Hi Guys,
Our institutions have access to the best and the brightest in the investment world. Their deep pockets, their pride, and their goals govern their hiring policies and monitoring processes. These are among the Big Guys (read dollars) when making investment decisions. Are their results better than ours?
Ben Carlson writes excellent columns. He published one today that explores the market performance of the Institutional community. Here is a Link to it:
http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/Carlson concludes that simplicity is superior to complex over short and longer timeframes. By simple his standard is a .3 component Vanguard fund set. The short term data is not very compelling; the luck of the draw could dominate these outcomes. The longer time period outcomes are far more meaningful. Simple also translates into lower costs.
Once again, are their results better than ours? Of course there is no universal answer to that question. It depends. My answer is No, and I suspect that a large fraction of MFOers would similarly respond with a definite No.
Please give the referenced article a little of your valuable time.
Best Regards
Comments
Seriously though, I couldn't tell from the article but it seemed as though Mr. Carsons conclusions were based on the past years results. If so, what happens when you stretch that out 3, 5, 10 years and beyond? One commentator suggested that commodities might make up the bulk of those alternate investments and the current down cycle in same explains the poor comparison showing of endowments vs Bogle. Year by year that could have an affect if one is caught leaning the wrong way but it might balance out over the long run.....
If I knew how the "model" was allocated during this apparently 10-year time frame, I might be able to offer some half-intelligent thoughts on the broader topic/comparison. Thanks for any additional insights.
I'll read the article again. Maybe I missed the definition. (Ich finde nicht)
*The Vanguard portfolio is made up of the Total U.S. Stock Market Index Fund (40%), the Total International Stock Market Index Fund (20%) and the Total Bond Market Index Fund (40%). The total cost of this portfolio is a rounding error at around 0.07% in the ETF versions of these funds.
Carlson article drew from available data at this link. One may click upon a few selected tables within the NACUBO page.
http://www.nacubo.org/Research/NACUBO-Commonfund_Study_of_Endowments/Public_NCSE_Tables.html
Helpful - but I have to wonder why the author didn't clarify that the Bogle Model and the Vanguard Model are one and the same.
Food for thought when I find some time - but I think Mark touched on some of the problems with this comparison and devoted about as much time as it merits.
Agree.
Must have been a deadline for an article. We find more informed writings here.
Thanks for reading my post.
Please take a second look at the referenced article. It has both data for several,extended timespans up to 10 years, and does include a definition of the Bogle Model,which was invented by the author.
The 3 and 5 year data show that the simple Bogle portfolio that contains 3 Index funds outdistanced 75% of the top quartile of endowment funds and just marginally lost to the top decile of endowment operations. At the 10-year comparison period, the Bogle Model even outperformed that top decile endowment group. That's impressive. Simple beats complex!
A definition of the Bogle Model is provided at the bottom of the article. It is 40% of the US stock index fund, 40% total bond index fund, and 20% total international stock index fund. That's a respectable benchmark that is easily implimented by individual investors.
My portfolio is a little more complex with a mix of actively managed and passive products.
Thanks again for taking an interest in the post.
Best Wishes
EDIT: Sorry guys for my belated reply which was already covered by quicker. MFOers: That seems to be a constant with me: a dollar short and a day late. Thank you all for your help.
EDIT 2: Hank, the article did link Vanguard and the Bogle Model. To quote: " As I’ve done in the past, I broke down these numbers to see how things stacked up against a simple Vanguard 3-fund portfolio* which I have labeled the Bogle Model." That quote was just above the first table in the article.
(1) "As I’ve done in the past, I broke down these numbers to see how things stacked up against a ... "simple Vanguard 3-fund portfolio*."
(2) "...which I have labeled the Bogle Model."
(3) *The Vanguard portfolio is made up of ..."
---
For an article touting simplicity, Carlson makes the article unnecessarily complicated by using three different terms to represent the same thing. Even more reprehensible - he doesn't define for his reader the portfolio he's discussing until the end of the article (than in a footnote). Perhaps it was written for an audience of devote Bogle adherents for whom the omission and intermixing of vocabulary would pose less of an issue. But I'd say, generally speaking, he could benefit from some writing instruction or a good book on the matter.
Here's a link to On Writing Well by William Zinsser. http://kevevans.com/on-writing-well/
A couple excerpts:
The secret of good writing is to strip every sentence to its cleanest components. ... Clear thinking becomes clear writing; one can’t exist without the other.
A tenet of journalism is that “the reader knows nothing.” As tenets go, it’s not flattering, but a technical writer can never forget it. You can’t assume that your readers know what you assume everybody knows, or that they still remember what was once explained to them.
A chief reason a lot of tech writing is so excruciatingly tedious is that TWs are (or are made so by marketing, and sometimes by engineering) timid, and dogmatically follow Zinsser's excessively strong advice.
