Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I have a very simple one-word answer to the needs for fund manager benchmarks: Yes.
For retail customers, a fund selection is often based on the quality of its manager. One important ingredient in the recipe for manager qualifications is a measure of his success (along with fees, tenure, education and experience, portfolio construction policies, etc.). Benchmark comparisons are an easy way to gauge that success. Underperforming managers have a deserved disappearing history.
A comparison against a benchmark doesn’t impact the overall economy, nor does it impact the companies that contribute to making that economy. It is simply a statistic that permits a judgment about the quality decisions of any manager.
Everyone, in any industry, must be held accountable for his performance. In baseball, a pitchers Earned Run Average (ERA) is a convenient way to assess the effectiveness of that pitcher even if he pitches for a terrible team that makes plenty of errors and doesn’t score many runs.
Likewise, a police force’s performance can be addressed by keeping statistics on its arrest ratio and its response time. While I worked in the engineering field, I was responsible for the effectiveness, efficiency, and stability of my designs. All this is expected and natural.
Statistical comparisons against a meaningful standard and against historical outcomes are a simple way to accomplish this useful task. By definition, bad fund managers are losing folks money or compromising individual investor returns. They are a drag on society, and should be replaced with more prescient managers. That’s the way the world works.
I’m totally responsible for selecting my fund managers; those managers are totally responsible to deliver returns that I find acceptable. One measure of that acceptability is a comparison against an applicable benchmark. It’s as simple as that. There is no need for conjecture about possibly some imaginary and non-documented complex and likely tertiary effects.
Hi Guys, Everyone, in any industry, must be held accountable for his performance. In baseball, a pitchers Earned Run Average (ERA) is a convenient way to assess the effectiveness of that pitcher even if he pitches for a terrible team that makes plenty of errors and doesn’t score many runs.
Even in baseball where use of stats is extensive, they miss a lot. Poor fielding does affect ERA even though errors do not, and low scoring teams also hurt pitchers' ERAs.
Did the shortstop turn the double play, or was his throw to first wide (not an error, so long as runners don't advance)? Does the team have a gun in right field who keeps runners on first from getting to third on a single with one out (that would enable a sac fly to score them)? Does the infield have the quickness to play in and protect against a squeeze play, or does the team routinely forfeit runs because its infielders lack range?
Did the pitcher have to go for broke (e.g. force a strikeout with that runner on third) because he couldn't count on his team to make up a run? Did he have to pitch a low ball hitter down because the small probability double play would save a precious run that his teammates wouldn't get back?
Mutual funds - how good is the family's trading desk - can they move in and out of positions without too much market impact? How much internal trading is done (where one fund in the family buys while the other is selling) to reduce trading costs? Is the fund allowed to loan securities and thus boost returns? Does the index fund (still a managed fund) have to track index changes immediately, or can it lead/lag to its advantage?
Somewhat analogous to a low scoring team - does the fund manager have to take outsized risks, because his fund's ER is so high?
Performance figures and benchmarks are very useful for the big picture. As you wrote, they're convenient. But teammates also matter and there are factors that the numbers don't fully capture.
Thanks for your contribution. I sure do agree with your observation that baseball, and almost any other meaningful, complex human endeavor, demands a refined team organization and dedicated effort. “No man is an island unto himself”. We’ll always benefit from listening to knowledgeable folks prior to making important choices.
Successful teams are never solely dependent on a single individual, not even if that individual is a superstar like Michael Jordan or Joe DiMaggio. A great team is better than the sum of its individual parts. But a superstar does set the tone and encourages confidence.
When I was a kid, my Uncle Mike took me to many NY Yankee ball games. He preferred sitting in the lower Right-field seats. With its low 3-foot wall, he new and often talked with Right Fielder Johnny Lindell (who also pitched in an emergency) between innings. On a few occasions when the team was losing in the late innings, Joe DiMaggio would drift over from Centerfield, and confidently tell Lindell not to worry; the team would make a winning comeback. Very often they did so.
DiMaggio inspired the team, and indeed made it better than its parts. I agree that cold statistics would never capture that part of DiMaggio’s game. Teams win when they are motivated. As Yogi Berra famously said: “Ninety percent of the game is half mental”.
But I do believe that you overemphasized my brief baseball analogy. It was merely inserted to illustrate the usefulness of a single statistical summary. It was not meant to be the only factor that influences any decision; it should never function as a standalone discriminator. I only wanted to emphasize how a few statistical signals can be assembled to guide an investment process. Your well crafted emphasis on baseball distorts the principle purpose of my post.
Having said that, and acknowledging the sagacity of your pitching dissertation, if I had to manage a single critical baseball game, without other undefined constraints (like an overworked, tired twirler), I would always send a pitcher to the mound who had a 2.00 ERA over alternate choices that had 4.00 ERAs.
