Benefits of actively managed funds
Re: Benefits of actively managed funds
As a sort of "meta" observation, the presence of active management should increase risk by introducing agency risk. If that is true and expected return is not increased then actively managed funds should be a dead loss even if fund costs are not increased.
Such agency risk did in fact materialize at one point in the history of Wellington, did it not? I have no idea what measure of ongoing risk has existed and will exist.
Such agency risk did in fact materialize at one point in the history of Wellington, did it not? I have no idea what measure of ongoing risk has existed and will exist.
- nisiprius
- Advisory Board
- Posts: 52212
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Benefits of actively managed funds
Do [actively managed] mutual forms outperform during recessions?
Do Active Managers Outperform in Bear Markets
In the Spring/Summer 2009 edition of Vanguard Investment Perspectives, the firm examined the data covering the period 1970–2008 to determine whether active managers could turn their supposed advantage (being able to move to cash) into outperformance. The study looked at the returns of active funds during the seven periods in that timeframe when the Dow Jones Wilshire 5000 Index fell at least 10 percent and the six periods when the MSCI EAFE Index fell by at least that amount.
Despite acknowledging the data’s survivorship bias (poorly performing funds disappear and are not accounted for) Vanguard found:Vanguard concluded: “We find little evidence to support the purported benefits of active management during periods of market stress.”
- Whether an active manager is operating in a bear market, a bull market that precedes or follows it, or across longer-term market cycles, the combination of cost, security selection and market-timing proves a difficult hurdle to overcome.
- Past success in overcoming this hurdle doesn’t ensure future success. The degree of attrition among winners from one period to the next indicates that successfully navigating one or even two bear markets might be more strongly linked to simple luck than to skill.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Benefits of actively managed funds
Thanks for the link!nisiprius wrote: ↑Mon Aug 09, 2021 10:17 am Do [actively managed] mutual forms outperform during recessions?Do Active Managers Outperform in Bear Markets
...
Vanguard concluded: “We find little evidence to support the purported benefits of active management during periods of market stress.”
It's incredible that Vanguard seems to be saying their own product (actively managed funds) is... useless (my words, not theirs), at least in the case of downturns.
Re: Benefits of actively managed funds
I'm looking forward to the day when everyone figures out that there are NO benefits to actively managed funds and they'll all vanish from the planet!
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Re: Benefits of actively managed funds
they talk about active being protection to the downside vs index funds but they aren't taking into account survivorship. at least some of the articles i read. they always mention 00-03 where sp500 gets trounced and many of these active products did ok. but in reality, many active funds went out of business during that time frame. so some funds can offer that protection. but once they do it once, its unlikely they can do it again. why? well most Mutual funds that did ok, and or outperformed the sp500 during 00-03 did so by chucking money into Small to Mid cap value stocks. which pulled them through. what happens next typically is these funds become so large, that they are unable to buy those products any longer because they can't own enough shares without violating diversification regulations to make a significant impact on the portfolio.
I also contend that "the market" is a subjective term. some consider the US "their" market definition. some the total world market. and in the end most of us are active investors. meaning even if all we do is index invest, there are elements of timing, there are tilts, etc etc all actively timing on the account end instead of on the fund manager stock picking end.
So, to search for the redeeming value of a active mutual fund i'll contend that if a long term buy and hold advisor uses active funds and can convince a fidgety customer/investor to do so even though its more expensive AS opposed to trying to do such a thing on their own (the customer) with a 3 fund portfolio or what have you. the active funds are likely better as they are attached to someone who will convince the investor to stay the course. obviously this is kind of the unicorn of the advisor world by large, but this has largely played out in my parents investing journey. especially seeing my dad's personal "play account"
I also believe there is something to be said for the ole American spirit of winning. I believe this drives innovation and new products that many of use likely take advantage of regularly.
I also contend that "the market" is a subjective term. some consider the US "their" market definition. some the total world market. and in the end most of us are active investors. meaning even if all we do is index invest, there are elements of timing, there are tilts, etc etc all actively timing on the account end instead of on the fund manager stock picking end.
So, to search for the redeeming value of a active mutual fund i'll contend that if a long term buy and hold advisor uses active funds and can convince a fidgety customer/investor to do so even though its more expensive AS opposed to trying to do such a thing on their own (the customer) with a 3 fund portfolio or what have you. the active funds are likely better as they are attached to someone who will convince the investor to stay the course. obviously this is kind of the unicorn of the advisor world by large, but this has largely played out in my parents investing journey. especially seeing my dad's personal "play account"
I also believe there is something to be said for the ole American spirit of winning. I believe this drives innovation and new products that many of use likely take advantage of regularly.
-
- Posts: 48
- Joined: Sat Feb 15, 2020 5:54 am
Re: Benefits of actively managed funds
Oh, yes. I wasn't clear. When I say actively managed, I meant they are with firms like Bernstein or Edelman, not actively managed mutual funds. They chose the firm, then the firm does all the choosing of the specific investments.etfan wrote: ↑Mon Aug 09, 2021 9:11 amBut 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.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.
Re: Benefits of actively managed funds
On the flip side, if one of them has been around for a 100 years, that gives you confidence to use it.
