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Jason Zweig: The Decline and Fall Of Fund Managers
Although I'm much older than Jason Zweig and a tad older than Charles Ellis, I did learn much from their information loaded works and their fine writing styles. We all studied at Columbia University although the subject matter couldn't have been more different.
We share many common beliefs on how the markets work.
I am pleased and honored by your comparison. Thank you.
As I lose neurons, myocytes, and fast twitch fibers, I slowly realize that the age of mega-data means that the areas of inefficiency which smart people with lots of research time to exploit "the market" become smaller. That allows smart managers of all asset, all authority funds a narrowing window of opportunity to exploit specific areas of the market and world. Small cap foreign or frontier funds have several years left, but big data will flatten that world fairly soon also.
I think the remaining decision left for indexers is whether to indulge in market timing. Is there a presidential cycle effect? should you sell in May? Do you believe Schiller and go to cash, or at least add no new money?
Running a mutual fund is a lucrative profession, if one can find investors (That's why there are so many of them). OTOH, why should I allow a failed mutual fund manager to advise my investments? Is he or she now more adept because smaller amounts are involved? Will they work for $500/hr for 2 hours, which may be all the advice I want for the next 6 or 12 months?
I doubt mutual fund managers will go the way of travel agents, but some salaries may decrease. Maybe this will attract people who enjoy the challenge of "beating the market" more than the desire for a 7 figure income, and I REALLY hope I find a couple of them.
Obviously, I do not believe we are entering a new age of active managers, although I do believe that some managers of small funds can out-perform until they become larger funds.
Depending on one's point of view, everything is drivel; and absolute drivel drives out pure drivel, which drives out relative drivel (such as this). I think that's Gresham's Law of Drivel.
Good stuff! I especially liked your revision to Gresham's Law. There is indeed much drivel generated by various elements of the investment community.
But there are also some infrequent gems. It does take a little unpleasant digging to separate the rare diamonds from the heaps of dung. The diamonds are there. A second level of complexity and uncertainty is introduced to characterize if these rare gems are the products of luck or skill.
Over the last few years Michael Mauboussin has contributed much to uncovering how to distinguish between luck and skill. His “The Success Equation” book does yeomen work on this subject. He is an engaging speaker. Here is a Link to a one-hour video that focuses on “Untangling Skill and Luck”:
I also agree with your assessment that the general investment skill level in both the professional and amateur ranks has remarkably improved over the last two decades. Low hanging fruit is a rapidly disappearing commodity as the knowledge base has expanded both in its depth of understanding and in its wide distribution.
Benjamin Graham recognized this trend many years ago, and reported his belief in the fifth version of his famous “The Intelligent Investor” book. He cautioned the “Superinvestors of Graham and Doddsville” about the challenges of finding the far fewer improperly priced investment opportunities.
I’m a much slower learner. About a decade ago, my mutual fund portfolio was almost 100% populated by actively managed products. Today, that concentration has been reduced to roughly a 50/50 mix of actively and passively managed holdings.
I do plan to reduce my actively managed funds still more, but I also plan to retain some active elements. Some managers do outperform their benchmarks for an extended time horizon. There are superior fund managers.
So, although I agree with much of what Charles Ellis and Jason Zweig advocate, I am not as hard over to the Index end of the spectrum that these gentlemen represent. I respect our differences; that’s a needed part in the marketplace’s price discovery mechanism.
@MJG May I ask in which market sectors will you be retaining the highest percentage of actively managed funds? I do understand that one person's investment decisions may not be appropriate for others to act upon.
Thank you for reading my post and for your question.
I’m sure you realize that, as a matter of personal policy, I resist divulging my specific fund positions. I believe it can do more harm than good because we all have different time horizons, life experiences, anxiety levels, investment proclivities, goals, family commitments, ages, and overall wealth. But since I introduced the fact that I’ll be scaling down my actively managed fund holdings, I feel the need to make an exception to that policy. So here goes.
