Bogle says: "Active mutual funds could disappear:

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Bogle says: "Active mutual funds could disappear:

Post by noyopacific » Thu Apr 02, 2015 7:12 pm

http://www.marketwatch.com/story/active-mutual-funds-could-disappear-john-bogle-2015-04-02
Calling active mutual funds "fat, dumb and happy" as they take in billions in pointless fees from retirement investors, Vanguard Group founder John Bogle predicts the end of the active management industry.
The information contained herein, while not guaranteed by us, has been obtained from from sources which have not in the past proved particularly reliable.

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Re: Bogle says: "Active mutual funds could disappear:

Post by AWH_CPA » Thu Apr 02, 2015 7:22 pm

does he know that vanguard has active funds? there are very good actively management funds that beat their indexes on 15 year, 10 year, 5 year, 3 year etc. in fact some of those are vanguard funds.

maybe he should say "Expensive Active mutual funds could disappear". I'm pretty sure Vanguard Primecap isn't going anywhere.

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Re: Bogle says: "Active mutual funds could disappear:

Post by wolf359 » Thu Apr 02, 2015 8:28 pm

He knows it's a stretch, and he gave a very long timeframe.

I think it's very unlikely. Someone will always try to beat the market. Active fund marketing is very, very good. And there are a whole lot of successful lotteries that show that lots of people can't or won't do math.

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Re: Bogle says: "Active mutual funds could disappear:

Post by nedsaid » Thu Apr 02, 2015 11:27 pm

Not a chance. We already have equal weighted indexes, fundamental indexes, factor investing, and the creation of new asset classes. DFA does passive investing but with all the screening, there are elements of active management. I think it will go by different names, with lower fees, and less trading. But active management will always be with us.
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Re: Bogle says: "Active mutual funds could disappear:

Post by tennisplyr » Fri Apr 03, 2015 11:46 am

I doubt it, as long as money is to be made, it ain't happening
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Active mutual funds and Las Vegas gamblers

Post by Taylor Larimore » Fri Apr 03, 2015 11:49 am

Bogleheads:

In my opinion, active mutual funds will disappear when gamblers stop going to Las Vegas.

Best wishes.
Taylor
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Re: Bogle says: "Active mutual funds could disappear:

Post by bhsince87 » Fri Apr 03, 2015 11:59 am

Well, Taylor sort of beat me to it. I was going to say, "There's a sucker born every minute." People will always fall for the sales pitch, IMO.
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Re: Bogle says: "Active mutual funds could disappear:

Post by sawhorse » Fri Apr 03, 2015 12:53 pm

bhsince87 wrote:Well, Taylor sort of beat me to it. I was going to say, "There's a sucker born every minute." People will always fall for the sales pitch, IMO.


I imagine a very large percent of mutual fund investments in individual accounts occurs through employer plans. Many plans do not offer index funds.

These people aren't suckers. Most of them would never think of augmenting their employer plan by opening am additional account with the mutual fund company to invest non-retirement money. Rather, they are bound by their employer options.

I get the feeling that many mutual fund companies market almost exclusively to employer 401k plans precisely because they don't succeed in getting individual investors to open personal non-retirement accounts with them.

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Re: Bogle says: "Active mutual funds could disappear:

Post by nisiprius » Fri Apr 03, 2015 1:18 pm

AWH_CPA wrote:does he know that vanguard has active funds?
Given his very long, detailed chapter on the history of the Wellington Fund, in his book The Clash of the Cultures: Investment vs. Speculation, I would hazard a guess that he does.
I'm pretty sure Vanguard Primecap isn't going anywhere.
Nor does John C. Bogle think Wellington is going anywhere any time soon:
Wellington Fund's 100th anniversary in 2028 now lies just beyond the horizon... I have no doubt whatsoever that Wellington Fund will each that 100th anniversary milestone, so rarely achieved among our nation's business corporations and financial institutions. When we reach that coveted anniversary, it will represent both a ringing endorsement of Walter Morgan's vision and the triumph--I reiterate--of the wisdom of long-term investment over the folly of short-term speculation.
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Re: Bogle says: "Active mutual funds could disappear:

Post by Petrocelli » Fri Apr 03, 2015 1:23 pm

Didn't Vanguard start a bunch of actively managed funds when John Bogle was running Vanguard?
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Re: Bogle says: "Active mutual funds could disappear:

Post by abuss368 » Fri Apr 03, 2015 1:27 pm

Great article. Thank you for sharing.
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Re: Active mutual funds and Las Vegas gamblers

Post by abuss368 » Fri Apr 03, 2015 1:27 pm

Taylor Larimore wrote:Bogleheads:

In my opinion, active mutual funds will disappear when gamblers stop going to Las Vegas.

