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Anyone looking at the stats recognizes it's just brutal for active managers over the long-term. It's that fee drag that accumulates over time. There are a few lessons to be learned in it. It's really hard to win in large-caps that are widely covered by analysts. Fees really matter, so if you go active, look generally for a low-cost manager. Career risk matters too. This last one I think many investors don't know. I think many managers hug the benchmark because if they deviate too much and just a handful of, for instance, FAANG stocks are driving the market higher, not holding those stocks is a significant bet that could lead to job loss if you're wrong. So, many managers feel pressured to hold those popular names, end up being closet indexers as a result, and fall just as much as the market plus their fees when downturns occur. You need a manager who thinks differently, has the research team, intelligence and trading chops to execute his/her strategy effectively and low fees to boot--a tall order. Hence you get awful stats like the one in this article about large-cap managers versus the S&P 500:
I don't make much of articles that lump everybody together. Unless you are willing to really look at you goals and risk tolerances and investigate how a particular manger fits, you are better off in a passive funds, but ones based on the broadest market possible.
The extreme out performance of FAANMG or whatever in the last few years has distorted everything.
I do think it is fair to ask mangers who are 100% invested if they beat their respective benchmark over time.
I tend to think "active management" should also include knowing when the market is too expensive and the potential long term return unattractive and be able to raise cash for a margin of safety.
I tend to think "active management" should also include knowing when the market is too expensive and the potential long term return unattractive and be able to raise cash for a margin of safety.
I tend to agree, but actually very few active managers do that. Career risk from potentially lagging the market by being out of it is a primary reason. A secondary one is that many funds are held by financial advisors who do their own asset allocation for clients, so if they want the client to hold cash, they do it directly. With funds, advisors tend to want managers to be fully invested in their style at all times so as not to throw the client's underlying allocation to stocks, bonds and cash off.
ALMOST makes the entire managed (non-index) MF industry seem like a scam...
"Consider these tallies for funds that invest in S&P 500 stocks through the end of 2022:
Over three years, 74.3 percent of actively managed funds trailed the index. Over five years, 86.5 percent underperformed. Over 10 years, 91.4 percent underperformed. Over 20 years, 94.8 percent underperformed."
M* has investor-returns (vs fund-returns). That is an AUM weighted-average of fund-returns. IMO, it is a flawed statistics for investor experience, but it is all that is available. A surprising conclusion is that investor-returns and fund-returns are the closest for allocation/balanced funds, and the reason is that these fund holders stick longer with the funds and don't trade like funds in other categories (leading to lagging investor-returns).
“A surprising conclusion is that investor-returns and fund-returns are the closest for allocation/balanced funds, and the reason is that these fund holders stick longer with the funds and don't trade like funds in other categories (leading to lagging investor-returns).”
It's more than simply an AUM-weighted average of fund returns. It considers cash flows - investor dollars going in and out - and calculates how much each extra investor dollar earns. That's still asset weighted, though the assets being weighted are those attributable to investor trades rather than assets under management.
It's not perfect. A single large investor with lousy timing can skew the results to the downside. Much as a few billionaires can make it seem like average workers are earning a whole lot more than they are.
"Closest" is a matter of perspective. Take a category returning, say, 8.04%, and let's say the average investor dollar returns 0.69% less. The investors are failing to capture 8.58% of that 8.04% return.
Compare that with a category returning 13.2%, where the average investor dollar returns 1.17% less. The investors are failing to capture 8.86% of that 13.2%.
Investors are failing to capture nearly the same fraction of returns either way. Those figures are what M* calculated for allocation/balanced funds and for domestic equity funds from 2010 to 2020.
Perhaps the investors aren't sticking around longer for the allocation/balanced funds. The differences in the category "gaps" (as M* calls the 0.69% underperformance) could be due primarily to the relative magnitude of category returns.
If one category returns 1.5x that of another category (with exactly the same performance graph, just 1.5x the amplitude), then one would expect the "gap" for that category to naturally be 1.5x as large as well.
Lots of investors like to beat these annual/historic active PM vs passive statistics* to death.
But inside those numbers, and usually left out of these endless (IMO, usually worthless) discussions and articles, you can find PMs/funds that consistently, and over most/sometimes all of the interim periods, beat the indexes.
Those are the PMs/actively managed funds you want to own. (Read it s-l-o-w-l-y and try to understand it.)
If an investor does not know which PMs/funds those are, or can't scope them out, then, yeah, go ahead and invest in the indexes, and use the widely ballyhooed statistics as your justification.
