Benefits of actively managed funds

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etfan
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Benefits of actively managed funds

Post by etfan »

Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
Silk McCue
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Re: Benefits of actively managed funds

Post by Silk McCue »

etfan wrote: Sun Aug 08, 2021 3:49 pm

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
Marketing, ignorance and greed maybe.

Cheers
mrjohnanderson007
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Re: Benefits of actively managed funds

Post by mrjohnanderson007 »

All of our entire lives we are taught to believe that if something cost more it's a better product. It will also bring more happiness.

It's actually simple. 99% of the population are not educated in investing and don't want to learn. They either just choose something in their work portfolio unaware of expenses. Or listen to an advisor selling them the expensive product.
Last edited by mrjohnanderson007 on Sun Aug 08, 2021 4:19 pm, edited 1 time in total.
dbr
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Re: Benefits of actively managed funds

Post by dbr »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
Or, an actively managed fund could lose more than the market.

Above post lists factors involved. I would say marketing accounts for most of it, in symbiosis with ignorance. It is very difficult to imagine that if you pay a professional for something that you will not get something of worth for your fee. In reality the dirty secret to investing is that you get what you don't pay for. It is interesting to try to list other business enterprises where the more you pay the less you get. Gambling casinos might be one -- the more you bet the more you lose.
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Re: Benefits of actively managed funds

Post by rob »

It's regular income as a percentage of assets no matter how badly you do you job, so great cushioning... Oh you bent benefits to YOU... Not so much...
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Re: Benefits of actively managed funds

Post by TravelforFun »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
They’re people who are absolutely lost without an advisor.

TravelforFun
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Watty
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Re: Benefits of actively managed funds

Post by Watty »

etfan wrote: Sun Aug 08, 2021 3:49 pm In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
The same logic is true for lottery tickets and casinos but people still buy them.

Somethings people do are not logical.
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

Surprised by the common answers so far. Basically the managers are greedy and their customers are fools, and there are no redeeming qualities.

Does the same sentiment apply to funds like target dates and "life strategy" or "balanced" funds? I think those are technically actively managed since they don't track an index.
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Re: Benefits of actively managed funds

Post by 02nz »

etfan wrote: Sun Aug 08, 2021 4:59 pm Surprised by the common answers so far. Basically the managers are greedy and their customers are fools, and there are no redeeming qualities.

Does the same sentiment apply to funds like target dates and "life strategy" or "balanced" funds? I think those are technically actively managed since they don't track an index.
The managers are not necessarily greedy (that's a very subjective term). Some will be successful in beating the market even after costs. But the BH philosophy says you cannot pick them out in advance.

No, Vanguard target date funds and LifeStrategy funds cannot be consider actively managed. They are made up of index funds. Of course somebody at Vanguard designed them and has even tinkered with them (adding more international, for example). But that doesn't make them actively managed in the traditional sense.
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Re: Benefits of actively managed funds

Post by Silk McCue »

02nz wrote: Sun Aug 08, 2021 5:03 pm
etfan wrote: Sun Aug 08, 2021 4:59 pm Surprised by the common answers so far. Basically the managers are greedy and their customers are fools, and there are no redeeming qualities.

Does the same sentiment apply to funds like target dates and "life strategy" or "balanced" funds? I think those are technically actively managed since they don't track an index.
The managers are not necessarily greedy (that's a very subjective term). Some will be successful in beating the market even after costs. But the BH philosophy says you cannot pick them out in advance.

No, Vanguard target date funds and LifeStrategy funds cannot be consider actively managed. They are made up of index funds. Of course somebody at Vanguard designed them and has even tinkered with them (adding more international, for example). But that doesn't make them actively managed in the traditional sense.
To clarify I was not referring to the managers as the ones being greedy.

Cheers
delamer
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Re: Benefits of actively managed funds

Post by delamer »

etfan wrote: Sun Aug 08, 2021 4:59 pm Surprised by the common answers so far. Basically the managers are greedy and their customers are fools, and there are no redeeming qualities.

