Lessons Learned from a Decade of SPIVA MJG,
I've been sitting on this a couple of days, digesting the SPIVA data on performance and persistence. I'm happy to see this, then. I don't at all think this is an overdone subject if people can discuss in good faith.
When I started investing I figured I'd better learn as much as I could, so I started reading voraciously. The first things I read were Bill Bernstein and Burton Malkiel, though there were a couple technical asset allocation guides thrown in. Indexing seemed self-evident based on what they were presenting as evidence. For instance, Bernstein claims in the Intelligent Asset Allocator that due to expense ratios, commissions, bid-ask spreads and AUM impact costs, the average actively managed large cap fund's total expenses are 2.2%, active small cap and developed market funds average 4.1%, and active emerging market funds average an incredible total expense of 9%. Of course all of those costs are mitigated by indexing. But in an efficient market, no manager could ever come close to those numbers, let alone overcome them. So how come some do?
When I started reading the classic value investing literature, it rang far more true. MFO's articles and Charles' research on risk/return also helped me clarify the role of volatility in my equity holdings. The article I linked to before by John Rekenthaller discussing the paper showing most foreign funds narrowly outpace their index sort of cemented the deal for me. Given certain conditions I believe active management can still provide better returns, particularly in less efficient markets, and especially when adjusted for risk.
I don't pretend to have anything but anecdote, and my grasp of statistics isn't great at all. But looking at the SPIVA data, a couple of things stand out to me:
First, the piece on persistence demonstrates something most thoughtful investors already know: there is no such thing as a perfect investment vehicle. Year over year persistence is the wrong measure when you have a 20+ year horizon. As BobC pointed out, rolling returns are far more informative. I do not expect my funds to always have yearly top decile returns. I expect them to behave in particular ways given certain market environments over a market cycle. I expect DODWX to be highly volatile and I expect PRBLX to sort of chug along in up markets while protecting in bears. It doesn't matter to me if they are ahead of the S&P right now, but 5, 10, 20, 30 years from now. Which leads to...
Second, the SPIVA scorecard only weighs total return over one, three and five year periods, which seem far too short a time to judge long-term investment performance. That being said, I do not see the slam-dunk case you see here. I do see a lot of reversion over periods of time. For instance, in the LCV realm, only 14.94% of funds outperformed the index last year. But over a five year period, 50.22% of active funds outperformed. Looking at the 'Lessons Learned' article, that number was an astounding 81.3% in August 2011. While growth funds almost always lagged the index over 5 year periods of time, across the capitalization spectrum, value funds, on average, were notably better. This suggests to me that either there is something to value investing that is not mechanical, that value has been a down area of the market (what Bernstein calls Dunn's rule -- that indices do really well when their market section does well, and vice versa) and that managers have mitigated risk, or that market cap indices, because they overweight overbought sections of the market by definition, are really, really susceptible to bubbles like the MSCI EAFE being 65% Japanese stocks in 1989, the 1999 tech boom or financials in 2008. Exactly the sort of crashes behavioral finance holds gets most investors into hot water. I can see some combination of the three at work.
Third, data of the sort SPIVA uses always assume a static, one-time purchase of a fund. But accumulators should be or are DCAing. In order to see how money invested periodically would compound over time, I ran a comparison of some well known core domestic funds against the S&P and LCV indices on M*'s portfolio manager tool. Each fund assumed a yearly investment of $1000 on Jan 1 from 2003 to 2013 ($11,000), with reinvested dividends and cap gains. Most of these are funds I am either interested in, or were "Great Owls." In either case, they aren't random, and this set was certainly data mined. And of course, past returns, future results... But I do think a several of them were low-hanging fruit in 2003 if one was engaged in finding quality active management, and I do think the results demonstrate that if you do find that quality active manager, the time spent looking might pay off. These are the results:
Name / Value 9/17/13 / $ Gain / %Gain / YTD%
FDSAX / 22,864.90 / 11,864.90 / 107.86 / 31.95
YACKX / 22,609.37 / 11,609.39 / 105.54 / 21.39
SEQUX / 20,413.10 / 9,413.07 / 85.57 / 23.08
PRBLX / 20,174.85 / 9,174.84 / 83.41 / 21.93
MPGFX / 20,107.78 / 9,107.83 / 82.8 / 23.36
FMIHX / 19,883.22 / 8,883.18 / 80.76 / 21.4
VDIGX / 19,660.95 / 8,660.91 / 78.74 / 21.77
OAKLX / 19,575.41 / 8,575.42 / 77.96 / 23.7
PRWCX / 19,397.13 / 8,397.14 / 76.34 / 15.82
VEIPX / 19,185.04 / 8,185.00 / 74.41 / 20.98
FPACX / 18,939.87 / 7,939.91 / 72.18 / 15.27
RIMHX / 18,437.03 / 7,437.02 / 67.61 / 14.51
DODGX / 18,297.51 / 7,297.46 / 66.34 / 26.63
FUSEX / 18,025.54 / 7,025.53 / 63.87 / 21.29
VIVAX / 17,722.27 / 6,722.28 / 61.11 / 23.12
AUXFX / 17,625.38 / 6,625.40 / 60.23 / 16.78
Taking Bernstein's total expense of 2.2% for large cap domestic funds, some managers are doing something very, very right. I have another table for global funds, and the results vs. VTWSX are even greater despite what one would assume are greater total expenses.
