argument against indexing on morningstar...

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Beanbone
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argument against indexing on morningstar...

Post by Beanbone »

Just read this. Love to hear bogleheads' thoughts on it...

http://news.morningstar.com/articlenet/ ... ?id=555759
skibbi9
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Re: argument against indexing on morning star...

Post by skibbi9 »

don't feel like digging up my login... feel like quoting the article?
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Beanbone
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Re: argument against indexing on morning star...

Post by Beanbone »

Here is the author's main point for those who can't log in to the morningstar article...
Because of the success of investor fund selection, the point that investors would be far better off owning index funds is greatly overstated. True, low-cost index funds do outperform the typical actively managed mutual fund over time. But as we saw, investors don't hold typical funds. They hold above-typical funds, and against that group the indexes aren't big winners. Consider the largest category of mutual funds, large-blend U.S.-stock funds. Compared with the equal-weighted large-blend average of 0.78% per annum from 2001 to 2010, the Vanguard 500 Index (VFINX) Investor shares' gain of 1.31% is excellent. Compared with the asset-weighted large-blend average of 1.17%, it's not.
Note from admin alex - we have restored the above quote after moderator review. It is an excerpt (not the whole work) and otherwise appears to qualify under fair use.
Last edited by Beanbone on Tue Feb 05, 2013 1:00 pm, edited 2 times in total.
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Re: argument against indexing on morning star...

Post by KyleAAA »

It's probably not wise to post the entire article here. Copyrighted material, and all. The copyright trolls are out in force these days.
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Re: argument against indexing on morning star...

Post by Gauntlet »

Before the article gets taken down, I'll go ahead point out one of several glaring issues. The author does not compare "after expense, after tax" returns. As we know, these 2 items would eat into the actively managed fund returns more so than the passive funds.
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neurosphere
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Re: argument against indexing on morning star...

Post by neurosphere »

I read the article twice, and I have no idea what he is trying to say.
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Re: argument against indexing on morning star...

Post by bottlecap »

neurosphere wrote:I read the article twice, and I have no idea what he is trying to say.
Yeah, the article isn't clear. Perhaps that's the intent?

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Re: argument against indexing on morning star...

Post by damjam »

Compared with the equal-weighted large-blend average of 0.78% per annum from 2001 to 2010, the Vanguard 500 Index (VFINX) Investor shares' gain of 1.31% is excellent. Compared with the asset-weighted large-blend average of 1.17%, it's not.
If the numbers are correct, this means that Vanguard 500 Index did better than the average equal-weighted large-blend andthe average asset-weighted large-blend. This confuses his argument.
Last edited by damjam on Tue Feb 05, 2013 1:52 pm, edited 1 time in total.
2retire
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Re: argument against indexing on morning star...

Post by 2retire »

Gauntlet wrote:Before the article gets taken down, I'll go ahead point out one of several glaring issues. The author does not compare "after expense, after tax" returns. As we know, these 2 items would eat into the actively managed fund returns more so than the passive funds.
I don't see where it said fees weren't taken into account. As a matter of fact, it would have been very difficult not to include fees. As far as taxes are concerned, I believe that the vast majority of people's money would be in tax deferred accounts and therefore taxes really wouldn't be an issue.
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Re: argument against indexing on morning star...

Post by SSSS »

1.31% is still greater than 1.17%, though.

Also, I'm wondering if they figured their dollar weighting at the END of the period (meaning it counted investors who jumped on AFTER the outperformance) or whether it properly dollar-weighted over the entire period.
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Re: argument against indexing on morning star...

Post by bUU »

I was shouted down about this on another forum this weekend, someone (a subscriber to the Fidelity Monitor & Insight newsletter, apparently) advocating that their models consistently outperform index funds, complete with links to (password-protected) evidence that allegedly proves it. Hard to know what to think.
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Re: argument against indexing on morning star...

