In another post talking about ARIVX, PressmUp brought in the concept of having multiple funds in the same category (or bucket or sleeve) to diversify management mishaps. Basically if one manager is having an off year another might be compensating with a good year. I know a lot of people here follow this concept and I understand the principle. My counter to this argument is that an index will give the same result of management diversification and the same or better returns over time. My own personal attempt at investing is to mix one favorite fund/manager in a category with the corresponding index. Hopefully a little alpha to outperform the index but even here I could be kidding myself. Of course this alpha fund has to have a system or process or be unique enoughto give alpha.
Just playing around, I used the 2 funds PressmUp mentioned and compared return to the one alpha fund plus index idea. Because all the funds mentioned were fairly new it is a very limited comparison. I took the funds in equal ratios, 50:50 since there were only 2 funds to play with. VVPSX and SCMFX were the funds PressmUp uses and I use 1 fund, GPGOX in the SCap space. I only took the last 3 1/2 years to compare all over an equal time frame.
50:50 mix of:
VVPSX + SCMFX averaged 16% / year from 2012 to 2015 YTD
VVPSX + Russ2000 index avg 17%
SCMFX + Russ2000 index avg 15%
GPGOX + Russ2000 index avg 17%
Russ2000 index alone avg 16%
All examples pretty close in return I would say. I also know my statistics are flawed in that I used 2015 with the same weight in the average as the other full years. But for quick and dirty comparison it works.
Now I'm more curious about people who have 3 or 4 or more funds in a category. Have you stopped to make sure that your manager diversification scheme actually benefits your return?
Are you willing to test your multiple fund selection?
For people with multiple funds in a category, would you be willing to make this comparison for information purposes? If you averaged your 3 or 4 or 5 small cap funds for example (any category really) and compare that to what you think is your favorite fund (if you had to pick just 1) plus the index, which method gives greater return? I'd be very curious to hear.
Comments
Each of us have to run with what works best for each one of us.
I have my portfolio as a whole benchmarked against the Lipper Balanced Index and overall have out performed it through utilization of my sleeve management system which I have posted many times before and below again for those interested. And, yes ... I have most of the sleeves benchmarked against a standard and entered into Morningstar's Portfolio Manager as a portfolio by themselves. With this, I can check each sleeve along with the funds held within the sleeve for their daily performance, weekly performance, monthly performance, quarterly performance, year-to-date performance, one, three, five and ten years returns against a chosen benchmark the exception being the specialty sleeve which has no benchmark.
In addition, the use of special investment positions (SPIFFS), form time-to-time, have been a positive contributor to the portfolio's overall performance.
Old_Skeet's Sleeve Management System (06/26/2015)
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle to the cash area with some nav exchanges taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: AJVAX, ANWPX, NEWFX, PGROX, THOAX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: IIVAX, PCVAX & PMDAX
Specialty Sleeve: CCMAX, LPEFX, SGGDX & TOLLX
I wish all ... "Good Investing."
Old_Skeet
(1) What was the expense ratio of your composite MF portfolio for 2014?
(2) Since the SEC now requires funds to include a separate statistic that includes all expenses paid by fund shareholders in their fund offering literature (this figure includes transaction costs, acquired fees, trading commissions, etc), what would that figure have been for your composite MF portfolio in 2014?
(3) For all your MFs not in tax-sheltered locations, what percentage of the total return of those funds was relinquished to the taxman? For half of those funds, if you had been invested instead in an index fund (say, an index fund used as a benchmark for any of these funds' performance), would your net (after-tax) returns have been higher, about the same, or lower?
"Just curious." I'm speculating you haven't any idea what the answers would be to any of these questions. And, if that is the case, ... then why is that the case? [expenses.... fiddle-dee-dee?]
