Are there skilled investors and managers?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
garlandwhizzer
Posts: 3562
Joined: Fri Aug 06, 2010 3:42 pm

Are there skilled investors and managers?

Post by garlandwhizzer »

I believe that there are in fact skilled managers who can consistently beat the market. They are exceptionally rare, however, and those who show consistent success tend eventually to return to beta or less due to asset bloat from performance chasing investors. Warren Buffett is a classic example and it is getting harder and harder for him to outperform the S&P 500. Another great example is Primecap Managenment, the firm that manages Primecap, Primecap Core, and Capital Opportunity. Primecap has outperformed its comparable index, the S&P 500, by 2.5% per year for the last 30 years. Likewise their other 2 Vanguard funds have significantly outperformed their comparable indexes for 1yr, 5yr, 10yr, and the lifetime of the funds. This is in spite of the fact that they invest in a market style that is supposed to underperform, growth which is supposed to underperform value in the long run, and specialize in a market cap segment, large cap that is also supposed to underperform small cap over the long run. They consistently produce alpha over long time frames and may in fact have a secret sauce at least until their asset base grows to the point that it overgrazes the available alpha supply.

Interesting Vanguard article about them: https://personal.vanguard.com/us/insigh ... cap-012015

They're neither Bogleheads nor factor investors so they won't find much support on this forum. When a group has had this much success over this long a time frame through all kinds of market ups and downs, I tip my hat to them, recognizing how hard and rare it is to beat the simple arithmetic of index investing over the long run.

Garland Whizzer
User avatar
packer16
Posts: 1488
Joined: Sat Jan 04, 2014 1:28 pm

Re: Are there skilled investors and managers?

Post by packer16 »

I believe there are some out there but they invest in less competitive markets that other dismiss or restricted from investing in. I think the standard test of manager skill (beating an index that includes an investable large cap universe) is constrained by their customers willingness and ability to feel uncomfortable investing in "written" off sectors of the market like Greece and Russia and the volatility that a concentrated portfolio would generate.

Packer
Buy cheap and something good might happen
User avatar
Petrocelli
Posts: 2966
Joined: Mon Feb 19, 2007 5:29 pm
Location: Fenway Park, between 2nd and 3rd base

Re: Are there skilled investors and managers?

Post by Petrocelli »

Some managers are smarter than others, as in any profession.

The best managers charge the lowest expense ratios.

Those managers usually work for Vanguard.
Petrocelli (not the real Rico, but just a fan)
exeunt
Posts: 907
Joined: Tue Jan 08, 2008 5:54 pm

Re: Are there skilled investors and managers?

Post by exeunt »

Yes.

1) Grossman-Stiglitz points out markets can't be perfectly efficient because there has to be some reward for expending resources to obtain new information.

2) Even Fama and French believe there are skilled investors, but think that it's all-but-impossible to identify them in advance.

3) Virtually no respected academic believes in the caricature of EMH where no one can possibly ever be skilled.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Are there skilled investors and managers?

Post by Phineas J. Whoopee »

Of course there are more and less capable investors and managers. If that's what skill means, then fine.

If skill means somebody stroking h/er/is grey beard and pronouncing to assistants "XYZ corporation is richly priced at $25 per share. Short it!" then no, probably not.

But of course some investors are able, legally, legitimately, to access information microseconds sooner than others. How? They spend more money on better infrastructure and lower-latency data feeds. It's available to anybody who has, and cares to spend, that much money. But it isn't enough. They also have to process the information either faster or better, or preferably both but that's not a reliable plan, and then execute any trades they make better and faster. How? They spend more money co-locating their systems at the exchange so the amount of time the information physically takes to get to and from their serves is less than for those who spent less and are further away, because the laws of physics matter and the speed of light in a fiber optic cable is not infinite.

Some who try and go to the expense do better than the others, and some don't. It isn't just random, but there's no assurance for anybody investing all it takes to build the infrastructure and hire the people that they will do better. Of course, I say again, firms which buy those advantages have those advantages. Of course investors who can relate news to background better, even if they're not quite as fast as others, will make better decisions.

If that's the definition of skill, then yes, obviously, there are skilled investors and managers.

If skill means something different, let's call whatever this is "fred." Yes, obviously then, there are fred investors and managers.

Can you or I profit from it personally? I can't. Maybe you can. Or maybe you're one of the people who invest ever so much to be better, only to turn out worse.

It isn't completely random.

I wasn't even talking about illegal trading based on inside information.