Post by Gauntlet »

2retire wrote:
Gauntlet wrote:Before the article gets taken down, I'll go ahead point out one of several glaring issues. The author does not compare "after expense, after tax" returns. As we know, these 2 items would eat into the actively managed fund returns more so than the passive funds.
I don't see where it said fees weren't taken into account. As a matter of fact, it would have been very difficult not to include fees. As far as taxes are concerned, I believe that the vast majority of people's money would be in tax deferred accounts and therefore taxes really wouldn't be an issue.
I disagree. Why would it be difficult to NOT include fees? Fund companies do this all the time when they advertise fund returns. So do all my friends when they are bragging to me about their returns :happy Also, the vast majority of your money (and mine) might be in tax-deferred accounts but I think that is a bad generalization.
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Re: argument against indexing on morning star...

Post by hicabob »

"But as we saw, investors don't hold typical funds. They hold above-typical funds, and against that group the indexes aren't big winners." - this sounds like Lake Wobegon Investment House - where all mutual funds are above average. :happy
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Re: argument against indexing on morning star...

Post by hlfo718 »

Still doesn't solve the 10 trillion dollar question of how do you find managers that will outperform ahead of time and how do you know when to sell? Everything he said in the article, besides indexing bonds, was a waste of time.
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Re: argument against indexing on morning star...

Post by bUU »

hicabob wrote:"But as we saw, investors don't hold typical funds. They hold above-typical funds, and against that group the indexes aren't big winners." - this sounds like Lake Wobegon Investment House - where all mutual funds are above average. :happy
It does, but in a larger sense, couldn't there be some differentiation? First, I work for a small company and have only crap funds available to me in my 401(k), so is it possible that a lot of the crap funds are dumped onto investors who cannot hope for better for one reason or another - the impact of that being a biasing of the remaining funds in the positive direction? First-and-a-half, how many of the crap funds make up for innate crappiness by setting up a veritable kick-back system with stock brokers? After selling off my late mother's holdings, I could be convinced that such a system must have existed, and she was a victim of it. Second, between Morningstar ratings and Lipper Leaders, is it possible that there enough basic insight there to bias one's (managed) holdings above the midline, leaving those who look only at last year's returns ripe for the downside risks that undercut the value of managed funds in general?

Note: These are all questions, I've posted - not assertions.
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Re: argument against indexing on morning star...

Post by baw703916 »

Because the average dollar invested in active funds underperforms the average dollar invested in index funds, you should only invest dollars that are above average in active funds. :happy
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Re: argument against indexing on morning star...

Post by carolinaman »

baw703916 wrote:Because the average dollar invested in active funds underperforms the average dollar invested in index funds, you should only invest dollars that are above average in active funds. :happy
The statement above was his major point. Most investors do not buy average funds. They use M* or other sources to find good funds well above average that consistently perform well. He also stated that investors are prone to performance chase, buying into funds after they had big gains, with the predictable bad results. Their performance chasing greatly diminished their gains and he recognizes this as a big problem. People who apply the Boglehead philosophy of setting an AA of low cost indexed funds, rebalancing and staying the course would not have the performance chasing problem and would have better overall results. The authors contention is that active investors can also achieve good results provided they are disciplined investors who do not chase performance.
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Re: argument against indexing on morning star...

Post by 2retire »

Gauntlet wrote: I disagree. Why would it be difficult to NOT include fees? Fund companies do this all the time when they advertise fund returns.
Because someone that is doing research is going to be using something like the Morningstar databases that already have fees removed. I've also not heard of fund companies advertising returns sans fees. Heck, I believe that's illegal. Now, advisers not including their fee when they report your returns, that is a different story and mentioned in Rick's books.
Also, the vast majority of your money (and mine) might be in tax-deferred accounts but I think that is a bad generalization.
I based that on a survey done on these boards. Even though this community makes significantly more money than your average investor, and has plenty of extra cash to put in taxable, the majority of most people's money was in tax deferred accounts.
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Re: argument against indexing on morning star...

