups might fail, according to a person familiar with his thinking.
BlackRock, never a big player in Silicon Valley in the past, has funded 10 deals in the past two years, including four this year: software company Hortonworks Inc. in March and Dropbox in January. BlackRock doesn't disclose which of its mutual funds have invested, and declined to say how much the firm put into each company. The deals generally "represent a small portion of the total portfolio of a fund, but with the intent of adding incremental returns," a spokesman said.
Fidelity, likewise, has stepped up. The Boston-based fund firm has participated in 14 privately held tech-company rounds of funding since 2010, including six last year and four this year that have closed, including One Kings Lane, a home-décor website.
Another fear among some analysts is that this rush into pre-IPO stocks has echoes of the 1990s dot-com bubble, when many fund managers got badly burned by ill-timed moves into technology shares. Janus and Fidelity had funds that suffered large losses in the dot-com crash.
A spokesman for Janus declined to comment.
Mr. Bartel of Fidelity conceded the firm is seeing valuations that "aren't as compelling," as they used to be but also said it is seeing more pitches than ever.
.