PJW
User avatar
Watty
Posts: 28813
Joined: Wed Oct 10, 2007 3:55 pm

Re: Are there skilled investors and managers?

Post by Watty »

I believe that there are in fact skilled managers who can consistently beat the market. They are exceptionally rare, however, and those who show consistent success tend eventually to return to beta or less due to asset bloat from performance chasing investors. Warren Buffett is a classic example and it is getting harder and harder for him to outperform the S&P 500.
It is ever rarer for fund manager to be able to beat the market by enough to cover the fees and taxes that their trading costs. Part of Berkshire Hathaways past success is that they are not a mutual fund and they do not have high expenses.

If you do find a superior example of someone that can invest well they may find that as times change they are not able to keep up with the changes and there performance falters. Bill Gross is a classic example of that.
User avatar
Trevor
Posts: 235
Joined: Tue Jul 08, 2014 3:16 pm

Re: Are there skilled investors and managers?

Post by Trevor »

Absolutely, but I have no way to single them out of a crowd and I am definitely not a skilled investor myself. So I'd much rather stick with indexes.
WWJD - What Would Jack Do?
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Are there skilled investors and managers?

Post by JoMoney »

While the performance of Primecap has been impressive. I question that the S&P500 is the appropriate benchmark. The fund invests heavily in mid-cap and large-cap stocks, and if you go back and look at the funds "median market-cap" overtime you'll see quite a bit of variance. Currently VPMCX has a median market-cap of $72.1-billion which might make it appear comparable to an S&P500 index which has a median market-cap of $77.2-billion... but if you look at the "Portfolio Characteristics" back in 2005 you'd see it significantly smaller (middle-er?) at $22.8-billion and it's been even smaller going further back (at the end of 2005 the median market cap of S&P500 was $53.3-billion.)
If the fund was benchmarked as something that style-drifts between something like a Mid-Cap and Large-Cap index, the performance doesn't quite seem as impressive:
Image

If you read up on the fund though, it isn't just one manager picking stocks, they employ multiple managers who in aggregate makeup the fund. I certainly don't think they set out to focus on simple size/style criteria, they actually do focus on specific companies and sectors of the market where the managers believe they'll find opportunity. It is interesting though that the performance (in hindsight) is explained by exposure to different "factors" over time.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
garlandwhizzer
Posts: 3562
Joined: Fri Aug 06, 2010 3:42 pm

Re: Are there skilled investors and managers?

Post by garlandwhizzer »

Jo Money wrote:
Currently VPMCX has a median market-cap of $72.1-billion which might make it appear comparable to an S&P500 index which has a median market-cap of $77.2-billion... but if you look at the "Portfolio Characteristics" back in 2005 you'd see it significantly smaller (middle-er?) at $22.8-billion and it's been even smaller going further back (at the end of 2005 the median market cap of S&P500 was $53.3-billion.)
If the fund was benchmarked as something that style-drifts between something like a Mid-Cap and Large-Cap index, the performance doesn't quite seem as impressive:
The style drift referenced above is likely not due to chasing a different strategy in terms of cap weight but to having more and more money to invest over time. It's a lot easier in a concentrated portfolio (124 -139 stocks) to soak up investor dollars in large caps relative to smaller caps. Actually the mid cap index fund has median market cap of 11.1 billion now and is not now nor ever has been a fair market cap comparison to VPMCX. In 2005, the year cited above, VPMCX, had a market cap more than twice that of the mid cap index. So the comparison is a bit unfair over a time frame when mid caps outperformed small caps. It is interesting to compare VIMSX, the mid cap index at current average cap 11.1 billion to VHCOX, the Capital Opportunity fund which is the "mid cap" offering managed by the same company, median market cap presently at 37.5 billion. In spite of the fact that its market cap is over three times as large presently it has outperformed VIMSX over the last ten years, a period in which mid caps bested large caps. It also enlightening to compare the performance of VIMSX over its entire lifetime (since 1998) to VHCOX. Ten thousand dollars invested in the mid cap index grew to 48,000, very impressive, but 10,000 invested in VHCOX grew to 87,000, a massive outperformance.

There is no way around it, Primecap Management company knows what it is doing. Like Buffett, they will at some point succumb to asset bloat, but there is on denying the fact that they have been very successful at creating alpha.

Garland Whizzer
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: Are there skilled investors and managers?