Is it your impression that the linked article by Carlson is sufficiently clear and articulate for someone not knowledgeable about The Vanguard Portfolio?
When I hear Vanguard I think of a very large fund house known for offering dozens of various index funds (domestic, equity, bond, balanced, international, etc.) Sorry to appear stupid, but while familiar with the concepts of index and passive investing, I've never owned a Vanguard fund and only recently purchased my first index fund (an international all-equity fund).
I have no problem with your not liking the style book from which I excerpted. Perhaps you would suggest another that you approve of for everyone's enlightenment?
And then Zinsser jumps oddly from journalism to TW, of which financial writing is a subset, I suppose. I'll have to go get my buried copy and see what he was about in that extreme passage. He had a huge career as writer, teacher, and preacher of this stuff.
I've spent almost 50y doing paying technical journalism, writing and editing writers, a fair amount of it financial, including a beginner bond guide for Fidelity. Prudently balanced reader assessment is seldom easy to achieve, and is an area where reasonable people forever disagree about assumptions and sophistication. I bet a nickel that comm professor Snowball has thoughts about and considerable experience in this slippery area, as he deals with it all the time with students and moreover does such a solid job balancing info are this site.
I read recently how a 9th-grade-English teacher in our largest (Mass.) high school was assigning her kids to write a note instructing a younger sib how to make a PB&J sandwich. Not her original idea for sure, but always a good thing to do as a writing teacher for kids (or anyone), down even to like 5th grade. Do you start with turning on the kitchen light? Do you explain what the sandwich is? Do you do branching for toasting, or crust removal? Do you assume they've had one and just need to be reminded of the steps for what they saw mom do? What if they're impaired? Cognitively (adult) or physically? Do you adhere to / guide toward a standard outcome or discuss freedom of quantity and spreading? Etc.
Funny example BTW. Reminds me ...
Off topic ... But I've been reading Dicken's Hard Times.
There's a hilarious scene where the ultra-conservative (English) schoolmaster asks a young girl to define "horse." While she's helped her father breed horses for years and is familiar with them in ways the schoolmaster is not, he humiliates her in front of the class when she can't offer up an appropriate text-book definition of "horse."
Apologies to @MJG for all the diversion. I will look over the comparison in the linked article and try to respond to the essence of it when I find time. (I'm actually at the gym right now)
The Vanguard asset allocator calculator can be found here:
https://personal.vanguard.com/us/funds/tools/recommendation?reset=true
My belief is that the author was using the 3 Fund as a simple index benchmark widely used and understood.
There has been much discussion of Vanguard Index products (the Bogle Model) on this thread. The exclusionary emphasis has been on Vanguard Index funds. That's not too surprising given that Vanguard emphasis that segment of their business.
But Vanguard actively managed funds are worthy of portfolio consideration. There are a ton of them, and many have superior performance records. Personally, I own a healthy mix of both their Index and actively managed funds.
Vanguard actively managed funds have been and are managed by some famous investors. For a very long period legendary John Neff directed the Windsor Fund to outperform his benchmark until his recent retirement. He's just one of several examples.
A fellow named Dan Weiner has been monitoring Vanguard for quite some time and publishes a rather expensive newsletter. He also shows up at Money Show events. Here is a Link to an interview with him that was conducted a couple of years ago that might be of MFO interest:
http://www.kiplinger.com/article/investing/T041-C009-S002-dan-wiener-likes-vanguard-actively-managed-funds.html
I certainly follow one rule that he identifies in the referenced interview: " I’m not a buyer of mutual funds. I’m a buyer of managers ". So am I. For an actively managed fund, the name of the game is insightful and skillful managers.
Thank you all for your participation.
Best Wishes.
Actually not so much. He did have an outstanding two decade record. Unfortunately, he managed Windor for another 11 years, "recently" retiring at the end of 1995.
Over the first ten of those years 1984-1994 (using fiscal years ending Oct. 31), he underperformed the fund's benchmark, the S&P 500, a bit, 14.5% vs. 14.8%. His final year was a relative (albeit not absolute) disaster, with a total return of 17.8% vs. the S&P's 26.4% (for fiscal 1995).
Those of us who became aware of him at the end of his career wondered what all the hubbub was about.
1995 Prospectus (for ten year records, 1984-1994)
1994 Prospectus (for 1995 record, and 10 year record 1985-1995)
Thanks for your comments concerning John Neff. Certainly his illustrious investment career does not end with a bang, but more with a whimper. He underperformed in his final year.
Speculating, that might well have been a major influence on why he retired. Perhaps his time had passed and he recognized that he lost that magic feeling. But one year a career does not make.
I was definitely not rating the man on only the final years of his long tenure with Windsor. I did own that fund for some fraction of that period. I based my statement that he was a legondary fund manager on his entire tenure. I sure didn't know his complete record so I extracted it from the Imvestopedia website.
