Hi Hank, Hi msf,
Thanks for your comments, especially those most recently made.
The active vs. passive management debate will remain a hot topic. While the overwhelming academic research concludes that passive is the winner on average and in the long haul, limited evidence suggests that active management can deliver superior returns and/or reduced risk over some periods. The secret sauce is to discover the right manager for the right timeframe.
That's not an easy task; what worked in the past need not work in the future. Fund manager Bill Miller is a great example. He outperformed his benchmark for 15 consecutive years and just a few years later scored in the bottom 1% of all active managers. Things change.
A successful active manager wins over some timeframe using a specific methodology that reflects his knowledge and his biases. Once again things like macroeconomic conditions change and the active manager is not flexible enough to either recognize the changes or to adjust his methods. That was Bill Miller.
If you favor active fund management, you must actively evaluate active managers. That's tough work, but necessary to capture the small percentage of fund managers who do beat their benchmarks. It's a changing group since persistence is not one of their basic characteristics.
Benchmarks are needed to challenge and test the quality of active fund management. For lhose funds that specialize in large companies, the S&P 500 Index seems to provide a respectable, albeit an imperfect measure.
I did know that a committee controlled the firms represented by the Index, and that a few changes were made annually based on rules and judgments. I am not aware of the weightings given to the formulaic portion of the decision process and the heuristic portion.
I am not adverse to having a human heuristic segment. For something as uncertain as company assessment and the stock markets, equations alone will never be perfect. But too much emotional heuristics can ruin a useful market tool. The balance is a difficult target, but the S&P 500 committee seems to have done an acceptable job. By rule, they must maintain a proper weighting in the 11 major sector categories. Nothing is ever perfect in the marketplace; a satisficing strategy must do.
Best Wishes.

This is a bit of a sidetrack, but is spurred by jstr's use of S&P as a prototypical index provider.
S&P's "indexes" do not have "systematic selection criteria", at least the way I would use that phrase: "entirely rules-based and containing no judgment".
See, e.g. "What Is an Index" http://alo.mit.edu/wp-content/uploads/2015/10/index_5.pdf
Unlike other index providers such as Russell, Wilshire, etc., Standard and Poor's has a human index committee that applies judgment in selecting securities for index inclusion. Notable is its criterion for removal: "lack of representation". This potential for subjective tinkering was out in full force at the peak of the dot com bubble:

The S&P 500 is often mischaracterized as a passively managed index of large stocks, but in 2000, its managers became seriously aggressive -- adding (and subtracting) four new stocks each month, on average. In the process, the index was systematically stripped of small and mid-sized value stocks from Jan. 28 to Dec. 11 in favor of large-cap growth stocks -- largely from the technology sector, and at exactly the wrong moment.

https://www.thestreet.com/story/1305526/1/make-a-bundle-on-the-sps-rejects.html
More recently, S&P made rule changes not to improve how well its index represented the market or the index's investability, but to improve S&P's bottom line:

In 2008 and 2009, S&P . . . tossed nine companies off the 500 for inverting. But four years ago [June 2010], S&P changed course, for business reasons. Companies were angry at being excluded, and index investors wanted to own some of the excluded companies. Moreover, S&P feared that a competitor would set up a more inclusive, rival index.

http://fortune.com/2015/11/23/pfizer-dow-jones/
Systematic selection criteria? Yeah, right.

The advent and growth of ETFs / index funds and the availability of funds that can focus on specific stock universe attributes in the 21st century, has validated / shed light on that ( Buffet's ) advice. Further improvement in computing power and growth of quantitative finance has also streamlined and improved the management process.
Take the S&P Mid Cap growth index / ETF for example. The MDY ( S&P Mid Cap 400 growth ETF ) was launched when Buffet / BRK-A started to become noticed in the mainstream ( mid 1990's ). ( It appears that ) the Mid Cap index has specific, systematic selection criteria for management of the index. Reading literature ( shareholder letters, anecdotal evidence contained in books and articles ) on Buffet's methods seems to belie a somewhat idiosyncratic and haphazard process in position sizings and weightings, asset holding periods, and the occasional use of sophisticated "derivative" products ( this can be said for Icahn also ). If Buffet's "genius / greatness" has been reflected in BRK-A's share price, then a buy & hold of the "diversified index fund" ( Mid Cap 400 ) definitely has had an edge for a couple of decades and from different starting points. https://docs.google.com/document/d/1Kv2UtpBp7OIK56ZzrkthnV1PDRUA9AmGS6hAmr3Tl6A/edit?usp=sharing
Application of this simple quantitative tactical strategy for example, has produced further excess, risk adjusted returns vs. buy & hold https://docs.google.com/document/d/1WLB4hOP8P15O8b10_P4VgHuuBQHHke_c3XjwAjiFqio/edit?usp=sharing
As the management industry migrates towards "passive" indexing, perhaps gone is the discretionary and esoteric based management style that once reigned in the 20th century ?

