Beat the market long-term? Yes, it can be done.

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Wakefield1
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Re: Vanguard: Beat the market long-term? Yes, it can be done.

Post by Wakefield1 » Sat Feb 11, 2017 8:45 pm

avalpert wrote:Salesman are gonna sell.

But honestly, while if active manager performance is random and skill non-existent I can see it making sense to say that Vanguard's active funds should do better than other active funds because costs are lower (though of course we still expect them to underperform their even cheaper index funds). On the other hand, if there is a potential for skill out there to think that Vanguards low fee funds would be the place to find it you almost have to assume that skillful active fund managers are irrational - or altruistic. You have to assume that, despite having recognizable skill that will lead them to outperform they are choosing to take that skill to the lower paying employer so that they can offer lower costs - it makes little sense.

Truthfully, if I was going to be betting on active managers for meaningful outperformance cheap funds are the last place I'd look (as are broad funds that act as closet-indexes but that is a separate discussion).

The pay that the "active" manager gets is not the only thing that makes the fund "expensive" it might be the take to the conglomerate owner of the mutual fund boutique!

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Re: Vanguard: Beat the market long-term? Yes, it can be done.

Post by Kenkat » Sat Feb 11, 2017 9:31 pm

avalpert wrote:
kenschmidt wrote:
avalpert wrote:Truthfully, if I was going to be betting on active managers for meaningful outperformance cheap funds are the last place I'd look (as are broad funds that act as closet-indexes but that is a separate discussion).


Cheap (low cost AND low turnover) active funds are the first and only place you should look. The only reason index funds are good performers* is because they are cheap. There's nothing else to it.

* they have many other great qualities but those don't affect performance

Nonsense. The reason index funds are good performers is that they are cheap and map the market they are tracking. If managers have actual skill they will seek to maximize the return on that skill - that means they are unlikely to be managing cheap funds and those who are managing cheap funds are unlikely to have identifiable skills. Cheap active funds with low turnover are a fine place to look if you are looking for active funds which mimic index performance - and that may be all you should look for in active funds (there is a reason I don't own any active equity funds today) but it isn't a compelling reason to choose them over an index fund.


I wasn't saying you should look for active funds over index funds but rather that if you ARE looking at active funds, only look at the cheap ones. Because that is the determinant of fund performance, index or active.

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Re: Vanguard: Beat the market long-term? Yes, it can be done.

Post by avalpert » Sat Feb 11, 2017 10:54 pm

kenschmidt wrote:
avalpert wrote:
kenschmidt wrote:
avalpert wrote:Truthfully, if I was going to be betting on active managers for meaningful outperformance cheap funds are the last place I'd look (as are broad funds that act as closet-indexes but that is a separate discussion).


Cheap (low cost AND low turnover) active funds are the first and only place you should look. The only reason index funds are good performers* is because they are cheap. There's nothing else to it.

* they have many other great qualities but those don't affect performance

Nonsense. The reason index funds are good performers is that they are cheap and map the market they are tracking. If managers have actual skill they will seek to maximize the return on that skill - that means they are unlikely to be managing cheap funds and those who are managing cheap funds are unlikely to have identifiable skills. Cheap active funds with low turnover are a fine place to look if you are looking for active funds which mimic index performance - and that may be all you should look for in active funds (there is a reason I don't own any active equity funds today) but it isn't a compelling reason to choose them over an index fund.


I wasn't saying you should look for active funds over index funds but rather that if you ARE looking at active funds, only look at the cheap ones. Because that is the determinant of fund performance, index or active.

Sure, but then you should ask why are you looking at active funds? If you accept that expected performance is the expected return of the asset class - fees then you will always choose the cheaper index funds - if you think something else contributes to performance you may look at active funds for that something else but then you are back to why would you expect Vanguard's active funds to have that something else?