Before I describe the short actively managed fund list, allow me to define the criteria that dominated my selection process. It was not a broad diversification goal or by sector selection. My primary selection criteria were to reward active managers who generated Excess Returns over a substantial timeframe. So Excess Returns and performance time were the key dimensions to shorten the field.
The Excess Returns were measured against the S&P 500 Index standard. The timeframe was the most recent 20-year period because I have owned the final candidates for from 17 to 22 years. I used the Portfolio Visualizer website as my data source.
My Final Five are provisional depending on the continuing tenure of the fund managers. Here are my Final Five with the mangers indicated:
FCNTX William Danoff since 1990 FLPSX Joel Tillinghast since 1969 VWELX Team Wellington since fund inception VGHCX Edward Owens, Jean Hynes since 1984 and ???? DODBX Dodge and Cox Team with John Gunn leader since 1977
This is not a fully diversified portfolio. The missing pieces will be filled with passively managed Index products. The ordering is important since successful active fund managers are hard to find.
These mangers were chosen because they delivered annualized Excess Returns over the S&P 500 benchmark for the 20-year test period. They delivered these Excess Return outcomes with lower volatility as measured by each funds Standard Deviation. The correlation coefficients were not overly impressive, but they helped just a little to dampen total portfolio volatility. These managers have demonstrated more skill than luck over a very daunting investment cycle.
Earlier, I noted that this list is provisional. Several issues need further resolution. Ed Owens is mostly retired, so I’m closely monitoring Jean Hynes’ performance. She did assist Owens for 20 years or so, but it’s a different ballgame when you graduate from a secondary position to the top-dog managerial slot.
Also, the 20-year records of the balanced funds, VWELX and DODBX, are very similar. In a sense, they are on my bubble. At this juncture, eliminating one or the other is a vexing choice since both funds have served me well for 20 years. During that extended period they outdistanced the all stock S&P 500 Index with lower volatility. That’s a noteworthy accomplishment.
I recognize that these are pedestrian selections, but I’m a pedestrian sort of investor. I like plain vanilla ice crème. I get my excitement when visiting Las Vegas. Keeping things simple works best for me.
Of course, I reserve the right to be flexible as the opportunities develop over time. In the investment world, nothing is forever.
The fund that you mentioned (SHRAX) likely never made it to my candidates list way back in the early 1990s. I avoided front-end loaded mutual funds like the plaque that they are. I was reading John Bogle’s “Common Sense on Mutual Funds” in those days, and indeed agreed that costs mattered greatly.
The front-loaded funds were immediately discarded by me from further consideration. I probably interviewed a half dozen financial advisors during that period, and every single one of them recommended portfolios populated only by these costly products.
Our potential retirement war-chest was modest, and I was sickened at the prospects of reducing it immediately by a composite 5% to 6%. It would take years of positive outcomes to replace those unnecessary highway robbery charges. I still feel that way, but less so as my wealth substantially increased. Even then, I believe that I recognized that I was summarily tossing away some excellent fund managers.
I do like Ricky Freeman’s record and his tenure. It is outstanding. He definitely is a talented and skilled stock picker. I am especially impressed by his low portfolio turnover numbers. The man makes his choices, and he stays the course with them. He sticks to his guns. Good for him, and the record shows that it is good for his investors too.
Automatically discarding front loaded funds will eliminate some superior active fund managers. However, I suspect that from an overarching portfolio strategy, it probably does more good than harm.
That’s more than a naked opinion since the cumulative fund management data consistently demonstrates that, on an annual basis, only 20% to 40% of active mangers outdistance passive Index management. Integrated over time, those numbers deteriorate even more, not including the upfront fee. It’s a hard uphill road to overcome fees, and the odds do not favor the individual investor.
@MJG Thanks for taking the time to address my question. Useful information and well thought out analysis as always.
VWELX vs. DODBX - When confronted with vexing choices during my migration to passive ETFs, I tend not to completely dump "old friends" who have been good to me over the years. I simply reduce dollar holdings in each. Might result in a few additional active funds to monitor, but it gives me something to do and something to talk about here.
