FYI: The bull market in stocks turned six last Monday, and despite some rocky stretches — like last week, when the market fell — it has generally been a very pleasant time for money managers, who have often posted good numbers.
Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years.
In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have
Regards,
Ted
http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html?_r=0
Comments
Using last 5 year figures always on my portfolio (easiest to get) I have 6 managed funds/ETF that beat "the market"... that's 6 out of 11 holdings/others are 8%ers
Of course its a NY Times article...so that explains a lot...
I've never had a lot of confidence in their financial reporting - though same goes for many other publications. What struck me is they seem to be basing these conclusions on the period immediately following the 08-09 market meltdown. I do recall that during the "roaring 90s" index investing became very popular and the S&P 500 was greatly run up. It than suffered and lagged for several years following that hot stretch. So, I'd expect a rebound following the 08-09 market wash-out. This probably helps account for the great run it's had in recent years.
None of this is intended to dispute the advantages of holding index funds for the very long haul. I'd agree on that. But to draw conclusions on just a 6-year stretch strikes me as a lot of journalistic hoopla.
Hopefully, my funds' defensive characteristics during bear markets will make up the difference in the long run. But it's frightening! I'll probably add some index funds to balance out my portfolio.
[I love the N Y Times. Don't kill the messenger.]
"60% of (my) managed funds beat the stock market index the last 5 years"
...so draw your own conclusion....
The conclusion is that the information is meaningless..
No, don't kill the messenger. As Flack recently pointed out, most of us here have a better grasp of the financial issues than the journalists who get paid to crank out something "fresh" every 24 hours. Also, read a variety of sources. Don't rely on NYT or anyone else for all your news.
The above is not to say that I have anything against indexing a stock portfolio. I would say that this is exactly the kind of article that I would expect from the New York Times.
Be careful here; be very careful indeed.
Trustworthy statistical sets don’t lie when based on honestly representative surveys. Their interpretations are an entirely different matter. In those interpretations, definitions matter greatly. A misinterpretation might not be dishonest; it might simply be a conflated reading of the stats.
Based on my quick reading of the referenced article, and an even quicker reading of your comments, I suspect MFO posters are conflating the S&P data that is the primary source for the article.
The article quotes data from the S&P Persistency scorecard that measures mutual fund performance persistency. That specific data records consistency of returns, not absolute total returns over any integrated multiple periods.
The author focuses attention on the top 25% of funds over the initial baseline year, and than reports only on their persistency in remaining in that top quartile for each of the next four years. They mostly fail to do so.
But that observation says nothing about the cumulative returns of these funds in the entire reporting period. A baseball player who hits in excess of .300 for 4 of any 5 seasons, but has a sub-par .299 in one of those seasons would also fail the S&P Persistency test. I would still trust that .300 hitter in any circumstances and would want him on my team (portfolio).
Properly assembled, statistics don’t lie. However, some writers do purposely lie using statistics to boost a flawed position. Many more writers misuse stats because of statistical innumeracy. And readers add to the chaos by misreading and/or misinterpreting the quoted statistics. User be very careful indeed.
The referenced piece tells more about the fund manager skill/luck debate than about the more important Excess Returns delivery over time.
Best Regards.
MAYBE its because they Want to WIN?....you draw your conclusion
Let's not carry the baseball analogy too far; analogies are imperfect.
But, extending the baseball analogy just a little further, staffing a ball club with high priced hitting stars does not guarantee winning. It likely improves the odds without guarantees since baseball, like investing, is a mix of both skill and luck elements. It includes both offense (hitting) and defense (fielding) components. The teams with the highest payrolls don't always win the championship.
Also, an extravagant payroll doesn't impact a ball clubs won-lost record. A high payroll mutual fund portfolio directly subtracts from net returns. Cost matters here, and here is where the analogy fails.
My post really is not centered on the validity of the analogy. I wanted to caution MFOers against a misinterpretation of the referenced article. The initial posts were falling victim to a misreading.
Best Wishes.
Everytime I see/read the work "luck" when talking about successful people, my bp hits the roof....
Do you understand "Luck" means Doing NOTHING, something just falls in your lap...Good Baseball players Good Investors, Good business people ect ect are NOT lucky they developed skills that made them successful....
Relying on "luck" got you in the (mental) position your in now, Skills will get you in a position you Want to be in......try it.... quit waiting for "luck" to help you...It Won't
Life lesson # (what ever you want it to be)
The primary focus of the article was about performance persistency. That's why the S&P Persistency scorecard was the referenced document.
Again back to the baseball analogy, the issue is if a .300 hitter in year One is likely to repeat his success in subsequent years. That's a tough task for most hitters and results in overpaid ball players.
The Persistency scorecard tells the same challenging story for fund managers. Persistency is an illusive goal for most of them with a very few rare exceptions. You don't often get what you pay for in the active fund investment universe as constantly emphasized by John Bogle.
The debate about the luck-skill spectrum in investing is stimulating, but I believe it is irrelevant in the discussion of the referenced article. You obfuscate by defaulting to the shortcomings of the baseball analogy and the luck/skill arguments.
You're diverting attention away from the purpose of my post; you're mudding the waters. Simply put, you were wrong in the manner that you originally read the article.
Best Wishes.
Most of the population finds it a challenge to say “I was wrong”. I have never suffered that deficiency. I am frequently wrong and recognition of that possibility (even likelihood) has helped me in decision making and managing projects.
I always advised those folks who worked for me that if I didn’t make several errors in any given day, I was either not working fast enough or was not sufficiently confronting difficult issues. Errors and being wrong happens.