Post by OneDay »

johnep wrote: They use M* or other sources to find good funds well above average that consistently perform well
johnep wrote:The authors contention is that active investors can also achieve good results provided they are disciplined investors who do not chase performance
Which really is chasing funds from the start, no? Seems like it is caught in a loop.
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Re: argument against indexing on morning star...

Post by carolinaman »

OneDay wrote:
johnep wrote: They use M* or other sources to find good funds well above average that consistently perform well
johnep wrote:The authors contention is that active investors can also achieve good results provided they are disciplined investors who do not chase performance
Which really is chasing funds from the start, no? Seems like it is caught in a loop.
No, not really. The article advocates selecting proven low cost funds that are well above average. For example, funds like Wellington, Contra, and Sequoia have very good long term records. Occasionally they may underperform but disciplined investors are unlikely to sell them then, if ever. The article emphasizes quality long term proven funds, not the hot fund of the day. Fund selection to meet a sound AA is totally different than performance chasing.
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Selecting managed funds ?

Post by Taylor Larimore »

The article advocates selecting proven low cost funds that are well above average. For example, funds like Wellington, Contra, and Sequoia have very good long term records.
Fund selection to meet a sound AA is totally different than performance chasing.
Sounds like "performance chasing" to me. :wink:

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Re: argument against indexing on morning star...

Post by nisiprius »

johnep wrote:The statement above was his major point. Most investors do not buy average funds. They use M* or other sources to find good funds well above average that consistently perform well.
1) Morningstar themselves has acknowledged that their star rating system does not have any predictive power. Their new bronze-silver-gold "analyst ratings" have been out for less than a year, so not very many investors can possibly have used them yet.

2) Good funds well above average that consistently perform well, you mean like this one? Is fifteen years "consistent" enough for you? Does past "consistency" guarantee future "consistency?"

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Re: argument against indexing on morning star...

Post by fjsfjsfjs »

The "typical" investor invests in funds that are "above average" - wow. The people who invest in the 50% of funds that are below average seem to be non-typical. If only we would know if we are typical or non-typical...
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Re: argument against indexing on morning star...

Post by nisiprius »

johnep wrote:The article advocates selecting proven low cost funds that are well above average. For example, funds like Wellington, Contra, and Sequoia have very good long term records. Occasionally they may underperform but disciplined investors are unlikely to sell them then, if ever. The article emphasizes quality long term proven funds, not the hot fund of the day.
By "Contra," I assume you mean Fidelity Contrafund. Funny, isn't it? It's nothing but Contrafund, Contrafund, Contrafund. Circa 1995 I worked for a company whose Fidelity-managed 401(k) plan offered both Fidelity Magellan Fund and Fidelity Contrafund--and everyone was investing in Magellan. Back then the talk was nothing but Magellan, Magellan, Magellan. That was the "well above average" fund with the "very good long term record."

Image

Funny, I don't hear much about Magellan lately. I wonder why that is. Its long-term record is better than Contrafund's. True, it has had its period of "occasional" underperformance, like right now, but I assume there are "disciplined investors" in it who are "unlikely to sell it now, if ever..." I wonder if those disciplined investors are experiencing any doubts as to whether "consistency" is easy to judge.

(I'm trying desperately to work in a wisecrack about Emerson's "A foolish consistency is the hobgoblin of little minds" but I can't manage to twist it so as to make it actually apply...)
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Re: argument against indexing on morning star...

Post by understandingJH »

Interesting perspective the author provides and I welcome hearing about other perspectives, information, and studies. I think here on this board we run a high risk for group-think, confirmation bias, and black and white thinking (i.e. low-cost index-based investing is the one-true religion of investing). I have the majority of my assets in index funds, but I do hold some active funds (because my 401k offers no bond indices so I invest in a variant of Pimco's Total Return and Real Return instead, and I hold part of my emergency fund in a Vanguard municipal fund).

