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How do you look at funds? a proposed case study.

edited February 2014 in Fund Discussions
Recently was told to look at BRLVX and BWLIX (the non-institutional edition) by a friend and find much to recommend it. Comparing it to it's M* category it almost always outperforms (10 out of the last 10 years) - though often by less than than its expense ratio (1.21% for BWLIX) (cutting positive years to 6 out of 10) and without necessarily maintaining strong performance over it's benchmark of the S&P 500 (5 out of 10 years of outperformance after expenses).

I am left with the following questions:
Do I look at this and conclude that it is a solid fund as a buy and hold since it has steady outperformance in its category?
Is it useful instead as an allocation fund for when I believe that Large Value is a sector where equity growth will come next?
Or is its outperformance sufficiently small compared to its expenses that I'd do just as well holding an index fund of its benchmark, or other relevant index?

I assume there are many "right" answers to this question revolving around my portfolio size, goals and risk tolerance, but as I start my investing life I'm most curious about process. What questions should I be asking? what factors look positive or negative? How do I reflect these numbers against any of the many investment philosophies present in this community?

Thank you in advance for your thoughts and shared experience.

Comments

  • edited February 2014
    (From you:) "I assume there are many "right" answers to this question revolving around my portfolio size, goals and risk tolerance, but as I start my investing life I'm most curious about process. What questions should I be asking? what factors look positive or negative? How do I reflect these numbers against any of the many investment philosophies present in this community?"

    Hello. You're quite correct. Investing is a Science/Art. Diversify your portfolio, and you will do well. Do not try to correctly "TIME" anything. If your allocations are smart, you'll do well over the long run. A sprint this is NOT. Sounds like you have many years to look forward to.

    There is some very specific, often arcane, vocabulary to get accustomed to and familiar with. Don't even try to ask the ethical questions. All of it is dirty. It's about making money, and you'll never hear a word anywhere about just how that gets accomplished.

    Realize you can't cover ALL the bases. Generally speaking, don't let any single holding grow to more than 20% of your total. Holdings that amount to less than 3 or 4 percent of your total might not even be worth holding, at that level. (You might have a very specific tactical reason for holding such, and that's OK...)

    I think you ought to see "The Zurich Axioms." Also, a good "primer" is Benjamin Graham's "The Intelligent Investor." You can actually purchase that book through this site via Amazon, and MFO will receive a bit of a donation from them.

    Basics:
    1. A core domestic fund which is not sexy, just reliable
    2. a small-cap fund, in a smaller proportion.

    3. DEVELOPED foreign economies, like western Europe.
    4. "Emerging Markets." Hold much less of this stuff than the others, maybe 15% or so of total. The Matthews funds are a great place to start. Specifically, MAPIX. It holds both developed Asia and emerging Asia. Pays quarterly..........Others will surely chime in and help, too. Yes, there are a million different recipes. If it seems too confusing and complicated, then you're doing it wrong--- for your own particular temperament and situation.

    Sock away all you can via 401k or 403b, then IRA. You may want the Roth version. Pay taxes up front, then it's tax-free upon withdrawal, after age 59 and a half.

    ZURICH AXIOMS: Some of it seems contradictory. It is a smart, intuitive tool.
    http://www.4shared.com/file/178091085/f7ab88be/Zurich_axioms.html

    BWLIX looks very good!
  • edited February 2014
    Hi jlev,

    30 minutes with Ray Dalio, How the Economic Machine Works

    Agree or not, worth your 30 minutes of video time.

    Regards,
    Catch
  • catch22,

    Thanks for the link to the video.

    thanks
    nath
  • edited February 2014
    Comparing it to it's M* category it almost always outperforms (10 out of the last 10 years) - though often by less than than its expense ratio (1.21% for BWLIX) (cutting positive years to 6 out of 10) and without necessarily maintaining strong performance over it's benchmark of the S&P 500 (5 out of 10 years of outperformance after expenses).
    I see this mistake occasionally here. The M* returns you see are net of fees. In other words, they are already subtracted. BRLVX has outperformed the LV category in every year since inception, and the S&P in 7 of 10. Note that this is the smaller fee institutional fund, and that BWLIX will gain less because of its fees.

    It looks to be a good find, but unfortunately history says outperforming funds tend to revert to the mean. You can look up any of MJG's posts to see the argument for indexing done very well.

    If you are looking for specific things to look for in a fund to suggest it *might* outperform, there are a few. My apologies if this is too pedantic or simplistic:

    1) Fees. Your returns = fund's returns - fees. Large fees = less returns.

    2) Manager tenure and track record at other funds. This might give you insight into the manager's methods and a better feel for whether returns are luck or actual skill.

    3) Turnover. Holding stocks longer lessens hidden transaction fees the fund has to pay to buy and sell. It's also just seems to be better investment advice.

    4) Manager investment. Some think its better to have their money at risk too.

    5) Fund size. Funds lose the ability to invest in smaller names or less names as they get more money invested in them. This is a double edged sword, as a successful fund attracts money, which then usually reduces future results.

    6) Parent company. Does the company close its funds before they get too big? Do they encourage manager retention, independent thought, and employee investment? Are they "shareholder friendly", communicate often, and own up to mistakes. What is their record of opening funds? Do they follow trends, or a process? Are there other funds using that process, and what is their success?