Basically, if you are looking at active funds with the lowest fees, stop looking and pick an index fund - if you are looking at active funds that are going to deliver the best performance, well best of luck to you.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Kenkat » Sun Feb 12, 2017 9:14 am

Because sometimes you don't have unlimited choice of which funds to use. I have a Fidelity S&P 500 Index fund and Vanguard Total Bond and Total International Stock in my 401(k). I use all three, but I also want to slant to small and value and there aren't index options available for that. So I supplement that with a couple of T.Rowe Price funds; these are relatively low cost and low turnover so decent choices in my book. They have captured the return of their asset classes well and improved performance of the overall vs. just saying well, the S&P 500 fund is a little cheaper so let's just go with that for my entire US stock allocation.

Secondly, indexing is harder than it looks. It seems Vanguard has fixed most of this now, but some of their early index funds were pretty bad. Large Value Index based on the Barra S&P 500 Value Index? Terrible in 2000-2002 - did not capture value at all. Small Cap Value with > 100% turnover annually because it used a bad index? Poor performance. These were bad enough that Vanguard (thankfully) switched the indexes they tracked as well as implemented banding techniques to minimize costs.

I do choose index funds in many cases for exactly the reasons you give. But some decent low cost active funds get painted with a broad brush as active = bad when there's an underlying principle behind it all (cost matter A LOT) that gets ignored.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Wakefield1 » Sun Feb 12, 2017 10:32 am

There might be similarity between an index fund and a near static fund that simply bought a basket of stocks at one time and then held them (and reinvested dividends in more shares) with as little change as possible except for redemptions or purchases (unless redemptions and purchases happened to be equal(and opposite)
I think in the early days of indexing there was some pretty significant computer programming written and kept as proprietary business information by some people who were with Vanguard at the time

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Sun Feb 12, 2017 11:48 am

avalpert wrote:Sure, but then you should ask why are you looking at active funds? If you accept that expected performance is the expected return of the asset class - fees then you will always choose the cheaper index funds - if you think something else contributes to performance you may look at active funds for that something else but then you are back to why would you expect Vanguard's active funds to have that something else?

You are making an unwarranted assumption here. Most if not all Bogleheads don't try to maximize returns. If they did they wouldn't own any bonds at all. What they are most concerned with are risk adjusted returns not just return alone. And how do you define the return of "the asset class". Is the large value class represented by the S&P 500, the Russell 1000 or a total stock market index. If a company in the S&P suddenly gets new competition or files for bankruptcy would you want your fund manager to keep it forever or at least until S&P gets rid of it or it's drops out of the top 5000 of the Total Market Index. Vanguard itself "actively" manages its index funds by changing the index when active managers start "beating the index". active managers could just replace low float securities with similar ones and reduce costs without changing pre cost returns or risk. Think of the old Russell or the old BarCap Total Bond Market Index which Vanguard replaced with the float adjusted version and which Bloomberg replaced or is replacing with the similar goal of reducing exposure to low float securities.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Sun Feb 12, 2017 12:39 pm

Doc wrote:
avalpert wrote:Sure, but then you should ask why are you looking at active funds? If you accept that expected performance is the expected return of the asset class - fees then you will always choose the cheaper index funds - if you think something else contributes to performance you may look at active funds for that something else but then you are back to why would you expect Vanguard's active funds to have that something else?

You are making an unwarranted assumption here. Most if not all Bogleheads don't try to maximize returns.

I made no such assumption. Do you think it is common for individuals (be them fund managers or just investors) to consistently get returns (or risk adjusted returns) higher than the asset class (or asset class blends) they are investing in?

And how do you define the return of "the asset class". Is the large value class represented by the S&P 500, the Russell 1000 or a total stock market index.

If we want to be precise is would define as the expected returns based on the factor loadings of index/class.

If a company in the S&P suddenly gets new competition or files for bankruptcy would you want your fund manager to keep it forever or at least until S&P gets rid of it or it's drops out of the top 5000 of the Total Market Index.

If I thought that my fund manager was able to forecast the impact that would have on their stock performance better than the market overall I would absolutely want them to act on it. Of course if I thought that I probably wouldn't be following much of a boglehead approach at all and i would submit that in that case I wouldn't want to chase low cost managers for the reasons I stated above.

But, if I think the manager isn't likely to out-forecast the market then no, by the time he acted it would already be priced in so I wouldn't want him to take any action.

