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" ... based on more than two decades of data, 1) randomly selected active U.S. small-company stock funds, 2) randomly selected active international large-company stock funds, and 3) randomly selected active U.S. large-company funds that were screened for cost and company size outperformed even the best of the index funds."
Yes, and there is of course no need for an investor to select funds randomly.
Note: Fidelity's study covered the 23 year time-span, 1992-2014 (limited by availability of the data they sought). -
Excerpt #1 - "The average actively run U.S. small-company and foreign large-company stock fund beat their prospectus benchmarks over those 23 years after all ongoing fund expenses. The average margin was about 100 basis points. Active U.S. large-cap funds trailed their prospectus benchmarks but by a moderate 67 basis points, meaning that they did outperform before paying their expenses."
Reaction: I'm not surprised. The advantage of indexing appears most pronounced for large-cap domestic stocks. If you own a diversified managed fund (like PRSGX), diversified across global markets and holding smaller as well as larger companies, the performance difference between that type of fund, on average, and the appropriate indexes is likely negligible. (*The latest annual report for PRSGX shows the fund invested 33% in international assets with an ER of .78%.) -
Excerpt #2 - "Funds that feed in big, highly liquid markets and which follow buy-and-hold strategies may benefit from heft. A giant asset base gives them giant revenue streams, which may be used to staff large research teams, hire expensive talent, and receive [glances furtively] better access to company managements. Scale also leads to lower expense ratios, which of course most directly aid fund returns."
Reaction: I agree. I also think there's a popular misconception regarding the term "manager." It can refer to a single "hands-on" individual like the well known Peter Lynch and Garrett Van Wagoner - as critics of managed funds like to point out. However, more to the article's point, "manager" can also reference a team of highly capable individuals able to synthesize a variety of research-based insights into markets, revenue streams, management, market capitalization/value, and technological and geopolitical trends in ways a solo manager cannot. (The style is notable at Dodge and Cox.) As the author suggests, such companies tend to buy and hold for very long periods. -
Excerpt #3 - "There’s nothing in there to indicate that indexing is suboptimal. On the other hand, it does indicate that active investors aren’t dupes, as commonly portrayed. After all, most of them have been investing in the largest fund companies, and most of them have gravitated toward the cheaper funds."
Reaction: None. He says it very well. -
Excerpt #4 - "Clearly, funds that invest in niche, illiquid markets and that trade frequently will quickly struggle with incoming assets. So, too, will many funds that hold concentrated portfolios."
Reaction - This is outside the purview of most of the article, but reinforces something I've long suspected. Many funds with exotic strategies (long-short, market-neutral, hedged, multi-asset, etc.) outperform for brief periods only to disappoint investors later. As the author suggests, much of this erratic performance is related to "hot" money moving around. Initial inflows propel the funds upward, but (predictable) outflows later work to their detriment.
Thank you for your excellent commentary on the Fidelity fund family study. It’s a very workman-like assessment of the Fidelity analysis. I especially liked the way in which you organized your review. It directs MFOers to issues that you considered important, and permits them to form their own judgments. Nice work!
The two salient findings of the referenced study are not, in general, too surprising. Costs always matter, and selecting funds from the least expensive quartile should improve an individual investor’s success odds significantly. I am somewhat surprised by the fund family size finding since I harbored high hopes for the young, small lions in the industry. I understand the size advantage explanation offered by Fidelity, and I especially liked your Dodge-Cox example.
Being an experienced fund investor, I’m forever suspicious of industry studies that, in the end, tout the researcher’s own best interests. In this instance, the study does seem to be evenhanded, although, as you mentioned, the special study period might be interpreted as some adroit data mining. I surely do not know if that’s the case, and am not interested in pursuing the matter.
My disinterest in resolving any such issue is influenced by the annual availability of several fund family rating reviews. The reviews are done by informed, independent agencies and are comprehensive. Typically, these assessments cover the most recent year, and usually include composite year rankings, like for 5 and 10 year timeframes.
One of my favorites is completed annually by Barron’s. Here is a Link that measures fund family 2014 performance:
EDIT: In checking the Link I do not get a full presentation of the article. You can do so by searching the web for "Barron's Dressing Up 2014". Sorry that the above address doesn't do the job.
Note that at the top of this extensive article, you can access the 2014, the 5-year, and the 10-year rankings with a single click. Note also how the rankings change over time. Performance persistence is a constant challenge.
Vanguard was a big winner in 2014, but did not top the longer period charts. The variability embedded in these charts are reminiscent of the Periodic Fund Category Tables often discussed on MFO. All of these presentations have a checkerboard-like character. Good luck at projecting next year’s winners.
Fund managers are an overconfident cohort. When asked if other managers will outdistance their benchmarks, these guys properly estimate a just south of 50% forecast. When asked if they will outdistance the relevant market, these same guys answer in the affirmative about 80% of the time. I suppose you need that overconfidence to be in the mutual fund business.
Whenever I think of overconfidence, I’m reminded of the Monty Python Black Knight scene in the Holy Grail movie. It’s always fun. Here is a Link to the scene that addresses the futility of overconfidence:
Enjoy, and thank you once again. Some fund managers, with year-after-year of sub-benchmark records, are perfect Black Knights. In that instance, they bleed investor’s blood, not their own.
