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https://morganstanley.com/ideas/thoughts-on-the-market-wilsonEach week, Mike Wilson offers his perspective on the forces shaping the markets and how to separate the signal from the noise. Listen to his most recent episode and check out those of his colleagues from across Morgan Stanley Research.
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GMO is also known for saying that its fund managers don't follow its big talking heads (Grantham and Inker) but GMO has suffered.
Personally, if M* says a manager invests $1M+ in a $B AUM fund, it does not impress me. More often than not a Manager's yearly compensation from the fund far exceeds their investment in the fund. (Some fund managers start a fund with $5M of their own money and I can treat that as constituting informational value.)
Mutual fund prospectus mandates are usually very broad. Even when they say small cap, they can still drift to the edge of mid cap or into micro cap.
Why some managers are found not to do a better risk management job than the rest of us? They suffer from the same human limitations as the rest of us. Moreover, obtaining knowledge and acting on it are entirely different skills.
IMO, it is better to find managers that do a better job than others. As an aside, I am willing to give managers a pass for their performance in 2020.
As an example, I would say David Giroux does a good risk management job. Of course, he has to contend with the size of PRWCX, a limitation.
1. Manager may be running lot of other internal/external money in that strategy and the reporting often misses that. There was a long discussion elsewhere about Giroux not having much in PRWCX, but I dig up data from Price SAI (a huge combo document) that he also runs much more in that type of strategy and indeed has lot of his personal money in that strategy that M* didn't pick up in its reporting of PRWCX.
2. If a young manager is running a bond fund, it may not be reasonable to expect him/her to have lot of money in the fund. Likewise, an older manager running a hot growth fund may not have lot of money in that fund.
3. Some firms with trading stocks encourage managers' investments in firms' stocks, and that can skew the data.
However, if a fund manager has $0 in his/her fund, that is a problem. But a reasonable amount relative to manager's salary is OK.
As for risk control, the point Yogi is making regarding suitability proves the other point I made. If you’re a 22 year old bond fund manager, you’re going to invest in bonds even if you think bonds are dramatically overvalued and your personal portfolio is 100% stocks and you invest nothing in your fund. And if you’re a growth stock manager, you’re going to buy growth stocks even if your own portfolio is 100% cash and you think the market will crash. Sure, prospectuses often provide leeway for risk control, but in practice it rarely happens. And with good reason if you consider that many funds are designed to stick to a portion of the style box for financial advisors to build bespoke portfolios for clients and for specific allocations in 401ks. The best place to find such risk control is in flexible allocation funds and boutique funds where the manager owns the fund company and has complete control over the firm so he/she won’t be fired if that defensive positioning is wrong.
Otherwise,
>> ... if M* says a manager invests $1M+ in a $B AUM fund, it does not impress me. More often than not a Manager's yearly compensation from the fund far exceeds their investment in the fund. (Some fund managers start a fund with $5M of their own money ....
... huh. How much do you think these guys make? Danoff may make $15M and Giroux close, presumably, but I expect the vast majority of even successful managers do not make what you might be thinking here, and a mil in one's own fund would be pretty impressive.
I will redirect to my previous statement - it is better to find managers that do a better job than others. How they invest their own money or how much money they make is not particularly useful information for me and detracts me from staying focused. If you find that information useful, by all means gather and use.
After investing for 10+ yrs, I continually use fewer and fewer indicators. When I started, I learned a lot of rules of thumb from M* and Vanguard articles but no longer use many of them, including manager investment or ER. It is possible all information provided in those articles is statistically significant - so, no knock on them.
Ah, okay. Well, me too. (Roughly.) Oldtimers in the Boston area, but also young'uns (meaning under 40, over 30).
@LewisBraham, do you know of research in this area? I see a study from 20y ago showing positive correlation, also one somewhat later ditto (rather cross-purposes hed):
https://www.investmentnews.com/most-portfolio-managers-shun-their-own-funds-24842
“It really doesn’t make any sense,” said Vern Sumnicht, chief executive of Sumnicht & Associates, which manages $300 million for clients.”The manager [without any shares] obviously doesn’t believe in what he’s doing.”
And sure, not a hard rule.
But the one statistic that has been shown to matter consistently to future outperformance is the one generally least discussed on this board—fees. There are legions of studies showing how much it matters in almost every fund category except I think one or two small-cap ones.
Yet discussing the research here raises a larger question as the posters haven’t been talking about performance but “risk control.” For most managers if their fund category is down 30% and they’re down 25%, that is actually deemed a victory from the point of risk control, but I doubt some of the posters here think that way. They say they want funds that don’t lose money but funds like that are often the least exciting and largely overlooked. FPA New Income comes to mind. The problem is people often want the best of both worlds, something that goes up 15% a year and never goes down, I.e, a fantasy or a fraud. I know people here are more sophisticated than that, but there is still that desire lurking beneath the surface of every investor.