Ceteris Paribus, I would choose a mutual fund that was under the leadership of a manager with a positive long-term Alpha and high Information Ratio history over one who did not sport those statistics. The simplest solution is most likely the right one. Investing need not be complicated. Picking a great team of fund managers is a positive step in that direction. Stat measures help in that selection process.
Comments
I have a very simple one-word answer to the needs for fund manager benchmarks: Yes.
For retail customers, a fund selection is often based on the quality of its manager. One important ingredient in the recipe for manager qualifications is a measure of his success (along with fees, tenure, education and experience, portfolio construction policies, etc.). Benchmark comparisons are an easy way to gauge that success. Underperforming managers have a deserved disappearing history.
A comparison against a benchmark doesn’t impact the overall economy, nor does it impact the companies that contribute to making that economy. It is simply a statistic that permits a judgment about the quality decisions of any manager.
Everyone, in any industry, must be held accountable for his performance. In baseball, a pitchers Earned Run Average (ERA) is a convenient way to assess the effectiveness of that pitcher even if he pitches for a terrible team that makes plenty of errors and doesn’t score many runs.
Likewise, a police force’s performance can be addressed by keeping statistics on its arrest ratio and its response time. While I worked in the engineering field, I was responsible for the effectiveness, efficiency, and stability of my designs. All this is expected and natural.
Statistical comparisons against a meaningful standard and against historical outcomes are a simple way to accomplish this useful task. By definition, bad fund managers are losing folks money or compromising individual investor returns. They are a drag on society, and should be replaced with more prescient managers. That’s the way the world works.
I’m totally responsible for selecting my fund managers; those managers are totally responsible to deliver returns that I find acceptable. One measure of that acceptability is a comparison against an applicable benchmark. It’s as simple as that. There is no need for conjecture about possibly some imaginary and non-documented complex and likely tertiary effects.
Best Wishes.
Did the shortstop turn the double play, or was his throw to first wide (not an error, so long as runners don't advance)? Does the team have a gun in right field who keeps runners on first from getting to third on a single with one out (that would enable a sac fly to score them)? Does the infield have the quickness to play in and protect against a squeeze play, or does the team routinely forfeit runs because its infielders lack range?
Did the pitcher have to go for broke (e.g. force a strikeout with that runner on third) because he couldn't count on his team to make up a run? Did he have to pitch a low ball hitter down because the small probability double play would save a precious run that his teammates wouldn't get back?
Mutual funds - how good is the family's trading desk - can they move in and out of positions without too much market impact? How much internal trading is done (where one fund in the family buys while the other is selling) to reduce trading costs? Is the fund allowed to loan securities and thus boost returns? Does the index fund (still a managed fund) have to track index changes immediately, or can it lead/lag to its advantage?
Somewhat analogous to a low scoring team - does the fund manager have to take outsized risks, because his fund's ER is so high?
Performance figures and benchmarks are very useful for the big picture. As you wrote, they're convenient. But teammates also matter and there are factors that the numbers don't fully capture.
Thanks for your contribution. I sure do agree with your observation that baseball, and almost any other meaningful, complex human endeavor, demands a refined team organization and dedicated effort. “No man is an island unto himself”. We’ll always benefit from listening to knowledgeable folks prior to making important choices.
Successful teams are never solely dependent on a single individual, not even if that individual is a superstar like Michael Jordan or Joe DiMaggio. A great team is better than the sum of its individual parts. But a superstar does set the tone and encourages confidence.
When I was a kid, my Uncle Mike took me to many NY Yankee ball games. He preferred sitting in the lower Right-field seats. With its low 3-foot wall, he new and often talked with Right Fielder Johnny Lindell (who also pitched in an emergency) between innings. On a few occasions when the team was losing in the late innings, Joe DiMaggio would drift over from Centerfield, and confidently tell Lindell not to worry; the team would make a winning comeback. Very often they did so.
DiMaggio inspired the team, and indeed made it better than its parts. I agree that cold statistics would never capture that part of DiMaggio’s game. Teams win when they are motivated. As Yogi Berra famously said: “Ninety percent of the game is half mental”.
But I do believe that you overemphasized my brief baseball analogy. It was merely inserted to illustrate the usefulness of a single statistical summary. It was not meant to be the only factor that influences any decision; it should never function as a standalone discriminator. I only wanted to emphasize how a few statistical signals can be assembled to guide an investment process. Your well crafted emphasis on baseball distorts the principle purpose of my post.
Having said that, and acknowledging the sagacity of your pitching dissertation, if I had to manage a single critical baseball game, without other undefined constraints (like an overworked, tired twirler), I would always send a pitcher to the mound who had a 2.00 ERA over alternate choices that had 4.00 ERAs.
Ceteris Paribus, I would choose a mutual fund that was under the leadership of a manager with a positive long-term Alpha and high Information Ratio history over one who did not sport those statistics. The simplest solution is most likely the right one. Investing need not be complicated. Picking a great team of fund managers is a positive step in that direction. Stat measures help in that selection process.
Have a Happy Easter.
Best Wishes.