I didn't know that led to a mutual fund's bankruptcy. What happens to the investors who own shares in it?so some funds can offer that protection. but once they do it once, its unlikely they can do it again. why? well most Mutual funds that did ok, and or outperformed the sp500 during 00-03 did so by chucking money into Small to Mid cap value stocks. which pulled them through. what happens next typically is these funds become so large, that they are unable to buy those products any longer because they can't own enough shares without violating diversification regulations to make a significant impact on the portfolio.
Re: Benefits of actively managed funds
Here’s the weighted breakdown of each stock in the S&P 500: https://www.slickcharts.com/sp500etfan wrote: ↑Mon Aug 09, 2021 10:03 amThat's a good point. In that case, a "3 fund portfolio" could consist of bonds, passive stocks, and an actively managed fund.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.
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.
The impact of any individual stock on the index is small.
Actively managed funds tend to make big bets on individual stocks. You’re more likely to be overly exposed to an underperformer via active investing than index investing.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Benefits of actively managed funds
Mutual funds are a profit-making business for the people who operate them. The profit motive answers the question of why they still exist, just like a bank or an insurance company. Some active funds are tied into retirement plans and that helps keep them afloat.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.
Financial decisions based on emotion often turn out to be bad decisions.
Re: Benefits of actively managed funds
Possibly not more than 0.01% of funds on the market would be a fit for BH investing. I am not sure more than 1% of Vanguard's funds are useful to the Boglehead investor. OK, maybe 10%, that being 14 out of about 140 funds. Probably all the choices of TR funds should be classed as duplicates.chris319 wrote: ↑Mon Aug 09, 2021 1:30 pmMutual funds are a profit-making business for the people who operate them. The profit motive answers the question of why they still exist, just like a bank or an insurance company. Some active funds are tied into retirement plans and that helps keep them afloat.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.
https://imgur.com/Xnnzedg
Re: Benefits of actively managed funds
Active funds can and do beat the index. I believe the statistic is that index funds outperform 80% of actively managed funds. That means 20% outperform. Some outperform year over year over year for many years. Some give all those gains back and then some (Magellan) some get closed to new investors or limit new contributions (PrimeCap).
If you get the right fund, you can make a lot of money, buts it’s quite literally a gamble if you would find the right fund.
If you get the right fund, you can make a lot of money, buts it’s quite literally a gamble if you would find the right fund.
Re: Benefits of actively managed funds
I mean I guess. CGM/Pioneer/putnam have some of the oldest running mutual funds ever. and they stink. and keep in mind that who buys mutual funds and the way we buy mutual funds today is much more in its infancy than most assume. like at the beginning of the 80's there were still not very many mutual funds. they were super expensive and even if they beat the market which many of them were able to do (if i had to guess more than they do today but i'm not definitive in that due to less restrictions, easier ability to truly find value, and the freedom to invest wherever) their fees hindered the true return to the investor. old fund families churn our crap products all the time, what worked 100 years ago, 50 years ago and even 25 years ago likely doesn't work any longer. and all the people that made it work are retired or dead. Ergo Fidelity in 1930 is not Fidelity in 2021
many funds would be liquidated, meaning all remaining shares sold off and MAYBE you got your money back. Some Fund families sold their companies and the funds were absorbed into other products by the purchasing company. Some fund families just take their crappy funds and roll them into their own products.
Re: Benefits of actively managed funds
When one saying "actively managed funds fail to outperform index funds" - we need to be more precise here.
If you are saying that AM S&P 500 fail to outperform index one - it more likely true. But if you go beyond simple indexing - balanced funds, especially some with more complex allocations, some sector specific or international - it might not be true. It just harder to compare apple to apple. AM balanced can have more complex structure that indexed.
For example:
STAR vs. LifeStrategy Moderate Growth vs American fund Balanced for the last 10 years.
VGSTX +19,642.32 | +196.42% VSMGX +15,131.16 | +151.31% × RLBGX +20,956.57 | +209.57% ×
Each of those funds can be complete portfolio and I don't see any index advantage. You can argue that Vanguard Balanced performed similarly VBIAX +19,839.57 | +198.40% × but this fund has no international exposure - so it is not correct comparison.
If you are saying that AM S&P 500 fail to outperform index one - it more likely true. But if you go beyond simple indexing - balanced funds, especially some with more complex allocations, some sector specific or international - it might not be true. It just harder to compare apple to apple. AM balanced can have more complex structure that indexed.
For example:
STAR vs. LifeStrategy Moderate Growth vs American fund Balanced for the last 10 years.
VGSTX +19,642.32 | +196.42% VSMGX +15,131.16 | +151.31% × RLBGX +20,956.57 | +209.57% ×
Each of those funds can be complete portfolio and I don't see any index advantage. You can argue that Vanguard Balanced performed similarly VBIAX +19,839.57 | +198.40% × but this fund has no international exposure - so it is not correct comparison.
Re: Benefits of actively managed funds
Without knowing what will cause the next sharp downturn, it will be very hard for me to argue that Wellington will surely withstand and recover better than a look-alike, index-based portfolio. It could come out worse, better, or the same and I do not know how to assign the probabilities.Robot Monster wrote: ↑Mon Aug 09, 2021 9:41 amDid 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.
