from Blitzer: ...But, my problem is that the active funds that I choose almost invariably underperform their related indices.
And this, I think, is the crux of every debate for active/passive. I kind of have a different view. A fund like FPACX for example which has lots of asset options, or even YAFFX which often loads up on cash, should I care if they beat the S&P500? All I care about is that my chosen manager gives good consistent returns with downside protection. MACSX? Do I expect this fund to have leading returns year in and year out? Nope. I own it because it is a relatively conservative way to participate in the growing Asia market. How do I compare it to a benchmark since it is so unique.
I guess to me, I'm less interested in what fund will give me the best return all the time or if it beats an index. I'm more interested in having a collection of fund managers that keep the journey on track with my goals - as smooth as possible.
Given that, the benchmark that I do find very important is overall portfolio results - is my collection of funds doing as good or better than a portfolio benchmark, say a comparative target date fund.

Three distribution days last week, Thursday especially, where SPY dropped 2% on twice normal volume.
Below 10 and 50 day simple moving averages.
So, not a great July.
YTD, still a nice 5.2%.
For those of us long US equities, let's hope Berkshire Hathaway's latest earnings help reverse recent downward thread.

US aggregate bonds having decent year as well, despite low expectations. Seems to be treading water this summer, which I suspect is due to Fed's plans to unwind some QE measures.

I thought I’d comment on a few things. They follow.
Item 1) In reviewing IRNIX which was presented by the Vintage Freak although it is a fund of funds it does carry a four star M* rating and has a duration on 3.35 years. So with this it appears good performance can be had form a fund of funds just as good performance can be had form my sleeve system that holds a number of funds … usually three to six. I expect this fund to continue to perform well and if one or even a few of the funds that it holds falters then there are the others that can still propel the fund. Its turnover ratio is 43% so it appears some active trading and positioning occurs. In 2008 it lost about one half of what its category lost.
Item 2) Some say I have way too many funds … perhaps so, perhaps not! In comparing my portfolio’s performance to Morningstars Moderate Target Risk as a benchmark … well I have handily bettered the benchmark. The results follow listed by period with the portfolio being listed first within the results and then the benchmark for a market close of August 1, 2014 in its current configuration.
1 Week) Portfolio -1.8%, benchmark -1.8% … 1 Month) -2.1%, -2.0% … 3 Month) 1.5%, 1.4% … YTD) 5.0%, 3.7% … 1 Year) 11.9%, 9.6% … 3 Year) 10.7%, 9.4% … 5 Year) 12.5%, 10.9% … 10 Year) 8.4%, 6.6%.
Closing comment: With this, there seems to be some added value by using the sleeve system along with selecting only quality funds and when one of them does falter replacing it with another. Seems this is what IRNIX might be doing and it seems to be doing it just fine as it only lost about one half of what the average strategic income fund lost in 2008.
I think one needs to ask themselves this question ... Does your portfolio meet your needs? And, if it does, from my thoughts, then the rest really does not matter if you are happy.
Have a good day … and, most of all I wish all … “Good Investing.”
Old_Skeet

I thought I’d comment on a few things. They follow.
Item 1) In reviewing IRNIX which was presented by the Vintage Freak although it is a fund of funds it does carry a four star M* rating and has a duration on 3.35 years. So with this it appears good performance can be had form a fund of funds just as good performance can be had form my sleeve system that holds a number of funds … usually three to six. I expect this fund to continue to perform well and if one or even a few of the funds that it holds falters then there are the others that can still propel the fund. Its turnover ratio is 43% so it appears some active trading and positioning occurs. In 2008 it lost about one half of what other funds in its category lost.
Item 2) Some say I have way too many funds … perhaps so, perhaps not! In comparing my portfolio’s performance to Morningstars Moderate Target Risk as a benchmark … well I have handily bettered the benchmark. The results follow listed by period with the portfolio being listed first within the results and then the benchmark for a market close of August 1, 2014 in its current configuration.
1 Week) Portfolio -1.8%, benchmark -1.8% … 1 Month) -2.1%, -2.0% … 3 Month) 1.5%, 1.4% … YTD) 5.0%, 3.7% … 1 Year) 11.9%, 9.6% … 3 Year) 10.7%, 9.4% … 5 Year) 12.5%, 10.9% … 10 Year) 8.4%, 6.6%.
Closing comment: With this, there seems to be some added value by using the sleeve system along with selecting only quality funds and when one of them does falter replacing it with another. Seems this is what IRNIX might be doing and it seems to be doing it just fine. After all, it caught the Vintage Freaks attention and carries a four star rating by M* ... and, it only lost about half of what other strategic income funds lost in 2008.
Have a good day … and, most of all I wish all … “Good Investing.”
Old_Skeet

FYI: When these indicators flash together, it’s time to sell
Regards,
Ted
http://www.marketwatch.com/story/3-market-warning-signs-predict-20-stock-tumble-2014-08-01/print?guid=9751D8A6-199D-11E4-8E04-00212803FAD6

Strategic Income is $500 NTF at Ameritrade, the other fund not available.

