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.
Agreed. Then again, it is no better than most other managers' mumbo jumbo. Relative Bulls**t Parallel.
I'm more worried, Mutual Funds are going Hollywood on us. The tragedy is both CRNEX and TVFRX don't look too bad from a performance standpoint. We just have to wait for a bear market before we know they are for real.
Reply to @VintageFreak: The real tragedy is CRNEX's 2.10% ER!!! And if the only way they're "hedging" is by selling OTM calls on the SPX that isn't going to help very much in a big market downturn.
No one likes high ER, but we need to be fair. Certain strategies require high ER and it drops with economies of scale. The Management Fee is 0.95%. Contrast that with WAGOX ER, an innocuous 1.84% of which 1.50% is Management Fee on a higher asset base, and therefore less likely to drop.
Let's see what happens. Let the fund outperform. Let the ER drop. THEN we can get interested.
Lastly, I've been noticing high ER suddenly cropping up in discussions. LOTs of funds have high ERs. Look at TFSMX. Look at WGRNX. We seem to be forgiving for our fund "darlings" when it comes to ERs. Newer, SMALLER funds, we seem to be unforgiving. IMHO, we need to wait and watch.
I am a natural skeptic when a novel investment approach is publicized as a breakthrough “Moneyball” concept. These type of discoveries are rare events to be treasured and exploited if verified.
My skepticism expands if the methodology is poorly documented. That skepticism grows still further if out-of-sample tests are not convincingly accessible. All this makes it easy to convert my skeptical persuasion into a Devil’s advocate position.
So, allow me to be a Devil’s Advocate with regard to the Transparent Value stock selection and scoring technique.
The Transparent Value management team has poorly documented its methodology; it is anything but transparent. Its proprietary Required Business Performance (RBP) stock selection criteria and its tightly coupled RBP probability metric (RBPP) remain a murky mystery. The documentation details are so sparse that a full understanding of the assumptions, its supportive database, and its complete out-of-sample tests are impossible to evaluate. In essence, it is mostly a black-box.
I do not buy black-boxes. I suspect you do not either.
Continuing with the baseball analogy, the RBP and the RBPP approach home plate with a few strikes against them from the get-go. The top tier modeling is based on an adaptation of the very imprecise 1959 Gordon Dividend Discount Model. The modification uses a discounted cash flow in the equation. The major adaptation is to reverse the equation usage to judge if a current price is under or overvalued. A buy decision is committed to only undervalued stocks.
Inverting and/or reengineering a dubious model that requires hard to guesstimate long term inputs is an unholy task and does not add precision to the approach. All this seems to be like putting lipstick on a pig.
Remember that the Gordon Dividend Discount Model originally needed a divided rate, an earning growth estimate, and an investment cost of equity (borrowing interest rate) as input parameters. These forward estimates need to be made in perpetuity. The modeling modifications do not lower the difficult input data hurdles. Good luck on that score without introducing a gross error.
The full analysis further requires a prediction of the stock or mutual fund managers probability of investment selection success to arrive at the RBPP measure. I surely do not know how that probability number is currently determined. But I can construct a likely statistical procedure.
The RBP folks examine data over the most recent 3-year performance period. Fundamentally, I believe that is too short a period of data accumulation. Regardless, I would form a probability of management acumen by simply forming the ratio of their past successful stock picks divided by the total number of trades made. If it is done that way, the methodology is wedded to past performance and is not forward looking whatsoever.
I am also not impressed with their numerical inclusion of behavioral investing aspects into their model. It is done in the manner of an error catch-basin. According to the formulation, only two outcome explanations for performance are recognized. The RBPP measures the success likelihood. The other outcome is a measure of failure and is assigned to a behavioral bias shortcoming.
Since these two outcomes define the entire universe of possible events according to the model, they must add to a value of One. Of course, that assumption presumes that their RBPP model is perfection. Fat chance. That type of thinking does not allow either endogenous or exogenous events like inflation, inventions, or wars to disrupt the forecast. Of course, these are non-predictable Black Swan events that always compromise the forecasting business, and make it a futile task anyway.
The RBP and RBPP methodology does not seem to have a convenient way to incorporate world and financial shocks into their scoring. It will likely not do an adequate forecasting job under these all too frequently occurring market jolts.
I don’t know if RBP and RBPP are legitimate breakthroughs or just another theory that will be consigned to the dustbin of investment history when tested in real world application. Only time and a more comprehensive data set will tell that story.
However, if like any idea that successfully survives a real world test, it will be quickly adopted by rivals. That’s what happened with the baseball “Moneyball” statistical technique. Billy Beane and the Oakland team no longer own a unique advantage. That’s precisely what consistently occurs in the investment community. Any advantages that results from intrepid research becomes recognized as such, and competition rapidly adapts and adopts to erode its effectiveness.
I’ll remain on the sidelines until more information becomes available and/or until an independent check is made with out-of-sample data. Academic verification is preferred. I’m somewhat surprised that academia has not responded to the challenge.
