on keeping a tranche of active mgmt in Roth

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raggedclaws
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on keeping a tranche of active mgmt in Roth

Post by raggedclaws » Fri Dec 08, 2017 1:20 pm

My inner contrarian has been asserting itself as I read stats and projections about indexing swallowing up the investing universe. Not out of concern that passive is imminently or inevitably destabilizing, but simply that over my investing lifetime (I'm 37 now) opportunities might reasonably be expected to increase for active managers to outperform, and by more. So, I have this urge to use my Roth space to hold a few actively-managed core equity funds, which would make my domestic equity allocation 15-20% active. I don't need that Roth space for my bonds, because my whole bond allocation fits in my TSP (G fund). My taxable accounts are all in broad market indexes.

Any bogleheads admit to similar thinking these days on an intentional active hedge or tilt (as opposed to a legacy holding with to much tax liability to sell)? If so, which still-open funds are you in? I've been thinking about selling out of Vanguard REIT (VNQ) and plowing that cash into Primecap Odyssey Stock (POSKX). My other Roth money is currently in T Rowe Price Blue Chip Growth (TRBCX), which has done beautifully over the 5 years I've owned it -- but I'm currently more interested in blend funds so I'm not tempted to worry about whether it's growth or value time.

Suggestions? Remonstrations? I feel like Tyler Durden getting repeatedly punched in the face with the simplicity of the three-fund solution, but still just not quite getting it...

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TheTimeLord
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Re: on keeping a tranche of active mgmt in Roth

Post by TheTimeLord » Fri Dec 08, 2017 1:22 pm

raggedclaws wrote:
Fri Dec 08, 2017 1:20 pm
I love the word "tranche", kudos for using it.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

bogglehead125
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Re: on keeping a tranche of active mgmt in Roth

Post by bogglehead125 » Fri Dec 08, 2017 1:58 pm

I like primecap and have a fair amount of VPMCX in roth & taxable. I am more enthusiastic about low-cost active equity than the average boglehead, which is not saying very much.

John Laurens
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Re: on keeping a tranche of active mgmt in Roth

Post by John Laurens » Fri Dec 08, 2017 2:16 pm

I think you are not being unreasonable. Personally, I know behaviorally I would not be able to stay the course if I was paying someone 10-30 times the index ER if they underperformed potentially many years in a row.

Regards,
John

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greg24
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Re: on keeping a tranche of active mgmt in Roth

Post by greg24 » Fri Dec 08, 2017 2:36 pm

If you focus on low-cost, low-turnover active funds, you should be fine.

POSKX at 0.69% expense ratio is pushing it on cost.

dbr
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Re: on keeping a tranche of active mgmt in Roth

Post by dbr » Fri Dec 08, 2017 2:44 pm

No, I would not have any inclination to do that, especially not a "few" funds. How much fund picking are you planning on doing?

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TomatoTomahto
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Re: on keeping a tranche of active mgmt in Roth

Post by TomatoTomahto » Fri Dec 08, 2017 2:56 pm

Our Roths are 100% PRIMECAP. There’s only $6500 per year allowed, so why share the room?

jalbert
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Re: on keeping a tranche of active mgmt in Roth

Post by jalbert » Fri Dec 08, 2017 3:37 pm

Why pay the higher expenses of active management with Roth space dollars?

Why risk negative tracking error in valuable Roth space?
Risk is not a guarantor of return.

crumbone
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Re: on keeping a tranche of active mgmt in Roth

Post by crumbone » Fri Dec 08, 2017 3:48 pm

I'll set aside the question of whether it's ever worthwhile to invest in an active fund (and the myriad behavioral pitfalls this subjects you to on the part of both the investor and the fund manager.)

Assuming "active management" is a factor that you'd like exposure to and recognizing– I hope– that you have no idea which active strategy will perform well, you'd like to diversify away your manager risk by investing in as many funds as possible. In other words, you'd want to hold all of your actively-managed funds in one passively-managed index fund.

This is making my head hurt.

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Watty
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Re: on keeping a tranche of active mgmt in Roth

Post by Watty » Fri Dec 08, 2017 4:00 pm

raggedclaws wrote:
Fri Dec 08, 2017 1:20 pm
I have this urge to use my Roth space to hold a few actively-managed core equity funds, which would make my domestic equity allocation 15-20% active.
What are your expectations if you do this?

An active fund manager would be in the investing hall of fame if they could beat a comparable index fund by 1% after expenses over the long term.

With a 20% in actively managed funds that extra 1% would boost your investment returns of your entire portfolio by 0.2%.

With compounding that could add up over the years but the odds of you picking an active mutual fund that actually does that are very slim.

There is always a chance that you could pick some fund that just by random chance hits a short term grand slam for a few years but the odds on that are also slim.

What is your best case scenario? Is that realistic?

randomguy
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Re: on keeping a tranche of active mgmt in Roth

Post by randomguy » Fri Dec 08, 2017 4:21 pm

Watty wrote:
Fri Dec 08, 2017 4:00 pm
raggedclaws wrote:
Fri Dec 08, 2017 1:20 pm
I have this urge to use my Roth space to hold a few actively-managed core equity funds, which would make my domestic equity allocation 15-20% active.
What are your expectations if you do this?

An active fund manager would be in the investing hall of fame if they could beat a comparable index fund by 1% after expenses over the long term.

With a 20% in actively managed funds that extra 1% would boost your investment returns of your entire portfolio by 0.2%.

With compounding that could add up over the years but the odds of you picking an active mutual fund that actually does that are very slim.

There is always a chance that you could pick some fund that just by random chance hits a short term grand slam for a few years but the odds on that are also slim.

What is your best case scenario? Is that realistic?


