exposing the lies about active management

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

exposing the lies about active management

Postby larryswedroe » Mon Jul 01, 2013 9:31 am

http://www.indexuniverse.com/hot-topics/19149-swedroe-taking-on-the-lies-about-active.html
while I usually ignore the investment porn put out by Wall Street and the media, on occasion I read some piece because the title hinted that it could provide fodder for my "cannon", exposing the incredible nonsense that is so often put out, including contradictions in their own statements. This one was about as over the top as I have come across.
Hopefully it will attract some attention from the media

Hope you find it interesting and helpful

Best wishes
Larry
Last edited by larryswedroe on Mon Jul 01, 2013 2:21 pm, edited 1 time in total.
larryswedroe
 
Posts: 12194
Joined: Thu Feb 22, 2007 9:28 am
Location: St Louis MO

Re: exposing the lies about active management

Postby Rick Ferri » Mon Jul 01, 2013 9:54 am

Larry Swedroe wrote wrote:American Century vs. DFA

Equal-weighting the American Century funds in each asset class, American Century outperformed in three of the nine asset classes and underperformed in the other six. An American Century portfolio that equal-weights the nine asset classes produced a return of 10.1 percent per year, underperforming by 0.5 percent per year a similar DFA portfolio that returned 10.6 percent.


American Century vs. Vanguard

American Century outperformed Vanguard in three of the seven asset classes where they had similar funds and underperformed in the other four. A portfolio of American Century funds underperformed a Vanguard portfolio by 0.1 percent per year (10.1 versus 10.2).


Nice article.

These results above are consistent with the random nature of active management returns. About 1 out of 3 surviving active funds beat their benchmark. The problem is picking which fund will win in advance, and then dealing with low average outperformance of the winners versus higher underperformance of the losers.

From the American Century Investments paper wrote:In a challenging investment climate, featuring slow growth, modest returns and the probability of heightened risks going forward, the ability to realize positive alpha produced by an active manager is quite valuable.


"The ability to realize positive alpha" says nothing about the probability of outperformance. The statement merely saying there is a possibility for alpha, which no one denies. Outperformance using active management is possible, it's just not probable.


Rick Ferri
Mutual fund investing is simple. There is risk, there is return, and there are costs. All else is marketing.
User avatar
Rick Ferri
 
Posts: 7804
Joined: Mon Feb 26, 2007 12:40 pm
Location: Home on the range in Medina, Texas

Re: exposing the lies about active management

Postby TimesAWastin » Mon Jul 01, 2013 1:44 pm

I don't know if this is intentional, but the link starts at page 3.
TimesAWastin
 
Posts: 116
Joined: Fri Mar 15, 2013 11:45 am
Location: Los Angeles, CA

Re: exposing the lies about active management

Postby G-Money » Mon Jul 01, 2013 1:50 pm

Nice article. Good luck convincing Petrocelli: :) viewtopic.php?f=10&t=119028&newpost=1738650
Don't assume I know what I'm talking about.
User avatar
G-Money
 
Posts: 2835
Joined: Sun Dec 09, 2007 8:12 am

Re: exposing the lies about active management

Postby nisiprius » Mon Jul 01, 2013 2:08 pm

Larry, a few years ago Vanguard published an article by no less a person than Gus Sauter, A framework for developing the appropriate mix of indexing and active management.

I think it's hooey, but I would be interested to hear your comments.

Sauter claimed
These analyses of U.S. and European funds demonstrate the asset allocation advantages to an investor of combining index and actively managed funds. They also further the rationale for an overall core-satellite approach, comprising index funds for the core and actively managed funds as satellites.
He includes this chart:

Image
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.
User avatar
nisiprius
Advisory Board
 
Posts: 25782
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: exposing the lies about active management

Postby Rick Ferri » Mon Jul 01, 2013 2:22 pm

The analysis is theoretical in that it is assumed you have the skill to select better performing active managers. The average active managers underperforms by far more than the 0.17% the chart suggests.

Rick Ferr
Mutual fund investing is simple. There is risk, there is return, and there are costs. All else is marketing.
User avatar
Rick Ferri
 
Posts: 7804
Joined: Mon Feb 26, 2007 12:40 pm
Location: Home on the range in Medina, Texas

Re: exposing the lies about active management

Postby nedsaid » Mon Jul 01, 2013 11:54 pm

Very interesting article.