That said, I think the issue really comes down to the psychology of money and asset allocation. If Wellington provides someone with a sense of security that enables them to hold a higher stock-to-bond ratio than they would choose if going pure-index, then in some sense Wellington should reasonably be expected over time to outperform the pure-index allocation (with the lower stock allocation) that they would otherwise have chosen.
In other words, for some investors Wellington may be a bridge enabling crossing to a higher stock allocation, rather than simply an alternative to a look-alike index allocation. Asset allocation decisions are partly emotional, and I think the asset allocation decision process is the context in which inserting Wellington into an otherwise pure-Boglehead portfolio may be most easily justified.
Re: Benefits of actively managed funds
It can be difficult to compare active funds since the holdings aren't the same. I have two things to look at:
One common active fund is American Funds Growth Fund of America. This fund exists with different expense ratios with different tickers (GAFFX has a lower ER than AGTHX). The funds don't always have a long history to backtest, so I'll use AGTHX since it has been around longer. I compare it to Vanguards Growth Index fund (VIGAX).
Looking back 21 years, the CAGR is 9.34 vs 9.2 with VIGAX winning. GAFFX would probably come out ahead if it existed this far back.
Looking back 11 years, the CAGR is 15.32 vs 17.39 with VIGAX winning again.
Looking back 5 years, the CAGR is 18.9 vs 21.4 with VIGAX still winning.
Part of this discrepancy is American Funds have some international holdings, and those have not done as well as US holdings recently. The American Funds also have some small and more mid cap stocks which can help or hinder depending on the times.
The other place I look is my megacorp 401K (funds are private and don't have tickers). They have a S&P 500 index fund and a large US company fund that is very similar except the large company fund is actively managed. The actively managed fund didn't exist until 2010, so I can only compare back that far.
Looking back 11 years, the S&P fund returned 266% versus 248% for the active fund.
Looking back 6 years, the S&P fund returned 103% versus 97.6% for the active fund.
However, the returns last year were 18.4% for the S&P index fund versus 23.5% for the active fund. So sometimes active funds do come out ahead. The 2019 returns were very close with the active very slightly outperforming the index fund. So maybe they have a better manager now.
One common active fund is American Funds Growth Fund of America. This fund exists with different expense ratios with different tickers (GAFFX has a lower ER than AGTHX). The funds don't always have a long history to backtest, so I'll use AGTHX since it has been around longer. I compare it to Vanguards Growth Index fund (VIGAX).
Looking back 21 years, the CAGR is 9.34 vs 9.2 with VIGAX winning. GAFFX would probably come out ahead if it existed this far back.
Looking back 11 years, the CAGR is 15.32 vs 17.39 with VIGAX winning again.
Looking back 5 years, the CAGR is 18.9 vs 21.4 with VIGAX still winning.
Part of this discrepancy is American Funds have some international holdings, and those have not done as well as US holdings recently. The American Funds also have some small and more mid cap stocks which can help or hinder depending on the times.
The other place I look is my megacorp 401K (funds are private and don't have tickers). They have a S&P 500 index fund and a large US company fund that is very similar except the large company fund is actively managed. The actively managed fund didn't exist until 2010, so I can only compare back that far.
Looking back 11 years, the S&P fund returned 266% versus 248% for the active fund.
Looking back 6 years, the S&P fund returned 103% versus 97.6% for the active fund.
However, the returns last year were 18.4% for the S&P index fund versus 23.5% for the active fund. So sometimes active funds do come out ahead. The 2019 returns were very close with the active very slightly outperforming the index fund. So maybe they have a better manager now.
Mark |
Somewhere in WA State
-
- Posts: 1841
- Joined: Fri Sep 28, 2018 4:59 pm
Re: Benefits of actively managed funds
I think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
Re: Benefits of actively managed funds
Of course whatever benefit one can find in actively managed funds is never going to be a guaranteed benefit and will always heavily depend on the managers. The people involved may make mistakes or quit. I wonder if it's really conservative to rely on actively managed funds or rather risky.GoneOnTilt wrote: ↑Sat Sep 25, 2021 10:18 amI think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
Re: Benefits of actively managed funds
The active managers, the Hedge Funds, the professional traders, and others are what make the markets pretty darned efficient. Add to that powerful computers and computer software and the emergence of Artificial Intelligence. Can't help but notice that fees are coming down. So active management does serve a purpose.
A fool and his money are good for business.
Re: Benefits of actively managed funds
I don't know anything about this fund in particular (other than it's name, since it's well-known), but you can't compare a value fund to the S&P500 - why not compare to a value index? Also I don't think it's helpful to conflate "value" and "conservative", as they are essentially unrelated.GoneOnTilt wrote: ↑Sat Sep 25, 2021 10:18 amI think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
Re: Benefits of actively managed funds
I definitely don't think it's conservative to rely on a small number of active funds, especially not with traditional active funds that aren't specifically designed to limit both upside and downside movements.etfan wrote: ↑Sat Sep 25, 2021 12:31 pm Of course whatever benefit one can find in actively managed funds is never going to be a guaranteed benefit and will always heavily depend on the managers. The people involved may make mistakes or quit. I wonder if it's really conservative to rely on actively managed funds or rather risky.
