The case for managed vs passive index equity funds now?

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Topic Author
mikeshep
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The case for managed vs passive index equity funds now?

Post by mikeshep » Mon Mar 16, 2020 6:34 pm

Hi, volatile markets - maybe the biggest ever have brought me back here after quite a long hiatus: ) Hope all are doing very well.

I asked this on the M* boards today and then thought, where better to raise the same question than over here. My PF is around 1.7M in value at the moment. Down from all time peak of 2.01m just 1 Month ago. I've had a 40% equity, moderate-conservative PF since 2010. I'm down abt. 16.5% YTD (344k) as of COB today. My equity is primarily in index funds: Domestic: VYM, SCHX, SCHV, SCHD (LC) JPME (mid), FNDA,(SC)

A friend of mine raised a compelling point that IF you use index funds for Equity positions, are you not, by their nature, exposed to the WORST performing, most vulernable stocks -- AS WELL AS the LEAST impacted sectors -- in a downturn like this? That, as opposed to
a MANAGED equity fund for this exposure and the chance for mitigating some losses. Kinda made sense when I thought about it today. What am I missing?

If so, albeit a bit 'late' - what would be some/any good managed options to consider for the same coverage the funds such as those I mention above provide? If it's justifiable to make a lateral move into such managed positions, I'd certainly consider it.

Thanks!

Mike In Mich

BigJohn
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Re: The case for managed vs passive index equity funds now?

Post by BigJohn » Mon Mar 16, 2020 6:50 pm

The problem with your friends point is that the manager has to have the secret sauce to know which sectors are worst/best in advance. Some will get it right and some won’t, you will not know which you bought until it’s too late to change. What is certain whether they win or lose is that you will pay higher fees which means they have to outperform the index just to break even.

ososnilknarf
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Re: The case for managed vs passive index equity funds now?

Post by ososnilknarf » Mon Mar 16, 2020 6:56 pm

The exact same argument can be made for doing worse than the index. The managed fund may have more worse performing equities too. And evidence has shown that the vast majority of actively managed funds do perform worse than their comparative indexes.
Actively managed has the potential to deviate from the index. Which direction though? Usually worse.

theorist
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Re: The case for managed vs passive index equity funds now?

Post by theorist » Mon Mar 16, 2020 6:58 pm

You may want to read this short article:

https://www.morningstar.com/articles/85 ... a-downturn

TL;DR some research suggests this can be true, but its hard to pick the right active funds, and the advantage is lost through underperformance in more common up markets

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nisiprius
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Re: The case for managed vs passive index equity funds now?

Post by nisiprius » Mon Mar 16, 2020 7:02 pm

"What am I missing?"

What you are missing is that stock-picking is hard, and that it is as hard to pick the bad ones as it is pick the good ones.

You can argue it ten ways from Sunday but the hard fact in e.g. the SPIVA reports is that over the last 15 years, in large-cap funds--other categories too but that's the one I can remember--89% of actively managed funds failed to beat the S&P 500. If it were as easy as throwing out the worst stocks, then underperformance should be common.
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.

onourway
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Re: The case for managed vs passive index equity funds now?

Post by onourway » Mon Mar 16, 2020 7:05 pm

In an uncertain time like this, I much prefer owning the entire market to owning individual companies, or having a fund manager make bets on individual companies for me. I am certain the world economy will recover from this. Many individual companies will not, and I don’t want the stress of having to know in advance which companies will fall on either side of that line. Owning the entire market allows me to be relatively indifferent as to what happens.

delamer
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Re: The case for managed vs passive index equity funds now?

Post by delamer » Mon Mar 16, 2020 7:42 pm

BigJohn wrote:
Mon Mar 16, 2020 6:50 pm
The problem with your friends point is that the manager has to have the secret sauce to know which sectors are worst/best in advance. Some will get it right and some won’t, you will not know which you bought until it’s too late to change. What is certain whether they win or lose is that you will pay higher fees which means they have to outperform the index just to break even.
And if the secret sauce did belong to a particular manager, then you should invest with that manager in good and bad times.

Topic Author
mikeshep
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Re: The case for managed vs passive index equity funds now?

Post by mikeshep » Mon Mar 16, 2020 8:29 pm

Ok, I hear ya, and not advocating anything either way. Glad that I asked because you hit on some aspects that readily didn't come to mind.
Someone on M* raised the example of, VEIPX vs. VYM - VYM being my second biggest stock equity holdings. On just a preliminary look, I'm
kind of intrigued with the managed fund VEIPX in this case. Still need to really compare these to see what pros/cons might be in a swap
on this particular VG fund. I guess while i'm at it i'll ask, does -16% YTD sound a little extreme or out of line with 'average' - for what's intended
to be a somewhat defensive conservative-moderate PF? Must say bond funds have been moving curiously in tandem with equities in a number
of cases for me - vs. serving as the 'ballast' they are supposedly intended to provide in equity sell-off/downturn market situations.
And, thanks for your replies to the initial post!

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Phineas J. Whoopee
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Re: The case for managed vs passive index equity funds now?

Post by Phineas J. Whoopee » Mon Mar 16, 2020 10:05 pm

Well, yes you are exposed to the ones which, in retrospect, will have done the worst. You're also exposed to the ones which, in retrospect, will have done the best.

Unless your friend doesn't have to wait until after the fact to distinguish them, or there's a manager who reliably can tell in advance, I see no argument for active management in what your friend said. There are valid arguments in favor of it, but that isn't one of them.

PJW

raveon
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Re: The case for managed vs passive index equity funds now?

Post by raveon » Mon Mar 16, 2020 10:38 pm

There was an article long time ago, that if a monkey chose stocks at random, he/she would beat 98% of the active managers on Wall Street....

https://www.forbes.com/sites/rickferri/ ... f169ea630a

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Phineas J. Whoopee
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Re: The case for managed vs passive index equity funds now?

Post by Phineas J. Whoopee » Tue Mar 17, 2020 12:39 am

raveon wrote:
Mon Mar 16, 2020 10:38 pm
There was an article long time ago, that if a monkey chose stocks at random, he/she would beat 98% of the active managers on Wall Street....

https://www.forbes.com/sites/rickferri/ ... f169ea630a
Well, yes, that's true, maybe not the precise percentage, I don't know, but only because the monkey would be choosing stocks at random. The greatest number are smaller and carry higher risks. On average one would expect mildly higher returns for the higher risk, but of course one might not get them. To use a cliche, that's what risk means.

Half a truth is a whole lie.

PJW

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