@MikeM You are not alone--- I started doing what you're suggesting about 5 years ago and probably should have started 10 yrs ago. It takes awhile (still a work in progress for me). The thing I've come to most like about it is that it gives you "another kind" of choice when rebalancing (or, if you get an unexpected gain in an individual stock and decide to realize it, you can "diversify down" the risk of reinvesting the gain by sprinkling some of it into an MF index fund with the same, or different, mkt cap). I dunno, does that rationale make sense? SleepyTime, and my explainer module power is on the wane.
Thank you for your question(s). And, to satisfy you, and others, that I have an awarness of the cost and fee structure I have choosen to respond to your question number one concerning expense ratio for the overall portfolio. I simply don't have the time to respond to your remaining questions.
The average mutual fund expense ratio on the portfolio as a whole is 0.89% while a similarly weighted hypothetical portfolio, according to Morningstar, is 1.27%. This can also be determined by each sleeve as a whole and for each fund held within its sleeve as well as the portfolio as a whole.
An advanced verson of an Instant Xray report provides answers to most of your remaining question. I believe, if you would like this information on your own portfolio you might visit your own neighborhood investment advisor. And, ask for a portfolio review. Some brokerage houses offer this as a free service while others may charge for it. So you might wish to call around and inquire about this to see if they are willing to do this for you if you are not one of their full service clients.
Make your phone calls and I am sure you will find an office that will provide you with a portfolio review and report details you are seeking to know about. Again, some may do it for a fee while some may do it in hopes you will become a client and/or in good client service of your account if you are one of their "valued" clients.
Seems to me ... the fiddler has now played.
Old_Skeet
I maintain independent portfolios at all major brokerages. By definition I have multiple funds in same "category". On top of it, I have a smattering of eponymous funds I own, which if I didn't I might own some independent stocks. These last category of funds tend to be very very focused. FAIRX, CGMFX, COBYX are examples. Again, here I'm diversifying in the same "category".
My own opinion is using multiple funds and management styles in a category isn't going to do any better than holding an index fund. I believe for different reasons, management diversification will do worst.
Are you willing to test my theory? I could be totally wrong that manager diversification retards return.
Take all your positions in your small cap fund sleeve (or large cap holdings if you prefer) and average their 3 or 5 year returns. Then take the average of the corresponding index and the fund you would keep if you could only keep one (50:50 weighting for simplicity). Is the average of your 4+ funds better or worst then 'index plus 1 favorite', or even better then the index itself?
I agree, comfort may out weight returns. Just curious about how this manager diversification effects total return for people here at MFO.
Thanks for your response.
There are many things that I look at beside top line performance on my investments held . One of those is yield. And, yes I might get out performed vs. an index but I know my distribution yield out paces that of the established index; and, that is just as important to me as top line performance.
And, too ... I also feel it important to look at full maket cycles as well shorter time periods.
I would suggest on selecting those things that are important besides out performing an index ... and, then go from there to make sure your goals and needs are being satisfied ... and, in doing this should you out perform an Index that is great. I know, overall, my benchmark is the Lipper Balanced Index not saying every sleeve in my portfolio out performs its standard.
I'll have to pass on testing your theory.
Old_Skeet
Rick Ferri completely agrees with MikeM’s observation that increasing the number of actively managed funds in any fund category lowers the likelihood of positive Alpha (excess returns) in that category.
According to studies completed by Ferri, investors who hold multiple actively managed mutual funds in categories are swimming against the tide. Their odds of besting a single Index strategy decreases as the number of their active positions and the time length of those positions increases.
Two overarching experimental factors contribute to Ferri’s conclusions. First, the percentage of actively managed funds that outdistance their Index benchmarks is typically below 50% for any given year, and that percentage drops with increasing years. Second, for those few funds that generate temporary Alpha, the positive outperformance is substantially less than the negative Alpha registered by those funds that fail to match the Index hurdle. It’s a double whammy.
Fund managers are smart folks, but selection and timing talents are overwhelmed by fees and costs.