There are several good books that address the being wrong and being wrong admission failures. In fact, one such book has that exact title. You might be interested in securing a copy of Kathryn Schulz’s “Being Wrong” book. It’s a quick and witty read.
The book contains a memorable quote from Johann Wolfgang von Goethe: “Once you have missed the first buttonhole, you’ll never manage to button up”.
Remember that even The Fonzie had difficulty in simply saying “I was wrong”. Here is a video Link to one such brief episode:
http://www.dailymotion.com/video/x237vwo_fonzie-is-wrong-but-cant-say-i-m-wrong_fun
Enjoy, it’s fun stuff. Unfortunately, a lot of folks share this shortcoming. Too bad.
Best Wishes.
'The fastest way to succeed is to double your rate of failure.'
-- supposedly Thomas Watson Sr., from 'Whoever Makes the Most Mistakes Wins: The Paradox of Innovation'
'An expert is a person who has made all the mistakes that can be made in a narrow field.'
-- supposedly Niels Bohr
The author's prior article on the subject (July 19, 2014) recognizes that over a longer term, some fund managers do beat the market. He points out that Hodges Small and SouthernSun Small Cap "rewarded shareholders spectacularly, turning a $10,000 investment to $35,000 over those five years, ... By contrast, the same investment in a Standard & Poor's 500-stock index fund would have become more than $23,000..."
I believe the value of the study by S&P Down Jones is to point out the risks of buying the hot funds that had a great year--as opposed to considering the long-term and the methodology of the fund. Too many investors buy the top one-year performers and end up selling when the funds have bad years.
[I do believe these forums lose some of their value when they descend into a right/left struggle. It can be a real turnoff.]
I do wonder about the 2-year stretch that preceded the six-year stretch (roughly early 2007 until early 2009). Just a guess, but a great many actively managed stock funds should have appeared more persistent than their index-based counterparts due to their holding at least a modicum of fixed-income; whereas index funds would have been completely at the mercy of the rapidly falling market and also probably suffered from greater investor outflows as well.
Somebody will have to explain to me why as an investor I should worry about the "persistency" ranking of my funds over any 6-year period. My own belief is one shouldn't even own equity funds unless he/she has an investment horizon of at least 10 years - preferably longer.
Trying to Convince investors like me is a time waster, I know your wrong (lazy) and my managers prove it every day...... but "best wishing"
Ole Joe belongs to the Tribe of "IF I could only get lucky" I too would be successful..... if I was taller,smarter or won the lottery then I would have it Made...the problem with the tribe, they SIT waiting for the luck, successful people are in action Everyday making their "own Luck"...but keep wishing ole Joe you'll get lucky......really
no you won't
Ok. Now that we know the warm and cuddly side of your personality exists.......
who are you managers; being what active managed funds do you have in the household portfolio???
Thank you.
Catch
You expressed an interest in earlier S&P Persistence Scorecards that contain Bear market performance records.
The S&P team has been doing this type of analyses for some time now, and their earlier reports are accessible. Here is a Link to their 2010 edition that should satisfy your curiosity:
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline;+filename=PersistenceScorecard_Nov10.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application/pdf&blobkey=id&blobheadername1=content-type&blobwhere=1243781101148&blobheadervalue3=UTF-8
Wow, that’s some address. The study findings change each year numerically, but the general overarching findings do not. With minor exceptions, their 2010 conclusion resembles their most recent conclusion. Here is their 2010 top finding:
“Very few funds have managed to consistently repeat top-half or top-quartile performance. Over the five years ending September 2010, only 4.10% of large-cap funds, 3.80% of mid-cap funds, and 4.60% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Expectations of a random outcome would suggest a rate of 6.25%.”
I like your long-term equities perspective. I have owned several activity managed mutual funds for over two decades. However, for even shorter timeframes that exceed one year, I might cut down a little on my equity positions while not abandoning them completely.
Especially today, the returns expected from fixed income sources barely nose-out inflation rates. I think I would attempt to minimize equity risk by very broad equity international and product diversification in holdings like emerging markets, real estate, and commodities. I do keep enough near-cash reserves in short term bonds and money markets to survive for at least two years.
That’s just me wandering a bit. I respect that all investors have different priorities, different risk profiles, different size war-chests, and different investment philosophies. More power and more profit to all of us.
Best Wishes.
I looked at your link. And also at a Vanguard study in which they reach a similar conclusion: The ability of actively managed funds to outperform during bear markets is over-rated. In some bear markets they do and in others they don't. More importantly perhaps, the Vanguard study found that in the years following bear markets, index funds usually do much better.
Mark was correct. I only glanced at the first couple paragraphs of the NYT article. The limited 6-year period which the author alludes to discouraged my reading further. Anything can happen over such a short period.
Regards
Link? I would like to read. I give lip service (and more than that) to these very notions in my winnowing down to PRBLX and the Yackts, but I regularly distrust my conclusions and seek contrary longterm evidence. Also at 68 I am in the retirement problem of having short and shorter longterm horizons, but unwilling to abandon equity funds and also unwilling (mostly) to index.
Hank and MJG, thanks much.
You seem to have had similar benefits. If in fact you were able to arrange the good fortune of your birth environment due to your own cunning, skill, and really hard work, then you are really quite unique, but somehow I doubt all of that very much.
Your ignorance is pathetic; your lack of compassion for others not as lucky as ourselves is simply contemptible. Yes, I said pathetic, contemptible, and lucky, and I mean exactly that. Your type: a dime a dozen.
As you requested, here's the link to the Vanguard publication. Bear in mind the summation I provided was not an excerpt, but rather my own interpretation after having read the report. As such, it may or may not accurately reflect Vanguard's views.
https://personal.vanguard.com/pdf/icribm.pdf