Actively managed funds

[chocolatebear11]

Hi,

I was talking to a few others regarding WCI, boglehead and other conservative investing strategies. They argue that actively managed fund manger beat the market/index funds. If they didn’t, how do they have a job?

The most common statistics is 80% of active managed fund managers lose to the market. Does anyone have data to back that up?

Does traders at big firms like JPmorgan and Berkshire do poorly?

[racelari]

Yes, there is data to back that up if you look at research by Jack Bogle and Vanguard. Also DALBAR, the group that wrote a study that individual investors underperform most funds because they buy in and out, also have studies showing that actively managed funds don't beat their index.

The reason that these actively managed funds still exist is because they, as well as a lot of investors, think that they might be in the 20% as you mentioned that beat the market. Unfortunately the further you go in time, that 20% shrinks when you go 15, 20, 30 years. Also, these funds do a good job of doctoring the numbers where they show that they are beating an index by cherry picking a time period they did well, excluding fees and taxes from their numbers, and also showing one time lump sum data instead of returns if you DCA your money into the funds. Finally, the funds may be using the wrong benchmark index, for example an actively managed fund that buys a lot of small and value companies might compare themselves to the S and P 500 index, and then claim to "beat the market" when they should have been comparing their returns to a small cap value index.

Fischer Investments as well as Americanfunds use such tactics I mentioned above.

Yes, JPM does not beat their passively managed counterparts.

Berkshire is way different. It is not a mutual fund, but rather a company that buys parts of other companies and Warren Buffet not only does the research in these individual stocks, but also helps the CEO's of these companies succeed. Warren Buffett is one of thousands of other traders/CEO's that can "beat the market". And he is not just buying the company stock- he uses his resources and advice to help those companies succeed as a part business owner.

[jacoavlu]

if you accept that active management incurs greater fees and taxes than indexing, then it becomes simple math that on average, active investing must underperform index investing


https://web.stanford.edu/~wfsharpe/a...ive/active.htm

[CordMcNally]

Hi,

I was talking to a few others regarding WCI, boglehead and other conservative investing strategies. They argue that actively managed fund manger beat the market/index funds.

You know what they say about arguing with idiots, don't you?

[Tim]

Actually, BRK is not “active” in it’s investment activity. It just makes a ton on long term investments.

If seeking higher long term returns is defined as “conservative”, aggressive should apply as well.

[EntrepreneurMD]

Yes! And don't you believe those posted active fund returns returns. They may post 70% 1-year returns or 20% annualized life of fund, but after expenses it's more like 3%. Look at the companies they're concentrated in. Do Amazon, UHC, Apple, Home Depot, Google, NVDA really make that much money?

Those active investors have to be faring worse than us, right? Yeah. Let's just agree. It makes us feel better for sure.

[jacoavlu]

Yes! And don't you believe those posted active fund returns returns. They may post 70% 1-year returns or 20% annualized life of fund, but after expenses it's more like 3%. Look at the companies they're concentrated in. Do Amazon, UHC, Apple, Home Depot, Google, NVDA really make that much money?

Those active investors have to be faring worse than us, right? Yeah. Let's just agree. It makes us feel better for sure.

actively managed funds can beat the index.

actively managed funds usually don't beat the index. The longer time period one looks at, the fewer the number of active funds that beat the index.

these are facts, demonstrated by data. Do you deny this?

[TheDangerZone]

Try spending more time on the blog and less time in the forums.

https://www.whitecoatinvestor.com/10...t-index-funds/

[TXDoc21]

If you pick up the book “the only guide to a winning investment strategy you will ever need” by Larry Swedroe it is well documented and explained in detail in there.

[Steven Podnos MD CFP]

While we use mostly passively invested index funds for stocks, we will use actively managed funds for areas that have "inefficiency" such as Emerging Markets and especially for fixed income. There really are no easy to use "indexes" for EM or global FI, and the use of active management for FI allows us to benefit from skilled managers that invested globally.

[jacoavlu]

While we use mostly passively invested index funds for stocks, we will use actively managed funds for areas that have "inefficiency" such as Emerging Markets and especially for fixed income. There really are no easy to use "indexes" for EM or global FI, and the use of active management for FI allows us to benefit from skilled managers that invested globally.

what’s criticism of VWO ?

[Lordosis]

I remember reading that the bond market was even more efficient than the stock market. But I do not know where I read that and cannot back up this source. Do you have any evidence of these inefficiencies in the bond market?

Also there is really not that much to gain from bonds and is it really worth complicating matters and investing in them internationally at higher fees?

[Tim]

Most analyses fail to account for "survivor's bias" in performance measures over time periods.
https://qz.com/1272280/there-are-now...-to-invest-in/
There are zero standards for adjusting the data population.
When you ask for statistics, be careful to factor in the "stronger mutual funds" survive.

