Hi Guys,
The search for mutual fund performance persistence has long been a long standing investor’s goal. It is illusive. In his seminal 1997 study titled “On Persistence in Mutual Fund Performance”, Mark Carhart summarized his findings as follows:
“The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.”
So, on average, Carhart had a strongly negative opinion on active fund management. Other studies demonstrated that managers who generated positive Alpha for one 5-year period, generated negative Alpha in the next 5-year period.
This is yet another illustration of a very persistent Iron Law in the investment world, the ubiquitous Regression-to-the-Mean. According to Carhart, poor fund management is consistent (and likely to disappear from the scene}, but better fund managers have difficulties maintaining their edge. Change happens.
Many researchers find the seeds of those difficulties embedded in the success of those better managers. Fund size explodes, but the better investment opportunities are more fixed. Performance erodes.
Remember when in the 1970s, Burton Malkiel claimed that a blindfolded monkey tossing darts at a listing of stocks to assemble a portfolio would do as well as a purported expert money manager making careful selections for his portfolio. Well, more recent studies find that judgment was too harsh.
Fund mangers do have skill. The problem is that almost all fund managers have substantially the same skill level. The skills tend to neutralize each other. That puts the outcomes back into the luck segment of the skill plus luck equation. Hence managerial outperformance is again in the chancy realm and persistency suffers.
Still another persistency study examines the Morningstar Star rating system for a clue. These researchers conclude that the lifetime of superior performance as measured by stars is very transient. Again on average, these researchers find that a star rating persists for only 5 months before another different star surfaces. The ratings go both up and down, so relative performance is variable. That’s no great surprise, but the short 5-month period is.
So, if established superior fund managers have recently fallen on hard times, the Regression-to-the-Mean Iron Law suggests that an investor should be patient, should keep his resolve, and should keep the faith and stay the course with these managers. These managers do exist and will recover. Some will fail, but the odds are encouraging.
How do you find these superior managers? A Stanford professor, Jonathan Berk, has a novel theory that is tied to the manager’s pay scale and assets under management. Here is a Link to a short YouTube video by him:

I’m not convinced, but Berk’s hypothesis adds another dimension to the debate. Enjoy.
Best Wishes.

My synopsis of Bill's argument: growth outperforms during periods of decelerating inflation (e.g., the Great Depression), value outperforms during periods of accelerating inflation (e.g., the 1970s) and the latter has been historically more common than the former. Of more relevance to us, the latter condition is more likely in our near-term value than is deflation, so "value investing is slowing rising from its coffin."
Or not. Numbers confuse me but delight Bill (and many of you).
David

Wonder if this decision by the plan administrator provides the employee with a qualifying event to rollover these shares "in kind" to another IRA. Seems as if an employee should have other options besides, "sell and buy something else."
Would this plan change be classified as a termination (we no longer offer this option) as a:
Plan Termination
If your employer has decided to terminate the 401(k) plan and doesn't offer a new defined contribution plan in its place, you can roll over your assets into an IRA. For example, if your employer is getting rid of the 401(k) plan and switching to a defined benefits plan instead, such as a traditional pension plan, the event qualifies for a rollover to an IRA. You can't put your 401(k) assets into the pension plan since you can't contribute to it. However, if the employer is switching to a SIMPLE IRA plan instead, you can roll over your 401(k) assets, as those have a place in the new plan.
from link:
qualifying-event-401k-asset-rollovers-ira
Also, 403b(7) account holders had an option called a 1035 exchange whereby assets could be moved from a fund family that was part of the plan sponsor's options to another institution of the employee's choice (that might not be part of the plan sponsor's list of options or even part of the plan).
I did this while still employed enabling me to obtain access to TRP funds which where not offered by my employee plan.
Wonder if an exchange is available for 401K plans similar to the 1035 exchange?