Does the same sentiment apply to funds like target dates and "life strategy" or "balanced" funds? I think those are technically actively managed since they don't track an index.
Managers of all-in-one funds select an asset allocation, just like any investor should for their portfolio. And the good ones use index funds as the underlying investments

They don’t pick-and-choose individual stocks and bonds in an attempt to beat the market, protect the downside, etc. as active managers claim to do.

Why are you surprised that Bogleheads have uniformly negative comments about active fund managers? Although I don’t see that anyone called the customers “fools” — uninformed, yes, but that’s different.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

delamer wrote: Sun Aug 08, 2021 5:26 pm Why are you surprised that Bogleheads have uniformly negative comments about active fund managers? Although I don’t see that anyone called the customers “fools” — uninformed, yes, but that’s different.
I'm not surprised that Bogleheads would in general recommend index funds and in general recommend against actively managed funds. I'm only surprised that they feel that such funds have no redeeming qualities whatsoever and that their investors are uninformed.
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Re: Benefits of actively managed funds

Post by Dregob »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
Who benefits from actively managed funds? The fund manager.
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Re: Benefits of actively managed funds

Post by backpacker61 »

I would say that sometimes there are benefits in some actively managed funds, provided the expenses are low enough. Most actively managed funds fail to overcome the cost hurdle.

In the fixed income space, index funds are weighted to the largest debtors, which may or may not be what you want.
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Re: Benefits of actively managed funds

Post by investorpeter »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
I don't think it's fair to say that active mutual funds don't provide any value; but that when you compare their value to an easily available, lower cost alternative such as an index fund, they don't provide enough value as an industry to warrant their fees. But they do provide some value. If you took the average person off the street and told them to invest $100k, on average, they would probably do worse than an actively managed mutual fund. They might keep it all in cash, or speculate on penny stocks, etc. And if someone advised such a person to instead invest in an actively managed fund, that would be a valuable service provided. Maybe not the optimally valuable service, but there would be value in it.

But the answer to why such large industries exist that don't provide sufficient value, it boils down to the saying, "that it is difficult to get someone to understand something when his livelihood depends on him not understanding it". The vast majority of financial advisors and active fund managers believe they are providing a net valuable service. And they embrace the complexity because it justifies their existence. And it's likely such paradoxical situations exist throughout our society, but it is just more obvious in finance because it is a more quantitative field where almost everyone agrees on a common measure of success. You could perhaps say the same about real estate brokers, car salesman, doctors, lawyers, accountants, etc. whereby there is unnecessary complexity that exists primarily to justify the field's existence. That with only a little basic knowledge, one could gain enough skill to be as competent as a professional in most, but not all, situations. Though of course, there are going to be some situations where their services would be needed. Like if you had acute appendicitis, you would want to go to a surgeon; or if you were charged with murder, you would want a criminal defense attorney. But perhaps in aggregate, these industries extract more in fees than valuable services provided, just like the active mutual fund industry.
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Re: Benefits of actively managed funds

Post by Jaymover »

I read somewhere that actively managed funds do tend to outperform in the micro small caps and emerging companies arena. As many microcaps are rubbish then a good fund manager will have researched companies to vet for skills and true prospects. As these types of risky asset classes tend to make up a small (say %5) of a total portfolio, then I would say that the extra 1-2% pa in fees is no big deal if the rest of your portfolio is low cost etfs.

Some would say why bother with the small cap diversification and just go 2 fund or 3 fund. However my microcap active has way outperformed my other assets recently which has been nice.
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Re: Benefits of actively managed funds

Post by mikeyzito22 »

Jaymover wrote: Sun Aug 08, 2021 7:54 pm I read somewhere that actively managed funds do tend to outperform in the micro small caps and emerging companies arena. As many microcaps are rubbish then a good fund manager will have researched companies to vet for skills and true prospects. As these types of risky asset classes tend to make up a small (say %5) of a total portfolio, then I would say that the extra 1-2% pa in fees is no big deal if the rest of your portfolio is low cost etfs.