And no, I have no plans to spoon-feed what I consider the best PMs and/or actively managed funds as posters on this forum are more than capable of finding them, or are already invested in them.
That said, we are current and LT holders of FSELX, a classic example of how rewarding it is if an investor can identify just ONE of the best of the best. Back in the day, almost 100% of our portfolio was in FLPSX during Tillinghast's glory days. Before that, ditto for Lynch's Magellan.
In semi-plain English: The % of PMs who beat the indexes for a given period is largely comprised of that period's hot PMs/funds, and the ones who consistently do it.
For the audience on this forum at least, I agree with stillers that these articles are kinda useless. For the very long term, passive beats active but in interim periods active can and does beat passive. Also an entirely different story and stats can be produced by picking different start and end dates of any analysis.
The vast majority of investors don't have the stomach or temperament to passively invest in SPY or VBINX over 40 years. Even on this forum, how many are only invested in only these two or similar passive investments?
Today is the 32nd anniversary of my purchase of DODGX. It was neck and neck with SPY up until the dot com bust. From then on, SPY never caught up. What happened the last 1-3-5-10-15-20 years doesn't make any difference.
Today is the 32nd anniversary of my purchase of DODGX. It was neck and neck with SPY up until the dot com bust. From then on, SPY never caught up. What happened the last 1-3-5-10-15-20 years doesn't make any difference.
Congratulations!
Most D&C funds carry ERs around .53% - probably a bit higher on international funds. Couple that with good management and it should pay off longer term. What I don’t know - but would love to hear - is how does a stable investor base affect a fund’s long term performance? And - while we’re on the subject … Indexes, like the S&P don’t have to contend with “flighty” investors moving in and out. Probably another reason they outperform active management..
Incidentally, looks like D&C’s domestic funds held up better than most yesterday. Likely their financials helped soften the downturn in overall market. Of course - that cuts both ways.
@hank, D&C funds are cheaper than a lot of ETFs. Helps that it's privately held, group managed, and they eat their own cooking.
I wish it had been 10K instead of 1K. Most of the other investments from that time are gone with the wind except for VWGIX discussed in another thread here.
The biggest chunk were in an IRA I cashed out to make a down payment on a house in Marin County. We're pretty happy about how that worked out. Only took equity out once to buy a new roof.
Looking back, I should have scrounged up 500 bucks to get into NICSX. We'ld be on easy street.
I disagree with the notion that articles on how active funds on average continue to get slapped around by index funds year in and year out don’t have a place on this board because we’re so sophisticated we know how to avoid the pitfalls of poorly run active funds. If you search the history of posts in MFO and even the older FundAlarm you can see posts recommending hot funds that subsequently proved disastrous—ARKK being a recent example from posts in 2021 and early 2022. I imagine everyone here has a story about terrible fund purchases or even decent fund purchases at the worst possible time. The index story bears repeating again and again because when surveyed almost every investor believes their skills at picking stocks or funds are above average—a statistical impossibility. Hope for the big score springs eternal.
I think all of us are looking for a smoother, less dramatic ride...whatever that means. With indexing, you ride it up, you ride it down, and please don't tell me that there is a law of nature that says stock always go up over time...proven fact they get riskier over time...especially when you consider that you have more money invested over time...(why else would put options cost more the longer out your strike date is?)
I'm thinking back when my Dad got me started investing in the early 80's with my money working at the local Texaco...*ah the stories...I should write a book....
Kellogg, Raytheon, JNJ, Merck and Coke (KO), $2k in each....
Looking back I'm thinking if I just added $2k each year to each of those and did nothing else I would have a beach house in Hawaii to go along with a Ferrari collection..without all the noodling around, reading WSJ, etc etc.
I'm thinking my 5 stock portfolio would have beat any SPY index fund although, I don't think there were any index funds back then?
I think you could do worse than just roll with a Raytheon/LMT, JNJ, WMT/Costco, BRK-B, American Express, MSFT going forward over the next 20 years....
”The vast majority of investors don't have the stomach or temperament to passively invest in SPY or VBINX over 40 years. Even on this forum, how many are only invested in only these two or similar passive investments?”
For better or worse, the kind of investors who post here probably aren’t sitting on their hands for 40 years.
Today is the 32nd anniversary of my purchase of DODGX. It was neck and neck with SPY up until the dot com bust. From then on, SPY never caught up. What happened the last 1-3-5-10-15-20 years doesn't make any difference.