FYI: Pity the poor value investors. Nurtured on the elegant prose of Benjamin Graham, the folksy humor of Warren Buffett, and the daunting statistical elegance of Fama and French, they’ve languished in the wilderness with fifteen years of excruciating underperformance. What went wrong?
Regards,
Ted
http://www.efficientfrontier.com/ef/701/value.htm

You should look at Leuthold Core (LCORX), in many ways one of the progenitors of the category. Nominally "tactical allocation," it has a 20 year track record. Top 2% over the past decade, top 5% in 2008. It's a purely quant-driven fund. Leuthold monitors 130 market and valuation indicators and shifts assets accordingly. A bit more downside protection and noticeably more upside than its peers, since inception.
Leuthold Global (GLBLX) is more global but uses the same discipline. LCORX looks better just now, but that's because domestic has been stronger than international of late. Since inception, Global has a hearty lead.
These are very disciplined folks with a long record as manager and a longer record as institutional researchers, which is where the business started.
David

FYI: The stock market has done a whole lot of nothing this year, yet strategists are still calling for a strong rally into year end.
Regards,
Ted
http://blogs.wsj.com/moneybeat/2015/08/18/morning-moneybeat-are-mid-to-high-single-digit-returns-realistic/tab/print/
Current Futures: (Negative)
http://finviz.com/futures.ashx

Similar sentiments have been expressed several times on the MFO Board during the past year, without challenge. The only difference of opinion I can recall was that Junkster wanted a 10-ft pole of separation, whereas I wanted the comfort of a 20-footer.
As noted elsewhere by Gershon Distenfeld, the HY ETFs have a number of hidden costs:

https://blog.abglobal.com/post/en/2015/07/with-high-yield-etfs-costs-can-be-hidden

For those who pine for relatively free and honest markets, where valuations bear some relation to fundamentals, and where there is ample value premium to be captured by managers committed to deep value investing (and the fact we have created special terms to distinguish "deep" from "relative" value is indicative of just how pathetically thin that premium has become, if it can be found at all), I think maybe we should look in the mirror and ask, as we await: if that opportunity should ever come back--- after all the manipulations, levitations, and interventions are over and done with--- is it something we'd really be willing to do well? is it a commitment we'd be able to keep with a good fund manager?
http://www.mutualfundobserver.com/discuss/discussion/19993/woe-betide-the-so-called-value-investor#latest
I think I could, but must admit some slight hesitation in giving a definitive "yes." Call me wimpy, but I still remember (barely) that it wasn't easy to hold firm, in the best of times.

Contrafund has around 113 billion in AUM, so as a percentage 900 million is not that much.

@msf, here's a recent article from Advisor Perspectives that confirms growth has been outperforming value recently but that value eventually has its turn. Over time based on their comparison of the cheapest 20% of stocks on a book value basis compared to the most expensive 20% of stocks on the same basis, value handily beats growth.
advisorperspectives.com/articles/2015/08/11/why-you-should-allocate-to-value-over-growth
I suppose it would be interesting to know how well those cheapest P/B stocks do compared to the other 80% or to "blend" stocks because it could be that the deep value stuff suffers a lot more volatility or a bigger drawdown but doesn't outperform by nearly as much over time.
Thanks for the thoughts about cash! That seems at least as reasonable and how I was thinking about it and I guess it means I'd have to look at the details of those funds before drawing any conclusions about their approach. I do find it interesting, however, that Longleaf is pretty clear about their "deep value" orientation but the style box says large blend and their portfolio statistics don't lead me to the same conclusion. Obviously it hinges on what they determine the intrinsic value to be but it seems they've had a lot of difficulty keeping up with any of their peers for the last 10 years.
The Timothy Plan Emerging Markets fund you mentioned is pretty remarkable. They're really what I would expect to see in "deep value". Lots of Brazil, Russia, basic materials, utilities, industrials and very small P/E, P/B and P/S. The expense ratio is really high considering they have a 5.50% front-end load, but I guess that's what's necessary to earn any money when you only have $7.8 million of AUM.

Just like to mention that TPEMX is managed by Brandes and you could get pretty much the same thing a lot cheaper with BEMIX.