Post by nedsaid »

Garland, I really applaud your posts here on this thread. You really are facing the old "it can't be done" set of arguments. I certainly agree that markets are mostly efficient and that it is hard to beat the indexes with active management. I agree that in the aggregate that indexing will beat active managers. You can't repeal basic arithmetic. Market performance minus miniscule costs in the aggregate will beat market performance minus larger costs. But that doesn't mean that there aren't skilled investment managers out there or that it is impossible to find mispriced securities. If PrimeCap has such a great long-term record, I applaud them for it. As Dizzy Dean used to say, "If you did it, it ain't bragging."
A fool and his money are good for business.
User avatar
Toons
Posts: 14459
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Are there skilled investors and managers?

Post by Toons »

Hey , I'm gonna pat myself on the back for being a skilled investor ,I chose the right investment managers,,,I invested in Primecap Core in 2005 :sharebeer

"The men who run the Primecap funds are so under the radar we couldn’t even find their pictures. And that’s just the way they want it."


http://www.kiplinger.com/article/invest ... -seen.html
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Are there skilled investors and managers?

Post by pkcrafter »

You can't say there are skilled managers. You can only say there are some managers with good past records. You know how luck works. When you decide to invest in one with a good record, it disappears. :happy

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
KyleAAA
Posts: 9497
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Are there skilled investors and managers?

Post by KyleAAA »

Of course there are skilled investors. I've never heard anybody seriously argue there aren't. What people usually argue is that you can't identify them in advance. Also, that most people with superior long-term records aren't at all skilled (i.e. Warren Buffett) since random chance requires that there be many of them.
tibbitts
Posts: 23589
Joined: Tue Feb 27, 2007 5:50 pm

Re: Are there skilled investors and managers?

Post by tibbitts »

garlandwhizzer wrote:
Jo Money wrote:
Currently VPMCX has a median market-cap of $72.1-billion which might make it appear comparable to an S&P500 index which has a median market-cap of $77.2-billion... but if you look at the "Portfolio Characteristics" back in 2005 you'd see it significantly smaller (middle-er?) at $22.8-billion and it's been even smaller going further back (at the end of 2005 the median market cap of S&P500 was $53.3-billion.)
If the fund was benchmarked as something that style-drifts between something like a Mid-Cap and Large-Cap index, the performance doesn't quite seem as impressive:
The style drift referenced above is likely not due to chasing a different strategy in terms of cap weight but to having more and more money to invest over time. It's a lot easier in a concentrated portfolio (124 -139 stocks) to soak up investor dollars in large caps relative to smaller caps. Actually the mid cap index fund has median market cap of 11.1 billion now and is not now nor ever has been a fair market cap comparison to VPMCX. In 2005, the year cited above, VPMCX, had a market cap more than twice that of the mid cap index. So the comparison is a bit unfair over a time frame when mid caps outperformed small caps. It is interesting to compare VIMSX, the mid cap index at current average cap 11.1 billion to VHCOX, the Capital Opportunity fund which is the "mid cap" offering managed by the same company, median market cap presently at 37.5 billion. In spite of the fact that its market cap is over three times as large presently it has outperformed VIMSX over the last ten years, a period in which mid caps bested large caps. It also enlightening to compare the performance of VIMSX over its entire lifetime (since 1998) to VHCOX. Ten thousand dollars invested in the mid cap index grew to 48,000, very impressive, but 10,000 invested in VHCOX grew to 87,000, a massive outperformance.

There is no way around it, Primecap Management company knows what it is doing. Like Buffett, they will at some point succumb to asset bloat, but there is on denying the fact that they have been very successful at creating alpha.

Garland Whizzer
Well, there is at least one way around it: they could have been lucky. I've owned multiple Primecap/VG funds in the past, and still do own trivial amounts of two of them. Although the long-term records have been outstanding, there have been some periods of underperformance (depending on the benchmark you choose, I guess.) So as with all active funds, the question becomes how long do you stick with a fund after it begins to underperform what you believe is an appropriate benchmark? And, how will you identify the next Primecap to replace the current one if you abandon it?
User avatar
Toons
Posts: 14459
Joined: Fri Nov 21, 2008 9:20 am
Location: Hills of Tennessee

Re: Are there skilled investors and managers?