Good for you.
I read some reputable article 41y ago about the best funds, and DODGX was right in there, and I invested, but of course bailed at some point. TWEIX and TORYX and the others in the article fell by the wayside over time.
It remains interesting to me that 10y returns of the very best broad-based biggies still show, today, DODGX slightly lagging FXAIX, FCNTX slightly ahead, and the only big big winner FBGRX.
All the others I looked up lag. FLPSX, e.g.
Of course niches (FSELX) excel also.
I did have a good friend in the 1990s, amateur investor, tell me she was in FBGRX big and was going to stay. I wonder if she did. At the time I thought meh. What a fund that was (and very recently is).
What would you hold for the next 20 years? The $70 billion 2040 Target Date VFORX is the most obvious solution for many investors but not here. The notion that you can’t get a reasonably smooth ride purely by indexing isn’t true. You can index a lot of things, including bonds. VFORX is all index, has a 0.08% expense ratio and will grow gradually more conservative in its allocations as 2040 approaches. A target date fund isn’t right for tinkerers and traders like on MFO, but I actually think it’s quite useful for many employees in retirement plans who don’t understand investing. One and done.
Would the class agree that indexing and especially target fund investing are indeed active management...indexes do change over time..so really the advantage is as mentioned prior, low costs and keeping the "man away from the machine, man only there to feed the dog who keeps the man away from the machine"
LB yes, I understand what you wrote and agree re Target Date funds but do know folks who got wiggy over the last 3 years and bailed out...and these are very educated, successful folks with MBAs etc...they looked like their dog got run over during the down drafts and did bail to cash...
While we are at it, meaning looking at the way back time machine...I actually wonder how many of us would have actually done better rolling with treasury notes for the past 30-40 years instead of puttering around with buying funds, stocks. Don't the studies show that most investors do NOT come anywhere near the returns listed for funds etc....due to the in and out and puttering around?
David M...saw the TWEIX in your post...that would have been a great long hold....and someone on the boards wrote within the past two years that they had a friend/colleague who had only ONE fund, Blackrock Global Allocation MDLOX?...keep it simple....keep adding to it. I read that a long long time ago in IBD Investors Business Daily. same thing, invest in one solid fund, keep at it. Enjoy your life, go to the beach, focus on your job etc...
Hold a target date fund for 20, 30, 40 years? Sounds good in theory.
What legal or contractual agreement exists with the sponsor to operate that fund for an indefinite time period or as @Baseball_Fan says to adhere to the same allocations, operating restrictions, fee structures? I’ve had at least two firms I invested through (Strong & Oppenheimer) go completely out of existence in the past 25 years. A third one, Templeton has been essentially merged out of existence since I opened a workplace plan there in the early 70s. Or are these simply extreme aberrations due to my antiquity?
WFC acquired what remained of Strong Capital (its famous ad-line was: Is your portfolio Strong?). Invesco acquired OppneheimerFunds. Invesco has been an aggressive acquirer but it is taking some rest now. True, Franklin Templeton is now quite different from old Templeton or Franklin.
There are no guarantees in finance, but I would say the likelihood of a private shop as big as Vanguard being acquired is slim, and a $70 billion target date fund that is a mainstay in thousands of employees retirement plans probably won’t change its stated strategy.
Compare it since 1994 w/ DODGX, FXAIX, FCNTX, and FBGRX. Okay.
But who among us would hold patiently through the recent runups and big drops of D&C, Blue Chip, and esp Contra, which of course is the one you want to have been in all along, unwaveringly, up 2132% the last 29y?
Never invested with Vanguard. From recent posts, customer service has declined over the years - perhaps something more important to post-retirees than the young. And, it sounds like they’ve pushed hard to move shareholders from mutual funds into ETFs. Both perhaps insignificant for 30-40 year holders of a target-date fund, but thought them worth mentioning.
@yogibearbull - Being in Michigan the nearby Milwaukee-based Strong Funds had a certain appeal. I never had a lot there, but did do some transfers in of my 403B while still working - a move possible in the 90s (but no longer allowed). I learned a lot while there. ”Pay yourself first” wasn’t original with Dick Strong - but he used the saying effectively in motivating myself (and I assume many others) to better manage our finances. In the end, Strong turned out to be a crook.