So how does one find the better than typical active funds as others have suggested? The author suggested that one key is finding active funds with low expenses and this is indeed what Vanguard suggests if one is to pursue active management (but states that low-fee active funds, while probably the biggest thing to look for, it isn't enough to make active management worthwhile, one need both low cost and high talent, something the article we are tearing apart is advocating just like vanguard). As has been already pointed out, the M* star rating is backwards looking and the newer analyst rating, while trying to be forward looking, is also partly backwards looking since it still takes into consideration past performance (I recognize that in finance at some point everything has a backwards looking component when examined in a quantitative manner including the case for indexing as shown in this vanguard white paper).

As regards active funds, I've recently read the following paper by vanguard: The case for vanguard active management: Solving the low-cost/top-talent paradox?

In there it addresses the issues with the analyst rating approach M* is now using (indirectly though). That approach at M* is based on a variation of the "4 Ps" cited by Jack Bogle in 1984 - people, philosophy, portfolio, and performance. In fact, Vanguard today uses similar criteria for finding top-talent active managers as shown on page 5 of that above linked paper. However on that same page it makes this comment about that approach:
One might ask that if these factors are truly effective and so widely used, why has the overall success rate of using active managers not been higher? Two reasons. First, the application of these factors remains subjective, not formulaic, and the human judgment and the robustness of the evaluation process can vary widely. Second, although there are six total factors, the most crucial intersection here is obtaining top talent (those managers who have the skill to outperform) at a low cost. Solving this paradox is not easy.
Nonetheless, what further intrigued me about the author in the OP's link is him talking about the need to look at Asset-weighted instead of Equal-weighted annualized excess returns. This is indeed something similar to what Vanguard does in the paper and shows the following statistics about their active funds compared to their benchmarks (plus including a third weighting methodology, "market-proportional" (page 8):

Excess Returns of Vanguard funds over their stated benchmarks
Januaray 1982-June 2012
0.35% Equal-weighted all funds
0.59% Asset-weighted all funds
0.24% Market proportional-weighted excluded sector funds
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Re: argument against indexing on morning star...

Post by understandingJH »

nisiprius wrote:
johnep wrote:The article advocates selecting proven low cost funds that are well above average. For example, funds like Wellington, Contra, and Sequoia have very good long term records. Occasionally they may underperform but disciplined investors are unlikely to sell them then, if ever. The article emphasizes quality long term proven funds, not the hot fund of the day.
By "Contra," I assume you mean Fidelity Contrafund. Funny, isn't it? It's nothing but Contrafund, Contrafund, Contrafund. Circa 1995 I worked for a company whose Fidelity-managed 401(k) plan offered both Fidelity Magellan Fund and Fidelity Contrafund--and everyone was investing in Magellan. Back then the talk was nothing but Magellan, Magellan, Magellan. That was the "well above average" fund with the "very good long term record."

Image

Funny, I don't hear much about Magellan lately. I wonder why that is. Its long-term record is better than Contrafund's. True, it has had its period of "occasional" underperformance, like right now, but I assume there are "disciplined investors" in it who are "unlikely to sell it now, if ever..." I wonder if those disciplined investors are experiencing any doubts as to whether "consistency" is easy to judge.

(I'm trying desperately to work in a wisecrack about Emerson's "A foolish consistency is the hobgoblin of little minds" but I can't manage to twist it so as to make it actually apply...)
And here is how the Contra and Magellan fund compared to the S&P 500 since 1995:

Image
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Re: argument against indexing on morning star...

Post by KyleAAA »

The answer to this seems obvious to me: on a dollar-weighted basis, the average dollar performs above average. Well duh! Funds with above-average returns grow faster than funds with below-average returns, so the number of absolute dollars will naturally grow larger in the higher-performing funds over time relative to the under-performing funds. This seems to be a non-issue unless I'm missing something.
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Re: argument against indexing on morning star...