Interesting article Ted. For one, there are a lot of maybes and what ifs. Is a target date fund that holds only index funds a good choice versus the investor buying those same funds themselves? To me that says the company and or the manager is not putting much effort into the product.
Nothing is sure but if you research a fund and wonder why they hold only index funds or have 150 managers that should be a clue to look elsewhere.
Just my thoughts. Thanks Ted.

FYI: Copy & Paste 8/2/14: Lewis Braham: Barron's
Regards,
Ted
Edited by Snowball to move the post back toward some approximation of the "fair use" envisaged by copyright law.
Please do not cut-and-paste wholesale from copyrighted materials. Excerpt, explain and link (if you can). Summarize, comment and aim folks toward the original when you can't.
"The case for index funds and ETFs has always rested soundly on costs. After expenses, most money managers can't beat their benchmarks, so a fund charging 1.5% will lag behind an ETF charging 0.05%. But what happens when the actively managed fund costs the same -- or less -- than the ETF? Welcome to the Vanguard paradox."
[two paragraphs deleted]
Moreover, Vanguard's actively managed funds are so well run that on average they beat their zero-fee benchmarks even over long periods of time. [remainder on the paragraph, which supplied the empirical data, deleted]
SO WHY BOTHER with ETFs?"
Mr. Braham cites two reasons, cost aside: (1) consisistency - you eliminate style drift, manager risk and so on and (2) mistimed purchases of sectors, styles and niches - which might be mitigated by holding a broad market index.
In general, though, Vanguard often has active products that are as good as or better than passive ones. Two flies remain in the anointment: (1) Vanguard as "dumbed down" (Dan Wiener's phrase) some funds by adding too many managers and (2) trading costs imposed when you buy Vanguard funds through non-Vanguard platforms can overwhelm your performance edge.

I agree the commentary is worth more than one pays for it, but the Gross and Double-Line sections could have been covered by a link to one of the many articles in the past month covering the issues, although I did check out the Disneyland employee link. I suppose I should have skimmed them, as suggested above, but I assumed if it was worth writing, it presumably was worth reading.
HOWEVER, a listing of the 17 5* funds for the past 1-10 years would have been appreciated, perhaps even worth a subscription. Did Ted link this when I wasn't looking? (Or did I miss the link in the commentary?)
I have found that the talks I spend more time preparing are shorter than the rush jobs, and the audience is more likely to stay awake. Suggesting tighter construction is not a personal attack.

@VintageFreak,
I have been doing the same thing. American Century made it easy for me by opening a new fund ASDVX. Short duration of less than 3 years. Investment grade and high yield instruments from anywhere including emerging markets. Preferred stocks. I had been looking at Schwab but since this was in a rollover account the paperwork was a consideration.
I was 80/20 stocks to fixed, now after a couple of moves including the above I am about 65/35.

Hi Mrdarcy,
No convincing is necessary.
On many past postings I documented that my current portfolio is divided about equally between passive and active funds. Recently, I decided to shift more towards a passive mix without abandoning active management completely. Active funds do have a place.
I plan a core Index dominated portfolio with a satellite active component. I expect a final mix of perhaps 80/20 or 70/30 passive to active components.
Many studies demonstrate that active funds outdistance passive products about 20% to 50% of the time, never predictable ahead of time, and never persistently.
The database includes stuff like the S&P. SPIVA scorecard and Persistency semi-annual studies and the Gus Sauter Vanguard work referenced earlier. Many others exist.
I don't mind a little leg pulling since it permits me to cite additional data sources. I have never submitted a post without quoting statistics that I culled from what I evaluated at least as semi~reliable from an honest source. This derives directly from my engineering background when preparing work proposals. Trust, but verify.
Thanks for the opportunity.
Best Wishes.