Re: Benefits of actively managed funds
At the risk of public scorn and ridicule, I'll suggest a benefit of simplicity in using certain active funds.
The middle ground of ex-US equity exposure around here seems to be 20% of equity. OK cool, let's go with that.
All the portfolios I will compare here will have approximately 20% of international on the equity side.
For simplicity, I'm going to use a 65/35 equity/bond AA. I know, 60/40 seems simpler, but see why I chose 65/35 in a minute.
This means what we are looking at is 52% total US stock, 13% total ex-US stock, and 35% bonds. Pretty simple, really.
So here you go:
1. 52% VTSMX/VTSAX, 13% VGTSX/VTIAX, and 35% VBMFX/VBTLX.
Boglehead style, assuming 20% of equity in international is preferred. (13/65 = 20%)
2. 50% Vanguard Balanced (VBINX/VBIAX) and 50% Vanguard LifeStrategy Moderate Growth (VSMGX).
Semi-Bolehead, and still about 20% of equity in int'l (40% / 2 = 20%).
3. 50% Vanguard Wellington (VWELX/VWENX) and 50% Vanguard STAR (VGSTX).
Not really Boglehead, but still about 20% of equity in int'l ((7% + 33%) / 2 = 20%).
(note that Morningstar has Wellington at 11% foreign holdings, but it doesn't matter that much really)
Past performance in PV:
https://www.portfoliovisualizer.com/bac ... tion7_3=50
I like #2 because it's passive. I don't have any prediction that #3 will continue to out perform, or not. A disadvantage for #2 and #3 is that it's not simple to change the AA, but for some that's an advantage! I like the 50/50 simplicity of those two. I use #3 for some of my tax-deferred assets.
I have a 65-ish widow relative who is not knowledgeable about investments and wants advice. Pensions and SS cover her expenses, and she expects to leave a considerable portion of their assets to heirs (I am not one of them!). All accounts are tax-deferred. She is "hands-off" and is not likely to even look at the account often. My advice will probably be:
- Roll everything into one of the large investment firms.
- Invest all assets per #2 or #3 above. Split it 50/50 between the two funds. This is the benefit, it's really easy.
- When RMDs start, set the account up for automatic RMD withdrawals (proportional method) to be deposited into bank account.
- Hire a Financial Planner/Advisor maybe once a year to give financial advice and do taxes only, not investment advice.
Please feel free to post your constructive criticism.
The middle ground of ex-US equity exposure around here seems to be 20% of equity. OK cool, let's go with that.
All the portfolios I will compare here will have approximately 20% of international on the equity side.
For simplicity, I'm going to use a 65/35 equity/bond AA. I know, 60/40 seems simpler, but see why I chose 65/35 in a minute.
This means what we are looking at is 52% total US stock, 13% total ex-US stock, and 35% bonds. Pretty simple, really.
So here you go:
1. 52% VTSMX/VTSAX, 13% VGTSX/VTIAX, and 35% VBMFX/VBTLX.
Boglehead style, assuming 20% of equity in international is preferred. (13/65 = 20%)
2. 50% Vanguard Balanced (VBINX/VBIAX) and 50% Vanguard LifeStrategy Moderate Growth (VSMGX).
Semi-Bolehead, and still about 20% of equity in int'l (40% / 2 = 20%).
3. 50% Vanguard Wellington (VWELX/VWENX) and 50% Vanguard STAR (VGSTX).
Not really Boglehead, but still about 20% of equity in int'l ((7% + 33%) / 2 = 20%).
(note that Morningstar has Wellington at 11% foreign holdings, but it doesn't matter that much really)
Past performance in PV:
https://www.portfoliovisualizer.com/bac ... tion7_3=50
I like #2 because it's passive. I don't have any prediction that #3 will continue to out perform, or not. A disadvantage for #2 and #3 is that it's not simple to change the AA, but for some that's an advantage! I like the 50/50 simplicity of those two. I use #3 for some of my tax-deferred assets.
I have a 65-ish widow relative who is not knowledgeable about investments and wants advice. Pensions and SS cover her expenses, and she expects to leave a considerable portion of their assets to heirs (I am not one of them!). All accounts are tax-deferred. She is "hands-off" and is not likely to even look at the account often. My advice will probably be:
- Roll everything into one of the large investment firms.
- Invest all assets per #2 or #3 above. Split it 50/50 between the two funds. This is the benefit, it's really easy.
- When RMDs start, set the account up for automatic RMD withdrawals (proportional method) to be deposited into bank account.
- Hire a Financial Planner/Advisor maybe once a year to give financial advice and do taxes only, not investment advice.
Please feel free to post your constructive criticism.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Re: Benefits of actively managed funds
With (2) and (3), you can't distribute the investments in a tax-efficient way if you have both a taxable and tax-deferred accounts.GaryA505 wrote: ↑Sat Sep 25, 2021 1:30 pm 1. 52% VTSMX/VTSAX, 13% VGTSX/VTIAX, and 35% VBMFX/VBTLX.
