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The more sophisticated among you (you possibly the folks who just have a ton of time on their hands) might find the KL Allocation site interesting. Their blog shares a lot of inter-asset analyses ("the spread between A and B implies C" sorts of stuff) that leads them to (a) be cautious about the current market and (b) conclude that bonds are a steadily withering option. They make a defense of gold (10% of holdings) as a steadier option going forward. I'm not qualified to assess the statistical arguments, but they seem provocative.
While Ed is not a great fan of gold as a buy-and-hold investment, he does share the general assessment of bonds.
The Jensen fund is one in a line of product extensions in the industry, where the good domestic fund in niche X is succeeded by the firm's global fund in the same niche. The argument, in general, is "we research every one of those international firms in depth already, since each of them poses a potential challenge to our domestic portfolio companies."
The American Century fund will be interesting to watch, at least, because it's a good side-by-side test of the same discipline's performance in two public wrappers.
I actually had two other pieces nearly ready, one on T Rowe Price Multi-Strategy and one on climate change and investing (an update). Sadly, one of my son's high school classmates, a passenger in a car too near a rolling protest, was killed Sunday night. While he more "knew of" than "knew" her, it was a sort of deeply disturbing event for the folks in his wide circle of cyber-linked friends and classmates. And the source of much talk and reflection here.
Regarding this about active mutual funds versus passive ETFs, I have a few quibbles:
They have not been repeatedly defamed by self-interested marketers and lazy financial journalists looking for cheap stories. “80% of mutual funds failed to beat the market last year” is utterly fatuous – beating the market isn’t the goal, one year is an irrelevant time period, risk matters as much as returns, very nearly all passive products also trail the market – but has made it hard to approach investors, young, professional or otherwise. The term “skunked” comes to mind. The repackage offers a clean slate.
While looking at a year's worth of performance versus the benchmark isn't very meaningful, it is actually over the long-term that active funds struggle the most to beat their benchmarks, and many financial articles have made that point. In fact, I think it is far more common to have an active fund beat a benchmark in the short-term, have an excellent year but struggle over the long-term as the cumulative hurdle effect of its fees gets harder and harder to overcome. Also, while there are many passive ETFs that don't match their benchmarks either, in the main categories like large cap, mid-cap and small-cap, they often do and sometimes even beat their benchmarks because of securities lending, or only lag a minuscule amount. Also, the long-term record of many funds versus their benchmarks doesn't necessarily improve when adjusted for risk. The SPIVA data on funds versus their benchmarks has risk-adjusted returns over the last fifteen years: https://us.spindices.com/resource-center/thought-leadership/spiva/ 92% of large-cap funds, 86% of mid-cap and 87% of small-cap funds have lagged their benchmarks on a risk-adjusted basis over the last 15 years. In fact, the one equity category where active managers had a fighting chance in this data were international small-caps where the benchmark won only 68% of the time over 15-years. Fixed income funds were better, but not by as much as one would hope
Even gross of fees, active managers struggled:
The risk-adjusted performance of active funds obviously improves on a gross-of-fees basis, but even then, outperformance is scarce. Only Real Estate (over the 5- and 15-year periods), Large-Cap Value (over the 15-year period), and Mid-Cap Growth funds (over the 5-year period) saw a majority of active managers outperform their benchmarks. Overall, most active domestic equity managers in most categories underperformed their benchmarks, even on a gross-of-fees basis.
As in the U.S., the majority of international equity funds across all categories generated lower risk-adjusted returns than their benchmarks when using net-of-fees returns. On a gross-of-fees basis, only International Small-Cap funds outperformed on a risk-adjusted basis over the 10- and 15-year periods.
When using net-of-fees risk-adjusted returns, the majority of actively managed fixed income funds in most categories underperformed over all three investment horizons. The exceptions were Government Long, Investment Grade Long, and Loan Participation funds (over the 5- and 10-year periods), as well as Investment Grade Short funds (over the 5-year period).
However, unlike their equity counterparts, most fixed income funds outperformed their respective benchmarks gross of fees. This highlights the critical role of fees in fixed income fund performance. In general, more active fixed income managers underperformed over the long term (15 years) than over the intermediate term (5 years).
On a net-of-fee basis, asset-weighted return/volatility ratios for active portfolios were higher than the corresponding equal-weighted ratios, indicating that larger firms have taken on better-compensated risk than smaller ones.