Vanguard itself "actively" manages its index funds by changing the index when active managers start "beating the index". active managers could just replace low float securities with similar ones and reduce costs without changing pre cost returns or risk. Think of the old Russell or the old BarCap Total Bond Market Index which Vanguard replaced with the float adjusted version and which Bloomberg replaced or is replacing with the similar goal of reducing exposure to low float securities.

I don't think that is a fair characterization of why they have switched indexes most of the time but in any case it is concerning when a fund changes indexes or a manager keeps changing strategies - yet another reason not to chase active managers.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Wakefield1 » Sun Feb 12, 2017 4:16 pm

Is there such a thing as an index that underperforms the market consistently?
When does managing a portfolio or fund to track an index begin to morph into a "quant" type of management?

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Sun Feb 12, 2017 5:00 pm

avalpert wrote:to consistently get returns (or risk adjusted returns) higher

You started with just higher returns not risk adjusted returns which is the assumption I referred to.
avalpert wrote:If we want to be precise is would define as the expected returns based on the factor loadings of index/class.

So right away you drop the "risk" factor again. And if we do say use small value we will likely over the long run have higher returns at the expense of higher risk in the shorter term which you can compensate for by using the Larry Portfolio.
avalpert wrote:If I thought that my fund manager was able to forecast the impact that would have on their stock performance better than the market overall I would absolutely want them to act on it. Of course if I thought that I probably wouldn't be following much of a boglehead approach ...

I guess Bogleheads don't buy Vanguard active funds. I wonder then who is buying that $1 trillion in Vanguard active funds. Anti Bolglers?
avalpert wrote:I don't think that is a fair characterization of why they have switched indexes most of the time but in any case it is concerning when a fund changes indexes or a manager keeps changing strategies - yet another reason not to chase active managers.

If you define active manager as not being an index manager then how do you differentiate between Gemma Wright-Casparius, Principal of Vanguard, or Donald M. Butler, CFA, Principal of Vanguard, from Joshua C. Barrickman or Gerard C. O'Reilly? I'm willing to bet a starbucks that the latter two have had more portfolio "drift" than the former given the index churning that they are forced into in the pursuit of the lowest possible cost.
avalpert wrote:it is concerning when a fund changes indexes or a manager keeps changing strategies

OK, but the two active managers at Vanguard that I mentioned don't change keep changing strategies any more than the latter two index managers.

All active managers do not keep changing strategies and some are very successful.

Dan Newhall wrote:Talent, cost, and patience are our active pillars
Between 1985 and 2014, Vanguard active funds, on an asset-weighted basis, have delivered about 0.45% in outperformance, net of fees.
op. cit.

I guess you thing that all the "Bogleheads" just stopped reading after the initial paragraph.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Sun Feb 12, 2017 5:34 pm

Doc wrote:
avalpert wrote:to consistently get returns (or risk adjusted returns) higher

You started with just higher returns not risk adjusted returns which is the assumption I referred to.
avalpert wrote:If we want to be precise is would define as the expected returns based on the factor loadings of index/class.

So right away you drop the "risk" factor again. And if we do say use small value we will likely over the long run have higher returns at the expense of higher risk in the shorter term which you can compensate for by using the Larry Portfolio.

My mistake, I did realize I was dealing with such a pedant - of course the factors are risk factors, what other factor loading would I care about?

avalpert wrote:If I thought that my fund manager was able to forecast the impact that would have on their stock performance better than the market overall I would absolutely want them to act on it. Of course if I thought that I probably wouldn't be following much of a boglehead approach ...

I guess Bogleheads don't buy Vanguard active funds. I wonder then who is buying that $1 trillion in Vanguard active funds. Anti Bolglers?

For starters, I would doubt that most investors in Vanguard funds would call themselves bogleheads or even know what the term was supposed to mean - but that is neither here nor there. Do you really think the bogleheads on this forum who invest in various Vanguard active funds think that those fund managers are able to forecast stock performance better than the market overall? Sounds like a good poll to do - but I'm pretty confident in what the results would say.

avalpert wrote:it is concerning when a fund changes indexes or a manager keeps changing strategies

OK, but the two active managers at Vanguard that I mentioned don't change keep changing strategies any more than the latter two index managers.