Boglehead style, assuming 20% of equity in international is preferred. (13/65 = 20%)
2. 50% Vanguard Balanced (VBINX/VBIAX) and 50% Vanguard LifeStrategy Moderate Growth (VSMGX).
Semi-Bolehead, and still about 20% of equity in int'l (40% / 2 = 20%).
3. 50% Vanguard Wellington (VWELX/VWENX) and 50% Vanguard STAR (VGSTX).
Not really Boglehead, but still about 20% of equity in int'l ((7% + 33%) / 2 = 20%).
(note that Morningstar has Wellington at 11% foreign holdings, but it doesn't matter that much really)
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Benefits of actively managed funds
etfan:
Most investors do not know that most active funds fail to beat the market. Just as the gambling industry wants people to think they can beat the casino, the investment industry want investors to think they can beat the market. A 2013 study by the US. Consumer Financial Protection Bureau reported the following:
"The total amount spent annually by financial institutions and other financial service providers on consumer financial products and services, including both awareness advertising and direct marketing, is approximately seventeen billion dollars." Very little of this money is spent promoting low-cost index funds.
Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “The marketing colossus known as the mutual fund industry provides the weaponry which enables investors’ to indulge their suicidal instincts.”
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Benefits of actively managed funds
Correct. This would only be appropriate for people with most or all assets in tax-deferred account. However, I'll add that distributing investments in a tax-efficient way across tax-deferred and taxable accounts can cause issues for balancing and RMDs, a point that is ignored when focusing on the accumulating phase. For this reason, some people prefer to "mirror" their allocation across accounts.etfan wrote: ↑Sat Sep 25, 2021 1:50 pmWith (2) and (3), you can't distribute the investments in a tax-efficient way if you have both a taxable and tax-deferred accounts.GaryA505 wrote: ↑Sat Sep 25, 2021 1:30 pm 1. 52% VTSMX/VTSAX, 13% VGTSX/VTIAX, and 35% VBMFX/VBTLX.
Boglehead style, assuming 20% of equity in international is preferred. (13/65 = 20%)
2. 50% Vanguard Balanced (VBINX/VBIAX) and 50% Vanguard LifeStrategy Moderate Growth (VSMGX).
Semi-Bolehead, and still about 20% of equity in int'l (40% / 2 = 20%).
3. 50% Vanguard Wellington (VWELX/VWENX) and 50% Vanguard STAR (VGSTX).
Not really Boglehead, but still about 20% of equity in int'l ((7% + 33%) / 2 = 20%).
(note that Morningstar has Wellington at 11% foreign holdings, but it doesn't matter that much really)
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Re: Benefits of actively managed funds
Interesting analogy!Taylor Larimore wrote: ↑Sat Sep 25, 2021 1:58 pm etfan:
Most investors do not know that most active funds fail to beat the market. Just as the gambling industry wants people to think they can beat the casino, the investment industry want investors to think they can beat the market. A 2013 study by the US. Consumer Financial Protection Bureau reported the following:
"The total amount spent annually by financial institutions and other financial service providers on consumer financial products and services, including both awareness advertising and direct marketing, is approximately seventeen billion dollars." Very little of this money is spent promoting low-cost index funds.
Could we then say that active fund managers would be "professional gamblers" who have convinced regular casino customers to give them their money so they could gamble on their behalf and beat the casino?
And could we take it further and say that the "whole market index funds" of the analogy are those people who have decided to put their money together and buy the casino instead, in order to benefit from its profits?
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Benefits of actively managed funds
Bogleheads:
John Bogle's Words of Wisdom: “I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again."
Best wishes.
Taylor
John Bogle's Words of Wisdom: “I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Benefits of actively managed funds
There is also Global Wellington (VGWAX/VGWLX). Its equity holdings consist of about 42% int'l.GaryA505 wrote: ↑Sat Sep 25, 2021 1:30 pm
3. 50% Vanguard Wellington (VWELX/VWENX) and 50% Vanguard STAR (VGSTX).
Not really Boglehead, but still about 20% of equity in int'l ((7% + 33%) / 2 = 20%).
(note that Morningstar has Wellington at 11% foreign holdings, but it doesn't matter that much really)
- Brianmcg321
- Posts: 1875
- Joined: Mon Jul 15, 2019 8:23 am
Re: Benefits of actively managed funds
No, they do even worse.
Rules to investing: |
1. Don't lose money. |
2. Don't forget rule number 1.
-
- Posts: 1841
- Joined: Fri Sep 28, 2018 4:59 pm
Re: Benefits of actively managed funds
Data please. This is incorrect for multiple active funds.
- Brianmcg321
- Posts: 1875
- Joined: Mon Jul 15, 2019 8:23 am
Re: Benefits of actively managed funds
https://mutualfunds.com/expert-analysis ... y-swedroe/GoneOnTilt wrote: ↑Sun Sep 26, 2021 2:33 pmData please. This is incorrect for multiple active funds.
But the problem isn't that some might outperform, how do you know in advance which ones will, out of the thousands that are available?