Regarding psychology, I would say most people who look at their portfolio every day can’t help meddling with it. I actually think it’s harder sometimes to hold an activity managed stock fund than an index stock fund. How many folks have such a deep faith in their managers that if the market is down 20% and your active fund is down 30% or 40%, you have the stamina and trust in the managers to stick with them? At least if you own a broad market index fund and it’s down 20%, you know almost every other stock investor is in the same boat. If your active fund is down 40%, you start having doubts in the managers’ abilities and want to sell, sometimes at the worst possible time. But studies show investors do better psychologically in balanced and target date funds, be they active or indexed, because they provide a smoother ride.
Comments
The extreme out performance of FAANMG or whatever in the last few years has distorted everything.
I do think it is fair to ask mangers who are 100% invested if they beat their respective benchmark over time.
I tend to think "active management" should also include knowing when the market is too expensive and the potential long term return unattractive and be able to raise cash for a margin of safety.
"Consider these tallies for funds that invest in S&P 500 stocks through the end of 2022:
Over three years, 74.3 percent of actively managed funds trailed the index.
Over five years, 86.5 percent underperformed.
Over 10 years, 91.4 percent underperformed.
Over 20 years, 94.8 percent underperformed."
- Do they beat the funds that don’t beat the market?
- Or are they beaten by the funds that are beaten by the market?
Thanks - Interesting and enjoyable topic.
Makes sense. Thanks Yogi.
https://awgmain.morningstar.com/webhelp/InvestorReturnsFactSheet.pdf
It's not perfect. A single large investor with lousy timing can skew the results to the downside. Much as a few billionaires can make it seem like average workers are earning a whole lot more than they are.
"Closest" is a matter of perspective. Take a category returning, say, 8.04%, and let's say the average investor dollar returns 0.69% less. The investors are failing to capture 8.58% of that 8.04% return.
Compare that with a category returning 13.2%, where the average investor dollar returns
1.17% less. The investors are failing to capture 8.86% of that 13.2%.
Investors are failing to capture nearly the same fraction of returns either way. Those figures are what M* calculated for allocation/balanced funds and for domestic equity funds from 2010 to 2020.
https://www.morningstar.com/articles/1056151/why-fund-returns-are-lower-than-you-might-think
Perhaps the investors aren't sticking around longer for the allocation/balanced funds. The differences in the category "gaps" (as M* calls the 0.69% underperformance) could be due primarily to the relative magnitude of category returns.
If one category returns 1.5x that of another category (with exactly the same performance graph, just 1.5x the amplitude), then one would expect the "gap" for that category to naturally be 1.5x as large as well.
But inside those numbers, and usually left out of these endless (IMO, usually worthless) discussions and articles, you can find PMs/funds that consistently, and over most/sometimes all of the interim periods, beat the indexes.
Those are the PMs/actively managed funds you want to own. (Read it s-l-o-w-l-y and try to understand it.)
If an investor does not know which PMs/funds those are, or can't scope them out, then, yeah, go ahead and invest in the indexes, and use the widely ballyhooed statistics as your justification.
And no, I have no plans to spoon-feed what I consider the best PMs and/or actively managed funds as posters on this forum are more than capable of finding them, or are already invested in them.
That said, we are current and LT holders of FSELX, a classic example of how rewarding it is if an investor can identify just ONE of the best of the best. Back in the day, almost 100% of our portfolio was in FLPSX during Tillinghast's glory days. Before that, ditto for Lynch's Magellan.
In semi-plain English: The % of PMs who beat the indexes for a given period is largely comprised of that period's hot PMs/funds, and the ones who consistently do it.
*Three kinds of Lies:
1. Lies
2. Damned lies
3. Statistics
EDIT: FWIW, I am 85% active and 15% passive, about my usual allocation.
The vast majority of investors don't have the stomach or temperament to passively invest in SPY or VBINX over 40 years. Even on this forum, how many are only invested in only these two or similar passive investments?
Most D&C funds carry ERs around .53% - probably a bit higher on international funds. Couple that with good management and it should pay off longer term. What I don’t know - but would love to hear - is how does a stable investor base affect a fund’s long term performance? And - while we’re on the subject … Indexes, like the S&P don’t have to contend with “flighty” investors moving in and out. Probably another reason they outperform active management..
Incidentally, looks like D&C’s domestic funds held up better than most yesterday. Likely their financials helped soften the downturn in overall market. Of course - that cuts both ways.
I wish it had been 10K instead of 1K. Most of the other investments from that time are gone with the wind except for VWGIX discussed in another thread here.
The biggest chunk were in an IRA I cashed out to make a down payment on a house in Marin County. We're pretty happy about how that worked out. Only took equity out once to buy a new roof.