O

@willmatt72: U.S. News & World Report ranking of World Allocation Funds.
Regards,
Ted
http://money.usnews.com/funds/mutual-funds/rankings/world-allocation

I own HCOYX also, which is ranked number 1 on that list. I did not mention it as a recommendation to Willmatt, as it is not a conservative fund. It takes on risky bets, which have made it excel prior to the last half year or so, but have definitely hurt it most of this year.

@bee. Thanks. It's nice to see this kind of list. It would be nice to see more postings like yours and less about biotech. The irony is when I was just starting out as a financial writer I was given the job of writing a weekly dueling portfolios column interviewing Don Yacktman and Jean Marie-Eveillard about their best ideas. This was in the late 1990s and everybody hated their patient value investment styles and readers would complain about how boring the managers I covered for this column were. Of course, when the dot.com bubble burst they both became heroes and celebrities again. If one likes Yacktman's style, now is the time to buy his fund, not when he's a hero. Then again, there is one unique risk factor. Don isn't running the fund anymore. But I believe the style remains fairly consistent.

Hi Guys,
Like Ted, I made some money investing in Peter Lynch and Magellan. Unlike Ted, I only invested small amounts, and only after Lynch had piloted Magellan for a half dozen years. The percentage returns were impressive, the dollar amounts much less so. During that phase of my investment learning cycle, I was still heavily committed to individual stock positions. My bad decision, and also bad timing.
Like Lewis Braham, I question if Lynch would be as successful in today’s marketplace as he was in yesteryear’s investing world. I doubt it.
Peter Lynch's record is unarguably outstanding. There can be no debate over his superior 13 years of active Magellan fund management. Today’s investing environment is significantly different. In his hay-day, Lynch enjoyed several advantages that do not currently exist.
His Fidelity boss (Ned Johnson) allowed him to go anywhere; today, a manager is more tightly constrained by a discipline to stay within prescribed box styles. Lynch was permitted to invest internationally, a rare option in the late 1970s and early 1980s. He invested in countless stocks, some after merely visiting a busy store; one wonders about the sagacity of that tactic. It is often said that Lynch never saw a stock that he didn’t want to buy.
Thirty-five years ago, Lynch was mostly investing against Joe Six-Pack. The competition was definitely inferior when contrasted against today’s fully trained money managers. This is the most common explanation for the disappearing Alpha phenomenon. It is tough to build long winning streaks when nobody owns an advantage for very long. Information exchange quickly erodes any such advantage.
I’m sure Lynch would do a competent managerial job today. Given the highly sophisticated and competitive environment that currently exists, becoming a superstar fund manager is far less likely. This is not a knock specifically aimed at Peter Lynch. The financial field is presently loaded with talented, deeply supported folks.
Institutional agencies carefully research and hire successful active fund managers. It is a laborious process. These institutions are finding that a much more challenging task. The selected management’s performance records are deteriorating. Alpha is more elusive. In response, these same institutions are now punting, and are presently hiring more passively managed sub-units. Things change.
Best Wishes.

Unfortunately, the author is a believer in the 1 variable school of thought - i.e. a change in one variable is a good thing.
A crash in stocks could mean fewer jobs and/or lower wages for the younger investor. It also assumes the younger investor has money to buy stocks - I don't many do.

I totally get what this article is saying, but let's face it..... If the stock market crashes, the vast majority of people in cash will continue to be in cash. Let's not pretend that these people will systematically start averaging into the market as it goes down.

That's true also - more people will swear off stocks and will confirm the actions who are in cash.

Unfortunately, the author is a believer in the 1 variable school of thought - i.e. a change in one variable is a good thing.
A crash in stocks could mean fewer jobs and/or lower wages for the younger investor. It also assumes the younger investor has money to buy stocks - I don't many do.

I totally get what this article is saying, but let's face it..... If the stock market crashes, the vast majority of people in cash will continue to be in cash. Let's not pretend that these people will systematically start averaging into the market as it goes down.