Here is a Link to the whitepaper by Rick Ferri that makes “The Case for Index Fund Portfolios” based on extensive Monte Carlo simulations:
http://www.rickferri.com/WhitePaper.pdf
Ferri identified 3 Passive Portfolio Multipliers (PPM) in terms of returns enhancements: (1) Combining Index funds in a portfolio improves the odds of outperforming actively managed funds, (2) As time expands, the odds shift even more favorably towards Indexing, and (3) Increasing the number of actively managed funds in any asset class also increases the likelihood of Index outperformance.
This last finding directly addresses the issues discussed in this MFO exchange. The statistics are not attractive for those folks who hold multiple actively managed funds in various asset classes. Those studies are imperfect, but they are fairly constructed, honestly executed, and tell a compelling story.
The Monte Carlo simulations do not say it can not be done; in fact, they say it can be done. But the odds are long.
Ferri ran 6 different portfolio construction scenarios. In one of those scenarios, he limited the actively managed fund universe to funds whose costs were below the category average. Results improved, but the Index portfolios still outdistanced their active rivals.
An Index portfolio guarantees Index returns. Adding active elements, even one element, degrades the likelihood of delivering those Index rewards. If you feel you have an edge with one superior actively managed fund why not just invest with that agency? Mixing it with an Index product only dilutes the perceived advantage.
Portfolio diversity works, but there are limits. The law of diminishing returns comes into play. A long, long time ago, market wizards concluded that equity diversity in the US was asymptotically reached when the individual stock holdings approached the 40 level.
Holding 40 or more mutual funds surely does not add to diversity; it contributes complexity. I’m sure reasons exist for such complex portfolios, but diversity is not one of them. Holding so many funds is equivalent to holding the entire marketplace, except at an added cost penalty.
Ferri’s work reaches conclusions that are similar to a small number of earlier studies by researchers like Allan Roth. The odds are that the mixed portfolios, even if they include some Index holdings, will underperform a pure Index portfolio.
To misapply the words of Gertrude Stein: “There is no there, there”.
For the record, I currently hold a mix of both passively managed and actively managed funds. Over time, I am gravitating towards a higher fraction of Index positions. I do plan to keep some actively managed products. Sometimes, hope trumps logic.
Best Wishes.
Although I declined MikeM’s offer to participate in his study … his post did encourage me to take a quick look at my income sleeve and see how the respective funds held compared to their standard. I used Morningstar data for the noted time period for $10,000 invested for each fund held within the sleeve. I am not saying that this is a perfect study … but, it did provide some interesting information I thought I’d share with the board.
FUND ... AMOUNT ... STANDARD ... AMOUNT ... PERIOD
GIFAX ... $12,575 ... Bank Loan ... $12,050 ... 3 yr
LALDX ... $15,640 ... Short Term Bond ... $12,720 ... 10 yr
LBNDX ... $19,295 ... High Yield Bond ... $17,790 ... 10 yr
NEFZX ... $19,840 ... Multi Sector Bond ... $16,250 ... 10 yr
THIFX ... $15,625 ... Short Term Bond ... $12,720 ... 10 yr
TSIAX ... $16,640 ... Multi Sector Bond ... $14,525 ... 5 yr
Sleeve's Total $99,615 ... Standard's Total $86,055 ... Hypo Amount Invested $60,000
It appears that all the funds currently held out performed their standard for the period noted and with this the sleeve’s total was greater and out performed the standard’s total.
I admit, this is a down and dirty quick review and your findings might differ from my findings. It is what it is.
Old_Skeet
Derf
I continued my study this past evening on each sleeve within my portfolio.
Here are some interesting things that I discovered.
There were a few funds that did not out perform their standard. One of these was FRINX which is a hybrid type fund with a standard of real estate classification. Another was CFLGX which is a high distribution fund with its standard being mid cap value. And, yet another was LPEFX another high distribution fund with its standard being classified as world stock. Note, the sleeve system worked as all sleeves bettered their respective standard as the faltering funds were supported by the others which continued to offer support and propel their sleeves.
Again, all the sleeves within the portfolio bettered their respective standard.
If there is an interest I will enter the complete study into word and post it on the board.
For now, I am moving on.
Old_Skeet