Best wishes.
Taylor


Excellent way of looking at it.

Have a great holiday Taylor.
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Re: Bogle says: "Active mutual funds could disappear:

Post by abuss368 » Fri Apr 03, 2015 1:28 pm

Petrocelli wrote:Didn't Vanguard start a bunch of actively managed funds when John Bogle was running Vanguard?


Yes, this is correct. Jack Bogle's son also is the fund manager for a small cap active fund. However, Mr. Bogle has long advised to own the market and stay the course.
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Re: Bogle says: "Active mutual funds could disappear:

Post by Fallible » Fri Apr 03, 2015 2:50 pm

noyopacific wrote:http://www.marketwatch.com/story/active-mutual-funds-could-disappear-john-bogle-2015-04-02
Calling active mutual funds "fat, dumb and happy" as they take in billions in pointless fees from retirement investors, Vanguard Group founder John Bogle predicts the end of the active management industry.


First, I think it's important to note here the rest of what John Bogle said (I boldfaced) in case some don't read the article:

"Active funds seem to be saying, "'We'll shrink, but we'll take a lot of money out of it on the way down, year after year.' That's what a cash cow is," Bogle told Bloomberg Markets magazine in an interview. "In 25 or 30 years, they'll be gone. That seems like an extreme statement, but I think it isn't without possibility."

[b]The complete disappearance of active management is a stretch, I know. Bogle admits as much."


That's why it's important to note entire quotes and contexts in Bogle's previous statements about what he means by "don't peek" and "stay the course," especially when they are sometimes referred to on the forum as 'commandments' meaning don't EVER look at your portfolio or don't EVER change an allocation.

It will be interesting to see when or whether AM survives in anything like its present form and how it manages to do that or not. The bigger story to me is how it plans to go right on charging clients those outsize fees.
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Re: Bogle says: "Active mutual funds could disappear:

Post by Maynard F. Speer » Fri Apr 03, 2015 4:11 pm

The obvious problem:

- As soon as half the market's invested in passive indexes, who's going to keep the markets efficient?

The whole concept of efficient markets (which passive investing is reliant on) necessitates most trades being based on active management decisions ... I'd speculate that the (slightly inexplicable) risk-adjusted out-performance of smart-beta strategies already suggests we're close to the tipping point where passive investing's popularity starts to work against market efficiency
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Re: Bogle says: "Active mutual funds could disappear:

Post by Maynard F. Speer » Fri Apr 03, 2015 4:42 pm

In fact, I could more easily envisage a future in which it's considered ethical to invest in an active fund every time you purchase a passive fund just to keep markets functioning efficiently .. a bit like offering a portion of food to the gods
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Re: Bogle says: "Active mutual funds could disappear:

Post by peppers » Fri Apr 03, 2015 5:49 pm

As long as monkeys can throw darts, we will have MPT.

Monkey Portfolio Trust.....has a certain cache'......
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Re: Bogle says: "Active mutual funds could disappear:

Post by Jim180 » Fri Apr 03, 2015 6:10 pm

If Mr. Bogle is right then it could mean a lot of financial advisors will disappear.

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Re: Bogle says: "Active mutual funds could disappear:

Post by kolea » Fri Apr 03, 2015 8:38 pm

I am starting to wonder if I completely understand the difference between a passive fund and an active fund. Take VTI - it follows the CRSP TR index. But when the CRSP changes, VTI will also change accordingly. How does that differ from a fund manager who creates his/her own list of stocks to put into the fund? They are both list driven, yes? The second fund can be cap-weighted and make changes to the list every quarter, at the same rate as the CRSP index does. So is the 2nd fund active of passive?

