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Informed Simplicity from Charles’ Balcony

edited June 2016 in Fund Discussions
Hi Guys,

I want to direct your attention to the June edition of Charles’ Balcony. It’s yet another fine example of Charles’ research orientation and depth. Good work Charlie. It illustrates how an informed simplistic investment approach can eviscerate complex, costly alternatives in the portfolio construction arena. Please give it a thoughtful read.

American Funds is famous for its in-depth research, independent bottom-up decision making, and heavy-weight cost structure. In much earlier days, their process appears to have delivered a performance edge, that more lately seems to have suffered significant erosion. A more professional investment cohort looks like they are neutralizing one another and battling to near zero positive Alphas.

Active fund management is struggling to demonstrate its superiority over Indexing.

That’s particularly difficult for the American group because of its fees. But that’s also the case when those fees are reduced. Cost leader Vanguard offers a rather complete array of both actively and passively managed funds in almost all fund categories. That offers a superior, natural opportunity for a real world test. How have the Vanguard products performed lately in a direct competition?

A 2015 article from the AssetBuilder website has addressed that issue and provides a partial answer. Here is a Link to that excellent study:

Some active Vanguard funds do and some do not deliver as advertised. I’m sure conclusions are timeframe sensitive.

Even with Vanguard’s low cost structure, the hurdle is a severe challenge for active fund managers. Over the 10-year timeframe of the referenced study, please note how similar the cumulative returns were. Advantages were minor in terms of that meaningful measurement.

Are the incremental and uncertain payoffs worth the risk of choosing a deadbeat manager? Everyone has their own answer to that question. My answer is a portfolio split that includes both active and Index holdings.

Thank you Charles.

Best Regards.


  • edited June 2016
    MJG, thanks for pointing out Charles's excellent contribution this month. I definitely have come to the same conclusion that managed funds in most investment areas are not worth the effort.

    I also believe that investors and professional advisers exasperate the under performance of using managed funds by multiplying the same investment style in a portfolio. Using 2 or 3 or more funds in the same category increases the chance to under perform the representative index in every study I've read. There is no way owning 3 domestic large cap funds for example is going to out perform the S&P500. If the argument is to do it for manager diversification, it's a whole lot easier to accomplish that with an index fund.

    Anyway, Charles has been saying this for a long time now, and now he is giving examples with actual fund portfolio comparisons. Great job.
  • MJG,

    Thanks for your post.

    Would you kindly go into more detail regarding your thoughts of a portfolio split that includes both active and Index holdings.

    Domestic equities? Internationals? Bonds? Percentage split?



  • MJG
    edited June 2016
    Hi Mona,

    Over time my disenchantment with active funds grew with their lackluster performance. About one year ago, I decided to take action. As a goal, I decided to reduce the active fund components of my portfolio to approximately the one-third level. A precise level is not warranted because of the uncertainties in any investment decision.

    Before acting, I needed empirical data on which asset classes were best served by active fund management. Luckily, Morningstar did the heavy lifting for me. Here is a Link to the Morningstar study that provided me with the requisite data:

    These data guided my decisions. I used the 10-year data sets. Take note of the improved odds when focusing on low cost funds. Management consistency is also a factor. I agree with MikeM's observation to minimize the number of active funds in any and all fund categories. That's solid advice.

    I own active funds in the large and small cap value areas, in the foreign fund group, and in some bond holdings.

    It is my policy not to name specific funds or specific percentages. Given my advanced age and the size of my portfolio what I do in detail is not likely applicable to others.

    I hope you find this reply a little useful. That's my singular purpose. Thanks for reading my post.

    Best Wishes.
  • @MJG Your comments are very useful, and of course we respect your wish for discretion about your specific investments, especially since you don't come here to boast, on the contrary, you're sure of your opinions but also quite humble. Thank you for participating in this forum.
  • @expatsp: I'll second that !
  • Hi expatsp, Hi Ted,

    I appreciate your kind words. Thank you guys so much.

    Best Wishes.
  • MJG,

    Thanks much for all the answers to my questions.

    Of course I would not ask you for the names of specific funds and "active fund components of my portfolio to approximately the one-third level" is certainly specific for me.

    I appreciate your taking the time to address my post.

  • 10 years ago I decided to simplify, for several reasons, by moving our investments from a handful of mutual fund companies and 10 mutual funds to 1 mutual fund company and largely 1 fund, a moderate allocation fund (PRWCX). Very simple and easy to manage.

    After about six years I found myself thinking that maybe it would be wise to be better diversified than basically being all-in on one fund, so I transferred all our investments to an online brokerage account to gain easier access to other fund families and funds.

    Today, I find myself slowly moving an increased percentage of assets back towards PRWCX as finding other MA funds or a combination of other funds to form a MA that comes anywhere near the performance of this singular, diversified fund difficult...including combinations of index funds.

    Our online brokerage account rep is trying to convince me to hand over at least a portion of our portfolio to him which would be invested in ETF's...and many of them. Past performance of these ETF portfolios with similar equity/bond ratio does not warrant it. Also, I can't help but feel that it would be just as good to be invested in a couple index funds rather than an array of 18 or more ETF's...only justification for that many funds seems to be to justify their management fees!
  • @MJG & Roy - Gentlemen, I couldn't agree more. For years and years I chased around reading all the pundits/guru's/hot hands writings and recommendations trying to diversify and be in the right place at the right time when all I really had to do was select a handful of decent options at the start and then keep my hands off. Infinitely more financially rewarding with the bonus of plenty of time for other stuff like a life.
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