Some would say why bother with the small cap diversification and just go 2 fund or 3 fund. However my microcap active has way outperformed my other assets recently which has been nice.
You say "outperformed recently." And what happens when the brokerage hires a new fund manger that doesn't "way outperform?" Do you switch because you have noticed that the fund manager changes or what is the criteria for such a switch? I recently moved some from total international to an active international fund. I saw that it was outperforming and thus, it seemed like a good thing (performance chasing).

I wanted more bang for my buck in international because total international has been less than kind. Guess what happened? After a year of outperformance, it started to slip and I got caught. Plus, it had a high turnover rate and a higher ER. So, as it slipped I remembered that indexing at low costs, plus reversion to the mean meant I should stick with the three fund for the majority of my portfolio except for intermediate bonds.

I suppose it isn't bad if you don't have much of a position in it and it is fun. However, it will barely make a difference nonetheless in that case. I still would think 5% in individual stocks that you think could blow the portfolio out of the water may be more exciting (versus a microcap etf with a high er). Stocks don't have ER's, so if your gambling there are many roads to Dublin.
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Re: Benefits of actively managed funds

Post by KlangFool »

OP,

The benefits of actively managed fund is that you do not have to actively manage your funds yourself.

Some folks says that they believe in 3 funds. But, then, they start choosing some different bond funds because they know how the interest rate going to move. And, they "market timed" their asset allocation because they believe that the stock and/or the bond is overvalued.

I allocate 40% of my portfolio to the Wellington fund. I choose to hire the professional to do the stock picking and bond picking. I do not 100% believe in passive indexing. Hence, I hedged my bet by putting 40% of my portfolio into the Wellington fund.

My portfolio is 40% passive index, 40% Wellington, and 20% mini-Larry. What do you believe?

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etfan
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Re: Benefits of actively managed funds

Post by etfan »

mikeyzito22 wrote: Sun Aug 08, 2021 8:17 pm You say "outperformed recently." And what happens when the brokerage hires a new fund manger that doesn't "way outperform?"
That's a good point. Even if a certain fund had good performance in the past, there's always a risk the manager will quit and they will hire an incompetent manager to manage the fund.
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Re: Benefits of actively managed funds

Post by nisiprius »

etfan wrote: Sun Aug 08, 2021 8:42 pm
mikeyzito22 wrote: Sun Aug 08, 2021 8:17 pm You say "outperformed recently." And what happens when the brokerage hires a new fund manger that doesn't "way outperform?"
That's a good point. Even if a certain fund had good performance in the past, there's always a risk the manager will quit and they will hire an incompetent manager to manage the fund.
Yes. According to John C. Bogle, the Wellington Fund had a rise, a fall, and a renaissance. The rise occurred from 1929 to 1966, the fall occurred 1966-1978 when they shifted to a more modern, aggressive, speculative management style, in tune with "the go-go years..." ...and seriously underperformed their competitors. And then from 1978 to the date of the book, which was 2012, it experienced a renaissance.

But there is also a risk that a manager who outperformed will suddenly begin underperforming. One example is the Legg Mason Value Trust, managed by Bill Miller, who beat the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005, only to have this happen: Green, S&P 500; Blue, Legg Mason Value Trust.

Image

Or the Sequoia Fund:

Image

Or the Fairholme Fund:

Image

In every case, the sudden reversal of fortune occurred despite continuity of management.
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

KlangFool wrote: Sun Aug 08, 2021 8:31 pm The benefits of actively managed fund is that you do not have to actively manage your funds yourself.
That's the obvious answer. But the reason I'm asking the question is because almost all the resources I'm reading say that fund managers don't add any value over DIY index funds.
Some folks says that they believe in 3 funds. But, then, they start choosing some different bond funds because they know how the interest rate going to move.
Those are just "behavioral pitfalls", correct? I guess if you need a managed fund to fix that, then that would be a good reason. Admittedly, I have a little bit of that problem.

But as far as choosing the right funds, from reading about this subject for a while, and asking questions, I think there is a rough agreement among most "experts" on how to implement a DIY portfolio.

I allocate 40% of my portfolio to the Wellington fund. I choose to hire the professional to do the stock picking and bond picking. I do not 100% believe in passive indexing.
I quickly looked up Wellington. It seems they beat all the Life Strategy funds in the last 10 years, including the more aggressive "Growth" one.