So what is the real issue here? Is it cost, or is it whether a fund follows a broad, externally defined index? Or is it performance, and if so, relative to what? If we say that any fund that is not following a total market index is in fact active, then we have to be clear on which total market index - US or Global. If we allow for passive funds to follow other indexes, than we have to allow for a "private" index that is created by a fund manager also, which would seem to be a form of active investing.

It seems to me that branding any fund that is not passive as gambling is a little bit of a stretch. Or perhaps I am just not getting what all is included in the passive category.
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Re: Bogle says: "Active mutual funds could disappear:

Post by Epsilon Delta » Fri Apr 03, 2015 8:50 pm

TwoByFour wrote:I am starting to wonder if I completely understand the difference between a passive fund and an active fund.

IMHO the difference between active and passive is turnover. Low turnover should lead to lower costs, both in the funds expenses and in taxes.

Lots of people want to make it more complicated. Most of them are selling something, or listening too hard to somebody who is selling something.

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Re: Bogle says: "Active mutual funds could disappear:

Post by Maynard F. Speer » Fri Apr 03, 2015 11:11 pm

Well you get high conviction, (presumably) very low-turnover active managers - Buffett, Soros, Nick Train .. and low-turnover smart beta

I think in practice it's a fees issue; sometimes conflated with a statistics issue - e.g. when monkeys seem to beat multi-$billion active funds, but also beats the S&P 500, on a better risk-adjusted basis ... And I think when hardline efficient market theorists deal with the figures, they find the results they want to find (as do inefficient market theorists) ..

I'd say it's very blurry .. The S&P 500 is the classic passive benchmark, when it's arguably an active fund in disguise (momentum rules, four quarters of earnings, liquidity requirements, committee input) ... Many active funds are essentially smart beta, while smart beta is essentially passive, but the design of a smart beta can be extremely complicated (e.g. to emulate another investor's process) .. So I think hardliners are essentially hardline efficient market theorists .. And I think it's quite hard to be a hardline efficient market theorist
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Re: Bogle says: "Active mutual funds could disappear:

Post by Petrocelli » Sat Apr 04, 2015 12:48 pm

Back in 2004, there was a thread on the old Diehard forum in which a poster was convinced to sell Primecap for TSM. This led to a 5 year "bet" on March 4, 2004 in which I "bet" that Primecap would beat TSM. It did. In fact, assuming $100,000 was invested in both funds, today the Primecap investor would have $292,323 vs. $235,546 for the TSM investor.

On June 30, 2006, I made another 7 year bet bet in which I took Windsor II and an indexer could chose any index fund or ETF . The indexer selected the ishares Russell 1000 ETF (IWD). Windsor II won. Assuming $100,000 was invested in both funds, today the Windsor II investor would have $179,682 vs. $172,368 for the IWD investor.

Oh, and as an aside, the Healthcare Fund is the best performing Vanguard Fund over the past 10 years in my 401(k) plan.

Will active funds disappear? For goodness sake, let's hope not.
Last edited by Petrocelli on Sun Apr 05, 2015 10:07 pm, edited 1 time in total.
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Re: Bogle says: "Active mutual funds could disappear:

Post by toto238 » Sat Apr 04, 2015 1:10 pm

Maynard F. Speer wrote:Well you get high conviction, (presumably) very low-turnover active managers - Buffett, Soros, Nick Train .. and low-turnover smart beta

I think in practice it's a fees issue; sometimes conflated with a statistics issue - e.g. when monkeys seem to beat multi-$billion active funds, but also beats the S&P 500, on a better risk-adjusted basis ... And I think when hardline efficient market theorists deal with the figures, they find the results they want to find (as do inefficient market theorists) ..

I'd say it's very blurry .. The S&P 500 is the classic passive benchmark, when it's arguably an active fund in disguise (momentum rules, four quarters of earnings, liquidity requirements, committee input) ... Many active funds are essentially smart beta, while smart beta is essentially passive, but the design of a smart beta can be extremely complicated (e.g. to emulate another investor's process) .. So I think hardliners are essentially hardline efficient market theorists .. And I think it's quite hard to be a hardline efficient market theorist


When you get into the nitty gritty, the difference between passive and active can become a little blurry. My take:

Make sure your investments are low cost.
Make sure your investments are well diversified (not just diversification illusion, actual diversification).
Make sure your investments are at the appropriate risk level for your goals, time horizon and risk tolerance.

