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.
Support MFO
Donate through PayPal
Among Active Managers Patience Is The Principal Virtue
The three Ps work wonders. From long gone famous motivational speaker and writer Napoleon Hill: “Patience, persistence, and perspiration make an unbeatable combination for success”.
The referenced article makes a case for a patient fund manager who allows his stock buys to perform over time using a low turnover ratio portfolio approach. These days, many fund managers demonstrate their impatience with average holding periods of less than one year. That increases trading costs with uncertain impacts on bottom-line performance. Often these same funds have high expense ratios to support the necessary research to make frequent buy/sell decisions.
That’s a double whammy for fund clients. SPIVA studies persistently demonstrate that active funds often fall short when compared to Index benchmarks, These excessive costs contribute to the shortfalls, Here is a Link to a recent 2015 SPIVA study that shows the persistence of that shortfall:
The annual numbers change but the conclusions are invariant over time. And they become more conclusive as the timeframe expands.
But the double whammy converts to a triple whammy when the impatience and the fickleness of private investors encourage them to abandon their fund selections far too early. Morningstar data show that investors do not receive the returns of the actively managed funds that they choose. Their timing is horrible. Here is the Link to the Morningstar Fact Sheet that describes their methodology::
All these findings support a primary argument for an Indexing portfolio construction. But exceptions do exist, and a few active fund managers have shown discipline with lower turnover ratios and superior stock selections to overcome the cost drags. That’s why my portfolio has a mix of both Index and actively managed mutual funds and ETFs.
And going the Indexing route also lowers the perspiration aspects of portfolio construction and maintenance, Worry is reduced since return volatility will be somewhat reduced and outcomes will tend to converge towards market rewards. Remember that the overall actively managed fund return distribution curves are very much asymmetrical with a measurable heavier weighting in the below average direction.
One frightful thought here: I believe I’m thinking and writing like a slightly younger John Bogle. On second thought, maybe that’s not too bad, especially the age factor.
Patience is forever a positive, principal virtue, an especially fruitful one in the investing world.
Comments
The three Ps work wonders. From long gone famous motivational speaker and writer Napoleon Hill: “Patience, persistence, and perspiration make an unbeatable combination for success”.
The referenced article makes a case for a patient fund manager who allows his stock buys to perform over time using a low turnover ratio portfolio approach. These days, many fund managers demonstrate their impatience with average holding periods of less than one year. That increases trading costs with uncertain impacts on bottom-line performance. Often these same funds have high expense ratios to support the necessary research to make frequent buy/sell decisions.
That’s a double whammy for fund clients. SPIVA studies persistently demonstrate that active funds often fall short when compared to Index benchmarks, These excessive costs contribute to the shortfalls, Here is a Link to a recent 2015 SPIVA study that shows the persistence of that shortfall:
http://us.spindices.com:80/documents/spiva/spiva-us-midyear-2015.pdf
The annual numbers change but the conclusions are invariant over time. And they become more conclusive as the timeframe expands.
But the double whammy converts to a triple whammy when the impatience and the fickleness of private investors encourage them to abandon their fund selections far too early. Morningstar data show that investors do not receive the returns of the actively managed funds that they choose. Their timing is horrible. Here is the Link to the Morningstar Fact Sheet that describes their methodology::
http://corporate.morningstar.com/us/documents/PR/Investorreturnsfactsheet.pdf
All these findings support a primary argument for an Indexing portfolio construction. But exceptions do exist, and a few active fund managers have shown discipline with lower turnover ratios and superior stock selections to overcome the cost drags. That’s why my portfolio has a mix of both Index and actively managed mutual funds and ETFs.
And going the Indexing route also lowers the perspiration aspects of portfolio construction and maintenance, Worry is reduced since return volatility will be somewhat reduced and outcomes will tend to converge towards market rewards. Remember that the overall actively managed fund return distribution curves are very much asymmetrical with a measurable heavier weighting in the below average direction.
One frightful thought here: I believe I’m thinking and writing like a slightly younger John Bogle. On second thought, maybe that’s not too bad, especially the age factor.
Patience is forever a positive, principal virtue, an especially fruitful one in the investing world.
Best Wishes.