Hi Guys,
Two days ago, MFO’s primary poster Ted submitted a Link that featured a battle bifurcation in the passive-active fund manager debate. Here is the internal Link to Ted’s post:
http://www.wsj.com/articles/are-index-funds-really-better-than-actively-managed-1425271058That’s not particularly surprising since the debate is never ending. What is somewhat surprising is that the combatants used the same data source to support their warring words. That basic source is the SPIVA scorecard. Here is a Link to a mid-year 2014 edition of that scorecard:
http://www.spindices.com/documents/spiva/spiva-us-mid-year-2014.pdfA more recent but less complete report has been prepared, but all these reports seem to have a consistent, repetitive character. They tend to all demonstrate the statistically difficult challenge of active fund managers bettering a representative benchmark yardstick.
Totally not surprising is that long time Index proponent Daniel Solin advocated the passive portfolio position whereas J.J. Zhang defended the actively managed position. Both deployed the same SPIVA data sets to bolster their arguments.
You get to choose which believer was a more “true believer” in their assessments.
From my perspective, I concluded that Zhang failed to scale the true believer hurdle. His arguments were muted and not convincing. He seemed to be highly selective and he distorted some of the data sets.
From my reading, Zhang joined the ranks of the Lies, More Lies, and Statistics cohort. A great danger for misuse of all statistics is the potential for artfully misrepresenting and/or misinterpreting them. I suggest that Zhang is guilty of just those failures. What do you think?
I do believe that actively managed funds have a productive place in a well diversified portfolio. I like the concept of a passive core and active satellite portfolio construction. My portfolio reflects that conviction. Dodge and Cox products, and Fidelity’s Contrafund and Low Price Stock funds have served me well for over two decades. But the odds of identifying such superior funds a priori are extremely low.
But signals do exist to improve those odds. Two primary indicators are low costs and low portfolio turnover rates.
Also, I examine the record of the portfolio manager. His/her overall record is a factor, but a significantly more influential factor is the individual’s record with the current organization. Organization matters; good performance is not always transferable. David Winters is an excellent current example of potential stumbles. His performance record was outstanding when he worked for the Mutual series of funds; it is not so since he started his own firm.
A fourth discriminating criterion is Active Share percentage divergence from an Index benchmark. Studies support the obvious expectation that outsized rewards can only be achieved if a portfolio distances itself from a baseline. Here is a Link to a Vanguard study that explores this issue:
https://pressroom.vanguard.com/content/nonindexed/active_management.pdfExtra costs are only justified if Active Shares are a substantial portion of a supposedly actively managed fund.
“Don’t always trust the experts” cautioned Steve Forbes. Malcolm Forbes observed that “I make more money selling advice than following it”. Once again, buyer beware. I’m sure none of this is new stuff for old MFO participants.
Your opinions are forever welcomed.
Best Regards.
Comments
Nice post MJG.
Hope all is well.
c
Regards- OJ
Thank you for reading my post; many more thanks for your generous comments.
After submitting, I realized that I omitted an important qualifier that I interpret from the referenced Vanguard study. Another thanks for charitably ignoring that omission.
The Active Share sorting criterion should not be used as a standalone selection rule. The Vanguard work shows mixed results with much scatter to any value added as a function of only Active Shares. It does not universally produce positive excess returns. Some active fund managers are talented, many are not. Luck is also a major factor.
However, when integrated with the other three sorting criteria, an Active Shares measure will improve the odds for choosing another Excess Returns component for your portfolios. Cobbling together a set of criteria is a profitable exercise.
My best wishes to all.