Why do you not 100% believe in passive indexing? Just curious to know what the argument against it is. Its proponents say that all the information that determines value is already "priced into" the market. So everything else is really guessing.
My portfolio is 40% passive index, 40% Wellington, and 20% mini-Larry. What do you believe?
If Wellington is a hedge against passive index funds, what's the mini-Larry for?

I don't have a belief on this. Asking because I'm wondering if I should add an active fund to my portfolio. (Having an expert do the work is appealing, in general).
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Re: Benefits of actively managed funds

Post by retire2022 »

I was in active funds for majority of my investing career, sold my last one Vanguard PrimeCap Admiral shares approx 750K last friday.

The fund choice was part of my job's retirement plan, NYSDCP, they only offered VPMAX not as a closed fund, rather one could buy as much as one wanted, had VPMAX from 2013-2021, I made money on it.

I am waiting to move everything over to Vanguard.
Last edited by retire2022 on Fri Aug 20, 2021 7:38 pm, edited 1 time in total.
mikeyzito22
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Re: Benefits of actively managed funds

Post by mikeyzito22 »

nisiprius wrote: Sun Aug 08, 2021 8:56 pm

In every case, the sudden reversal of fortune occurred despite continuity of management.
This is even more prescient. Although I made the point that the management could change for the worse, according to nisiprius, it doesn't even matter. The reversal of fortune occurred despite the continuity of management. That makes me think almost all active funds are a bad choice for buy, save more, and hold investors. Thank you for the charts.
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Re: Benefits of actively managed funds

Post by JoMoney »

etfan wrote: Sun Aug 08, 2021 3:49 pm...
In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
They exist because they make the operators of them money (at a cost to the investors.)
Mutual funds are a great convenience and of benefit to investors who don't want the hassle of dealing with an individual stock portfolio, and to being able to buy a widely diversified portfolio in one transaction, in fractional amounts divisible to pennies.
A mutual fund being "active" isn't inherently bad, there are plenty of good decent "active" funds that are low-cost and have performance that would generally follow what an index would do. Which is what should be expected. Despite active mutual funds failing to beat the market, outside of costs they are the market too, and unless they're churning the portfolio over with massive trading or narrowly focused in some small area, they could be just as reasonable option at a comparable cost. Vanguard has several "active" bond funds that are good examples of decent "active" funds at a low cost and with performance that isn't market beating, but does track the market segment they invest in, and offers a convenient option for investors.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

nisiprius wrote: Sun Aug 08, 2021 8:56 pm But there is also a risk that a manager who outperformed will suddenly begin underperforming. One example is the Legg Mason Value Trust, managed by Bill Miller, who beat the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005, only to have this happen: Green, S&P 500; Blue, Legg Mason Value Trust.
...

Or the Sequoia Fund:
...

Or the Fairholme Fund:
...

In every case, the sudden reversal of fortune occurred despite continuity of management.
Thanks for the concrete examples. I could think of two reasons why this happened: Either these managers got complacent after having done well for so long. Or perhaps they were never good in the first place (they just got lucky for a while).
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Re: Benefits of actively managed funds

Post by 40 Years' Gatherin's »

Just VTSAX (or VFIAX) & chill, people. Your active manager is likely doing the same with his own money :beer
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Re: Benefits of actively managed funds

Post by KlangFool »

etfan wrote: Sun Aug 08, 2021 9:01 pm

Why do you not 100% believe in passive indexing? Just curious to know what the argument against it is. Its proponents say that all the information that determines value is already "priced into" the market. So everything else is really guessing.
etfan,

<<Why do you not 100% believe in passive indexing? >>

Then, please explain to me how Telecom Bust and DotCom Bust is possible? The market can go irrational sometimes. There are times when the market is crazy. After both Telecom Bust and DotCom Bust, I do not trust passive index 100%.

As for Larry Portfolio, you should search the forum for the discussion.

Basically, it is a barbell strategy.

You pair the most RISKY -> SCV with the most SAFE -> Intermediate-Term Treasury and enjoy the oscillation and make money by rebalancing.