Rules to investing: |
1. Don't lose money. |
2. Don't forget rule number 1.
Re: Benefits of actively managed funds
I think using active funds in a defensive fashion, IOW you expect it to do "less bad" in a market downturn is just wishful thinking. Even if you found one that did well in the last downturn you don't know what it will do in the next.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Re: Benefits of actively managed funds
not for nothing but this product basically spends most of its time historically straddling the value/blend line. the last handful of years its basically a value product with a smattering of FAANG stops representing 5-10% of the fund.tibbitts wrote: ↑Sat Sep 25, 2021 12:39 pmI don't know anything about this fund in particular (other than it's name, since it's well-known), but you can't compare a value fund to the S&P500 - why not compare to a value index? Also I don't think it's helpful to conflate "value" and "conservative", as they are essentially unrelated.GoneOnTilt wrote: ↑Sat Sep 25, 2021 10:18 amI think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
Re: Benefits of actively managed funds
people want to win. and are easily persuaded that its more likely than it really is.etfan wrote: ↑Sat Sep 25, 2021 3:24 pmInteresting analogy!Taylor Larimore wrote: ↑Sat Sep 25, 2021 1:58 pm etfan:
Most investors do not know that most active funds fail to beat the market. Just as the gambling industry wants people to think they can beat the casino, the investment industry want investors to think they can beat the market. A 2013 study by the US. Consumer Financial Protection Bureau reported the following:
"The total amount spent annually by financial institutions and other financial service providers on consumer financial products and services, including both awareness advertising and direct marketing, is approximately seventeen billion dollars." Very little of this money is spent promoting low-cost index funds.
Could we then say that active fund managers would be "professional gamblers" who have convinced regular casino customers to give them their money so they could gamble on their behalf and beat the casino?
And could we take it further and say that the "whole market index funds" of the analogy are those people who have decided to put their money together and buy the casino instead, in order to benefit from its profits?
- bertilak
- Posts: 10725
- Joined: Tue Aug 02, 2011 5:23 pm
- Location: East of the Pecos, West of the Mississippi
Re: Benefits of actively managed funds
This is not an "other" reason. It is half of overall performance.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?
Reasons already given above. My summary: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.
- Ignorance. Many (most?) people don't know there is a viable alternative to active investing. They think that's what investing IS.
- Convenience. Some people simply do not have the time, energy, knowledge, or focus to manage investments, taxes, paying expenses, etc..
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Benefits of actively managed funds
I think a lot of the posts on this thread are right on, but some make over-generalizations.
For example:
Not all "actively managed" funds (funds that don't follow popular index) are involved in much active trading.
Not all actively managed funds have high fees.
I think it's not accurate or productive to put them all in one basket.
For example:
Not all "actively managed" funds (funds that don't follow popular index) are involved in much active trading.
Not all actively managed funds have high fees.
I think it's not accurate or productive to put them all in one basket.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
- bertilak
- Posts: 10725
- Joined: Tue Aug 02, 2011 5:23 pm
- Location: East of the Pecos, West of the Mississippi
Re: Benefits of actively managed funds
I think Wellington and Wellesley fit into those categories. They also have excellent track records and pedigrees.GaryA505 wrote: ↑Mon Sep 27, 2021 10:44 am I think a lot of the posts on this thread are right on, but some make over-generalizations.
For example:
Not all "actively managed" funds (funds that don't follow popular index) are involved in much active trading.
Not all actively managed funds have high fees.
I think it's not accurate or productive to put them all in one basket.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Benefits of actively managed funds
Yes, that's my point exactly. There's a whole spectrum of funds that are not index funds. Who would put Wellington in the same category as ARK funds?bertilak wrote: ↑Mon Sep 27, 2021 11:25 amI think Wellington and Wellesley fit into those categories. They also have excellent track records and pedigrees.GaryA505 wrote: ↑Mon Sep 27, 2021 10:44 am I think a lot of the posts on this thread are right on, but some make over-generalizations.
For example:
Not all "actively managed" funds (funds that don't follow popular index) are involved in much active trading.
Not all actively managed funds have high fees.
I think it's not accurate or productive to put them all in one basket.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
Re: Benefits of actively managed funds
Some people will only get into the market as a result of having a "financial advisor" who actively manages their funds. They will likely never beat the market, but will usually beat saving their money in CDs at the bank. They feel like they're doing something.
There's a lot of marketing that convinces them that they're on the best track.
There's a lot of marketing that convinces them that they're on the best track.
Re: Benefits of actively managed funds
I know people like that. Sometimes there's nothing you can do to change their mind.esqu1re wrote: ↑Mon Sep 27, 2021 11:40 am Some people will only get into the market as a result of having a "financial advisor" who actively manages their funds. They will likely never beat the market, but will usually beat saving their money in CDs at the bank. They feel like they're doing something.
There's a lot of marketing that convinces them that they're on the best track.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
-
- Posts: 196
- Joined: Wed Mar 24, 2021 12:25 pm
Re: Benefits of actively managed funds
My entire IRA portfolio consists of one actively managed fund, and it has done very well for me over the past 10+ years and easily beating the index. Even if it were to underperform in the future, it would take a lot to undo the extra profits accumulated over the years.
I do have index funds, too, in other accounts.
I do have index funds, too, in other accounts.
Re: Benefits of actively managed funds
Some 401k only offer actively managed funds and plan participants get used to them.