Post by Toons »

pkcrafter wrote:You can't say there are skilled managers. You can only say there are some managers with good past records. You know how luck works. When you decide to invest in one with a good record, it disappears. :happy

Paul
I can recall quite a number of years staying invested "before"there were "past good records" to smile about :happy
From the Vanguard annual report:

"The PRIMECAP Core Fund’s accomplishments
are much easier to explain than to
duplicate. Governed by a research-driven
selection process, the advisor seeks out
under appreciated growth and value
companies, employs precise criteria, and
This divergence resulted in under performance
in fiscal years 2011 and 2012,
when the fund trailed either one or both
of its comparative standards. Patience
and persistence are crucial to the process,
because PRIMECAP Core’s portfolio
is characterized by its low turnover
and long-term holdings. Over time,
shareholders have been rewarded for
staying with the fund." :sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
investor
Posts: 1010
Joined: Mon Feb 19, 2007 9:50 pm

Re: Are there skilled investors and managers?

Post by investor »

I spend money not benchmarks.
Long time supporter of Primecap Funds.

investor
richard
Posts: 7961
Joined: Tue Feb 20, 2007 2:38 pm
Contact:

Re: Are there skilled investors and managers?

Post by richard »

Here's a thread on a Fama-French paper that appears to have found skill. viewtopic.php?f=10&t=155692
richard
Posts: 7961
Joined: Tue Feb 20, 2007 2:38 pm
Contact:

Re: Are there skilled investors and managers?

Post by richard »

pkcrafter wrote:You can't say there are skilled managers. You can only say there are some managers with good past records. You know how luck works. When you decide to invest in one with a good record, it disappears. :happy

Paul
You can't say there are skilled managers. You can't say that no managers have skill.

I can say I have no ability to choose skilled managers. I can also say that skilled managers capture essentially all of the benefits of their skill through fees, leaving not much for their investors. In addition, trying to pick skilled managers risks picking unskilled and ending up worse off. Doesn't seem worth trying to find them.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Are there skilled investors and managers?

Post by JoMoney »

garlandwhizzer wrote:
Jo Money wrote:
Currently VPMCX has a median market-cap of $72.1-billion which might make it appear comparable to an S&P500 index which has a median market-cap of $77.2-billion... but if you look at the "Portfolio Characteristics" back in 2005 you'd see it significantly smaller (middle-er?) at $22.8-billion and it's been even smaller going further back (at the end of 2005 the median market cap of S&P500 was $53.3-billion.)
If the fund was benchmarked as something that style-drifts between something like a Mid-Cap and Large-Cap index, the performance doesn't quite seem as impressive:
The style drift referenced above is likely not due to chasing a different strategy in terms of cap weight but to having more and more money to invest over time. It's a lot easier in a concentrated portfolio (124 -139 stocks) to soak up investor dollars in large caps relative to smaller caps. Actually the mid cap index fund has median market cap of 11.1 billion now and is not now nor ever has been a fair market cap comparison to VPMCX. In 2005, the year cited above, VPMCX, had a market cap more than twice that of the mid cap index. So the comparison is a bit unfair over a time frame when mid caps outperformed small caps. It is interesting to compare VIMSX, the mid cap index at current average cap 11.1 billion to VHCOX, the Capital Opportunity fund which is the "mid cap" offering managed by the same company, median market cap presently at 37.5 billion. In spite of the fact that its market cap is over three times as large presently it has outperformed VIMSX over the last ten years, a period in which mid caps bested large caps. It also enlightening to compare the performance of VIMSX over its entire lifetime (since 1998) to VHCOX. Ten thousand dollars invested in the mid cap index grew to 48,000, very impressive, but 10,000 invested in VHCOX grew to 87,000, a massive outperformance.

There is no way around it, Primecap Management company knows what it is doing. Like Buffett, they will at some point succumb to asset bloat, but there is on denying the fact that they have been very successful at creating alpha.

Garland Whizzer
I'm not going to argue that they don't know what they're doing... they did what they did, and the results for those who "stayed the course" were quite good regardless of how they did it. I'm not sure I know enough to tell if they really "know what they're doing" or not, or if it's just survivor bias and a lucky happenstance. I doubt we would be talking about them if the fund hadn't outperformed the broad market index (we never here people touting Vanguard's Morgan Growth Fund, or other active funds that don't have impressive results, and many times the fact that plenty of underperforming strategies/funds existed in the past seem to disappear from the record).

Regarding the benchmark though, I think it's worthwhile to understand that their performance is pretty easily explained by the relative exposure to smaller cap size stocks, varying over time. Comparing the funds performance only to the S&P500 seems similar to comparing Vanguard's 60/40 Balanced Index (VBINX) to Vanguard's Total Stock Market Index (VTSMX).... You can do what you want, but I think it's important to consider that 40% of the VBINX fund is explained by the performance of Vanguard's Total Bond Market Index (VBMFX) as well.

