Tycoon wrote: Okay BackInTheBlack, you have made your point and got my attention. Which actively managed funds are going to outperform their respective indexes?
Alright, I'll give it a shot:
Over the next decade, so 10 years from today, I expect the following stock funds to beat their respective benchmarks/categories:
DODFX: Dodge & Cox International Stock ------------ benchmark: ACWX (iShares MSCI ACWI ex US Index)
FLPKX: Fidelity Low-Priced Stock K-shares ------------ benchmark: VMVAX (Vanguard Mid-Cap Value Index admiral shares)
MPGFX: Mairs & Power Growth -------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
OTCFX: T. Rowe Price Small-Cap Stock --------------- benchmark: VSGAX (Vanguard Small Cap Growth Index admiral)
PRDGX: T. Rowe Price Dividend Growth --------------- benchmark: VIG (Vanguard Dividend Appreciation Index ETF)
PRFDX: T. Rowe Price Equity Income --------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
RPMGX: T. Rowe Price Mid-Cap Growth -------------- benchmark: VMGMX (Vanguard Mid-Cap Growth Index admiral)
SEQUX: Sequoia ------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
TRBCX: T. Rowe Price Blue Chip Growth -------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
TRMCX: T. Rowe Price Mid-Cap Value -------------- benchmark: VMVAX (Vanguard Mid-Cap Value Index admiral shares)
VDIGX: Vanguard Dividend Growth -------------- benchmark: VIG (Vanguard Dividend Appreciation Index ETF)
VPMAX: Vanguard Primecap Admiral shares -------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
VWNAX: Vanguard Windsor II Admiral shares --------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
VHCAX: Vanguard Capital Opportunity Admiral shares --------------- benchmark: 90% VLCAX/10% VEUSX (Vanguard Large Cap/European Index admiral)
VGELX: Vanguard Energy Admiral shares --------------- benchmark: VENAX (Vanguard Energy Index admiral)
VEIRX: Vanguard Equity-Income Admiral shares ------------- benchmark: VLCAX (Vanguard Large Cap Index admiral)
VEVFX: Vanguard Explorer Value ------------- benchmark: VSMAX (Vanguard Small Cap admiral)
As for balanced funds:
BERIX: Berwyn Income --------------- benchmark: VSMGX (Vanguard LifeStrategy Moderate Growth Investor shares; this is a best-fit index fund-of-funds)
DODBX: Dodge & Cox Balanced ----------------- benchmark: 55% VLCAX / 15% EFA /30% VBTLX
OAKBX: Oakmark Equity & Income ----------------- 65% VLCAX / 10% EFA / 25% VBLTX
PRSIX: T. Rowe Price Personal Strategy Income ---------------- 28% VLCAX / 14% EFA / 40% VBLTX / 18% VUSXX
PRWCX: T. Rowe Price Capital Appreciation ---------------- 56% VLCAX/ 5% EFA / 28% VBLTX / 11% VUSXX
RPBAX: T. Rowe Price Balanced ---------------- 45% VLCAX / 20% EFA / 35% VBLTX
VWENX* : Vanguard Wellington Admiral shares ------------------ 55% VLCAX / 10% EFA / 35% VBLTX
*Wellington is a great fund in most respects, but the duration of their bond portfolio is a bit worrisome (not to mention asset bloat). Still, over a 10-year time period I expect that to be a minor speed-bump.
**I used the best index proxies available through iShares and Vanguard, always choosing the lowest-cost option, either in ETF or Admiral share fund form (except for Vanguard LifeStrategy Moderate Growth fund which is only offered in investor shares).
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While some of the above don't meet every single one of my standard criteria, the ones that don't, make up for that in other ways and thus deserve to be on the list. Cost was the #1 most important factor (I selected admiral shares, etc. where possible as well), persistent risk-adjusted outperformance was important, portfolio turnover was significant, fund family history/reputation was a factor, and manager tenure was important but not as crucial as the other screening factors.
Let's check back on this thread after 10 year shall we? Considering the broad array of funds I listed, I feel that a score of 70%+ would help to refute the notion that choosing outperforming active funds is mere anomaly. Certainly, compared to the low probabilities of outperformance unanimously ascribed to active fund strategies, a success rate of 7/10 would be statistically significant and potentially very meaningful to investors in general.
*edited to add: Active funds should be held in tax-deferred/exempt accounts, generally speaking, to achieve a decent chance at outperformance. Also, I chose to omit bond funds, because that bond markets are more difficult to index, and might be give the results of my active list an artificial bump, which, while potentially good for my argument, is not good for an objective statistical analysis down the road. I am trying to prove here that one doesn't need to use gimmicks or rig the game to beat benchmarks.
Why, you may ask, would 7/10 funds in a portfolio outperforming their benchmarks by seemingly trivial amounts matter? I'll show you why:
Say your 7 winners outperform by an average of 1.5%, and your losers underperform by the same amount: that averages out to an overall portfolio outperformance of 0.6% annually. To illustrate the effects, let's compare a $100,000 investment in the active portfolio to its benchmark(s). Let's assume that the benchmark returns 10.0% over a 35-year time horizon, or a typical (equity) investing lifetime, whereas the active portfolio averages a 10.6% annual return. At the end of the time period, the (costless) benchmark would produce an ending amount of $2,810,244 (rounded), while the active strategy produces an ending portfolio amount of $3,399,613, or a total difference of $589,369 or 20.97%. IF an investor could reasonably hope to achieve such a seemingly miniscule advantage in annual return, obviously the rewards are potentially huge. The simple effect of compounding is why persistent alpha remains so alluring, and why the potential merits of active management are worth reviewing from all possible angles, again and again.