What do active managers do differently?

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michaeljmroger
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What do active managers do differently?

Post by michaeljmroger » Thu May 30, 2019 12:48 pm

Has anyone ever analyzed a portfolio managed by an active manager at Merrill Lynch, Goldman Sachs, etc? I'm wondering what is it that they do that's so conceptually different from our beloved three-fund portfolio (aside from the higher fees, obviously).

Also, I realize this question might be controversial given the nature of this forum but, could it actually be wise for high-net worth individuals to delegate a small part of their portfolio to active managers in order to diversify their investment strategies? I don't know if it's a useful form of diversification though.

renue74
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Re: What do active managers do differently?

Post by renue74 » Thu May 30, 2019 12:50 pm

What do they do differently? They take your money...and come into the office everyday to stock pick.

crossbow
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Re: What do active managers do differently?

Post by crossbow » Thu May 30, 2019 12:53 pm

I've always wondered what their performance KPI is. Statistically they can't all be beating the market.

bloom2708
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Re: What do active managers do differently?

Post by bloom2708 » Thu May 30, 2019 12:57 pm

An active manager would use "proprietary" and "personal" methods for selecting the stocks and quantities of each stock in their funds.

Assume there are only 10 stocks. Each has a market cap. (# of shares x share price). Line them up in market cap order, that is the total market index.

8
4
10
1
2
5
6
7
3
9

The active manager can say, no to 7 and 3. Buy 3 times as much #1. Buy more #4 than #8. Act on information, gut feelings, personal favorites, etc.

Each day there is trading and the market caps change. The total market/index based has specific rules to follow. There is no room for adjustment (in the easiest sense). Indexes do adjust/change over time.

All the funds are buying the same 10 stocks. Of course, they usually charge more for this active management.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

Jack FFR1846
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Re: What do active managers do differently?

Post by Jack FFR1846 » Thu May 30, 2019 1:03 pm

Diversification of strategy is meaningless.

Strategy #1: 3 fund portfolio
Strategy #2: Say a fund. If my dog barks, buy it.
Strategy #3: Only buy funds whose top company begins with the letter M, W or X.

I'll stay concentrated in strategy #1. Others may want to diversify into the other strategies.
Bogle: Smart Beta is stupid

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Wiggums
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Re: What do active managers do differently?

Post by Wiggums » Thu May 30, 2019 1:04 pm

More evidence that it’s really hard to ‘beat the market’ over time, 95% of finance professionals can’t do it...

http://www.aei.org/publication/more-evi ... ant-do-it/

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Phineas J. Whoopee
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Re: What do active managers do differently?

Post by Phineas J. Whoopee » Thu May 30, 2019 1:11 pm

They spend a lot more.

To put it another way, and I did not make this up personally it's a common aphorism, you put up all the capital, you bear all the risk, and they take a significant portion of your return.

It is not possible for the market as a whole to beat the market as a whole.

PJW

lkar
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Re: What do active managers do differently?

Post by lkar » Thu May 30, 2019 1:27 pm

I've posted elsewhere about moving an inherited managed account to a self directed three fund concept. In the last couple of weeks since I made that decision I've been reading boglehead philosophy and trying to work backwards to see if I could understand what actually was happening in that account, mostly out of curiosity.

In the end I think the advisor actually did a decent job and I don't really feel like it was too wacky or even similar to some of the other posts I see here about management fees and stuff at certain places. We never really talked about strategy because I wasn't educated enough to understand but I'm now kind of reverse engineering it to see what it was about. It consisted of a core of 8 to 10 very low cost ETFs. The general asset allocation was right where I would have wanted to be, fluctuating between 75/25 and 70/30. It was a little bit international heavy.

The management seemed to consist mostly of tweaking of overall asset allocation and significant tinkering with the international components. The allocation between international bonds and all-US fluctuated on a nearly weekly basis. The other major tinkering was going back and forth between total market international stock and more small cap focused stock, though this was all done in a very narrow portion of the overall allocation, rarely more than 5 to 7 percent. Also, the portfolio seems to have fluctuated a bit between total market for US stock and at other times controlling the mix to be more mid-cap heavy with use of very low cost (like .03%) Schwab ETFs.