All active managers do not keep changing strategies and some are very successful.

I'm sure there are those who have been very consistent in their strategies - I would challenge the idea that there are those that are very successful beyond what would be expected from luck itself - or the Bill Miller effect.

Dan Newhall wrote:Talent, cost, and patience are our active pillars
Between 1985 and 2014, Vanguard active funds, on an asset-weighted basis, have delivered about 0.45% in outperformance, net of fees.
op. cit.

I guess you thing that all the "Bogleheads" just stopped reading after the initial paragraph.
[/quote]
No, I think that most bogleheads would recognize the common marketing crap you see from all mutual fund providers and note that just because it was from Vanguard doesn't make it any less marketing crap.

Like I said, salesmen are gonna sell.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Sun Feb 12, 2017 5:55 pm

avalpert wrote:No, I think that most bogleheads would recognize the common marketing crap you see from all mutual fund providers and note that just because it was from Vanguard doesn't make it any less marketing crap.

Like I said, salesmen are gonna sell.

The research was conducted by Daniel W. Wallick; Brian R. Wimmer, CFA; James Balsamo and disccused in a 20 page report with data and data sources not just some marketing crap. And do you really think that Vanguard would publish work that showed their index funds were not "the best thing since sliced bread" as a marketing ploy?

Be careful, somebody may try to sell you an indexed bridge in Brooklyn. :wink:

Index funds "work" because they are an efficient way to keep costs down and that is often enough to get them above the 50th percentile in their "peer" group provided their peer group uses the same index which is usually not the case. See the William Sharpe paper.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Sun Feb 12, 2017 6:00 pm

Doc wrote:
avalpert wrote:No, I think that most bogleheads would recognize the common marketing crap you see from all mutual fund providers and note that just because it was from Vanguard doesn't make it any less marketing crap.

Like I said, salesmen are gonna sell.

The research was conducted by Daniel W. Wallick; Brian R. Wimmer, CFA; James Balsamo and disccused in a 20 page report with data and data sources not just some marketing crap. And do you really think that Vanguard would publish work that showed their index funds were not "the best thing since sliced bread" as a marketing ploy?

Be careful, somebody may try to sell you an indexed bridge in Brooklyn. :wink:

Index funds "work" because they are an efficient way to keep costs down and that is often enough to get them above the 50th percentile in their "peer" group provided their peer group uses the same index which is usually not the case. See the William Sharpe paper.


I did not see the data tables in the linked report - do you have them? And yes, I do think Vanguard would publish work that showed their active funds were even better than the best thing sliced bread as a marketing ploy - in fact that i exactly the type of marketing ploy I'd expect to see from them - you see a paper which says active funds in general under-perform but ours are special is great for them, and puts them right alongside all those other providers that have reports which show how their funds are the best out there.

Index funds work (when they work) because they keep costs down and because they track their target asset class broadly and not try to guess who the better performers in that asset class will be.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Mon Feb 13, 2017 8:31 am

avalpert wrote:I did not see the data tables in the linked report - do you have them?


There are several charts and a few tables in the report that are not in Newhall's "perspective". Are you looking at the correct link?

"Keys to improving the odds of active management success", Vanguard Research
https://personal.vanguard.com/pdf/ISGKEY.pdf

No I don't have the raw data but it is available from Morningstar. I have personally used Morningstar's Premium Mutual Fund Screener to show that low cost active mutual fund performance is likely to exceed the category average and very often exceeds an "appropriate" index fund. Low costs includes low turnover as well as low expense ratio and the absence of loads. The higher performance may come at the price of higher variance in some cases. Furthermore tracking error is present and may persist over several years time. If your Investment Policy Statement will not tolerate tracking error by all means don't buy any active funds or even an indexed mutual fund from a company that changes the fund's index every few years.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Mon Feb 13, 2017 9:59 am

Doc wrote:
avalpert wrote:I did not see the data tables in the linked report - do you have them?