The company I work for had just such a 401k plan. ERs of over 2% and down to about 0.5% were the norm. When I showed management a Consumers Reports article on fees that basically noted that fund ERs like we were paying were outlandish, they took it up with the program manager who fought back hard with selective statistics. I pushed back too. We ultimately had one S&P index fund added to the program. Over the last 5 years, we have gained more index options. But every year during the annual program meeting, the program manager pushes the higher ER funds as set and don't worry options...he should be saying they are set, pay big time, and never do the math funds.
Bottom line, for many staff, the only investing education they have ever had comes from the program manager who relentlessly pushes the high cost mutual funds. IMO, that is one reason why so many folks use them.
The company I work for had just such a 401k plan. ERs of over 2% and down to about 0.5% were the norm. When I showed management a Consumers Reports article on fees that basically noted that fund ERs like we were paying were outlandish, they took it up with the program manager who fought back hard with selective statistics. I pushed back too. We ultimately had one S&P index fund added to the program. Over the last 5 years, we have gained more index options. But every year during the annual program meeting, the program manager pushes the higher ER funds as set and don't worry options...he should be saying they are set, pay big time, and never do the math funds.
Bottom line, for many staff, the only investing education they have ever had comes from the program manager who relentlessly pushes the high cost mutual funds. IMO, that is one reason why so many folks use them.
Re: Benefits of actively managed funds
Can you share the name & ticker of this active fund?chuckwalla wrote: ↑Mon Sep 27, 2021 12:22 pm My entire IRA portfolio consists of one actively managed fund, and it has done very well for me over the past 10+ years and easily beating the index. Even if it were to underperform in the future, it would take a lot to undo the extra profits accumulated over the years.
I do have index funds, too, in other accounts.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
-
- Posts: 88
- Joined: Thu Oct 08, 2020 2:52 am
Re: Benefits of actively managed funds
There are some active funds with a consistent history of outperformance, across fund managers and over long periods of time. They also tend to be low cost. I toured DFA headquarters a few years ago and was surprised at how many traders there were on the floor, for an index fund. There's more to running a fund than simply picking stocks that will go up. One might argue that some active funds are really passive, and some passive funds are really active.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.
As for the rest, I can think of a few reasons. One is history, people buying in before index funds were available and don't want to realize gains. Another is availability. An index equivalent may not exist for the product you want. Or the index fund may not be available in your 401k or 529 or whatever. Active funds may come with services or reduced fees, that make sense in some circumstances. Finally, the general rule is that the more efficient the market, the stronger the argument to index. You'll notice that asset allocation funds from active companies often do contain some index funds. It becomes increasingly hard to find trading opportunities the more money you manage too.
Increasingly, we're seeing new products replicating what used to be the domain of hedge funds. I guess you'd put those under active umbrella, since they involve derivatives and leverage.
For most people, an asset allocation using index funds makes the most sense.
-
- Posts: 1841
- Joined: Fri Sep 28, 2018 4:59 pm
Re: Benefits of actively managed funds
Hi hnd,hnd wrote: ↑Mon Sep 27, 2021 10:03 amnot for nothing but this product basically spends most of its time historically straddling the value/blend line. the last handful of years its basically a value product with a smattering of FAANG stops representing 5-10% of the fund.tibbitts wrote: ↑Sat Sep 25, 2021 12:39 pmI don't know anything about this fund in particular (other than it's name, since it's well-known), but you can't compare a value fund to the S&P500 - why not compare to a value index? Also I don't think it's helpful to conflate "value" and "conservative", as they are essentially unrelated.GoneOnTilt wrote: ↑Sat Sep 25, 2021 10:18 amI think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
I'm curious if you own this fund (American Mutual Fund) and/or if you have any thoughts on it?
-
- Posts: 15363
- Joined: Fri Apr 10, 2015 12:29 am
Re: Benefits of actively managed funds
Active management tries to overperform the market, while also taking the risk of underperforming the market. This is true regardless of future outcomes.
But if you were to survey actively managed stock mutual funds, I expect that you would find that the majority overperform during bull markets and underperform during bear markets. That's because many of them are just trying to beat the market with portfolios with higher expected return that is explained by taking more risk.
But if you were to survey actively managed stock mutual funds, I expect that you would find that the majority overperform during bull markets and underperform during bear markets. That's because many of them are just trying to beat the market with portfolios with higher expected return that is explained by taking more risk.
Re: Benefits of actively managed funds
My parents have a 8 fund American Fund portfolio and have for the past 20 years. about 4 years ago my dad asked me to look at it and tell him what I thought. This is one of the 8 funds that he owns. My opinion on American Funds as a company is that I believe they have a fantastic process when it comes to active management.... however they don't like to be categorized it appears and thus many of their funds are very convoluted in their construction. odd allocations, which make them difficult to build portfolios with at times. and they like to, as I mentioned above, straddle stylebox lines.GoneOnTilt wrote: ↑Mon Sep 27, 2021 4:23 pmHi hnd,hnd wrote: ↑Mon Sep 27, 2021 10:03 amnot for nothing but this product basically spends most of its time historically straddling the value/blend line. the last handful of years its basically a value product with a smattering of FAANG stops representing 5-10% of the fund.tibbitts wrote: ↑Sat Sep 25, 2021 12:39 pmI don't know anything about this fund in particular (other than it's name, since it's well-known), but you can't compare a value fund to the S&P500 - why not compare to a value index? Also I don't think it's helpful to conflate "value" and "conservative", as they are essentially unrelated.GoneOnTilt wrote: ↑Sat Sep 25, 2021 10:18 amI think sometimes, yes.