As I said, the ETFs were very low cost. And it does not appear that I was charged trading commissions for the sales and trades. The fees look to be about 1.25 percent. I don't know what the algorithms they were using were. There was a method to the madness and I think it was done by bot. The truth is that for the two years the money was there, the tweaks to the international stuff seem to have been beneficial to me and to have been a little bit better than return in total market international would have been by a small amount. I'm trying to figure out whether the international bond component worked out any better for me than BND would have, and it's hard to tell. As compared to the target date fund in my 401k which has a very very similar AA (76/24), the managed fund did a few basis points better even after the fees. But it's a very small sample size and obviously, I've made the decision that this is unlikely to be replicated and so I'm taking the money and moving out and going to set and forget.

But it was interesting to try to figure out the methods, and I think I could have done an awful lot worse.

bloom2708
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Re: What do active managers do differently?

Post by bloom2708 » Thu May 30, 2019 1:44 pm

lkar wrote:
Thu May 30, 2019 1:27 pm
I've posted elsewhere about moving an inherited managed account to a self directed three fund concept. In the last couple of weeks since I made that decision I've been reading boglehead philosophy and trying to work backwards to see if I could understand what actually was happening in that account, mostly out of curiosity.

In the end I think the advisor actually did a decent job and I don't really feel like it was too wacky or even similar to some of the other posts I see here about management fees and stuff at certain places. We never really talked about strategy because I wasn't educated enough to understand but I'm now kind of reverse engineering it to see what it was about. It consisted of a core of 8 to 10 very low cost ETFs. The general asset allocation was right where I would have wanted to be, fluctuating between 75/25 and 70/30. It was a little bit international heavy.

The management seemed to consist mostly of tweaking of overall asset allocation and significant tinkering with the international components. The allocation between international bonds and all-US fluctuated on a nearly weekly basis. The other major tinkering was going back and forth between total market international stock and more small cap focused stock, though this was all done in a very narrow portion of the overall allocation, rarely more than 5 to 7 percent. Also, the portfolio seems to have fluctuated a bit between total market for US stock and at other times controlling the mix to be more mid-cap heavy with use of very low cost (like .03%) Schwab ETFs.

As I said, the ETFs were very low cost. And it does not appear that I was charged trading commissions for the sales and trades. The fees look to be about 1.25 percent. I don't know what the algorithms they were using were. There was a method to the madness and I think it was done by bot. The truth is that for the two years the money was there, the tweaks to the international stuff seem to have been beneficial to me and to have been a little bit better than return in total market international would have been by a small amount. I'm trying to figure out whether the international bond component worked out any better for me than BND would have, and it's hard to tell. As compared to the target date fund in my 401k which has a very very similar AA (76/24), the managed fund did a few basis points better even after the fees. But it's a very small sample size and obviously, I've made the decision that this is unlikely to be replicated and so I'm taking the money and moving out and going to set and forget.

But it was interesting to try to figure out the methods, and I think I could have done an awful lot worse.
Ikar,

Have you played with a tool like this to see the effect of "just 1.25%" over 30 or 40 years?

https://www.dinkytown.net/java/compare- ... -fees.html

Use .1%, .75% and 1.25% as the fees. Use your actual numbers and some reasonable return number.

Our cost at Vanguard all up is .06%. The difference in fees every year adds up.

Something to consider beyond the overly complex (buying funds that overlap and essentially contain the same things over and over).
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

crossbow
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Re: What do active managers do differently?

Post by crossbow » Thu May 30, 2019 2:02 pm

lkar wrote:
Thu May 30, 2019 1:27 pm
The allocation between international bonds and all-US fluctuated on a nearly weekly basis. The other major tinkering was going back and forth between total market international stock and more small cap focused stock, though this was all done in a very narrow portion of the overall allocation, rarely more than 5 to 7 percent.
lkar, mathematically, tinkering with a small % of the portfolio will (in most cases) not make much of a difference. To my mind, your advisor was simply putting on a show.