Looking back, I should have scrounged up 500 bucks to get into NICSX. We'ld be on easy street.
I'm thinking back when my Dad got me started investing in the early 80's with my money working at the local Texaco...*ah the stories...I should write a book....
Kellogg, Raytheon, JNJ, Merck and Coke (KO), $2k in each....
Looking back I'm thinking if I just added $2k each year to each of those and did nothing else I would have a beach house in Hawaii to go along with a Ferrari collection..without all the noodling around, reading WSJ, etc etc.
I'm thinking my 5 stock portfolio would have beat any SPY index fund although, I don't think there were any index funds back then?
I think you could do worse than just roll with a Raytheon/LMT, JNJ, WMT/Costco, BRK-B, American Express, MSFT going forward over the next 20 years....
Best,
Baseball Fan
For better or worse, the kind of investors who post here probably aren’t sitting on their hands for 40 years.
Hold for 20++ yrs?
I read some reputable article 41y ago about the best funds, and DODGX was right in there, and I invested, but of course bailed at some point. TWEIX and TORYX and the others in the article fell by the wayside over time.
It remains interesting to me that 10y returns of the very best broad-based biggies still show, today, DODGX slightly lagging FXAIX, FCNTX slightly ahead, and the only big big winner FBGRX.
All the others I looked up lag. FLPSX, e.g.
Of course niches (FSELX) excel also.
I did have a good friend in the 1990s, amateur investor, tell me she was in FBGRX big and was going to stay. I wonder if she did. At the time I thought meh. What a fund that was (and very recently is).
LB yes, I understand what you wrote and agree re Target Date funds but do know folks who got wiggy over the last 3 years and bailed out...and these are very educated, successful folks with MBAs etc...they looked like their dog got run over during the down drafts and did bail to cash...
While we are at it, meaning looking at the way back time machine...I actually wonder how many of us would have actually done better rolling with treasury notes for the past 30-40 years instead of puttering around with buying funds, stocks. Don't the studies show that most investors do NOT come anywhere near the returns listed for funds etc....due to the in and out and puttering around?
David M...saw the TWEIX in your post...that would have been a great long hold....and someone on the boards wrote within the past two years that they had a friend/colleague who had only ONE fund, Blackrock Global Allocation MDLOX?...keep it simple....keep adding to it. I read that a long long time ago in IBD Investors Business Daily. same thing, invest in one solid fund, keep at it. Enjoy your life, go to the beach, focus on your job etc...
What legal or contractual agreement exists with the sponsor to operate that fund for an indefinite time period or as @Baseball_Fan says to adhere to the same allocations, operating restrictions, fee structures? I’ve had at least two firms I invested through (Strong & Oppenheimer) go completely out of existence in the past 25 years. A third one, Templeton has been essentially merged out of existence since I opened a workplace plan there in the early 70s. Or are these simply extreme aberrations due to my antiquity?
Invesco acquired OppneheimerFunds. Invesco has been an aggressive acquirer but it is taking some rest now.
True, Franklin Templeton is now quite different from old Templeton or Franklin.
As for TWEIX, yes and no. See
https://www.morningstar.com/funds/xnas/tweix/chart
Compare it since 1994 w/ DODGX, FXAIX, FCNTX, and FBGRX. Okay.
But who among us would hold patiently through the recent runups and big drops of D&C, Blue Chip, and esp Contra, which of course is the one you want to have been in all along, unwaveringly, up 2132% the last 29y?
@yogibearbull - Being in Michigan the nearby Milwaukee-based Strong Funds had a certain appeal. I never had a lot there, but did do some transfers in of my 403B while still working - a move possible in the 90s (but no longer allowed). I learned a lot while there. ”Pay yourself first” wasn’t original with Dick Strong - but he used the saying effectively in motivating myself (and I assume many others) to better manage our finances. In the end, Strong turned out to be a crook.
Our current list keep adding buy list
BRK.b
Tsla
Vang2040 2050
Iwm
Yinn fxi
Vong
Vo
Vang international etf and eem
Vht
Qqq vgt
Tlt
Boeing
Cost
Little XLE slv gld
Tsp Ira all in 2045 spy Iwm and vo international small caps
Also few hundreds per month into btcusd ethusd dodecoins (100 200)
Prob more heavily load toward fxi China sp500 etf imho ccp new world leader in 3 5 yrs bypass everyone else
Thankyou so much for all the wonderful commentaries and thoughtful suggestions