Comments
Yes, and there is of course no need for an investor to select funds randomly.
-
Excerpt #1 - "The average actively run U.S. small-company and foreign large-company stock fund beat their prospectus benchmarks over those 23 years after all ongoing fund expenses. The average margin was about 100 basis points. Active U.S. large-cap funds trailed their prospectus benchmarks but by a moderate 67 basis points, meaning that they did outperform before paying their expenses."
Reaction: I'm not surprised. The advantage of indexing appears most pronounced for large-cap domestic stocks. If you own a diversified managed fund (like PRSGX), diversified across global markets and holding smaller as well as larger companies, the performance difference between that type of fund, on average, and the appropriate indexes is likely negligible. (*The latest annual report for PRSGX shows the fund invested 33% in international assets with an ER of .78%.)
-
Excerpt #2 - "Funds that feed in big, highly liquid markets and which follow buy-and-hold strategies may benefit from heft. A giant asset base gives them giant revenue streams, which may be used to staff large research teams, hire expensive talent, and receive [glances furtively] better access to company managements. Scale also leads to lower expense ratios, which of course most directly aid fund returns."
Reaction: I agree. I also think there's a popular misconception regarding the term "manager." It can refer to a single "hands-on" individual like the well known Peter Lynch and Garrett Van Wagoner - as critics of managed funds like to point out. However, more to the article's point, "manager" can also reference a team of highly capable individuals able to synthesize a variety of research-based insights into markets, revenue streams, management, market capitalization/value, and technological and geopolitical trends in ways a solo manager cannot. (The style is notable at Dodge and Cox.) As the author suggests, such companies tend to buy and hold for very long periods.
-
Excerpt #3 - "There’s nothing in there to indicate that indexing is suboptimal. On the other hand, it does indicate that active investors aren’t dupes, as commonly portrayed. After all, most of them have been investing in the largest fund companies, and most of them have gravitated toward the cheaper funds."
Reaction: None. He says it very well.
-
Excerpt #4 - "Clearly, funds that invest in niche, illiquid markets and that trade frequently will quickly struggle with incoming assets. So, too, will many funds that hold concentrated portfolios."
Reaction - This is outside the purview of most of the article, but reinforces something I've long suspected. Many funds with exotic strategies (long-short, market-neutral, hedged, multi-asset, etc.) outperform for brief periods only to disappoint investors later. As the author suggests, much of this erratic performance is related to "hot" money moving around. Initial inflows propel the funds upward, but (predictable) outflows later work to their detriment.
Thank you for your excellent commentary on the Fidelity fund family study. It’s a very workman-like assessment of the Fidelity analysis. I especially liked the way in which you organized your review. It directs MFOers to issues that you considered important, and permits them to form their own judgments. Nice work!
The two salient findings of the referenced study are not, in general, too surprising. Costs always matter, and selecting funds from the least expensive quartile should improve an individual investor’s success odds significantly. I am somewhat surprised by the fund family size finding since I harbored high hopes for the young, small lions in the industry. I understand the size advantage explanation offered by Fidelity, and I especially liked your Dodge-Cox example.
Being an experienced fund investor, I’m forever suspicious of industry studies that, in the end, tout the researcher’s own best interests. In this instance, the study does seem to be evenhanded, although, as you mentioned, the special study period might be interpreted as some adroit data mining. I surely do not know if that’s the case, and am not interested in pursuing the matter.
My disinterest in resolving any such issue is influenced by the annual availability of several fund family rating reviews. The reviews are done by informed, independent agencies and are comprehensive. Typically, these assessments cover the most recent year, and usually include composite year rankings, like for 5 and 10 year timeframes.
One of my favorites is completed annually by Barron’s. Here is a Link that measures fund family 2014 performance:
http://online.barrons.com/articles/SB51367578116875004693704580438203823401046
EDIT: In checking the Link I do not get a full presentation of the article. You can do so by searching the web for "Barron's Dressing Up 2014". Sorry that the above address doesn't do the job.
Note that at the top of this extensive article, you can access the 2014, the 5-year, and the 10-year rankings with a single click. Note also how the rankings change over time. Performance persistence is a constant challenge.
Vanguard was a big winner in 2014, but did not top the longer period charts. The variability embedded in these charts are reminiscent of the Periodic Fund Category Tables often discussed on MFO. All of these presentations have a checkerboard-like character. Good luck at projecting next year’s winners.
Fund managers are an overconfident cohort. When asked if other managers will outdistance their benchmarks, these guys properly estimate a just south of 50% forecast. When asked if they will outdistance the relevant market, these same guys answer in the affirmative about 80% of the time. I suppose you need that overconfidence to be in the mutual fund business.
Whenever I think of overconfidence, I’m reminded of the Monty Python Black Knight scene in the Holy Grail movie. It’s always fun. Here is a Link to the scene that addresses the futility of overconfidence:
Enjoy, and thank you once again. Some fund managers, with year-after-year of sub-benchmark records, are perfect Black Knights. In that instance, they bleed investor’s blood, not their own.
Best Wishes.