Post by understandingJH »

KyleAAA wrote:The answer to this seems obvious to me: on a dollar-weighted basis, the average dollar performs above average. Well duh! Funds with above-average returns grow faster than funds with below-average returns, so the number of absolute dollars will naturally grow larger in the higher-performing funds over time relative to the under-performing funds. This seems to be a non-issue unless I'm missing something.
This was my initial thought too! Thanks for pointing it out to everyone.
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Re: argument against indexing on morning star...

Post by WendyW »

'
Is it this article? --> The Myth of the Dumb Investor
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Re: argument against indexing on morning star...

Post by pingo »

It sure appears that choosing star fund managers leads to underperformance just long enough to lead performance chasers to lose hope and jump into other star manager funds...just in time for them underperform, too.

I realize that the article talks about choosing from above average funds of the past, but the OP's title invites pro-indexing arguments from Morningstar. There are plenty of examples where Morningstar directly and indirectly makes arguments in favor of sticking with index funds. A recent few:

1. Per Morningstar, index funds are above average over long periods: Over shorter periods, index funds are almost sure to perform alongside the average mutual fund. So in searching index fund performance at M*, they are typically given 3 stars (what else would you expect for a fund that offers market returns minus its costs?) and they'll tend to be in the middle of their category performance over the 1, 3, 5 and sometimes even 10 years periods (although 10 years is usually enough time). But here is a classic example of the Morninstar's unwitting testimony in favor of passive investing: with every fund quote they show how it performed versus all funds in the category!

Fidelity Spartan 500 Index Fund (FUSEX) (after costs)
All Large Blend U.S. funds (after costs)
Image

See the chart at Morningstar.com

2. Per Morningstar's Director of ETF Research...
Morningstar Video Reports wrote:...we know that on average active funds underperform index funds. Costs and turnover and taxes, like that lead to what should be a 50-50 to be less than that.
3. Per Morningstar, average investor returns are worse than average fund returns. Because of performance chasing (as noted earlier), is it really a surprise? M* also recently posted an article called Mind the Gap: Why Investors Lag Funds (Sorry. Morningstar's own link is not working, correctly.) I have read similar M* articles in the past.

4. Per Morningstar, chasing their stock picks has made for unimpressive returns: Regarding the January 11, 2013 M* article How Our Stock Star Ratings Have Performed, perplexed and even frustrated commenters asked: Why would "no-moat, 1-star" stocks do about as well or better than higher-rated Morningstar picks? (I was also surprised to find out that one can invest in M* picks via...wait for it...an index ETF!)

5. Per Morningstar today:
Morningstar's Samuel Lee wrote:Why, then, do investors spend so much effort trying to be clever, neglecting the fundamentals? Keeping bonds in tax-sheltered accounts likely adds more value than trying to find the next Apple (AAPL). The all-consuming quest for alpha is a symptom of overconfidence.
Now, if one has the option of selecting an above-average performer (many do not, given limited savings ability and employer-sponsored options), and if one knows they'll never let it go, and if one believes that the fund is in line with their ability to handle risk, and if using such a fund can be appropriately used to meet asset allocation needs...well, I guess it makes sense to invest with a star manager's fund.

But I'll note that per Mornignstar indexing is also good enough and even above average. It also enables me to stay the course with less work, which is important in order to not underperform my funds.
Last edited by pingo on Mon Feb 11, 2013 9:18 am, edited 22 times in total.
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Re: argument against indexing on morning star...

Post by jebmke »

nisiprius wrote:Above, fund manager's yacht. "Where are the customers' yachts?"
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Re: argument against indexing on morning star...

Post by White Coat Investor »

I love that people are still debating this. As far as I'm concerned, the case for indexing has been sufficiently made. It would take overwhelming evidence for me to change my mind at this point. This article didn't even provide evidence, much less overwhelming evidence.
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Re: argument against indexing on morning star...

Post by carolinaman »

understandingJH wrote:Interesting perspective the author provides and I welcome hearing about other perspectives, information, and studies. I think here on this board we run a high risk for group-think, confirmation bias, and black and white thinking (i.e. low-cost index-based investing is the one-true religion of investing). I have the majority of my assets in index funds, but I do hold some active funds (because my 401k offers no bond indices so I invest in a variant of Pimco's Total Return and Real Return instead, and I hold part of my emergency fund in a Vanguard municipal fund).