    7) Number of holdings/active share. In general, if you want to beat an index, you have to be unlike an index. One way to go about that is to put your money where your mouth is, so to speak, and own a greater percentage of your best ideas. The more you own, the more watered down your ideas, the closer to an index you are. You can search for numerous active share discussions here.

    8) Fund volatility. It's great if a fund goes up up up, but if it then goes down down down, you're nowhere. Does the fund, and the manager/company, have a history of downside protection? Note, smaller number of holdings might suggest higher volatility.

    9) Clearly articulated purpose for fund. Read the prospectus. Is the fund sort of gimmicky, or does it lay out a clear vision of what its methods are and its investment niche. The clearer the better. Never invest in something you don't understand.

    10) How does this fund fit in my portfolio? There is a divide here between people with a number of funds, and those who feel investors should pursue their own best ideas. you need a personal idea of goals, risk tolerance, time horizon, style, etc... And your fund choices need to fit those criteria. In general, if you're just starting out, try to find a couple of core equity funds and DCA into them. Worry about bonds later (assuming you have a long term horizon). It's ok if those funds are total market indices and you figure out if you want to be an active investor later on. Getting started is the important thing.

    As for reading, crash suggested Ben Graham. I'd second that, but after William Bernstein's 'Intelligent Asset Allocator' and maybe even Jack Bogle's 'Common Sense on Mutual Funds.' You'll walk away thinking only of mutual funds, but it will set the stage for Graham's opposite view of value investing.

    Good luck!
  • Reply to @bnath001: Agreed, thank you! I was thinking of this video when I read the M* article the other day and couldn't for the life of me remember what it was called.
  • My chief criteria as new retiree are downside semi-protection, fees, outperformance (typically small) vs indexes, and a look at active competition, and studying at least at the cheaper version of this one and comparing it with my faves in this space, I see no reason not to dive in (yet no overriding reason to do so). It did have a worse 08-09 dip than mine (PRBLX and YACKX) and did not come roaring back quite as much; it also had a worse dip than JENSX, TWEIX, GABEX (slightly) and came back nearly as well. So there are others, is my point. But this one is close, cheaper than some, and looks good in most other respects. If you want large value, and I hope you are right about that niche, go for it or one of the others.
  • I believe that Bridgeway does not participate in No Transaction Fee programs at major brokerages, so if you buy their funds in a brokerage account, you'll pay a fee to buy and to sell. You can, of course, purchase shares directly from the fund. They are a shareholder-friendly outfit, very conscious of costs. No glossy literature; "just-the-facts" on 8.5 X 11 inch white paper. Their reports to shareholders are honest to a fault, almost pedantic. While Bridgeway offers a couple of large-cap funds, they made a name for themselves in micro-cap, small-cap, and aggressive growth funds. They are a quant shop, meaning that their methods for buying and selling stocks are mysterious (to me anyway) and not really divulged. Volatility has been extreme in the growth funds. It soured my on the whole shop and I haven't owned any of their funds for a few years, although I was an enthusiastic investor for quite a while. They donate a sizable portion of their profits to charity.
  • Reply to @BenWP: This fund is marketed (branded) as American Beacon. American Beacon, like several other fund families (Vanguard, Harbor, Litman Gregory Masters come to mind) outsource the management of some or all of their funds.

    So, even though the fund is managed by Bridgeway, it is sold by American Beacon. Like other American Beacon funds, the Investor class is available NTF.

    Here's the thread started by Shadow on the acquisition of the Bridgeway fund by American Beacon (in 2012):
    http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/1561/bridgeway-large-cap-value-fund-reorganized-into-american-beacon-bridgeway-large-cap-value-fund/p1
  • Thanks for that update. Bridgeway also manages a couple of LC funds for Calvert, one of which was a socially responsible fund that Bridgeway used to offer.
  • Thank you everyone for your thoughts and suggested reading. I'm slowly reading/watching all of the associated links, videos and books and will likely get back to everyone soon with more questions. A very sincere thank you for now.
  • Er, I said "mutual funds."

    I meant, "index funds."

    Best of luck. You're asking the right questions.
  • edited March 2014
    A first question, about the Dalio video having made it through the Zurich axioms once and waiting for time to read Graham's book.
    catch22 said:

    Hi jlev,

    30 minutes with Ray Dalio, How the Economic Machine Works

    Agree or not, worth your 30 minutes of video time.

    Regards,
    Catch

    I'm wondering of how global this deleveraging was? Was it the US? the US and other developed markets? Global?
    My question is inspired by thinking about how I should interpret the article http://acrossthecurve.com/?p=12475 in terms of his framework.
    Part of its presentation seems like usual sensationalism, but I'm not sure I entirely understand how strongly coupled the Chinese debt markets are with the outer world and whether it could now be catching up to the problems other economies have been dealing with.
  • What may help is that in taxable accounts with large companies index funds are almoat surely best because they have low turnover that does not generate capital gains distributions. I agree with the criteria discussed by Mr.DArcy(a nice post) but argue that in the case ofa taxable account the index case is even stronger.One argument in favor of index funds is that its very hard to pick managers that will outperform particularly because good funds get big.
    Morningstar helps make a selection by comparing after tax returns with pre tax returns.Finally its really hard to tell that the current market (ora future one) will favor large value. There is apparently a bias infavor of smallcap value overa long period of time though I suspect that conclusion is strongly influenced by extreme out performance in the 21st century especially 2000-2007
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