[EntrepreneurMD]

actively managed funds can beat the index.

actively managed funds usually don't beat the index. The longer time period one looks at, the fewer the number of active funds that beat the index.

these are facts, demonstrated by data. Do you deny this?

Warning: This answer is in depth and 99% won't care for it as FI is good enough for most with some SORR considerations to remain FI of course, which for most physicians following the general advice here will accomplish. Probably not enough for any meaningful (true) RE (retire early) especially for PCP's. What I do now has taken years of self improvement and education outside of my profession that 99% don't necessarily want to do. It's the other 1% I'm speaking to. Lastly, my personality disorder makes the challenge enjoyable - it's actually a source of happiness - the grass is green right here. The reasons for the satisfaction are really not about returns at all, but it's about the freedoms the approach has afforded me. I'm 20 years in, I/m not talking about a lucky year or two. Most FP's don't get here with just luck, at about 5x my FI number now and no debt.

Why have I chosen this path? It chose me. I migrated away from what didn't work for me and towards what does. It's a more difficult path than the traditional investor-saver path. I see here physicians regularly complaining about burnout, depression, long work ours, employers, discontent with the actual job and administrative hassles, complacency accumulating long term debt. I decided long ago not to have any of that, and that makes this path more than worth it for me.

I haven't actually seen data regarding long term active versus passive fund returns, after expenses. I can't really deny or confirm. It's very nuanced - even if a fund outperforms it can actually underperform in the real world due to tax efficiency in taxable vs. tax advantaged accounts, etc. There can certainly be a whole bunch of funds concentrated in poor sectors that underperform or in strong sectors that outperform for a decade or two then the entire sector goes out of favor and underperforms the averages. A prolonged major recession like 2008 can reverse outperformance to underperformance upon a market turn at least for the correction phase. Doing what I do blindly without continuing financial education likely will lead to underperformance and indexing would be preferred. Not unlike what I did with business start-up/expansion and commercial real estate. Easy is not an option.

Now what I have seen over my 20 years, and acted upon it to get here:

1- I found it quite easy (for myself, perhaps not others) to choose sectors for which data supports continued strength versus those that have remained weak, and as you know I posted this a few years ago. Maybe it was luck, but what I said then seems to still hold true.

2- I found it quite easy (for myself, perhaps not others) to research and find a vast array of funds that have consistently outperformed SP for a long time - inception date, 10-year annualized, since I bought in, etc. Of my current holdings, perhaps 1 or 2 didn't keep up with SP (as you know I tend to hold about 10-12 funds at any given time); however the others had significant outperformance - that's partially how I got about 50% returns this year in retirement accounts despite that, and a lot better than indexing almost every year. Even half of 50% in normalized years would be a big deal to me. I personally have found plenty of actively traded funds that have outperformed SP over the long term.

3- Neither I nor my portfolio care how any individual fund is performing. It's how the portfolio is performing on a whole based on funds included and buy sell/dates, relative size of each position, etc. As of late I've been able to, based on increased focus on technical analysis, sell an underperformer high (lately my underperformers have significantly outperformed SP) and buying lower either a stronger sector fund or the same fund. So as a sector/fund potentially loses favor as you say over the long term, I am repeatedly adjusting holdings at opportune times to keep the overall portfolio performing. This year almost all funds I hold have done 30-120% YTD (the 120%-er I have only held a few months and is up nicely from purchase date, my biggest holding at 30% of portfolio registers 85% YTD right now).

4- If I can continue to do this and mitigate losses during suboptimal market conditions, I'll have a system I can maintain in retirement one day.

5- Did the same thing building a business and CRE portfolio from the ground up. Constantly learning and modifying strategy as a spillover effect from the market strategy. Most objective observers would say I did well here as well. Both of these can also provide income and stability in retirement.

6- Was it worth all the effort? It feels like it's in my DNA and perhaps why so few have the drive. It was a pleasure to problem solve and meet the challenge, probably regardless of the returns though they look pretty good with overall NW estimates approach 9 figures at some point based on current, long term trajectory.

7- If I'm forced to retire early (health issues, PCP's replaced by robots, etc.) I'm fully at peace as a lot of my income and returns are not dependent on active work.

So of course any investment (market or otherwise) can outperform or underperform SP over the short and long term. I've spent 20 years making sure my portfolio of investments (market and otherwise) are optimized. Some luck yes. A lot of luck maybe. All luck no. Some effort yes. A lot of effort gosh yes. All effort, no. Strategically planning for another 20 yeas of the same or better. Not married to any specific investment, fund, sector, active or passive fund strategy, plan. Seasons change, I evolve with them rather than accepting a suboptimal status quo. I say this because I think it is central to success but very difficult for may docs.

[Kennyt7]

An INDEXER here but own BRKB and Vanguard HEALTH CARE(look at its 35 yr record)
MATHEMATICS makes active investing an IMPOSSIBLE task, don't bother