I think the poster in question has a system where he can monitor his holdings. Maybe a computer application? He seems to do well with it and I commend him for that.
Simplicity does have its place. I know I
could never monitor 50 + funds. I have 9 holdings and that's enough for me.
As far as the argument of which type of investment plan works best, it's a wash. There are too many variables. It is easy to pick out funds on each side to make one side look better than the other. It's the old passive versus active argument.
In this case I would say that both you and the other poster are right.

I’m immediately just a little leery when an author tosses out an extremely high, unrealistic percentage claim without justification. Additionally, he highlights that number in the title of the article. What about you guys? Does it strike a skeptical chord with you? It does with me.
I’m apprehensive that anyone ever claimed that Index portfolios outdistanced active fund managed equivalents 90% of the time for any fund category for any extended timeframe. I doubt it ever happened.

Um...
From January 9th:

The active route is more challenging with a likelihood of Index out-performance that is in the 10 % to 30 % range depending on time horizon and number of active funds within the portfolio.

On some level I'm just pulling your leg. But it is an honest question whether there is any evidence that would convince you of the utility of an active strategy.

Hi Guys,
I’m immediately just a little leery when an author tosses out an extremely high, unrealistic percentage claim without justification. Additionally, he highlights that number in the title of the article. What about you guys? Does it strike a skeptical chord with you? It does with me.
I’m apprehensive that anyone ever claimed that Index portfolios outdistanced active fund managed equivalents 90% of the time for any fund category for any extended timeframe. I doubt it ever happened.
I suspect that the author constructed a straw-man target that could easily be burned. I addressed this fraudulent method in an earlier post. Here’s the internal Link to that post:
http://www.mutualfundobserver.com:80/discuss/discussion/14757/charlie-munger-interview-comments
I am very familiar with active versus passive fund studies with results that are timeframe and category dependent. Just about all these studies show an advantage to the passive game plan. However, results are never 90% one-sided. In the investment universe, a 70% outcome advantage is outstanding.
The brief study that the writer referenced also seemed a bit sloppy in its construction. Various asset classes were tested against an S&P 500 Index benchmark. The active fund results should have been more carefully measured against a fair representative benchmark.
The Gus Sauter study that was mentioned can be found as follows:
https://global.vanguard.com/international/web/pdfs/INTAPR.pdf
Except for the highly skilled, both very talented and extremely lucky investor, the Sauter study basically reinforces the case for passive investing. I would anticipate nothing less from a Vanguard son.
I encourage you to read the study very carefully. It examines both the US and the European mutual fund marketplace. In the US world, only 14% of the actively managed funds outperformed an Index in both excess returns and in reduced risk. Another 21% also generated excess returns above Index returns, but at a higher risk level. So 65% of the active portfolios delivered less than their Indices.
Sauter also concluded that the relative outcomes would more heavily favor the Index strategy as the number of active funds increased from the three level that was explored in the study.
I hope this clears away some of the fog.
Best Wishes.