There are several charts and a few tables in the report that are not in Newhall's "perspective". Are you looking at the correct link?

"Keys to improving the odds of active management success", Vanguard Research
https://personal.vanguard.com/pdf/ISGKEY.pdf


Yes, very pretty charts and tables that tell their marketing story - but none include the statistical details you would want to evaluate their conclusions.



No I don't have the raw data but it is available from Morningstar. I have personally used Morningstar's Premium Mutual Fund Screener to show that low cost active mutual fund performance is likely to exceed the category average and very often exceeds an "appropriate" index fund.

Of course finds with lower cost than the category average is likely (though not guaranteed of course) to exceed the category average (net of costs) - that is what you would expect. And some will no doubt exceed it's appropriate index equivalent - some will even do it over a long period of time - but whether what that some is is predictable ahead of time and whether those that do should be expected to continue to do so is kind of the whole point. You are still betting (not investing, betting) on risks that you do not expect to be compensated for - and thus aren't likely to be worth taking unless you desperately need to reach for higher returns. And if you are in that situation, again you are probably better off chasing real lottery tickets, not the slight payoffs you get from Vanguard's active set.

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Re: Vanguard: Beat the market long-term? Yes, it can be done.

Post by bertilak » Mon Feb 13, 2017 10:29 am

kenschmidt wrote:
avalpert wrote:Truthfully, if I was going to be betting on active managers for meaningful outperformance cheap funds are the last place I'd look (as are broad funds that act as closet-indexes but that is a separate discussion).


Cheap (low cost AND low turnover) active funds are the first and only place you should look. The only reason index funds are good performers* is because they are cheap. There's nothing else to it.

* they have many other great qualities but those don't affect performance

Bogle's fundamental philosophy seems to be the Cost Matters Hypothesis (CMH). It just so happens index funds are an effective way to keep costs down AND to be highly diversified. (I would add diversified to cheap and I think Bogle was assuming that as a given.) The Wellesley fund has been around since before S&P500 and TSM funds. In one of Bogle's books (or papers) he mentions that, way back when, he established an index for Wellesley to follow with its equity side. I don't remember him mentioning bonds, but I think indexes are less important for bonds.

Bogle says he still holds Wellesely for two reasons:
  1. Nostalgia
  2. Tax implications of selling

EDIT: The above references to Wellesely might actually be about Wellington. I'm not sure which.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Mon Feb 13, 2017 11:34 am

avalpert wrote: You are still betting (not investing, betting) on risks that you do not expect to be compensated for - and thus aren't likely to be worth taking unless you desperately need to reach for higher returns.

"There you go again" with the same unjustified assumption that the goal is to get higher return. Just last week I took a very large position in a Vanguard active bond fund instead of the nearest index cousin because the active fund had lower return and lower risk.

bertilak wrote:Bogle's fundamental philosophy seems to be the Cost Matters Hypothesis (CMH).

That says it all. It's cost that matters not index per se. Indexing is just an easy way to keep costs down and avalpert's salesmen like index funds too because they only have to compare the fund to the index i.e. compare it to itself.

FWIW less anyone thinks I am anti-index, about 75% of our equity position is indexed and it would be even higher except for some asset classes where there is a dearth of index funds available. On the other hand about 75% of our fixed income is actively managed because of lower risk and liquidity reasons not for higher returns.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Mon Feb 13, 2017 11:43 am

Doc wrote:
avalpert wrote: You are still betting (not investing, betting) on risks that you do not expect to be compensated for - and thus aren't likely to be worth taking unless you desperately need to reach for higher returns.

"There you go again" with the same unjustified assumption that the goal is to get higher return. Just last week I took a very large position in a Vanguard active bond fund instead of the nearest index cousin because the active fund had lower return and lower risk.


And again, I made no such assumption at all. I assumed you would only take risks if you expect to be compensated unless you were desperate for returns (though even then there are better ways to play the lottery).

bertilak wrote:Bogle's fundamental philosophy seems to be the Cost Matters Hypothesis (CMH).

That says it all. It's cost that matters not index per se. Indexing is just an easy way to keep costs down and avalpert's salesmen like index funds too because they only have to compare the fund to the index i.e. compare it to itself.