All of this is really just a long-winded way of saying, IMO, if you are the sort of investor who wants to save money and not think much about it, by all means index. But if you are the sort who wants to actually study what they own, and you pay attention to some basic things like fees, turnover, AUM, manager tenure, manager investment, etc... it might well be possible to find funds which will outperform, particularly in less efficient markets. If that is the case, fund selection isn't quite Whack-A-Mole/"Outfox the Box". That or I'm deluded in my hope.
All best.
12b-1 Fees Short answer: Yes, management fees, trading expenses and 12B-1 fees are figured into M* returns, as are dividend and capital gains distributions. Loads and redemption fees are not. If you look at a chart for VFINX/FUSEX you will notice a slight difference between the fund's return and the S&P return that grows over time. That is the result of the fees.
Long answer: "Annual total returns are calculated on a calendar-year and year-to-date basis. Total return includes both capital appreciation and dividends. The year-to-date return is updated daily. For mutual funds, return includes both income (in the form of dividends or interest payments) and capital gains or losses (the increase or decrease in the value of a security). Morningstar calculates total return by taking the change in a fund's NAV, assuming the reinvestment of all income and capital gains distributions (on the actual reinvestment date used by the fund) during the period, and then dividing by the initial NAV. Unless marked as load-adjusted total returns, Morningstar does not adjust total return for sales charges or for redemption fees. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets."
what do you think of this NYT piece on new-think retirement balancing? Hi Guys,
If you don’t know, I have some skills and experience that contribute to my qualifications in assessing Monte Carlo-based retirement analyses. I have reviewed much of the literature, have done countless specific analyses, and have even written a Monte Carlo code when not many existed. So, this is not a casual posting; it has a serious purpose.
The NY Times article that reviewed the Pfau and Kitces study did a respectable job at summarizing the researcher’s basic findings. But, like any broad-brush evaluation aimed at a general readership, it is not necessarily nuanced or complete. A study of this magnitude deserves special attention since an interpretation of its discoveries can be very personal. Also, the authors are heavyweights in the retirement arena; these researchers speak with authority.
Therefore, my first recommendation is that you not be satisfied with a reasonable review, but that you go directly to the source. The referenced document is not mathematical, is a breezy read, has specific recommendations, contains useful charts that summarize all its findings, and is only19 pages long. Here is a Link to this fine Monte Carlo research paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930The study itself is comprehensive, but it is simultaneously limited in scope because it only partially deals with the complex continuum of retirement issues. For example, retirement planning must address both the accumulation and the distribution phases of an overall retirement strategy. The referenced study only focuses on the distribution portion of retirement.
The study examines the survival prospects of a retirement portfolio under the commonly accepted 4 % and 5 % annual withdrawal schedules (adjusted for inflation) for three representative market rewards scenarios. Not shockingly, the postulated returns scenarios are a primary determinant force in any portfolio survival study. The three reasonable postulated scenarios are: one developed by Harold Evensky for professional financial planning purposes, another calibrated to the current low interest rate environment, and a third that reflects historical equity and bond returns.
The major distinction in the Pfau and Kitces work is that the equity/bond asset allocation mix is not held constant during the retirement period; 121 equity glide-pathways are defined and evaluated. Monte Carlo analyses randomly selects the portfolio’s returns annually for each of 10,000 cases considered for each equity glide-path. A 30-year retirement lifecycle is documented.