I appreciate your openness to consider other perspectives. For the record, the vast majority of my AA is in low cost funds, mostly index funds. The Boglehead philosophy is very sound and I agree with most of it. However, I agree with the article to a point. M* has published articles in the past that were more persusaive regarding active vs passive. There are a lot of very smart people on this forum and appreciate their posts. But I absolutely agree with your comment about at times group think. That is not so bad except when counter arguments to the Boglehead philosophy are raised- Then it is like starting a holy war.
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Re: argument against indexing on morning star...

Post by Gauntlet »

I don't really see how this is a group think issue. There are countless studies that show over the long-term (decades) that active fund investing will lose to passive fund investing (after expenses, taxes, turn over etc.). Will there be a few active funds that do better? Yes. However, finding these fund managers before they start crushing the indexes is extremely difficult. I'm not raising my pitchfork here or saying that owning actively managed funds is awful, but the average investor that decides to invest money in an actively managed fund should do so with his/her eyes wide open. More than likely, after 10 years, no matter what the * rating, they will lose to the S&P 500 index.
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Re: argument against indexing on morning star...

Post by understandingJH »

Gauntlet wrote:I don't really see how this is a group think issue. There are countless studies that show over the long-term (decades) that active fund investing will lose to passive fund investing (after expenses, taxes, turn over etc.). Will there be a few active funds that do better? Yes. However, finding these fund managers before they start crushing the indexes is extremely difficult. I'm not raising my pitchfork here or saying that owning actively managed funds is awful, but the average investor that decides to invest money in an actively managed fund should do so with his/her eyes wide open. More than likely, after 10 years, no matter what the * rating, they will lose to the S&P 500 index.
To me this issue, and why I brought up group-think, is that yes, I agree there is a lot of scientific studies showing how passive does better than active investing in aggregate (and I have been convinced by these). Still, I want to maintain my own critical thinking skills and for me that means keeping an open mind. This article though brings up points that challenge those studies, based on the premise used. This is healthy and not uncommon in other scientific fields of inquiry. By changing the premise (in this case compare not indexing to active funds in aggregate, but to some subset instead (just like the concept of Active Share investing challenges by avoiding closet indexers [which with higher fees are doomed from the start]).

To the point, the problem I'm noticing at times is it appears an almost knee-jerk reaction is given by many to dismiss such alternate points of view without seeing if the argumentation has merit (i.e. just parroting information/counter arguments based on the very studies that are being challenged). This is a circular problem, and an example (I think?) of begging the question. And even if we do see if the challenging viewpoint has merit, there is always the risk of using other logic fallacies in scrutinizing the material. It's amazingly easy to do. I hope that this doesn't sound like I'm attacking anyone, if anything I feel like I'm attacking myself, as I too had similar knee-jerk reactions wanting to dismiss the article. I'm very analytical and like to keep an open mind, which is very hard to do at times.
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Re: argument against indexing on morning star...

Post by FafnerMorell »

Being open-minded is great for mulling philosophical conjectures - but when it comes to spending/investing money, I prefer more concrete criterion. Much of the active vs. passive debate is pure strawman, but as someone starts pitching "Why settle for Vanguard's TSM when for a mere 1.5% more, you can have a fund that just buys good stocks?", it sounds like the usual con job. But hey, if you want to buy, go for it - your money.
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Re: argument against indexing on morning star...

Post by pkcrafter »

A distillation of what Rekenthaler said, and comments in blue:
Actually, fund investors are good at selecting funds.

Compared with the equal-weighted large-blend average of 0.78% per annum from 2001 to 2010, the Vanguard 500 Index (VFINX) Investor shares' gain of 1.31% is excellent. Compared with the asset-weighted large-blend average of 1.17%, it's not.

Uh, it's better than what active investors did.