If you have those covered, I don't think it really matter too much whether it's "passive" or "active". It just so happens that funds that are generally agreed upon to be "passive" meet those 3 requirements more often than funds that are generally agreed upon to be "active".

This especially can be important in illiquid markets, such as emerging markets, some parts of the bond market, among others. These are often areas where a "quasi-index fund" may be advantageous. This would be a fund where the managers aren't necessarily trying to beat the market, but are taking care to try to avoid some of the high costs that an index fund can run into when dumping a large amount of money into an illiquid asset. So they don't strictly adhere to an index, but they're not trying to really beat the market either. Good examples of these at Vanguard I would consider the Vanguard Intermediate Term Investment Grade Fund, any of the non-indexed tax-exempt funds, and to a lesser extent, International Explorer, Growth and Value funds.
If it's low-cost, well diversified and appropriate for your risk-level, I think you'll do just fine. No need to fight over a couple bps.

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Re: Bogle says: "Active mutual funds could disappear:

Post by Johno » Sat Apr 04, 2015 1:59 pm

Death of the 'active managed fund industry' catering to low/medium net worth retail investors? A stretch of the imagination if taken literally but it could decline a lot I suppose. A disappearance of actively managed *money*? Obviously not going to happen, even though Mr. Bogle is basically right about the retail investor's choices. Non-retail oriented traders or alternative investment vehicles (hedge funds, non-hedge fund trading firms etc) will always be there vigorously arbitraging the smallest price discrepancies under any normal circumstances, unless laws or regulations are changed so that they can't, which is presumably not what is he is predicting.

Of course changes in investment patterns can have particular unforeseen consequences during market turmoil. That's conceivably true of changes in retail investor behavior (more probably more their relative tendency to pull their money out during a crisis though than which type of fund they invest in), but obviously also true of the behavior of professional participants. For example some believe high frequency trading may tend to create instability in certain circumstances. An idea like that is not true just because it resonates with populist instinct or some best selling authors claim it. I'm just saying it can't be ruled out (actually statements like that are typically hard to prove even in hindsight with actual financial research). Likewise it can't be ruled out that a change in the structure of the mutual fund/ETF market could have adverse consequences in some particular situations. But a general loss of efficiency because 'everybody' is indexing, no, because far from 'everybody' and nowhere near every $ would ever be indexing, unless you assume some other external constraint forcing that outcome. The retail investor is only part of the market.

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Re: Bogle says: "Active mutual funds could disappear:

Post by CABob » Sat Apr 04, 2015 3:17 pm

Maynard F. Speer wrote:The obvious problem:

- As soon as half the market's invested in passive indexes, who's going to keep the markets efficient?

The whole concept of efficient markets (which passive investing is reliant on) necessitates most trades being based on active management decisions ... I'd speculate that the (slightly inexplicable) risk-adjusted out-performance of smart-beta strategies already suggests we're close to the tipping point where passive investing's popularity starts to work against market efficiency

There is general agreement that it takes some active investing in order to keep the market efficiency in order. I'm not sure that it takes a whole lot of active investing however. I am of the opinion that a relatively small amount of trading could keep the markets in order.
I'm also not sure it is active mutual fund trading that is necessary. I would think that active trading of individual stocks would do it.
Comments?
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Re: Bogle says: "Active mutual funds could disappear:

Post by MindBogler » Sat Apr 04, 2015 3:59 pm

Maynard F. Speer wrote:The obvious problem:

- As soon as half the market's invested in passive indexes, who's going to keep the markets efficient?

The whole concept of efficient markets (which passive investing is reliant on) necessitates most trades being based on active management decisions ... I'd speculate that the (slightly inexplicable) risk-adjusted out-performance of smart-beta strategies already suggests we're close to the tipping point where passive investing's popularity starts to work against market efficiency

That doesn't seem obvious to me at all. The problem with this thought experiment is people (wrongly) assume that we all are trying to buy or sell at the same time. Even if everyone was indexing, people have cause to sell and to buy for divergent reasons. A retiree needs to sell and an accumulator needs to buy. We don't each have the same objectives at the same time or even the same investment strategy. I rebalance when I hit a band and you do it mechanically once a year. People aren't robots, it will never be the same. There will always be a market, even if everyone eschews active management and sticks to a buy and hold strategy.