KlangFool
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Re: Benefits of actively managed funds

Post by tibbitts »

Jaymover wrote: Sun Aug 08, 2021 7:54 pm I read somewhere that actively managed funds do tend to outperform in the micro small caps and emerging companies arena. As many microcaps are rubbish then a good fund manager will have researched companies to vet for skills and true prospects. As these types of risky asset classes tend to make up a small (say %5) of a total portfolio, then I would say that the extra 1-2% pa in fees is no big deal if the rest of your portfolio is low cost etfs.

Some would say why bother with the small cap diversification and just go 2 fund or 3 fund. However my microcap active has way outperformed my other assets recently which has been nice.
Do you have a reference other than "read somewhere"? What microcap fund did you select, and what were the criteria you used?
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

40 Years' Gatherin's wrote: Sun Aug 08, 2021 9:36 pm Just VTSAX (or VFIAX) & chill, people. Your active manager is likely doing the same with his own money :beer
Perhaps we should only invest in actively managed funds whose managers invest all of their life savings in their own funds? :D
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

KlangFool wrote: Sun Aug 08, 2021 9:36 pm <<Why do you not 100% believe in passive indexing? >>

Then, please explain to me how Telecom Bust and DotCom Bust is possible? The market can go irrational sometimes. There are times when the market is crazy. After both Telecom Bust and DotCom Bust, I do not trust passive index 100%.
That's built into the index investing strategy, correct? You seem to be a proponent of 40% bonds, which is to protect the investor from financial hardship during downturns. But the market always rises.

Do actively managed funds not suffer similar busts, or do they tend to do better than the market during downturns?

As for Larry Portfolio, you should search the forum for the discussion.

Basically, it is a barbell strategy.

You pair the most RISKY -> SCV with the most SAFE -> Intermediate-Term Treasury and enjoy the oscillation and make money by rebalancing.
Thanks for the explanation. On the surface, this sounds the same as the general stock/bond concept, where you rebalance from one to the other as one rises and the other falls. Instead of Total Stock + Total Bond, this is SCV + Intermediate Treasury. I will search for details to see what else is involved.

Found a good explanation:
https://www.investopedia.com/articles/i ... rategy.asp
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Re: Benefits of actively managed funds

Post by Nathan Drake »

Everything is actively managed to some degree. Even a bog standard S&P 500 fund has to time movements in/out and has a committee that makes the decision.

I think "active" management can have an advantage in that it doesn't need to disclose the magic formula for when those moves are made. But it needs to adhere to being broadly diversified, tax efficient, and low cost.

Avantis funds/ETFs are such an example of smart "active".
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Re: Benefits of actively managed funds

Post by ChinchillaWhiplash »

dphilipps
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Re: Benefits of actively managed funds

Post by dphilipps »

ChinchillaWhiplash wrote: Sun Aug 08, 2021 10:57 pm Because it is possible for some of them to perform well? https://www.portfoliovisualizer.com/bac ... ion2_2=100 https://www.portfoliovisualizer.com/bac ... ion2_2=100
If you benchmark those funds against health-care sector or growth index funds (e.g. VHT/VUG), a more appropriate comparison rather than the broad S&P 500, then that picture isn't quite as rosy.
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Re: Benefits of actively managed funds

Post by Dusn »

We all benefit from active management. Without a large portion of the shareholders actually paying attention and holding companies accountable, the market wouldn’t work.
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Re: Benefits of actively managed funds

Post by KlangFool »

etfan wrote: Sun Aug 08, 2021 9:57 pm
KlangFool wrote: Sun Aug 08, 2021 9:36 pm <<Why do you not 100% believe in passive indexing? >>

Then, please explain to me how Telecom Bust and DotCom Bust is possible? The market can go irrational sometimes. There are times when the market is crazy. After both Telecom Bust and DotCom Bust, I do not trust passive index 100%.
That's built into the index investing strategy, correct? You seem to be a proponent of 40% bonds, which is to protect the investor from financial hardship during downturns. But the market always rises.

Do actively managed funds not suffer similar busts, or do they tend to do better than the market during downturns?