Here is the paragraph from that source that convinced me that he truly earned his reputation:
"John Neff\'s average annual total return from Vanguard\'s Windsor Fund during his 31-year tenure (1964-1995) as portfolio manager was 13.7%, against a similar return from the S&P 500 Index of 10.6%. He showed a great consistency in topping the market\'s return by beating the broad market index 22 times during his tenure and was regularly in the top percent of money managers."
If it interests you, here is a Link to that website:
http://www.investopedia.com/university/greatest/johnneff.asp#ixzz4XxnIh8Xn
I was presenting John Neff's complete total performance record. I hope the summary data presented by Investopedia was accurate. It was part of their greatest investor series. They quoted the CFA Institute as the source. You might be motivated to check it. I am not.
Best Wishes
"He underperformed in his final year."
Neff underperformed over the period from 1984 to 1995 - the final eleven years of his career, as I documented.
"Speculating, that [final year] might well have been a major influence on why he retired."
Bzzt. "Effective at year-end 1995, Mr. Neff will retire and Mr. Freeman will assume the position of portfolio manager of the Fund." That was from the Feb 23, 1995 prospectus for which I provided a link. Neff's retirement was planned well in advance.
Now, let me point out something I didn't write. In the thread on greatest investors, I did not say that Neff didn't belong in that list. You might think, "well, I wasn't critical about anyone mentioned, so that doesn't prove anything." Take a look, I specifically and in some detail criticized including Icahn.
So you didn't have to go digging up quotes to show me what a wonderful overall record Neff had. But ... the fact that he had a great couple of decades doesn't offer any insight into finding or sticking with active managers.
You wrote that you walked away. Why? How long did you wait before bailing? Was it bailing or something else? By emphasizing his career record and ignoring his last several years (calling out only his final year), are you tacitly suggesting that people should have ridden him all the way through those lackluster years? Even though they would be giving up some of the earlier excess gain?
Overview:
Over the past 10 years the Vanguard Portfolio (an index-based model comprised of 60% equities and 40% bonds) beat the performance of the average college endowment studied by about 1% per year (6% yearly for the Vanguard model and 5% yearly for the average endowment).
Unlike the Vanguard model, the endowments invested substantially in alternative investments. The amount so allocated varied by size of endowment, and was highest (58% of invested assets) for endowments over 1 billion dollars.
Author's Conclusions and Assertions:
(1) The author states that he was surprised by the results because the endowments are considered more "sophisticated" than the Vanguard balanced index. (He seems to equate using alternative investments with "sophistication").
(2) He notes that the higher costs of alternative and actively managed investments partially explain the underperformance of the endowments.
(3) He concludes that "sophisticated" investments (i.e. alternative and actively managed investments) do not work as well as "simple" investments.
My Observations:
- 10 years is a very short time on to base such sweeping generalizations. The past decade was marked by both generally positive equity and bond markets. In particular, the rate on the U.S. 10-year Treasury bond fell from around 5% in 2007 to 2.45% at the end of 2016. (Interest rates and bond prices are negatively correlated.) Thus, the balanced index fund was helped by the dramatic fall in interest rates.
- Indexes don't think. So they didn't have to consider the damage a sharp rate reversal would have imparted on their value. But human investors do think. By diversifying into alternatives the endowment managers were mitigating risk (away from bonds). From a gambler's perspective those sticking stodgily to a 40% bond component were the true gamblers.
- Since indexes don't think, they didn't have to consider the damage a prolonged bear market in equities would have imparted on their value either. Human investors, as already established, do think. By diversifying into alternatives the managers were mitigating risk away from equities.
Use of Alternatives:
- Alternatives are much maligned. What are they? Broadly defined they are investments not thought to be closely correlated with equity or bond performance. One common alternative is hard assets (real estate, commodities, energy, precious metals). While not necessarily expensive to own, these investments are highly volatile. Commodities, as defined by the Goldman Sachs Commodity Index (GSCI), endured one of their worst bear markets in history over the 10 year period covered by the study, off more than 50% from their peak at one point in 2016. Another popular alternative is short-selling. This approach also suffered over the past decade as equity prices were generally positive (excepting 2007-2008). Additionally, short selling and various forms of derivative investing are quite expensive. By owning these alternatives an investor is in-effect buying "insurance" to protect against a steep market decline.
Final Thoughts:
- Generally, a 100% equity based index should outperform most alternatives (including bonds) given a long enough time frame (but 10 years is painfully short). By logical extension (given a multi-decade time frame) lower cost index funds should prevail. I've no argument there - if one wants to assume the risk inherent in equities. I suspect that under normal circumstances the 60/40 Vanguard Portfolio represents significantly less risk than an all-equity portfolio and would be a prudent investment for many. However, in an era of ultra-low interest rates the risks were (and remain) considerably elevated.