@msf, here's a recent article from Advisor Perspectives that confirms growth has been outperforming value recently but that value eventually has its turn. Over time based on their comparison of the cheapest 20% of stocks on a book value basis compared to the most expensive 20% of stocks on the same basis, value handily beats growth.
advisorperspectives.com/articles/2015/08/11/why-you-should-allocate-to-value-over-growth
I suppose it would be interesting to know how well those cheapest P/B stocks do compared to the other 80% or to "blend" stocks because it could be that the deep value stuff suffers a lot more volatility or a bigger drawdown but doesn't outperform by nearly as much over time.
Thanks for the thoughts about cash! That seems at least as reasonable and how I was thinking about it and I guess it means I'd have to look at the details of those funds before drawing any conclusions about their approach. I do find it interesting, however, that Longleaf is pretty clear about their "deep value" orientation but the style box says large blend and their portfolio statistics don't lead me to the same conclusion. Obviously it hinges on what they determine the intrinsic value to be but it seems they've had a lot of difficulty keeping up with any of their peers for the last 10 years.
The Timothy Plan Emerging Markets fund you mentioned is pretty remarkable. They're really what I would expect to see in "deep value". Lots of Brazil, Russia, basic materials, utilities, industrials and very small P/E, P/B and P/S. The expense ratio is really high considering they have a 5.50% front-end load, but I guess that's what's necessary to earn any money when you only have $7.8 million of AUM.

Hi @Old_Skeet, I did a screen of all domestic and international equity funds with a P/E below 12, of which there are 122 distinct portfolios. There are exactly 9 that have a prospective P/E less than half of the S&P and 7 of them are emerging/frontier markets. The two lowest P/E ratios? Fairholme Allocation at 6.74 and Pinnacle Value at 6.28, which is still not even close to 75% below the S&P. Both funds are within the "core" value column of the style box although the Fairholme fund it further to the left.
When I restrict the list to funds that have a price/book of less than 1 only 3 of the 9 funds survive, including PVFIX, and there are only 17 funds with a P/E of less than 12 and a P/B less than 1, quite a few of which were mentioned by @Vert (thank you!).
I guess it's clear I don't understand M*'s system because Chou Opportunity, which is indeed left of the style box in deep value territory, has a P/E of 16.51 and a P/B of 1.26. CHOEX has a tiny price/sales ratio of 0.25 so maybe that plays a bigger role in the style designation, but some of the others like KGGAX and TDVFX met my P/E and P/B criteria and also have P/S below 1 and they're still within the left edge of the style box.

Hi bee,
Although, I agree, it might be a complex thing to do Morningstar seems to be able do it for funds that hold any equities. In addition, they provide both TTM and forward estimates as a tool in Portfolio Manager for each fund held within my portfolio, with equity positions, and for my portfolio as a whole.
My portfolio scores according to M* on a TTM P/E Ratio of about 85% (18.3) of what the S&P 500 Index reflects (21.7). In addition, it holds a little better of 40% in value style equities, about 35% core style equities and about 25% growth style equities. This information suggest, from my thinking, that the portfolio has a value tilt ... but, not a deep value tilt although I do hold about 20% of my portfolio's assets in cash. As MSF states a large cash position might put a fund (or perhaps even a whole portfolio by my thinking) into a deep value classification but I don't think I am there with a 20% cash position.
Old_Skeet

Unfortunately, the author is a believer in the 1 variable school of thought - i.e. a change in one variable is a good thing.
A crash in stocks could mean fewer jobs and/or lower wages for the younger investor. It also assumes the younger investor has money to buy stocks - I don't many do.

Hi LLJB,
Thank you for making a post on deep value funds.
One of the things that I look at beside what you noted above is P/E Ratios, both TTM and forward estimates. Take TDVFX which has a forward P/E Ratio of 11.8 and KGGAX at 10.0 both being well back of the S&P 500 Index forward P/E Ratio at 17.7. I guess what I'd like to know is how far back of the P/E Ratio, let's say for the S&P 500 Index, does a fund have to be to score before it would be considered a deep value fund? About 75%, or so, of the Index is my thinking.
I wonder what some others might think along these lines?