As for Larry Portfolio, you should search the forum for the discussion.

Basically, it is a barbell strategy.

You pair the most RISKY -> SCV with the most SAFE -> Intermediate-Term Treasury and enjoy the oscillation and make money by rebalancing.
Thanks for the explanation. On the surface, this sounds the same as the general stock/bond concept, where you rebalance from one to the other as one rises and the other falls. Instead of Total Stock + Total Bond, this is SCV + Intermediate Treasury. I will search for details to see what else is involved.

Found a good explanation:
https://www.investopedia.com/articles/i ... rategy.asp
1) Do you believe passive index is good enough? That is the question.

2) My goal is not to make as much money as possible. It is to protect myself when the market is crazy. Some folks believe that both the stock and the bond are overpriced now. My position is "I do not know" and I let the Wellington fund handle this.

KlangFool
Last edited by KlangFool on Mon Aug 09, 2021 7:10 am, edited 1 time in total.
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Re: Benefits of actively managed funds

Post by Jaymover »

tibbitts wrote: Sun Aug 08, 2021 9:45 pm
Jaymover wrote: Sun Aug 08, 2021 7:54 pm I read somewhere that actively managed funds do tend to outperform in the micro small caps and emerging companies arena. As many microcaps are rubbish then a good fund manager will have researched companies to vet for skills and true prospects. As these types of risky asset classes tend to make up a small (say %5) of a total portfolio, then I would say that the extra 1-2% pa in fees is no big deal if the rest of your portfolio is low cost etfs.

Some would say why bother with the small cap diversification and just go 2 fund or 3 fund. However my microcap active has way outperformed my other assets recently which has been nice.
Do you have a reference other than "read somewhere"? What microcap fund did you select, and what were the criteria you used?
I was trying to find my source. Yes, companies spruiking active small cap etfs! . Actually I am not a US investor so shouldn't mention it on this thread (Australian Ethical Emerging Companies Fund). However I imagine there is a US equivalent - maybe ARK . I guess I trust the company not to put any money in fly by nighters and more into companies doing meaningful things with reasonable balance sheets. And your are right, it has outperformed the index significantly for the last two years but tracked the relevant index during the years before that. Lucky for me I guess, a bit of fun maybe. The rest of my money is in boring global ETFs that are also doing okay.
NotSoDaring
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Re: Benefits of actively managed funds

Post by NotSoDaring »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
Several years ago we went with a well-known NY firm. (We lived in NYC at the time.) We went with them for exactly this reason: to help our investments lose less during a downturn. We both work full-time and didn't have the time to manage it ourselves. And their pitch really was that they could do this. While we were with them all we did was ride the market up and down in line with the market, plus, add in all the fees, so we ended up losing more than had we just been in VOO or VTI. That experience forced us to make the time to learn.

That said, we know plenty of people who have their money with managers. They simply have no desire, time or interest in doing it themselves, and have enough that their fees are lower and the percentage doesn't matter to their overall portfolios. They are willing to pay for the luxury of not having to deal with it. That, I believe, describes the managed, fee-based clientele.
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Bluce
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Re: Benefits of actively managed funds

Post by Bluce »

etfan wrote: Sun Aug 08, 2021 3:49 pm Overall, actively managed funds fail to outperform index funds. So, if that is the objective, it appears that it's a bad idea to invest in active mutual funds.

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?

In general, I'm trying to figure out why active mutual funds still exist if it's a known fact that they mostly fail to beat the market.
I have not read the entire thread so I apologize if this was already mentioned.

One (or more) of the classic investment books showed that managers have no magic formula for increasing their cash levels at the beginning of a bear, and getting back in at or near the bottom. This shouldn't surprise anyone. They're not any better at market timing than we are.

One of the better managed funds out there, VG's Wellesley, didn't do anything during last year's plunge (that I recall).