One thing many studies show is that performance chasing generally doesn’t work, but sadly performance is the statistic most cited pretty much everywhere, including here.
Good callout on investor psychology around upside gains with no downside pains. This is why I prefer Sortino ratio over Sharpe ratio when evaluating fund historical performance.
While manager skin does have some signal value, the challenge here is separating the signal from the noise. I.e. A 30 year old bond fund manager having no skin is noise. I don't know how old Cathy is but if she is in 60's let's say and has no skin in ARKK that is noise too imo.
"There’s nothing more profitable than a market inefficiency you know about and most other people don’t!"
The cat is out of the bag !
I guess my comment was a bit late as article was from Aug. , 2019.
Additional thoughts:
* Isn't risk/reward the same as "sell down until you sleep comfortably at night? You could jam all the numbers, ratios you want but isn't that what it comes down to?
*Does it matter if your investment in a mutual fund goes down 5% one day and you lose the equivalant of your annual grocery spend that day but overall it is very small % of your wealth? Hold on, sell, what to do? I've been reading a new book, Money Magic, Kotlikoff, great book, suggests the more money you have the less risk you should take in the stonk market??
* is there a difference between having 85% cash/15% aggressive, ARKK? vs a balanced fund...is the black swan approach better?
*Is there a difference between looking at what fund mgr has/doesn't have invested in a fund and a "wealth advisor" who has a fraction of your wealth advising what you should do with your wealth? Are you better off with the person with some grey in his hair and has seen things or the younger person who isn't jaded from past experience?
*what else do we have to go on besides looking at past performance...reading tea leaves as to what might happen going forward, trend following...where the puck will be ala The Great Gretzsky? (I was just in a building yesterday where the late Mr Rumsfeld used to work...the "Unknown, unknowns"...I guess you could apply that to investing...no one really knows what will happen or are there some who can make better guesses than others?
Best,
Baseball Fan
I know you're using the toll road fees as an analogy but this analogy is applicable to passively managed like funds only, not actively managed funds.
The other metric of a 1.50% ER fund being 50 times better than a 0.03% ER fund isn't applicable either imo.
What matters I believe is after fee performance (after accounting for risk, category etc..)
If one has access to a crystal ball that can see 10 years and the following were the choices what would most people pick?
Fund A 10Y performance 5%, fees 0.03%
Fund B 10Y performance 10%, fees 1.50%
For a starting balance of $10K, after 10Y Fund A balance will be $16,242 and Fund B balance will be $22,609
Note that I'm not arguing for or against passive investing, just the math of expenses and compounding
As a personal aside, for more than 15 years I had hard cutoffs for ER, I would look at any fund that exceeded my thresholds but I now believe that is an error and that some fund managers do indeed earn and overcome expense drag.
Unfortunately, M* has overdone this by creating 127 categories in the US alone (more elsewhere) and most M* data is applicable within its categories. As users, we don't have control over aggregating M* categories - e.g. we cannot aggregate LC-growth, LC-blend, LC-value into a simple LC, or other combos. Lipper fund categories, at least as reported in Barron's, are poor for bond funds.
As for Sharpe Ratio vs Sortino Ratio, I have found that in most cases, fund rankings by Sharpe Ratio and Sortino Ratio are similar, i.e. funds with high Sharpe Ratios also have high Sortino Ratios, etc. It is also known that adding bonds will increase both ratios, and optimization on either of those ratios will produce strange results for a mix of stock, bond, blend funds. But their utility remains in assessing similar funds.
I use the sub-type field in MFO screener to group and compare. I think there are less than 10 values in that field so makes it a lot easier vs. like you stated M* and Lipper fund categories which can become mind bogglingly complex.
There are indeed managers who earn in excess of their expense ratio drag. The problem is--and perhaps the raison d'être for this site--is knowing in advance which managers those will be. I don't necessarily think past performance stats or even past risk stats, which one could argue are fruit of the poisonous tree being derived from performance stats, are necessarily the best indicators of that future outperformance. And as you've observed, the bare fact of the matter is the higher the expense ratio, the greater that hurdle is for the manager to overcome to beat the market and his/her peers. It's possible, but one must have a lot of confidence in the manager to begin with and increasing confidence the greater that hurdle is. That's where I think just looking at these numbers doesn't really help. They are a starting point perhaps, but not an end point.
not is dropped here?
He believes we're in a "super bubble" about to burst and something that has only occurred 3x in the last 100 or so years.
-S&P 500 to fall 50% to 2500 in his opinion.
-"Today, well over 40% of the Nasdaq is down 50% from their highs" - suppose he's referring to the death cross.
His Recommendations?
- Have cash for next few years
- Avoid US stocks except high quality
-Blue chips are the way to go, but avoid US
-Go International, they are normally overpriced
-EM like Japan, Growth
-Oh and avoid US stocks
Those are his "thoughts" on the market.