You could replicate this with 95% of your portfolio in the 3-fund strategy and assign the remaining 5% to individual stocks as you please. Your portfolio results will (most likely) be similar to a 100% equally weighted 3-fund portfolio.
Last edited by crossbow on Thu May 30, 2019 2:09 pm, edited 1 time in total.

esteen
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Re: What do active managers do differently?

Post by esteen » Thu May 30, 2019 2:08 pm

Jack FFR1846 wrote:
Thu May 30, 2019 1:03 pm
Diversification of strategy is meaningless.
While I don't disagree, have there been studies testing the effects of diversifying management strategies? It'd be nice to back up those sentiments with some data.

lkar
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Re: What do active managers do differently?

Post by lkar » Thu May 30, 2019 2:25 pm

bloom2708 wrote:
Thu May 30, 2019 1:44 pm
Ikar,

Have you played with a tool like this to see the effect of "just 1.25%" over 30 or 40 years?

https://www.dinkytown.net/java/compare- ... -fees.html

Use .1%, .75% and 1.25% as the fees. Use your actual numbers and some reasonable return number.

Our cost at Vanguard all up is .06%. The difference in fees every year adds up.

Something to consider beyond the overly complex (buying funds that overlap and essentially contain the same things over and over).
You're singing to the choir. This is why I am moving the money and I'm going to a three fund portfolio.

That said, return is return. And the truth is that over the two years since I inherited the managed account it outperformed my vanguard 2035 target date fund in my 401k by a few basis points even including the fees and at a very similar asset allocation.

Again, to be very clear, I am not promoting managers. I fear my post may be taken that way. I am putting my money where my mouth is and moving the money to my own self-managed account where I will buy low cost funds. Obviously, I do not think the performance would continue. I think it is very likely the manager just got lucky. Or, I guess more accurately, I did. But I was responding to the post asking what they do.

lkar
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Re: What do active managers do differently?

Post by lkar » Thu May 30, 2019 2:33 pm

crossbow wrote:
Thu May 30, 2019 2:02 pm
lkar wrote:
Thu May 30, 2019 1:27 pm
The allocation between international bonds and all-US fluctuated on a nearly weekly basis. The other major tinkering was going back and forth between total market international stock and more small cap focused stock, though this was all done in a very narrow portion of the overall allocation, rarely more than 5 to 7 percent.
lkar, mathematically, tinkering with a small % of the portfolio will (in most cases) not make much of a difference. To my mind, your advisor was simply putting on a show.

You could replicate this with 95% of your portfolio in the 3-fund strategy and assign the remaining 5% to individual stocks as you please. Your portfolio results will (most likely) be similar to a 100% equally weighted 3-fund portfolio.
I didn't draft my post very well. The most significant tinkering seems to have been moving in and out of total market to add heavier concentration in largecap and midcap at times. The US stock component of the portfolio was 40-50 percent depending on the timing of the international in and outs. If I had to isolate exactly what happened to increase my returns over the last year or so above what I would have done with a three-fund portfolio I think it was that my managed account spent a bit more time in SCHX than total market and seems to have been lucky with timing. So I got a tiny premium, though at the cost of a little more risk and less diversification. As I said in the post above, I got a little lucky that the fees didn't beat me.

lkar
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Re: What do active managers do differently?

Post by lkar » Thu May 30, 2019 2:41 pm

Ok, third post in a row for me. Reading back on those last two posts I wish I really had never weighed in here. It is not my intention to become the manager defender. I was just ruminating about my experience. There is no "therefore" there. I'm not advocating it. I was trying to add a little more color than "advisors stink" but maybe I just should have left it at that. I won't edit my posts because, well, I posted them and they are true. It is what it is. But for the record: Low-cost three-fund portfolio is what I'm choosing to do and what I think makes the most sense.