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Re: Bogle says: "Active mutual funds could disappear:

Post by Maynard F. Speer » Sat Apr 04, 2015 5:24 pm

toto238 wrote:When you get into the nitty gritty, the difference between passive and active can become a little blurry. My take:

Make sure your investments are low cost.
Make sure your investments are well diversified (not just diversification illusion, actual diversification).
Make sure your investments are at the appropriate risk level for your goals, time horizon and risk tolerance.

If you have those covered, I don't think it really matter too much whether it's "passive" or "active". It just so happens that funds that are generally agreed upon to be "passive" meet those 3 requirements more often than funds that are generally agreed upon to be "active".


Couldn't agree more .. While I think it's been hugely beneficial that fees have come under scrutiny, the ideological debate seems rather disproportionate (when we all know how much more important asset allocation and savings habits are)


CABob wrote:There is general agreement that it takes some active investing in order to keep the market efficiency in order. I'm not sure that it takes a whole lot of active investing however. I am of the opinion that a relatively small amount of trading could keep the markets in order.
I'm also not sure it is active mutual fund trading that is necessary. I would think that active trading of individual stocks would do it.
Comments?


Well I think it's an interesting question, and I'm certainly ready to be proven wrong (presumably a fairly complicated thing to model) ..

One place I think active managers plays an important role is in the lengths they go to to research companies .. The Warren Buffetts of the world are in a position to look beyond numbers and assess (/restructure) the people they invest in .. Some sectors (such as Biotech), where valuation has to factor in intellectual value and specialist knowledge, I'd feel without well resourced fund managers these firms may find themselves chronically under-invested and unable to fund new treatments .. So then the economy itself stops working as well ..

I also find it intriguing that today almost any smart beta strategy (even upside variations) seems to produce a slightly better risk-adjusted return than the cap-weighted index .. And I think Roger Ibbotson's suggested there may be a certain 'popularity' premium at play .. I don't know whether I read that 17-22% of investment today is passive(?), but to me that would suggest the tipping point might be somewhere around 25% (wild speculative guess mode)


MindBogler wrote:That doesn't seem obvious to me at all. The problem with this thought experiment is people (wrongly) assume that we all are trying to buy or sell at the same time. Even if everyone was indexing, people have cause to sell and to buy for divergent reasons. A retiree needs to sell and an accumulator needs to buy. We don't each have the same objectives at the same time or even the same investment strategy. I rebalance when I hit a band and you do it mechanically once a year. People aren't robots, it will never be the same. There will always be a market, even if everyone eschews active management and sticks to a buy and hold strategy.


Well that's certainly true, however there are examples of markets behaving somewhat more through people wanting to buy and sell at different times (depending on their circumstances) and somewhat less on the data, fundamentals and forecasts active traders and investors use ..

One example might be BitCoin .. which is really a market that's been very prone to investor speculation - quite cut off, as it is, from any way to properly assess its value .. It reacts to news and events, but in a very volatile way .. And I'm not sure such a market would be very desirable for investors, or beneficial for industry ..

We've got a similar issue with Private Equity today, where there are almost as many start-up firms as there are people able to reasonably value them - so those markets tend to be very inefficient (pricing is a poor reflector of a firm's prospects), and at the same time, firms developing the right products, and with the right minds, aren't being adequately funded in early stages ..
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Re: Active mutual funds and Las Vegas gamblers

Post by EyeYield » Sat Apr 04, 2015 6:45 pm

Taylor Larimore wrote:Bogleheads:

In my opinion, active mutual funds will disappear when gamblers stop going to Las Vegas.

Best wishes.
Taylor

That will happen right after the best seller, "What Happened To The Brokers' Yachts?", goes paperback.
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Re: Active mutual funds and Las Vegas gamblers

Post by Petrocelli » Sun Apr 05, 2015 6:18 pm

EyeYield wrote:
Taylor Larimore wrote:Bogleheads:

In my opinion, active mutual funds will disappear when gamblers stop going to Las Vegas.

Best wishes.
Taylor

That will happen right after the best seller, "What Happened To The Brokers' Yachts?", goes paperback.


Buying funds like Healthcare, Windsor II and Primecap cannot be analogized to going to Las Vegas.
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