FYI: Looking for yield in a closed-end fund these days is like buying a pen at Tiffany's — you'll get what you're looking for, but you'll pay an awful lot for it.
But the preferred stock offerings of many closed-end funds could be a lucrative way to get yield at a reasonable price.
Regards,
Ted
http://www.investmentnews.com/article/20161014/FREE/161019955?template=printart

FYI: Interest rates are a huge driving force behind many investment decisions. You can call them discount rates, hurdle rates, lending rates, borrowing rates or whatever, but their level definitely has an affect on risk appetites.
But I also think it’s possible for investors to put too much faith into the almighty interest rate. For instance, there’s a huge difference between credit and interest rate levels. Rates were much higher in the mid-2000s but credit was much looser so people borrowed like crazy, something they’re not doing as much today.
Regards,
Ted
http://awealthofcommonsense.com/2016/10/when-market-signals-look-too-good-to-be-true/

Nice catch, Catch! :)
I hope folks take a look at that thread from March 2014. (In particular, Ted hasn't aged a bit over those two and a half years!)
Thanks.

Lost confident on Mark Hockey since 2000 and never look back. Large stake in banks took much longer to fully recover. His international fund did well when he can move around with much small asset base. Think he reached his maximum capacity long ago. Today all his funds lagged considerably to the indexes. Artisan International fund is one of the choice in my 401k and I stay away from it.

FYI: Your mutual funds may have a dirty little secret, but someone has just published an exposé.
In fact, according to the first carbon-footprint analysis of over $11 trillion in global funds and ETFs, all 10 of the world’s top asset managers have fund lineups with a higher average carbon footprint than an S&P 500 benchmark.
Regards,
Ted
http://www.fa-mag.com/news/find-your-funds--dirty-secrets-with-this-new-tool-29487.html?print

Hank asked, "In other words, do the instructions to his trustees also represent prudent advice on how all of us should invest?"
Everyone that invests will have to pave their own road to riches but I believe that Mr. Buffett's advice is a solid bed on which to apply the final layer. In my own plan I disregard the bond fund advice and substitute that portion with my SS account. My stock holdings are roughly 85% US (half & half S&P 500 and others) and 15% foreign. We should remember that Warren's advice was a general recommendation for most (not all) investors. I venture to guess that over 50% of folks who contribute to a 401k or similar have no idea what they own or why they own it.

@hank
Is this the thread, from March 5, 2014, to which you refer?
http://www.mutualfundobserver.com/discuss/discussion/11836/warren-buffett-suggests-a-portfolio-of-90-s-p-500-index-fund-and-10-short-term-bonds

For more on the principles of swing pricing, and the different ways it can be applied:
http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL.pdf

What MJG references here originally appeared in a 2014 Letter to Shareholders of Berkshire Hathaway from Warren Buffett. In that letter he shared with shareholders his instructions to the trust he had established to invest on behalf of his wife after his death. http://www.reuters.com/article/us-buffett-letter-advice-idUSBREA221YY20140303
Excerpt from article: Specifically, Buffett wants the trustee of his estate to put 10 percent of his wife's cash inheritance in short-term government bonds and 90 percent in a low-cost S&P index fund ... (Buffett) "I believe the trust's long-term results from this policy will be superior to those attained by most investors - whether pension funds, institutions or individuals."
An extensive discussion ensued on MFO at that time soon after Buffet's instructions became public. (Unfortunately, I can't seem to get back as far as March 2014 in searching past threads or I'd link the discussion.) Central to the discussion, I believe, was whether Buffet's estate and wife's situation were in any way similar to that of Joe and Jane Doe. In other words, do the instructions to his trustees also represent prudent advice on how all of us should invest?

@TSP financials.morningstar.com/fund/management.html?t=CAALX
Also: https://sec.gov/Archives/edgar/data/809593/000113322816011586/e446873_485apos.htm

Fond memories from the Way Back Machine
01/22/2007 From M*
Numeric Investors decided to get out of the mutual fund business. On Feb. 23, it will liquidate all of its retail mutual funds. Numeric is closing the funds because they compose only 3.5% of its business (about $450 million out of $13 billion), and three of the four funds are closed to new investors,
This is a surprise and a real disappointment because the advisor runs some excellent quantitative funds, it has shown itself to be a shareholder-friendly shop, and many of these fund's strongest peers are closed.
http://www.morningstar.com/advisor/t/42991190/fund-times-numeric-funds-to-liquidate.htm
N/I Numeric Investors Small Cap Value
NISVX (not valid )