Other? MAPOX, maybe OAKBX depending, FPACX, one of the two Yackts if you can get into them. Typo above in Tillinghast (1989). Also in VWELX unless you really go back to 1929. I was not able to have the patience with DODBX, alas.
Comments
Mr. Ellis sounds a lot like our MJG.
It would help for active managers to lower their fees.
Suspect there will be more all asset, all authority fund managers in years ahead.
Although I'm much older than Jason Zweig and a tad older than Charles Ellis, I did learn much from their information loaded works and their fine writing styles. We all studied at Columbia University although the subject matter couldn't have been more different.
We share many common beliefs on how the markets work.
I am pleased and honored by your comparison. Thank you.
Best Wishes.
I will not compare anything here to MJG.
I think the remaining decision left for indexers is whether to indulge in market timing. Is there a presidential cycle effect? should you sell in May? Do you believe Schiller and go to cash, or at least add no new money?
Running a mutual fund is a lucrative profession, if one can find investors (That's why there are so many of them). OTOH, why should I allow a failed mutual fund manager to advise my investments? Is he or she now more adept because smaller amounts are involved? Will they work for $500/hr for 2 hours, which may be all the advice I want for the next 6 or 12 months?
I doubt mutual fund managers will go the way of travel agents, but some salaries may decrease. Maybe this will attract people who enjoy the challenge of "beating the market" more than the desire for a 7 figure income, and I REALLY hope I find a couple of them.
Obviously, I do not believe we are entering a new age of active managers, although I do believe that some managers of small funds can out-perform until they become larger funds.
Depending on one's point of view, everything is drivel; and absolute drivel drives out pure drivel, which drives out relative drivel (such as this). I think that's Gresham's Law of Drivel.
Good stuff! I especially liked your revision to Gresham's Law. There is indeed much drivel generated by various elements of the investment community.
But there are also some infrequent gems. It does take a little unpleasant digging to separate the rare diamonds from the heaps of dung. The diamonds are there. A second level of complexity and uncertainty is introduced to characterize if these rare gems are the products of luck or skill.
Over the last few years Michael Mauboussin has contributed much to uncovering how to distinguish between luck and skill. His “The Success Equation” book does yeomen work on this subject. He is an engaging speaker. Here is a Link to a one-hour video that focuses on “Untangling Skill and Luck”:
I also agree with your assessment that the general investment skill level in both the professional and amateur ranks has remarkably improved over the last two decades. Low hanging fruit is a rapidly disappearing commodity as the knowledge base has expanded both in its depth of understanding and in its wide distribution.
Benjamin Graham recognized this trend many years ago, and reported his belief in the fifth version of his famous “The Intelligent Investor” book. He cautioned the “Superinvestors of Graham and Doddsville” about the challenges of finding the far fewer improperly priced investment opportunities.
I’m a much slower learner. About a decade ago, my mutual fund portfolio was almost 100% populated by actively managed products. Today, that concentration has been reduced to roughly a 50/50 mix of actively and passively managed holdings.
I do plan to reduce my actively managed funds still more, but I also plan to retain some active elements. Some managers do outperform their benchmarks for an extended time horizon. There are superior fund managers.
So, although I agree with much of what Charles Ellis and Jason Zweig advocate, I am not as hard over to the Index end of the spectrum that these gentlemen represent. I respect our differences; that’s a needed part in the marketplace’s price discovery mechanism.
Best Wishes and thanks for your viewpoint.
Thank you for reading my post and for your question.
I’m sure you realize that, as a matter of personal policy, I resist divulging my specific fund positions. I believe it can do more harm than good because we all have different time horizons, life experiences, anxiety levels, investment proclivities, goals, family commitments, ages, and overall wealth. But since I introduced the fact that I’ll be scaling down my actively managed fund holdings, I feel the need to make an exception to that policy. So here goes.
Before I describe the short actively managed fund list, allow me to define the criteria that dominated my selection process. It was not a broad diversification goal or by sector selection. My primary selection criteria were to reward active managers who generated Excess Returns over a substantial timeframe. So Excess Returns and performance time were the key dimensions to shorten the field.