In some instances, the retirement portfolio is favored with positive returns in its early years; in other instances, the reverse is randomly selected and the portfolio suffers initial erosive market drawdowns. Portfolio survival is definitely dependent upon both the magnitude and the order of these future projected returns.
For a more complete assessment of the entire retirement planning process, I recommend you visit another research paper. The paper is authored by Javier Estrada, another financial research wizard; his paper is titled “Rethinking Risk”. Here is a Link to the compact 23 page study:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2318961Estrada examined returns data from 19 countries over a 110 year timeframe. He makes the case for a heavier commitment to equity positions during the accumulation phase of retirement planning, even just before the retirement date. He observes that “ In fact, stocks have both a higher upside potential and a more limited downside potential
than bonds, even when tail risks strike.” He’s writing here about Black Swan low probability events late in the lifecycle period.
In his conclusion section, Estrada writes “ … it is clear that stocks are more volatile than bonds, but it is far from clear that they are riskier than bonds for the type of investor considered here. This is because, even when tail risks strike, stocks enable investors to accumulate more wealth by the end of the holding period than bonds. Hence, in what sense are stocks riskier than bonds for a long‐term investor that focuses on the endgame?”
In essence, the Pfau & Kitces Monte Carlo studies, and the Estrada empirical assembly and analysis of market data dovetail to fit an emerging picture. These researchers are advocating for more aggressive portfolios with a higher fraction of equity holdings. However, Pfau & Kitces endorse a U-shaped percentage equity holding profile that features more fixed income products immediately after the retirement date.
Their study is soundly constructed, but its numerical findings are not overwhelming. That’s why you need to examine the results for yourself. It is likely that some of the reported trends are within the uncertainty (the noise) of the calculations. Basically, the study documents marginal benefits, small
gains in survival likelihoods.
In many instances, the reported portfolio survival probabilities are at totally unacceptable survival rates. That is especially true for the Evensky model returns and today’s low fixed income returns forecasts. From my viewpoint, the only actionable portfolio equity glide-path scenario is that coupled to the historical market returns. That’s a rude awakening.
Referring to the Pfau & Kitces figures, their analyses show portfolio survival rates above the 90 % likelihood mark only for historical-like annual return rates. That might also be interpreted as a clue that a 4 % withdrawal rate is unacceptable if current, muted market conditions hold for the next decade or so.
There is a lot to be learned from the two referenced studies. Please take advantage of them. I believe that although they offer interesting and new insights, they do not make overwhelmingly compelling arguments. If I do decide to act on them, it will be very incremental in character.
Nobody sees the future market returns with clarity, so conservative retirement approaches and planning are always the order of the day.
I hope these references are helpful in that regard.
Best Wishes.
ASTON/Fairpointe Mid Cap Fund to close http://www.sec.gov/Archives/edgar/data/912036/000119312513367597/d598072d497.htm497 1 d598072d497.htm ASTON FUNDS
Aston Funds
ASTON/Fairpointe Mid Cap Fund
Class N Shares and Class I Shares
Supplement dated September 16, 2013 to the Prospectus dated February 28, 2013 and supplemented on July 2, 2013 for Aston Funds (the “Prospectus”) and Summary Prospectus dated March 1, 2013 for the Fund (the “Summary Prospectus” and together with the Prospectus, the “Prospectuses”)
IMPORTANT NOTICE
This supplement provides new and additional information beyond that contained in the Prospectuses and should be retained and read in conjunction with the Prospectuses. Keep it for future reference.
Effective after the close of business on Friday, October 18, 2013 (the “Soft Close Date”), the ASTON/Fairpointe Mid Cap Fund (the “Fund”) is closed to new investors until further notice, with the following limited exceptions, where the Fund determines that the exception processing is operationally feasible and will not harm the Fund’s investment process:
• Financial advisors and/or financial consultants that have clients invested in the Fund may continue to recommend the Fund to their clients and/or open new accounts or add to the accounts of their clients.
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Summers Withdraws name from Fed Chair Consideration Reply to
@catch22: My
capital appreciation funds are up an average 26.61% YTD.
PRHSX: 37.97%
SPY: 20.06%
IJH: 21.80%
What's yours ?
Help me Select Fund - GOODX or SEQUX Reply to
@VintageFreak: ah, I missed that about the
capital losses. Makes sense. You know you can carry those over indefinitely, counting the losses a
gainst taxable income until they run out, right?
SEQUX has substantially lower risk in terms of they are less likely to screw something up as a result of the way they invest. If you think they will both do well, flip a coin.