Costs and diversification - an active fund that charges you only 1 bp and puts you into 1 position isn't a good bet. An active fund that charge you 10 bp and cover 85% of the asset universe is perfectly fine - it will behave almost identically to an index fund in that universe...

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Mon Feb 13, 2017 12:16 pm

avalpert wrote: I assumed you would only take risks if you expect to be compensated unless you were desperate for returns ...

No. I often will NOT take risks even if I am compensated for taking those risks. Maybe you would but don't assume that everyone has the same outlook as you.

I don't buy long Treasuries because of the term risk even though I will be compensated by the higher guaranteed coupon and no credit risk.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Mon Feb 13, 2017 12:32 pm

Doc wrote:
avalpert wrote: I assumed you would only take risks if you expect to be compensated unless you were desperate for returns ...

No. I often will NOT take risks even if I am compensated for taking those risks. Maybe you would but don't assume that everyone has the same outlook as you.


I never assumed that - you keep asserting assumptions that I just haven't made. You are imagining attacks on your chosen risk exposure that aren't there.

Just because I assumed one would (or at least should) ONLY take a risk IF they expect to be compensated doesn't mean I assume that one ALWAYS takes EVERY risk they might be compensated for.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Mon Feb 13, 2017 12:54 pm

avalpert wrote:And again, I made no such assumption at all. I assumed you would only take risks if you expect to be compensated unless you were desperate for returns ...


avalpert wrote:I never assumed that - you keep asserting assumptions that I just haven't made.


avalpert wrote:You are imagining attacks on your chosen risk exposure that aren't there.

I don't take it as an attack.

You "seem" to be looking at it only from one side. Take more risk if you are rewarded for that risk. The other side is take less risk even though you get less reward.

It appears that you belive that active management means more risk. That is not always the case. Sometimes it is obvious that sticking to an index and buying the crap in that index is somehow better than an active manager that only buys the 499 stocks in the index that are not crap. I don't agree.

Enough.
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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by avalpert » Mon Feb 13, 2017 1:30 pm

Doc wrote:
avalpert wrote:And again, I made no such assumption at all. I assumed you would only take risks if you expect to be compensated unless you were desperate for returns ...


avalpert wrote:I never assumed that - you keep asserting assumptions that I just haven't made.


avalpert wrote:You are imagining attacks on your chosen risk exposure that aren't there.

I don't take it as an attack.

You "seem" to be looking at it only from one side. Take more risk if you are rewarded for that risk. The other side is take less risk even though you get less reward.


If it seems that way to you it is only because you aren't reading what I am writing. Note how your selective underlining left out the 'only take risks' part - you keeping committing the same fallacy by morphing 'only' into 'always'.

I never said to take more risk just because you expect to be rewarded for it - I have repeatedly said I haven't said that yet you keep reading it into my words. I have said you shouldn't take risk you don't expect to be rewarded for.

It appears that you believe that active management means more risk. That is not always the case. Sometimes it is obvious that sticking to an index and buying the crap in that index is somehow better than an active manager that only buys the 499 stocks in the index that are not crap. I don't agree.

I do believe that active management always means more risk than equivalent risk-exposed index - I disagree that it is ever obvious what 'crap' can be dropped from the index to beat it's (risk-adjusted) performance because I don't believe (nearly any) people can consistently beat the market and I don't believe that any retail investor can identify beforehand who a person who can consistently do that might be. So when you choose an active fund you are choosing to take on more, uncompensated risk - in some cases it might not matter (like treasuries) and in some cases the concept of an investible index may be too difficult to implement as to make the choice moot (fixed income arguably fits the bill here, possibly micro-caps, etc.)

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by petulant » Mon Feb 13, 2017 1:39 pm

Two points being made in this thread can be reconciled. The first is that there are these old low-cost active funds that actually may do just as well as the index. The second is that, if you're interested in active funds, why would you expect a skilled manager to hang around the low-cost side of the market?