The story is similar for the industry's other stock-fund categories. With domestic-stock funds, the relevant indexes outgained the asset-weighted fund averages in six of the eight remaining squares of the Morningstar Style Box, and the funds outperformed in the other two cases.

Yes, so funds outperformed in two out of nine categories, that doesn't earn bragging rights. And we don't know if the same two categories will outperform in the future. Chances are they will not.

Fund investors do have a problem. They select funds well, but they allocate poorly. Reworking my study so that it compares asset-weighted versus equal-weighted results over a 10-year stretch, rather than over individual calendar years, yields a very different picture. Now investors find themselves sharply lagging the equal-weighted averages. The reason is that they buy hot categories and sell cold ones.

There are two reasons for this, 1) investors are attempting to outperform the indexes, so they buy recent performance, and 2) even it they try to hold, their favorite fund can pull the rug out and force them to switch.

The myth of the dumb fund investor is harmful because it addresses a problem that does not exist and distracts from a large and real problem that very much does.

No, doing stupid things like performance chasing identifies the dumb investor. Picking recent winners is easy and takes no skill and no discipline, but holding 8 or 10 active funds over a long period is difficult and problems with the funds themselves can necessitate switching. Most active investors won't hold anyway because of the allure of greener grass. At any rate, the article isn't well-focused and investors who can pick recent good funds but then can't hold still awards them the dunce cap.

There is an important point here to take away--successful index investing isn't accomplished by just buying index funds. If investors don't follow up with the other habits recommended by John Bogle and the Boglehead Philosophy they will not capture the low cost advantage of indexing.

Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course



Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
understandingJH
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Re: argument against indexing on morning star...

Post by understandingJH »

FafnerMorell wrote:Being open-minded is great for mulling philosophical conjectures - but when it comes to spending/investing money, I prefer more concrete criterion. Much of the active vs. passive debate is pure strawman, but as someone starts pitching "Why settle for Vanguard's TSM when for a mere 1.5% more, you can have a fund that just buys good stocks?", it sounds like the usual con job. But hey, if you want to buy, go for it - your money.
I'm not suggesting that one should whimsically switch investment... philosophies :twisted: ... because a paper comes out or an op-ed is written, etc. You do make a valid point that once one decides that boglehead investing is the best choice for himself that it's probably best to stick with it in the long term (which is one of the main ways for it to really be beneficial). I'm certainly not seriously considering going active. Like another poster said, it would also take a lot of evidence to sway me.

For me at least, that doesn't mean I am not interested in hearing arguments from the other side. I feel very much the same about Total Market vs. Slice and Dice. I've adopted a the total market approach. I'm skeptical of slice and dice approaches, but I am not completely writing that approach off, and neither am I writing off active management.

But then again, I'm young (almost 30) and have just started investing a couple years ago. Fortunately I jumped right into indexing from the start. So my perspective is probably a bit different than many on the board. Critically thinking about my current investment style as well as competing ones I think is important because I'm so new to this. That said I do understand the risk of being a danger to oneself. I'll have to give that point more consideration.
sls239
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Re: argument against indexing on morningstar...

Post by sls239 »

Fund investors do have a problem. They select funds well, but they allocate poorly.
This to me sounds like M* is saying that it isn't the fund managers' fault that the average investor gets lackluster performance. That if they would just stick with the fund, they'd be OK. And then they suggest that "you" could behave in such a way.

But I don't think it matters if you place the blame on the investor or on the fund managers, the index funds still have the advantage.

I think it would be a mistake if I were to take my money and say "I'm not going to be like them, if my fund under-performs, I'll know to stick with it, I won't start thinking I made a mistake and bought a stinker."

The fact that a fund is passively managed makes it more likely a person will stick with it. It takes away the risk of me being a merely "average" investor and unable to shake the fear of having bought a stinker. And it reduces that risk by charging extremely little, if any, premium.
OneDay
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Re: argument against indexing on morning star...