Hi Guys,
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers."
That is a recent quote from Warren Buffett. Over many years he remains consistent in his investment recommendations. Here is a quote from his 1996 Shareholder Letter:
"Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals."
I recently discovered a fine set of investment videos from an outfit in England. They practice what Buffett has been saying for decades for most investors. The presentation material is not very sophisticated, especially for most of MFO participants, but it includes many brief segments from famous US researchers. It's all about sensible investing which is the name of the firm that produced the video. Your enjoyment will most likely be tied to your preference for active or passive investing strategies. Here is a Link to one of their 1 hour videos:
https://www.sensibleinvesting.tv/passive-investing-the-evidence
Enjoy. Since I do a mix of both actively and passively managed mutual funds, I did enjoy it. I am slowly moving more of my funds in the passive direction.
Best Regards.

FYI: (Click On Article At Top Of Google Search)
The PNC Multi-Factor Small Core is up an average of 16.6% a year over the past five years.
Regards,
Ted
https://www.google.com/#q=Top+Small-Cap+Quant+Fund+Takes+a+Scientific+Approach+Barron's
M* Snapshot PLOIX:
http://www.morningstar.com/funds/xnas/ploix/quote.html
Lipper Snapshot PLOIX:
http://www.marketwatch.com/investing/Fund/PLOIX
PLOIX Is Unranked In The (SCG) Fund Category By U.S. News & World Report:
http://money.usnews.com/funds/mutual-funds/small-growth/pnc-multi-factor-small-cap-core/ploix

The agency also voted 2-1 to allow open-ended funds, not money market funds or ETFs, to use swing pricing, effectively letting asset managers pass on trading costs to investors who redeem. The change permits funds to cash out investors at less favorable pricing during periods of market stress, potentially slowing withdrawals. The SEC says the mechanism aims to keep fund shareholders from being diluted by purchases and redemptions. [my emphasis]

Hmmmmm............ yeah, sorta important.
Other takes:
http://www.reuters.com/article/us-sec-funds-idUSKCN12D21R
http://www.thinkadvisor.com/2016/10/13/sec-imposes-sweeping-liquidity-rules-for-mutual-fu

SEC Final Rules page: https://www.sec.gov/rules/final.shtml
Perhaps the bigger item got buried - funds are now allowed to use swing pricing in times of stress (essentially impose redemption fees by passing through the cost of selling underlying securities to meet redemptions).
Here's that SEC final rule (198 pages):
https://www.sec.gov/rules/final/2016/33-10234.pdf
There's got to be more on the liquidity rule than is being reported, especially regarding Vanguard. Here's the SEC final rule (459 pages): https://www.sec.gov/rules/final/2016/33-10233.pdf
First, because ETFs would seem to have a liquidity problem similar to open end funds. When there is large selling pressure, authorized participants (AP) are supposed to swoop in, buy up the ETF shares being sold on the open market, and then sell the underlying securities at a profit. So even though the fund itself doesn't sell assets, the APs are expected to. if they don't (because of illiquidity) the ETF price could go into free fall.
Second, the report says that this rule applies to funds that provide daily portfolio information. What sort of info? All ETFs provide indicative NAV and portfolio composition files, but they are not required to provide daily portfolios. In fact, Vanguard discloses its ETF portfolios only monthly.
Third, Vanguard's ETFs are unique in that they are simply shares of an open end fund portfolio. Is this a back door way for Vanguard to avoid meeting liquidity requirements on its open end funds?
P.S. No, I have not read the 650+ pages from the SEC.

AndyJ,
Do you think it is too early to get back into Intermediate Term Munis like VWIUX and FLTMX?
Mona

Who knows, Mona, but I wouldn't until the direction flips, at least. Even yesterday, an okay day for rate-sensitive FI, munis were flat while core taxables gained, and there's not a clear sign yet that Treasury yields are topping - could be headed for 2% on the 10y.
Sept-Nov is supposedly the longest weakest period of the year on average for munis, so that's kind of a caution too.
Keep in mind this is coming from someone who's really cautious when there's any possible sign of a prolonged downturn in an asset class I typically like ... -- Best, AJ

FYI: The Securities and Exchange Commission had originally lumped ETFs in with mutual funds last year when proposing the rules, which try to make sure that firms can more easily sell assets to meet demands from investors who want to cash out during market downturns. ETF providers had pushed back on the inclusion, with BlackRock Inc., the world’s largest asset manager, arguing that the structure of many ETFs makes them more liquid than mutual funds. Vanguard Group is also one of the biggest providers of ETFs
Regards,
Ted
http://www.bloomberg.com/news/articles/2016-10-13/blackrock-poised-for-etf-regulatory-win-in-fund-liquidity-rule