One important saving grace I think is that SPIVA only considers risk as volatility and not downside capture or Sortino ratios. So that should be considered. All of that said, the threat from passive ETFs is most certainly real and should not be underestimated.
TMSRX is a bit of a “black-box” (to me anyway). I feel most of these “go anywhere” type funds are. But, who better to trust to run one than TRP? Seems to me they’re trying with this fund to generate income (or at least income-like returns) that can stand up if / when bonds start to fall - as they surely must some day. (They actually use the term “Income” in the fund’s handle.) I suspect the fund would fit into numerous “slots” in various portfolios. I use it in my alternative sleeve which is 25% of investments. The other big holding in that sleeve is PRPFX. TMSRX adds stability and, remarkably, some days rises when most everything else is falling. I’ll look forward to David’s in depth review of the fund next month.
*** Apologies and a correction: Just noticed that the word “income“ does not appear in TMSRX’s title as I claimed above. Where’d I get that idea? BTW, I’ve sometimes considered plugging it into my “income” sleeve where I think it would fit nicely as a hedge against rising rates.
PS - Today’s NYT addresses the two Davenport killings, including the one mentioned by David. Senseless & Tragic. So sorry.
Comments
The more sophisticated among you (you possibly the folks who just have a ton of time on their hands) might find the KL Allocation site interesting. Their blog shares a lot of inter-asset analyses ("the spread between A and B implies C" sorts of stuff) that leads them to (a) be cautious about the current market and (b) conclude that bonds are a steadily withering option. They make a defense of gold (10% of holdings) as a steadier option going forward. I'm not qualified to assess the statistical arguments, but they seem provocative.
While Ed is not a great fan of gold as a buy-and-hold investment, he does share the general assessment of bonds.
The Jensen fund is one in a line of product extensions in the industry, where the good domestic fund in niche X is succeeded by the firm's global fund in the same niche. The argument, in general, is "we research every one of those international firms in depth already, since each of them poses a potential challenge to our domestic portfolio companies."
The American Century fund will be interesting to watch, at least, because it's a good side-by-side test of the same discipline's performance in two public wrappers.
I actually had two other pieces nearly ready, one on T Rowe Price Multi-Strategy and one on climate change and investing (an update). Sadly, one of my son's high school classmates, a passenger in a car too near a rolling protest, was killed Sunday night. While he more "knew of" than "knew" her, it was a sort of deeply disturbing event for the folks in his wide circle of cyber-linked friends and classmates. And the source of much talk and reflection here.
David
Regarding this about active mutual funds versus passive ETFs, I have a few quibbles: While looking at a year's worth of performance versus the benchmark isn't very meaningful, it is actually over the long-term that active funds struggle the most to beat their benchmarks, and many financial articles have made that point. In fact, I think it is far more common to have an active fund beat a benchmark in the short-term, have an excellent year but struggle over the long-term as the cumulative hurdle effect of its fees gets harder and harder to overcome. Also, while there are many passive ETFs that don't match their benchmarks either, in the main categories like large cap, mid-cap and small-cap, they often do and sometimes even beat their benchmarks because of securities lending, or only lag a minuscule amount. Also, the long-term record of many funds versus their benchmarks doesn't necessarily improve when adjusted for risk. The SPIVA data on funds versus their benchmarks has risk-adjusted returns over the last fifteen years:
https://us.spindices.com/resource-center/thought-leadership/spiva/
92% of large-cap funds, 86% of mid-cap and 87% of small-cap funds have lagged their benchmarks on a risk-adjusted basis over the last 15 years. In fact, the one equity category where active managers had a fighting chance in this data were international small-caps where the benchmark won only 68% of the time over 15-years. Fixed income funds were better, but not by as much as one would hope
Even gross of fees, active managers struggled:
*** Apologies and a correction: Just noticed that the word “income“ does not appear in TMSRX’s title as I claimed above. Where’d I get that idea? BTW, I’ve sometimes considered plugging it into my “income” sleeve where I think it would fit nicely as a hedge against rising rates.
PS - Today’s NYT addresses the two Davenport killings, including the one mentioned by David. Senseless & Tragic. So sorry.
The Jensen Quality Growth funds are really attractive -- but on principle I refuse to hold a fund that charges 12(b)-1 fees.