American Funds American Mutual Fund, for example, has shown downside protection during every S&P 500 decline of 15% or more since its inception in 1950. One of its objectives is conservative management, so one would not expect it to perform better than the S&P.
Also, it's a large value fund. If you compare it to large value index funds, it's performed quite well, and has had significant comparative downside protection.
So again, I think the answer to your question above can be yes, at times there can be other benefits to actively managed funds besides outperforming the market. Perhaps large value funds might be one of them.
EDIT: It has also moved in different directions as the S&P 500 at times. For example, in 2000 and 2001, American Mutual Fund was up when the S&P was down, and in 2002 it was down by only about half (or so as I recall). So maybe some value there as well for a conservative investor.
I'm curious if you own this fund (American Mutual Fund) and/or if you have any thoughts on it?
Largely, I believe these larger AF funds like AMRMX are too big and unable to capture the magic they once had. especially for the premium you pay. I'm not sure the fantastic process is enough to keep these gigantic mutual funds going as constructed.
Re: Benefits of actively managed funds
My 81 year-old lunch buddy fits that description exactly. He has USPS pension, so his (small) stock holdings are just to play with. But he's always talking about his "financial advisor" as if I'm supposed to be impressed.esqu1re wrote: ↑Mon Sep 27, 2021 11:40 am Some people will only get into the market as a result of having a "financial advisor" who actively manages their funds. They will likely never beat the market, but will usually beat saving their money in CDs at the bank. They feel like they're doing something.
There's a lot of marketing that convinces them that they're on the best track.
He also does not measure his holdings (individual stocks) against any benchmark so he has no idea how well he's doing. He doesn't even know what I'm talking about (compare your returns to a dumb index) and apparently his "advisor" doesn't talk about it either.
He's said something like "I was up 12% last year so I'm happy."
Me: "But Don, the total market was up 18%. You'd have been better off in an index." He's clueless so I let it go.
"There are no new ideas, only forgotten ones." -- Amity Shlaes
Re: Benefits of actively managed funds
I have a friend who clips grocery coupons but refuses to learn anything about basic investing.Bluce wrote: ↑Mon Sep 27, 2021 10:10 pmMy 81 year-old lunch buddy fits that description exactly. He has USPS pension, so his (small) stock holdings are just to play with. But he's always talking about his "financial advisor" as if I'm supposed to be impressed.esqu1re wrote: ↑Mon Sep 27, 2021 11:40 am Some people will only get into the market as a result of having a "financial advisor" who actively manages their funds. They will likely never beat the market, but will usually beat saving their money in CDs at the bank. They feel like they're doing something.
There's a lot of marketing that convinces them that they're on the best track.
He also does not measure his holdings (individual stocks) against any benchmark so he has no idea how well he's doing. He doesn't even know what I'm talking about (compare your returns to a dumb index) and apparently his "advisor" doesn't talk about it either.
He's said something like "I was up 12% last year so I'm happy."
Me: "But Don, the total market was up 18%. You'd have been better off in an index." He's clueless so I let it go.
Fortunately, she is in the federal employees’ TSP so the fees are minimal at least. But the money will eventually go to her adult child, and it should be invested more aggressively.
But to esqu1re’s point, Don Is better off with his advisor than keeping his money in CDs. No matter how much it frustrates you (or me).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Benefits of actively managed funds
Ha, yes. "Cash is trash," and so are CDs.delamer wrote: ↑Tue Sep 28, 2021 10:17 amI have a friend who clips grocery coupons but refuses to learn anything about basic investing.Bluce wrote: ↑Mon Sep 27, 2021 10:10 pmMy 81 year-old lunch buddy fits that description exactly. He has USPS pension, so his (small) stock holdings are just to play with. But he's always talking about his "financial advisor" as if I'm supposed to be impressed.esqu1re wrote: ↑Mon Sep 27, 2021 11:40 am Some people will only get into the market as a result of having a "financial advisor" who actively manages their funds. They will likely never beat the market, but will usually beat saving their money in CDs at the bank. They feel like they're doing something.
There's a lot of marketing that convinces them that they're on the best track.
He also does not measure his holdings (individual stocks) against any benchmark so he has no idea how well he's doing. He doesn't even know what I'm talking about (compare your returns to a dumb index) and apparently his "advisor" doesn't talk about it either.
He's said something like "I was up 12% last year so I'm happy."
Me: "But Don, the total market was up 18%. You'd have been better off in an index." He's clueless so I let it go.
Fortunately, she is in the federal employees’ TSP so the fees are minimal at least. But the money will eventually go to her adult child, and it should be invested more aggressively.
But to esqu1re’s point, Don Is better off with his advisor than keeping his money in CDs. No matter how much it frustrates you (or me).
"There are no new ideas, only forgotten ones." -- Amity Shlaes