Well, several things to point out. Like somebody alluded to before, some of these old funds have ingrained policies that have been set since before the advent of the modern indexing paradigm. Back then, the consumer-friendly approach was to own a diversified but smaller batch of stocks with good management and good balance sheets, then have low turnover, low fees, and manage redemption/investment/cash well. I would suggest that while there are good reasons to prefer indexing, that old paradigm never became bad, so older funds following policies based on it aren't terrible. But most new funds don't follow these paradigms; instead, they're factor-based, often smaller than old megafunds, have high turnover, and carry high fees.

Second, I think the BH consensus is that bond indexing hasn't fully caught up to stock indexing as far as performance goes, so it's ambiguous whether active or passive bond funds are better. Both Wellington and Wellesley have massive fixed income allocations that may be effectively managed and managed with respect to stock allocations very well.

Third, skilled managers may be attracted to low-cost funds if the size of the fund means that overall fees remain high. To get $1M out of a $500M fund, I need a .2% expense ratio. To get $1M out of a $100B fund, I only need a ridiculously small expense ratio. So these older, established funds can afford to hire expensive help without increasing costs much.

But that's a finite space, especially when skilled managers can go start a hedge fund and collect much higher fees.

Heck, I wouldn't be surprised if part of the problem with active management over the last 20 years didn't come from the move of financial skill to the hedge fund space (and then an alpha-shrinking competition between them).

So it's not crazy that megafunds with lots of management money following old consumer-friendly policies might do okay, while most mutual funds just can't be expected to generate alpha on a sustainable basis.

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Re: Hard to Believe [Vanguard insights on VG Active funds beating market]

Post by Doc » Mon Feb 13, 2017 3:11 pm

@Petulant

Re: Skill and income for the manager. A highly skilled manager may have a high "bonus" based on his performance or he may be satisfied with a lower percentage "bonus" on a lower performing fund that was much bigger base.

1% of 20 = 20% of 1 :D
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Beat the market long-term? Yes, it can be done.

Post by financial.freedom » Fri Feb 17, 2017 5:34 pm

From Vanguard:

https://personal.vanguard.com/us/insigh ... ROD:210:XX

From the article:

Between 1985 and 2014, Vanguard active funds, on an asset-weighted basis, have delivered about 0.45% in outperformance, net of fees.1 That may seem insignificant, but a small return advantage compounded over 30 years, can amount to a meaningfully higher-ending portfolio value. In this instance, an initial $10,000 investment invested across Vanguard's active funds, on an asset-weighted basis, would have grown to more than $287,000 at the end of 2014. That's more than 60% above their stated benchmark return of about $175,500.

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Re: Beat the market long-term? Yes, it can be done.

Post by qwertyjazz » Fri Feb 17, 2017 6:38 pm

I am glad that I am a Bogleheads and never would trust a company that tries to sell active management :oops:
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Re: Beat the market long-term? Yes, it can be done.

Post by galeno » Fri Feb 17, 2017 6:41 pm

If you are willing to hold a portfolio with more risk than "the market" you CAN beat it over long term. I did it for 11 years. It's a heck of a roller coaster however.
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Re: Beat the market long-term? Yes, it can be done.

Post by financial.freedom » Fri Feb 17, 2017 6:56 pm

galeno wrote:If you are willing to hold a portfolio with more risk than "the market" you CAN beat it over long term. I did it for 11 years. It's a heck of a roller coaster however.


They state their outperformance on an "assest-weighted" basis. If the weighting of assets is the same, I think they are trying to imply that they controlled for risk -- but then again, they don't specifically state "risk-adjusted" basis.

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Re: Beat the market long-term? Yes, it can be done.

Post by larryswedroe » Fri Feb 17, 2017 7:37 pm

the following is from a summary of my findings when I looked at Vanguard active funds, 15 years ending 9/15, in my series. Draw your own conclusions

• In the four asset classes for which there are comparable DFA funds, the Vanguard active funds outperformed in one.

• In the five asset classes for which there are comparable index funds from Vanguard, the firm’s active funds outperformed in four.