Hi Guys,
A few days ago I was shocked by the number of mutual funds owned by a wise and loyal MFO member. I didn’t examine the incremental diversification benefits accrued by the overall funds or their individual investment philosophies; I simply counted.
I’m sure the owner had excellent reasons and logic when these funds were originally added to his portfolio. I’m equally sure that the styles and the strategies deployed by such a competitive group tend to cancel each other out and neutralize a potential high excess returns.
Diversification is a cardinal investment rule; it is the stuff of successful investing. Well maybe, but more likely it must be exercised prudently; it has its own set of limits. Safety in numbers is a residual human characteristic from our hunter-gatherer days.
J. Paul Getty opined that “Money is like manure. You have to spread it around to make things grow”. Warren Buffett proffered the other viewpoint with “Buy two of everything in sight and you end up with a zoo instead of a portfolio”. Economist and financial advisor Mark Skousen summarized both sides with this wealth-linked compromise: “To make it concentrate, to keep it diversify”.
Assembling a huge number of actively managed mutual funds in multiple categories is almost a 100% guarantee of underperformance relative to any reasonable benchmark. That failure guarantee is mostly tied to active fund management fees. It is true that some superior fund managers do overcome the fees hurdles, but these are few in number and even this minority subset is further eroded by persistency problems over time.
A recent study that illuminates this issue was released by Rick Ferri a year or so ago. It is a Monte Carlo-based parametric study that has been referenced on MFO earlier. Here is a Link to it:
http://www.rickferri.com/WhitePaper.pdf
You can use these study results to estimate your likelihood of selecting a group of active fund managers that potentially might outdistance a passive portfolio, and importantly, by how much.
The overarching findings from this extensive analysis is that the odds are not especially satisfying, and that the likely excess returns are negative. Notwithstanding these unhealthy findings, they do not completely close the door for active portfolio elements. However, these results do put a hard edge on the low probabilities and the negative expectations.
To illustrate, assume that an investor has somehow increased his likelihood of choosing a positive Alpha fund manager to 70 percent by applying an undefined meaningful fund manager selection process. That’s actually quite high given the poor historical record of individual investors. Using Ferri’s numbers for a 3-component portfolio (40% US equity, 20% International equity, 40% Investment grade bonds), the likely outperformance median return is 0.52% while the underperformance median is -1.25%. That asymmetry reflects cost and fee drags.
The prospective excess returns coupled to a 70% chance of selecting a superior active manager is (0.7 X 0.52) + (0.3 X -1.25) = -0.011. So, an investor needs to have a higher than 70% active fund manager selection probability before he can anticipate a net positive excess return for his efforts. That’s a tough task.
The situation deteriorates rapidly as more active managers are added to the mix within each investment category. In the sample scenario, the likelihood of hiring two successful active fund managers is simply 0.7 X 0.7 = 0.49 without impacting the median expected excess return numbers.
The probabilities of generating excess rewards from active management falls from neutral to bad to worse very rapidly. The bottom-line is that hiring a ton of active fund managers adds to investment risk without substantially enhancing the rewards side of the equation. Charles Ellis might well characterize this as a Losers game.
Twenty years ago the investment game was a lot easier to play. Market efficiency has improved over time and has reduced the opportunities for excess profits just like improvements in baseball pitching staff depth has improved to lower overall batting averages.
At that time, it was investor against investor on trades; today the trades are much more commonly executed on an institution against institution basis. And these institutions are populated by well educated, smart professionals who are supported by extensive research staff and super computers for numbers crunching. The chances for an individual investor to outplay these titans has dimmed over the decades.
I don’t mean to say that it can’t happen because it does happen. But it’s not an easy chore. Institutional agencies have their own set of hobgoblins to battle. Since retirement, I have been benchmarking my private portfolio against an Index benchmark that I vary as my asset allocation changes, and against a nice pension that is tied to a portfolio maintained by a highly regarded financial service organization.
Anecdotally, over most of my retirement, my personal portfolio was dominated by active fund holdings. I slightly underperformed the Index benchmark, but I frequently outperformed my pension portfolio. I don’t have access to the pension portfolio’s specific allocations, but I suppose they are more widely and more conservatively distributed than my personal portfolio. They have access to alternate investment products that I can not touch.
One takeaway from all this is that some active managers can deliver the goods, but they are a rare breed. So choose carefully, monitor diligently, and very definitely limit the number of active managers that you hire for your portfolio(s). That’s just my amateurs opinion.
Simplifying is wonderful. It will certainly add to your free time; it will likely enhance your portfolio returns, especially if you use active fund management.
Best Regards.

@davidmoran: Here is the companion article from MarketWatch.Com.
Regards,
Ted
http://www.marketwatch.com/story/index-funds-superior-to-high-priced-active-management-2014-08-01/print?guid=A88A6EFF-2BDE-404A-82CF-4654914144D5

FYI: - Jeffrey Gundlach's DoubleLine Funds had net inflows of $603 million in July, with its flagship DoubleLine Total Return Bond Fund attracting net inflows of $375 million.
Regards,
Ted
http://www.reuters.com/assets/print?aid=USL2N0Q727Z20140801

Hi Andy- Yes, I'd think that 25 to 30% would be a pretty good number for that.

Minimum investment $250,000 danario. Possible bone in the soup.

Good piece, backing up the clear tendency of market-cap indexes to be great on the way up and very un-great on the way down. It's amazing how something as simple as the clearly documented record of those indexes in up- and down-markets escapes the cognition of the 'indexes are all you need, now and forever' commenters.
I'd been thinking the reason there's been so much of that sentiment flying around the finance sphere is that many of those making said comments must be thinking only in terms of the standard return periods, and any of those from 1-5 years show market-cap indexes as brilliant choices because the last 5y neatly coincides with the latest bull market - clearly the sweet spot of a market cap index.
One of the best analyses of an optimal stake in stock indexes in a long-term portfolio came from, believe it or not, Gus Sauter, former bigwig at Vanguard (sorry, no link, haven't been able to find it recently), which took into account many years of data and concluded that something like 30%, but no more, of a stock portfolio in index funds made an optimal contribution to long-term returns.