Post by OneDay »

johnep wrote:
OneDay wrote:
johnep wrote: They use M* or other sources to find good funds well above average that consistently perform well
johnep wrote:The authors contention is that active investors can also achieve good results provided they are disciplined investors who do not chase performance
Which really is chasing funds from the start, no? Seems like it is caught in a loop.
No, not really. The article advocates selecting proven low cost funds that are well above average. For example, funds like Wellington, Contra, and Sequoia have very good long term records. Occasionally they may underperform but disciplined investors are unlikely to sell them then, if ever. The article emphasizes quality long term proven funds, not the hot fund of the day. Fund selection to meet a sound AA is totally different than performance chasing.
Taylor Larimore wrote:Sounds like "performance chasing" to me.
Exactly. The Bogelheads' Guide to Investing lays this out pretty well in one of its chapters and specifically on page 155. (shout out to Taylor!) To believe in the index methodology you have to except that past performance means nothing.
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mephistophles
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Re: argument against indexing on morningstar...

Post by mephistophles »

M* makes money by convincing investors that they have tools that enable people to pick individual stocks and funds and etf's. They don't make money by telling everybody just to index.
Sandman62
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Location: Rhode Island

Re: argument against indexing on morning star...

Post by Sandman62 »

Gauntlet wrote:I don't really see how this is a group think issue. There are countless studies that show over the long-term (decades) that active fund investing will lose to passive fund investing (after expenses, taxes, turn over etc.). Will there be a few active funds that do better? Yes. However, finding these fund managers before they start crushing the indexes is extremely difficult. I'm not raising my pitchfork here or saying that owning actively managed funds is awful, but the average investor that decides to invest money in an actively managed fund should do so with his/her eyes wide open. More than likely, after 10 years, no matter what the * rating, they will lose to the S&P 500 index.
Though we have 2/3 of our retirement savings in indexed funds, we also have 10-12% each in a couple Fidelity active funds the past 15 years that have beaten indexes over 10 years - even with their expense and management fees combining to 1.58 and 1.74%.

http://performance.morningstar.com/fund ... on?t=FLPSX
http://performance.morningstar.com/fund ... on?t=FMILX

Are we not Bogling properly? :P
Last edited by Sandman62 on Thu Feb 07, 2013 6:10 am, edited 2 times in total.
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kwyjibo
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Re: argument against indexing on morningstar...

Post by kwyjibo »

Soon after reading this thread I came across this blog post: http://blog.futureadvisor.com/new-study ... gher-fees/

Which says :
A 2013 Rotman School of Management study published in the February Journal Of Finance found that mutual funds offering higher fees attract the most investments, particularly when the broker isn’t directly affiliated with the mutual fund.
And this:
the study correlates unaffiliated brokers with significantly worse performance
I don't think anyone who reads and agrees with a Bogle book is going to argue with high fees correlate with worse performance, but either this study or John Rekenthaler the Vice President of Research for Morningstar's article (or both) are cherry picking their numbers or leaving out some other important details.

I haven't read the whole paper yet, just the blog post, I'll edit my post if I find the blog's interpretation is off.
Last edited by kwyjibo on Wed Jun 26, 2013 5:29 pm, edited 1 time in total.
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LH
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Re: argument against indexing on morning star...

Post by LH »

skibbi9 wrote:don't feel like digging up my login... feel like quoting the article?
https://www.google.com/search?q=Because ... 20&bih=920

you can search these articles on google. sites usually allow you to come in from google as a matter of their own policy.
MEF
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Re: argument against indexing on morningstar...

Post by MEF »

I was led to this forum when I Googled " ASSET-WEIGHTED RESULTS." I was rereading the article discussed here and I hate to admit it, but I cannot get an intuitive feel for this A-W R thing.
I think many of the posts here - with charts of 40 year results, for instance, are not pertinent to this AWR analysis.
Can anyone help explain what AWRs are, and how they compare to "equal-weighted results" ?
This forum is interesting, and I appreciate reading your thoughts.
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