If one is worried about any funds following the bear down (or worse) then their AA is too risky and should be changed IMO.
"There are no new ideas, only forgotten ones." -- Amity Shlaes
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

ChinchillaWhiplash wrote: Sun Aug 08, 2021 10:57 pm Because it is possible for some of them to perform well? https://www.portfoliovisualizer.com/bac ... ion2_2=100 https://www.portfoliovisualizer.com/bac ... ion2_2=100
Isn't it inevitable that some portfolios will perform better than others? It would actually be surprising if ALL actively managed funds managed somehow to underperform the S&P 500.
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Re: Benefits of actively managed funds

Post by etfan »

Dusn wrote: Mon Aug 09, 2021 5:57 am We all benefit from active management. Without a large portion of the shareholders actually paying attention and holding companies accountable, the market wouldn’t work.
Sounds like we should be careful not to convince too many people to become passive investors then :confused

If this forum becomes too successful, it might undermine its own message.
02nz
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Re: Benefits of actively managed funds

Post by 02nz »

etfan wrote: Mon Aug 09, 2021 8:58 am
ChinchillaWhiplash wrote: Sun Aug 08, 2021 10:57 pm Because it is possible for some of them to perform well? https://www.portfoliovisualizer.com/bac ... ion2_2=100 https://www.portfoliovisualizer.com/bac ... ion2_2=100
Isn't it inevitable that some portfolios will perform better than others? It would actually be surprising if ALL actively managed funds managed somehow to underperform the S&P 500.
Some will of course perform better than the market. However, mathematically, it is inevitable that active investors will collectively always underperform the indexing world, since collectively active investors and passive investors hold the same assets in the same proportions, the only difference is cost.
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Re: Benefits of actively managed funds

Post by UpperNwGuy »

etfan wrote: Mon Aug 09, 2021 9:00 am
Dusn wrote: Mon Aug 09, 2021 5:57 am We all benefit from active management. Without a large portion of the shareholders actually paying attention and holding companies accountable, the market wouldn’t work.
Sounds like we should be careful not to convince too many people to become passive investors then :confused

If this forum becomes too successful, it might undermine its own message.
Trust me. That won't happen.
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Re: Benefits of actively managed funds

Post by etfan »

KlangFool wrote: Mon Aug 09, 2021 6:33 am 1) Do you believe passive index is good enough? That is the question.

2) My goal is not to make as much money as possible. It is to protect myself when the market is crazy. Some folks believe that both the stock and the bond are overpriced now. My position is "I do not know" and I let the Wellington fund handle this.
1) Based on what I'm reading in some sources, it does seem that passive index is good enough. It's not the best, but it doesn't seem like there's good evidence that I can be guaranteed to improve on it through active funds.

2) What role does the Larry strategy play then?
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Re: Benefits of actively managed funds

Post by etfan »

NotSoDaring wrote: Mon Aug 09, 2021 7:36 am That said, we know plenty of people who have their money with managers. They simply have no desire, time or interest in doing it themselves, and have enough that their fees are lower and the percentage doesn't matter to their overall portfolios. They are willing to pay for the luxury of not having to deal with it. That, I believe, describes the managed, fee-based clientele.
But getting to the point where such investors choose an actively managed fund still requires research and making decisions to decide which actively managed fund to choose.
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Re: Benefits of actively managed funds

Post by BogleMelon »

etfan wrote: Sun Aug 08, 2021 3:49 pm

But are there possibly other benefits besides outperforming the market? For example, in a downturn, do actively managed funds help your investment lose less value?
If this claim/selling point is true, then we shouldn't invest at all. Overall the market should go up. This is why people invest. If the market down time is greater, then investing is pointless.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather
Beehave
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Re: Benefits of actively managed funds

Post by Beehave »

etfan wrote: Mon Aug 09, 2021 9:06 am
KlangFool wrote: Mon Aug 09, 2021 6:33 am 1) Do you believe passive index is good enough? That is the question.

2) My goal is not to make as much money as possible. It is to protect myself when the market is crazy. Some folks believe that both the stock and the bond are overpriced now. My position is "I do not know" and I let the Wellington fund handle this.
1) Based on what I'm reading in some sources, it does seem that passive index is good enough. It's not the best, but it doesn't seem like there's good evidence that I can be guaranteed to improve on it through active funds.