Yep. One of the core reasons to index is that your chance of picking the right fund guy is incredibly low. I will admit to making sector bets at times in a prior life:)

ResearchMed
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Re: on keeping a tranche of active mgmt in Roth

Post by ResearchMed » Fri Dec 08, 2017 4:33 pm

raggedclaws wrote:
Fri Dec 08, 2017 1:20 pm
My inner contrarian has been asserting itself as I read stats and projections about indexing swallowing up the investing universe. Not out of concern that passive is imminently or inevitably destabilizing, but simply that over my investing lifetime (I'm 37 now) opportunities might reasonably be expected to increase for active managers to outperform, and by more. So, I have this urge to use my Roth space to hold a few actively-managed core equity funds, which would make my domestic equity allocation 15-20% active. I don't need that Roth space for my bonds, because my whole bond allocation fits in my TSP (G fund). My taxable accounts are all in broad market indexes.

Any bogleheads admit to similar thinking these days on an intentional active hedge or tilt (as opposed to a legacy holding with to much tax liability to sell)? If so, which still-open funds are you in? I've been thinking about selling out of Vanguard REIT (VNQ) and plowing that cash into Primecap Odyssey Stock (POSKX). My other Roth money is currently in T Rowe Price Blue Chip Growth (TRBCX), which has done beautifully over the 5 years I've owned it -- but I'm currently more interested in blend funds so I'm not tempted to worry about whether it's growth or value time.

Suggestions? Remonstrations? I feel like Tyler Durden getting repeatedly punched in the face with the simplicity of the three-fund solution, but still just not quite getting it...
I think you've tossed a red herring at us, after first batting it away when it came flying at you. :wink:

Whether this is in a Roth, or called a tranche :twisted: - the underlying question really seems to be only, do you/should you own some assets as active funds.

Many/most here on BH will be very opposed to this, but others do have some favorite active funds.

For those people, PRIMECAP does seem to be relatively popular. We have some, as PRIMECAP funds; the Vanguard versions were closed.
There are a few others we have; we slice and dice, so that means more funds in general. It works for us.
Some are Vanguard active funds, and a few are from other outside fund families.
All of them are in tax-deferred accounts.

What percent of your portfolio overall were you considering, in total, to active, and is that what you are already at if you include the REIT investments?

RM
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raggedclaws
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Re: on keeping a tranche of active mgmt in Roth

Post by raggedclaws » Fri Dec 08, 2017 8:20 pm

jalbert wrote:
Fri Dec 08, 2017 3:37 pm
Why pay the higher expenses of active management with Roth space dollars?

Why risk negative tracking error in valuable Roth space?
By holding active funds in a Roth, I give their returns a tailwind compared to what they would be on the taxable side, and I can also strike "low turnover" as a criterion for an otherwise good manager/strategy. Another big reason is that I'll feel freer to switch funds for any halfway-decent reason in the future, like if there is a manager change I don't like or the ER rises or a more attractive fund appears on the horizon, or i just simply get older and wiser...no reluctance to sell a fund solely out of desire to avert the tax hit.

But I see -- the assumption underlying your comment is that one would want to put the highest-returning assets in the Roth, as opposed to the most tax inefficient, i.e. bonds. To which I'd say...the hope is that the active funds in fact ARE the highest returning assets, as well as being a little tax inefficient.

raggedclaws
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Re: on keeping a tranche of active mgmt in Roth

Post by raggedclaws » Fri Dec 08, 2017 8:26 pm

greg24 wrote:
Fri Dec 08, 2017 2:36 pm
If you focus on low-cost, low-turnover active funds, you should be fine.

POSKX at 0.69% expense ratio is pushing it on cost.
Yeah I agree, borderline. But seems like the best Vanguard active funds (with ERs ~50% lower) are all closed, and what other investment houses with outstanding reputations have open funds in this category at an ER lower than the .60s?

raggedclaws
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Re: on keeping a tranche of active mgmt in Roth

Post by raggedclaws » Fri Dec 08, 2017 8:56 pm

ResearchMed wrote:
Fri Dec 08, 2017 4:33 pm


What percent of your portfolio overall were you considering, in total, to active, and is that what you are already at if you include the REIT investments?

RM
I was thinking that 20% active would be the max on the domestic stock side. I'm not quite there yet and may never get there if I limit active holdings to Roth space. If I filled up my Roth with active US funds, my domestic stock portfolio would be 15% active. The REIT is my only Roth holding that isn't actively managed, but it's currently 30% of my Roth.

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aj76er
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Re: on keeping a tranche of active mgmt in Roth

Post by aj76er » Fri Dec 08, 2017 9:23 pm

You could look into Wellington/Wellesley which both have very good track records.

I only hold a single active fund, ANWPX; it was gifted to me as a child (~30yrs ago) and I simply never sold it. It is a global growth fund. When it was introduced, it was ahead of it's time (much, much earlier than Vanguard's total world). I now hold it as an ongoing experiment in compounding :). It comprises <1.5% of my investible assets. In another 30yrs, if I continue holding, I project that it may climb to 5% or so of my IA simply because it will be compounding faster than my index funds (which I didn't start buying until 15yrs ago after starting full time employment).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Ron Scott
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Re: on keeping a tranche of active mgmt in Roth

Post by Ron Scott » Fri Dec 08, 2017 9:39 pm

I think the bogleheads have a pretty good "story" to tell about their investing strategy and I believe its in your own best interest to develop one for yourself.

If you believe there's a better strategy than owning the market you are, by definition, predicting that you can take money away from other investors who deviate from the bogleheads in the other direction. You can't take money from the bogleheads since they will ALWAYS get the market return.

Your story should include a description of the other investment strategy you are beating.

Who is that?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

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