Back to Primecap, if you look at the returns of a portfolio that was 50/50 S&P500/S&P400(Mid-Cap) the results quite comparabile (Portfolio Visualizer Link)
From the annual reports, it's obvious that Primecap's median market-cap relative to the market changes over time, it's not a fixed allocation, and it's not their strategy to maintain a fixed allocation. But I'm still not certain that comparing it only to the S&P500 is the appropriate benchmark.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Gropes & Ray
Posts: 1094
Joined: Wed Jul 16, 2014 7:28 am

Re: Are there skilled investors and managers?

Post by Gropes & Ray »

I believe there are a few skilled managers who will beat the market over decades. I just don't believe I have the skill to identify them. I think we're much more likely to buy into a hot fund family near the peak than to buy in at the beginning of the run.
User avatar
msi
Posts: 706
Joined: Sun Feb 17, 2008 10:15 pm

Re: Are there skilled investors and managers?

Post by msi »

Has anyone studied the performance of Vanguard's low ER actively managed funds vs. the index, as opposed to all managed funds? I couldn't find a thread with stats about that here.

It might be with low ER, they have actually beaten their benchmark indices in the long-run.

Edit: I found a Vanguard paper about this, where they compared the performance of their own active funds to the respective benchmarks.

http://www.vanguard.com/pdf/s356.pdf

They conclude:
Over long periods of time, the median
Vanguard active equity fund has outperformed its
stated costless benchmark as well as the median
non-Vanguard active equity fund
Last edited by msi on Sun Feb 01, 2015 4:36 pm, edited 1 time in total.
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Are there skilled investors and managers?

Post by pkcrafter »

Skilled managers? I find it interesting that most of the active funds that show good longer term records are managed by teams, not individual "skilled" managers. This proves it can be done and also proves it does not require a magic manager. What is needed is a philosophy of sticking with the strategy and keeping cost at a reasonable level.

It's quite obvious that the vast majority of mutual fund and ETF providers are far more interested in attracting investors for their own profit. And sure enough, most uninformed investors follow these shooting stars rather than buy funds that at most times carry a glow rather than a flame. The best active funds will hold their strategy when the market swings away from their style, even at the risk of losing investors. These successful active funds amount to a small handful, but they are the exceptions that prove the rule on the disappointing record of active management.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
Ged
Posts: 3944
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Are there skilled investors and managers?

Post by Ged »

One thing to consider is that in any large population there will be outliers. On average active managers will underperform, while there will always be a few that overperform just based on random chance. Flip enough coins and once in a while you will get 100 heads in a row.

The thing is there is no way to predict which those overperformers will be in advance.

Proof of existence of skill requires more than the existence of historical overperformers.
4nursebee
Posts: 2642
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Are there skilled investors and managers?

Post by 4nursebee »

Yes, I think there are skilled investors and managers.
I don't think I could identify them so I invest myself.
In recent years I've outperformed the market.
I'm not sure I could do it with a billion dollars in a fund though.
Pale Blue Dot
carolinaman
Posts: 5453
Joined: Wed Dec 28, 2011 8:56 am
Location: North Carolina

Re: Are there skilled investors and managers?

Post by carolinaman »

I agree that there are a small number of skilled investors and managers. As OP stated, skilled managers generally succumb to asset bloat or they close the fund before it gets too large and unmanageable. The ideal is to find one before they close their fund, but that is hard to do. Active investors must find those skilled managers, invest and monitor performance, and decide when to sell if fund performance declines. Then they have to find the next skilled manager to replace it. Even the best investors are going to get it wrong sometimes. Also, active investing does better in some segments of the market than others.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Are there skilled investors and managers?

Post by JoMoney »

johnep wrote:...Also, active investing does better in some segments of the market than others.
Vanguard wrote: https://personal.vanguard.com/pdf/flgesca.pdf
...Our research challenges this widely held belief on several fronts. We find that the typical small-cap fund’s outperformance is an artifact of a particular benchmarking
methodology. When we correct for the mismatch between active funds and popular small-cap benchmarks, the typical small-cap fund’s outperformance disappears.
We also examine a related belief; i.e., because the small-cap stock market is inefficient, it’s possible to identify skilled managers who will repeatedly exploit
those inefficiencies and generate persistent outperformance in the future. We demonstrate for prospective investors that the historical outperformance of the typical small-cap manager is fleeting. Our analysis indicates that the probability that past winners will repeat in the future is equivalent to a coin toss before costs (the same odds as if one picked-cap funds at random). After costs, of course,the odds are less than 50-50.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Post Reply