I agree with MFO’s Investor that without more transparency, a wait-and-see strategy is prudent.
Well, at least one Devil’s advocate has spoken. I hope it is helpful. I welcome your opinions.
Comments
I'm more worried, Mutual Funds are going Hollywood on us. The tragedy is both CRNEX and TVFRX don't look too bad from a performance standpoint. We just have to wait for a bear market before we know they are for real.
And if the only way they're "hedging" is by selling OTM calls on the SPX that isn't going to help very much in a big market downturn.
Let's see what happens. Let the fund outperform. Let the ER drop. THEN we can get interested.
Lastly, I've been noticing high ER suddenly cropping up in discussions. LOTs of funds have high ERs. Look at TFSMX. Look at WGRNX. We seem to be forgiving for our fund "darlings" when it comes to ERs. Newer, SMALLER funds, we seem to be unforgiving. IMHO, we need to wait and watch.
I am a natural skeptic when a novel investment approach is publicized as a breakthrough “Moneyball” concept. These type of discoveries are rare events to be treasured and exploited if verified.
My skepticism expands if the methodology is poorly documented. That skepticism grows still further if out-of-sample tests are not convincingly accessible. All this makes it easy to convert my skeptical persuasion into a Devil’s advocate position.
So, allow me to be a Devil’s Advocate with regard to the Transparent Value stock selection and scoring technique.
The Transparent Value management team has poorly documented its methodology; it is anything but transparent. Its proprietary Required Business Performance (RBP) stock selection criteria and its tightly coupled RBP probability metric (RBPP) remain a murky mystery. The documentation details are so sparse that a full understanding of the assumptions, its supportive database, and its complete out-of-sample tests are impossible to evaluate. In essence, it is mostly a black-box.
I do not buy black-boxes. I suspect you do not either.
Continuing with the baseball analogy, the RBP and the RBPP approach home plate with a few strikes against them from the get-go. The top tier modeling is based on an adaptation of the very imprecise 1959 Gordon Dividend Discount Model. The modification uses a discounted cash flow in the equation. The major adaptation is to reverse the equation usage to judge if a current price is under or overvalued. A buy decision is committed to only undervalued stocks.
Inverting and/or reengineering a dubious model that requires hard to guesstimate long term inputs is an unholy task and does not add precision to the approach. All this seems to be like putting lipstick on a pig.
Remember that the Gordon Dividend Discount Model originally needed a divided rate, an earning growth estimate, and an investment cost of equity (borrowing interest rate) as input parameters. These forward estimates need to be made in perpetuity. The modeling modifications do not lower the difficult input data hurdles. Good luck on that score without introducing a gross error.
The full analysis further requires a prediction of the stock or mutual fund managers probability of investment selection success to arrive at the RBPP measure. I surely do not know how that probability number is currently determined. But I can construct a likely statistical procedure.
The RBP folks examine data over the most recent 3-year performance period. Fundamentally, I believe that is too short a period of data accumulation. Regardless, I would form a probability of management acumen by simply forming the ratio of their past successful stock picks divided by the total number of trades made. If it is done that way, the methodology is wedded to past performance and is not forward looking whatsoever.
I am also not impressed with their numerical inclusion of behavioral investing aspects into their model. It is done in the manner of an error catch-basin. According to the formulation, only two outcome explanations for performance are recognized. The RBPP measures the success likelihood. The other outcome is a measure of failure and is assigned to a behavioral bias shortcoming.
Since these two outcomes define the entire universe of possible events according to the model, they must add to a value of One. Of course, that assumption presumes that their RBPP model is perfection. Fat chance. That type of thinking does not allow either endogenous or exogenous events like inflation, inventions, or wars to disrupt the forecast. Of course, these are non-predictable Black Swan events that always compromise the forecasting business, and make it a futile task anyway.
The RBP and RBPP methodology does not seem to have a convenient way to incorporate world and financial shocks into their scoring. It will likely not do an adequate forecasting job under these all too frequently occurring market jolts.
I don’t know if RBP and RBPP are legitimate breakthroughs or just another theory that will be consigned to the dustbin of investment history when tested in real world application. Only time and a more comprehensive data set will tell that story.
However, if like any idea that successfully survives a real world test, it will be quickly adopted by rivals. That’s what happened with the baseball “Moneyball” statistical technique. Billy Beane and the Oakland team no longer own a unique advantage. That’s precisely what consistently occurs in the investment community. Any advantages that results from intrepid research becomes recognized as such, and competition rapidly adapts and adopts to erode its effectiveness.
I’ll remain on the sidelines until more information becomes available and/or until an independent check is made with out-of-sample data. Academic verification is preferred. I’m somewhat surprised that academia has not responded to the challenge.
I agree with MFO’s Investor that without more transparency, a wait-and-see strategy is prudent.
Well, at least one Devil’s advocate has spoken. I hope it is helpful. I welcome your opinions.
Best Regards.