2) What role does the Larry strategy play then?
My take on KlangFool's strategy - - and I'm smpathetic to it:
(1) The index-based 3 fund strategy is most prudent, so invest a portion this way
(2) Index managers' hands may be tied if the world goes crazy, and the active fund (possibly/probably with slightly lower performance) may in this circumstance be able to avoid the problem. So invest a portion this way (in a value-oriented fund with strong history).
(3) To make up for any drag caused by "buying the insurance in #2," add a touch of barbell spice to the mix.

Given recent Dogecoin and RobinHood episodes, the dotcom hysteria circa 2001, etc., Klangfool's strategy has reasoning behind it that I understand and agree is significant enough to merit considering buying some insurance. Bonds or cash alone can provide such insurance, but you'd have to add more to an allocation (with associated drag over time) to insure against any peculiarities than Wellington, so in that sense Wellington is cheap insurance.
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Re: Benefits of actively managed funds

Post by Robot Monster »

Beehave wrote: Mon Aug 09, 2021 9:29 am Given recent Dogecoin and RobinHood episodes, the dotcom hysteria circa 2001, etc., Klangfool's strategy has reasoning behind...
Did Wellington outperform during the dotcom crash?

I think it's nice that Wellington can avoid meme stocks, I guess. But can't help but feel Wellington will not actually perform meaningfully differently than a passive look-alike portfolio that matches Wellington's allocation unless...meme stocks start having more than the negligible affect on Total Stock Market they currently do.
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Re: Benefits of actively managed funds

Post by KlangFool »

etfan wrote: Mon Aug 09, 2021 9:06 am
KlangFool wrote: Mon Aug 09, 2021 6:33 am 1) Do you believe passive index is good enough? That is the question.

2) My goal is not to make as much money as possible. It is to protect myself when the market is crazy. Some folks believe that both the stock and the bond are overpriced now. My position is "I do not know" and I let the Wellington fund handle this.
1) Based on what I'm reading in some sources, it does seem that passive index is good enough. It's not the best, but it doesn't seem like there's good evidence that I can be guaranteed to improve on it through active funds.

2) What role does the Larry strategy play then?
etfan,

1) Then, you have your answer.

2) I do not believe in putting all my eggs in one basket. Hence, I have 3 portfolio strategies. Larry portfolio is one of them.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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Re: Benefits of actively managed funds

Post by KlangFool »

Robot Monster wrote: Mon Aug 09, 2021 9:41 am
Beehave wrote: Mon Aug 09, 2021 9:29 am Given recent Dogecoin and RobinHood episodes, the dotcom hysteria circa 2001, etc., Klangfool's strategy has reasoning behind...
Did Wellington outperform during the dotcom crash?

I think it's nice that Wellington can avoid meme stocks, I guess. But can't help but feel Wellington will not actually perform meaningfully differently than a passive look-alike portfolio that matches Wellington's allocation unless...meme stocks start having more than the negligible affect on Total Stock Market they currently do.
You cannot buy confidence. If you believe that the Wellington fund can help, then, invest in it. If not, don't. You have to do the research and decide for yourself.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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etfan
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Re: Benefits of actively managed funds

Post by etfan »

Beehave wrote: Mon Aug 09, 2021 9:29 am Given recent Dogecoin and RobinHood episodes, the dotcom hysteria circa 2001, etc., Klangfool's strategy has reasoning behind it that I understand and agree is significant enough to merit considering buying some insurance. Bonds or cash alone can provide such insurance, but you'd have to add more to an allocation (with associated drag over time) to insure against any peculiarities than Wellington, so in that sense Wellington is cheap insurance.
That's a good point. In that case, a "3 fund portfolio" could consist of bonds, passive stocks, and an actively managed fund.

But:

1- Don't bonds already provide insurance against crazy episodes of meme stocks?

2- Isn't this really an argument against total stock and for S&P500? One problem with owning "the whole market" is you're too exposed instead of limiting yourself to the big stable players.

3- How do we know the things you described couldn't happen to actively managed funds? Imagine a group of Redditors decide to target Wellesley, like they did to GME? I'm not familiar enough so perhaps I'm missing some existing protections that make this unlikely.
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