The Excess Returns were measured against the S&P 500 Index standard. The timeframe was the most recent 20-year period because I have owned the final candidates for from 17 to 22 years. I used the Portfolio Visualizer website as my data source.
My Final Five are provisional depending on the continuing tenure of the fund managers. Here are my Final Five with the mangers indicated:
FCNTX William Danoff since 1990
FLPSX Joel Tillinghast since 1969
VWELX Team Wellington since fund inception
VGHCX Edward Owens, Jean Hynes since 1984 and ????
DODBX Dodge and Cox Team with John Gunn leader since 1977
This is not a fully diversified portfolio. The missing pieces will be filled with passively managed Index products. The ordering is important since successful active fund managers are hard to find.
These mangers were chosen because they delivered annualized Excess Returns over the S&P 500 benchmark for the 20-year test period. They delivered these Excess Return outcomes with lower volatility as measured by each funds Standard Deviation. The correlation coefficients were not overly impressive, but they helped just a little to dampen total portfolio volatility. These managers have demonstrated more skill than luck over a very daunting investment cycle.
Earlier, I noted that this list is provisional. Several issues need further resolution. Ed Owens is mostly retired, so I’m closely monitoring Jean Hynes’ performance. She did assist Owens for 20 years or so, but it’s a different ballgame when you graduate from a secondary position to the top-dog managerial slot.
Also, the 20-year records of the balanced funds, VWELX and DODBX, are very similar. In a sense, they are on my bubble. At this juncture, eliminating one or the other is a vexing choice since both funds have served me well for 20 years. During that extended period they outdistanced the all stock S&P 500 Index with lower volatility. That’s a noteworthy accomplishment.
I recognize that these are pedestrian selections, but I’m a pedestrian sort of investor. I like plain vanilla ice crème. I get my excitement when visiting Las Vegas. Keeping things simple works best for me.
Of course, I reserve the right to be flexible as the opportunities develop over time. In the investment world, nothing is forever.
Best Wishes.
Regards,
Ted
Without Sales Charge 12.58%
With Sales Charge 12.36%
(Fund inception 10/24/83)
The fund that you mentioned (SHRAX) likely never made it to my candidates list way back in the early 1990s. I avoided front-end loaded mutual funds like the plaque that they are. I was reading John Bogle’s “Common Sense on Mutual Funds” in those days, and indeed agreed that costs mattered greatly.
The front-loaded funds were immediately discarded by me from further consideration. I probably interviewed a half dozen financial advisors during that period, and every single one of them recommended portfolios populated only by these costly products.
Our potential retirement war-chest was modest, and I was sickened at the prospects of reducing it immediately by a composite 5% to 6%. It would take years of positive outcomes to replace those unnecessary highway robbery charges. I still feel that way, but less so as my wealth substantially increased. Even then, I believe that I recognized that I was summarily tossing away some excellent fund managers.
I do like Ricky Freeman’s record and his tenure. It is outstanding. He definitely is a talented and skilled stock picker. I am especially impressed by his low portfolio turnover numbers. The man makes his choices, and he stays the course with them. He sticks to his guns. Good for him, and the record shows that it is good for his investors too.
Automatically discarding front loaded funds will eliminate some superior active fund managers. However, I suspect that from an overarching portfolio strategy, it probably does more good than harm.
That’s more than a naked opinion since the cumulative fund management data consistently demonstrates that, on an annual basis, only 20% to 40% of active mangers outdistance passive Index management. Integrated over time, those numbers deteriorate even more, not including the upfront fee. It’s a hard uphill road to overcome fees, and the odds do not favor the individual investor.
Thanks for your input.
Best Wishes.
VWELX vs. DODBX - When confronted with vexing choices during my migration to passive ETFs, I tend not to completely dump "old friends" who have been good to me over the years. I simply reduce dollar holdings in each. Might result in a few additional active funds to monitor, but it gives me something to do and something to talk about here.
@Ted Any other candidates, besides SHRAX?
I was not able to have the patience with DODBX, alas.