Topic Author
michaeljmroger
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Re: What do active managers do differently?

Post by michaeljmroger » Thu May 30, 2019 3:42 pm

lkar wrote:
Thu May 30, 2019 2:41 pm
Reading back on those last two posts I wish I really had never weighed in here.
I'm actually grateful you did! It's very useful to hear some experience from "the other side". As much as I use and love the Bogleheads philosophy, I'm sometimes worried about limiting my views and cargo-cult the three-fund portfolio as the only appropriate investment strategy. As you get older, you learn there's a grey zone between pure black and pure white :wink:

Fallible
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Re: What do active managers do differently?

Post by Fallible » Thu May 30, 2019 4:18 pm

Here's a nice, straightforward comparison of active and passive management from Investopedia (link below):
KEY TAKEAWAYS
Active management is when managers actively pick investments in an effort to outperform some benchmark, usually a market index.
Passive management is when a fund manager attempts to mimic some benchmark, replicating its holdings and, hopefully, performance.
Active management funds tend to have high fees, and recent research has called into question their ability to outperform the market with any consistency.
https://www.investopedia.com/ask/answer ... gement.asp

For some detailed descriptions of what active managers are up against, read Charles Ellis's classic book, Winning the Loser's Game.
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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Elric
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Re: What do active managers do differently?

Post by Elric » Thu May 30, 2019 4:57 pm

michaeljmroger wrote:
Thu May 30, 2019 3:42 pm
lkar wrote:
Thu May 30, 2019 2:41 pm
Reading back on those last two posts I wish I really had never weighed in here.
I'm actually grateful you did! It's very useful to hear some experience from "the other side". As much as I use and love the Bogleheads philosophy, I'm sometimes worried about limiting my views and cargo-cult the three-fund portfolio as the only appropriate investment strategy. As you get older, you learn there's a grey zone between pure black and pure white :wink:
+1 and thanks for posting. I see too many posts on this forum that state or imply that ALL AUM advisers are dishonest crooks. I've bought into the Boglehead view that most don't need an adviser, that costs are a drain, and that most advisers' performance doesn't overcome their cost. I accept those as facts. That doesn't mean that some people might not benefit (certainly there are many on the board accepting the low fee Vanguard PAS as useful to some) nor does it mean that all are crooks. They ARE expensive for the services provided. But so are many restaurants. That may make them poor value, but not crooks.
"No man is free who works for a living." | Illya Kuryakin

esteen
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Re: What do active managers do differently?

Post by esteen » Thu May 30, 2019 5:19 pm

Elric wrote:
Thu May 30, 2019 4:57 pm
michaeljmroger wrote:
Thu May 30, 2019 3:42 pm
lkar wrote:
Thu May 30, 2019 2:41 pm
Reading back on those last two posts I wish I really had never weighed in here.
I'm actually grateful you did! It's very useful to hear some experience from "the other side". As much as I use and love the Bogleheads philosophy, I'm sometimes worried about limiting my views and cargo-cult the three-fund portfolio as the only appropriate investment strategy. As you get older, you learn there's a grey zone between pure black and pure white :wink:
+1 and thanks for posting. I see too many posts on this forum that state or imply that ALL AUM advisers are dishonest crooks. I've bought into the Boglehead view that most don't need an adviser, that costs are a drain, and that most advisers' performance doesn't overcome their cost. I accept those as facts. That doesn't mean that some people might not benefit (certainly there are many on the board accepting the low fee Vanguard PAS as useful to some) nor does it mean that all are crooks. They ARE expensive for the services provided. But so are many restaurants. That may make them poor value, but not crooks.
+2. Great post Elric. There can be times in a person's life where they may be too ignorant to invest well at all, and while ultimately the best course is to get them interested/educated enough to handle their own money there may be a time where a too-expensive advisor is better for them than keeping everything in a savings account or spending it all on penny stocks. That said, best to see the light and move to lower costs :sharebeer

EDIT: by ignorant I do not mean dumb - I mean lacking the requisite knowledge/experience at that point in time.

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