- Think of what the endowments did during the decade studied as hedging their bets. They bought insurance to protect their portfolios (and institutions) against potential steep declines in equities and/or bonds. It cost them about 1% per year (compared to the Vanguard index) to carry this insurance. Indexes don't think. So, they'd never perceive a need to carry insurance. Over the past decade the unthinking won out over the thinking. That's my take-away.
Just saying with an index fund "I get the market's return" is fine and "simple" so long as markets are rising. During that period, you don't have to care what the factors are driving that performance. But meanwhile the portfolio in your index fund is shifting dramatically. The Russell 3000 index of January 2000 during the dotcom bubble was vastly different in its sector composition and stock weights from the Russell 3000 of January 2003 after the stock bust. And until the crash occurred you didn't have to care. But there's nothing really simple about the underlying dynamics of index funds.
This leads me to my second point on a more practical level. There are certain environments where total market index funds will invariably shine versus actively managed ones and understanding those environments can help with your investment strategy:
1. When large cap stocks are beating small, total market stock indexes will beat active managers as these index funds are market cap weighted so the largest companies drive their performance. Active managers tend to buy smaller companies.
2. When stock markets are rising it's harder for active managers to win as they generally hold some cash and their fees act as a drag on top of that. The longer the stock market rises the worse the comparison between active and passive will be. So now we're in February of 2017--eight years into a bull market that began in March of 2009. Of course, total market index funds will look really strong right now.
3. The narrower the breadth of the stocks rising in a rising stock market the worse the comparison between active and passive will be. This is typically what happens as bubbles reach their peak. Just a handful of bellwether stocks--in 1999 it was Cisco, Worldcom, Intel, etc.--drive the market higher. Active managers--especially valuation conscious active managers--that don't hold those stocks lag. This is when you should be looking at stats like the advance/decline ratio.
4. Stock dispersion and correlation also can affect active managers. If stocks are all moving in the same direction and have similar daily variation in returns--so not only if the stock market is up 1%, do all stocks go up but all stocks go up about 1%, it is harder for active managers to differentiate themselves. So if we're in a low dispersion/high correlation market--all stocks rising and falling together about the same amount--it is virtually impossible for active managers to beat index funds after deducting their fees.
So as you can see, this is a tough game, not simple at all, from both an active or passive side. But simply buying and forgetting about a three index fund portfolio in 2017, after an eight year stock market rally, with valuations stretched and with interest rates near historic lows and set to rise--not to mention a heightened level of geopolitical risk-- seems a fool's errand. What's going on underneath the hood of those index funds is immensely complex.
I want to especially thank Hank and Lewis Braham for their thoughtful and thought provoking posts. I fully understand and appreciate the time commitment and deep thinking required to produce such excellent submittals. Their perspectives might not totally agree with all MFOers, but the diversity of opinion is what makes MFO so useful.
Data is the bedrock for investment decisions. Braham especially emphasized the market conditions when active fund management might add Alpha to a portfolio. SPIVA reviews the relative performance differences between actively managed funds and Index outcomes. Here is the SPIVA Link to their 2016 end of year report:
https://us.spindices.com/documents/spiva/persistence-scorecard-december-2016.pdf?force_download=true
It's a tough uphill road for active management and persistence is particularly challenging.
MFOer msf and I have been discussing John Neff's fund management performance in a running exchange on this thread.
It appears that he and I would choose to assess a fund manager's lifetime performance differently. That's not surprising since an assessment set of criteria was never established. Some measurement standard needs to be defined.
Based on his submittal, he would elect to evaluate a manager's lifetime achievements over several selected timeframes. I would choose the manager's overall record.
If you were a potential investor in 1985, it would have been difficult to ignore Neff's VWNDX performance of 20 years up to that point. It was superb. His relative record did slip a little thereafter but it was far from a disaster. Most importantly, projecting future returns is impossible. It's not a bad idea to cut a little slack for a proven winner if he subsequently stumbles. Slumps happen.
That policy paid dividends for me during Sumday's Super Bowl game. Tom Brady is a proven winner. I believed he and the Patriots would be winners before the starting kickoff. Brady had a miserable first half. The odds against a Pats victory lengthened and I took them. As you all know, Brady and the team rallied in the second half. Great for him and good for me. Recovery happened.
Do you assess his performance on the distinctive two halfs or for the entire game? The completed game is what matters. The final score and not the quarter-by-quarter scoring matters completely. Taken over multiple games, it's the total cumulative record that counts in winning a league championship and not a single game. The same is true in the investment world.
Best Wishes.
You're absolutely correct. I mistyped the Wimdsor symbol. Sorry about that. Thank you for the alert! I have corrected that error in my latest post.
Best Wishes