I certainly would not expect an active management company to sing the praises of indexing!!
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2587
Joined: Fri Nov 23, 2012 1:33 pm

Re: exposing the lies about active management

Postby nedsaid » Tue Jul 02, 2013 10:55 pm

Larry, could you post the performance of model portfolios that you recommend to your clients and compare the results net fees with American Century's One Choice Portfolios? Pick their conservative, moderate, and aggressive One Choice funds and compare them against your model portfolios. You threw down the gauntlet and should be prepared to back things up.

They wrote a paper and you shot holes in it. I thought you did a good job showing the flaws in their article.

I know this group well, this company has put considerable effort and resources to educate its investors. I learned an awful lot from them. I have read their white papers on the mid-cap part of the market being the "sweet spot" in the market. (I noticed that Mel Lindauer is a big advocate of this area of the market). They put out good articles on the virtues of diversification and managing risk. They teach about staying in the market and not timing it. They also have personal finance education available. They also offer guidance to their investors as do the other large no-load fund companies. These are good guys in the investment business.

I actually do read the annual and semi-annual reports of their funds. They have been pretty honest when things didn't go well. They have been diligent about fixing problems and avoided the mutual fund scandals.

I have actually thought about moving funds to Vanguard. I compared performance fund by fund and figured I wasn't missing out on much. Their One Choice funds have actually performed pretty well. I have been satisfied enough to stay with them.
Your comments about American Century underperforming Vanguard by 1/10 of a percentage point per year confirms the comparisons I made. They underperformed DFA by 5/10 of a percentage point a year but is this after the advisor fees? With a 1% fee, which is what Merriman charges then they would trail by 1/2 a percent!! If not, then Vanguard should be noted for indexing less well than DFA. So by keeping a portion of my funds at AC, I have not missed much.

As investors, we should not invest with people because they are nice or they do good things. Performance matters. I stayed because I was satisfied with the performance of my holdings there. They certainly have their clunkers, but every company does. Their earnings and price momentum funds do great in some environments and not so good in others.

Of course, they aren't going to write a paper extolling the virtues of indexing and telling their investors to heck with it, we are closing up shop. They aren't going to send their customers to DFA and Vanguard.

I have noticed many of the same things from experience that you have commented on in posted threads on this forum. That is why I am indexing more and more of my portfolio and have done the small and value tilts in my portfolio. So I have been paying attention.

I respect you deeply and i appreciate the time you spend to answer questions on the forum. I have learned a whole lot from your posts. Thanks again.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2587
Joined: Fri Nov 23, 2012 1:33 pm

Re: exposing the lies about active management

Postby Ged » Tue Jul 02, 2013 11:22 pm

nisiprius wrote:Image


The range on the horizontal axis seems to be saying that this concept is nonsense.
What do we want? Evidence driven change. | When do we want it? After peer review.
User avatar
Ged
 
Posts: 2095
Joined: Mon May 13, 2013 2:48 pm
Location: Roke

Re: exposing the lies about active management

Postby Call_Me_Op » Wed Jul 03, 2013 7:13 am

Ged wrote:
nisiprius wrote:Image


The range on the horizontal axis seems to be saying that this concept is nonsense.


And the vertical axis!
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4823
Joined: Mon Sep 07, 2009 3:57 pm
Location: Milky Way

Re: exposing the lies about active management

Postby jb1934 » Wed Jul 03, 2013 11:56 am

I get it. The problem is people listen to the noise. Madison Avenue,Wall Street,Insurance industry et al. know
this and act accordingly. Capitalsim. So we have a cesspool of fund companies selling
all types of products and promises.
But....I am still drawn to Wellesley Income. It does so well.
Wellesley Income (vwinx-vwiax)consistently beats it's indexes on growth of $ on M* charts.
I hedge my bets with Retirement Income(vtinx).
jb1934
 
Posts: 128
Joined: Mon Jan 18, 2010 10:39 am

Re: exposing the lies about active management

Postby nedsaid » Wed Jul 03, 2013 9:00 pm

I wanted to apologize to Larry Swedroe a bit. My intent wasn't to be a smart alec.

My point was that an advisor using index funds and using stategies to capture market premiums might beat the market before fees and trail the market after fees. I thought the comparison between American Century and Dimensional wasn't quite fair. We all have to eat. To a degree, any investment advisor has the same expense drag issue that a fund company has.

Larry wrote a good article that took apart an American Century white paper on the advantages of active management. He made his points effectively. I thought the tone to be a bit harsh.

I am aware of the advantages of indexing and index more and more of my portfolio as I get older. I also keep on eye on management fees and keep those as low as I can. Just haven't done the full Boglehead.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2587
Joined: Fri Nov 23, 2012 1:33 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: BigTom, Kircheis, lapuce, LongerPrimer, malloc, SnowSkier and 25 guests