• A portfolio of Vanguard’s actively managed funds, equal-weighted in the four asset classes for which there are comparable DFA funds, returned 5.4% a year. The average expense ratio was 0.38%. An equal-weighted portfolio of DFA funds in the same four asset classes returned 6.6% a year, outperforming the comparable Vanguard portfolio by 1.2 percentage points a year. The DFA portfolio’s average expense ratio was 0.25%. The underperformance of the Vanguard actively managed portfolio was well in excess of the difference (0.13 percentage points) in the average expense ratios.

• In the five asset classes for which comparable Vanguard index funds are available, an equal-weighted portfolio of Vanguard’s actively managed funds returned 5.9% a year. The average expense ratio was 0.39%, well below the expense ratio of the typical actively managed fund. An equal-weighted portfolio of Vanguard index funds in the same five asset classes returned 5.6% a year, underperforming the actively managed portfolio by 0.3 percentage points a year. The Vanguard index fund portfolio’s average expense ratio was 0.08%. Vanguard’s actively managed funds were able to outperform despite the disadvantage of an expense ratio 0.31 percentage points higher.

I then as is my practice looked at the risk adjusted returns to see if there was alpha. Here's the summary

When we examine the results from the three-factor analysis, we find that eight of the 12 Vanguard funds generated positive alphas, with the average annual alpha coming in at 0.8%. Only two of the 12 funds showed statistically significant alpha at the 5% level, one being positive and the other being negative.

When we look at results from the four-factor analysis, we again find that eight of the 12 Vanguard funds generated positive alphas. The average annual alpha was slightly smaller at 0.6%. One of the 12 funds showed statistically significant positive alpha at the 5% level.

When we include all six factors in our analysis, we find that just four of the 12 Vanguard funds now showed positive alphas. The average annual alpha, however, was still positive at 0.1%.

Here's the full piece if interested https://www.advisorperspectives.com/articles/2016/01/12/has-vanguard-added-value-as-an-active-manager

Best wishes
Larry

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Re: Beat the market long-term? Yes, it can be done.

Post by triceratop » Fri Feb 17, 2017 7:46 pm

larryswedroe wrote:the following is from a summary of my findings when I looked at Vanguard active funds, 15 years ending 9/15, in my series. Draw your own conclusions

• In the four asset classes for which there are comparable DFA funds, the Vanguard active funds outperformed in one.

• In the five asset classes for which there are comparable index funds from Vanguard, the firm’s active funds outperformed in four.

• A portfolio of Vanguard’s actively managed funds, equal-weighted in the four asset classes for which there are comparable DFA funds, returned 5.4% a year. The average expense ratio was 0.38%. An equal-weighted portfolio of DFA funds in the same four asset classes returned 6.6% a year, outperforming the comparable Vanguard portfolio by 1.2 percentage points a year. The DFA portfolio’s average expense ratio was 0.25%. The underperformance of the Vanguard actively managed portfolio was well in excess of the difference (0.13 percentage points) in the average expense ratios.

• In the five asset classes for which comparable Vanguard index funds are available, an equal-weighted portfolio of Vanguard’s actively managed funds returned 5.9% a year. The average expense ratio was 0.39%, well below the expense ratio of the typical actively managed fund. An equal-weighted portfolio of Vanguard index funds in the same five asset classes returned 5.6% a year, underperforming the actively managed portfolio by 0.3 percentage points a year. The Vanguard index fund portfolio’s average expense ratio was 0.08%. Vanguard’s actively managed funds were able to outperform despite the disadvantage of an expense ratio 0.31 percentage points higher.


I then as is my practice looked at the risk adjusted returns to see if there was alpha. Here's the summary

When we examine the results from the three-factor analysis, we find that eight of the 12 Vanguard funds generated positive alphas, with the average annual alpha coming in at 0.8%. Only two of the 12 funds showed statistically significant alpha at the 5% level, one being positive and the other being negative.

When we look at results from the four-factor analysis, we again find that eight of the 12 Vanguard funds generated positive alphas. The average annual alpha was slightly smaller at 0.6%. One of the 12 funds showed statistically significant positive alpha at the 5% level.

When we include all six factors in our analysis, we find that just four of the 12 Vanguard funds now showed positive alphas. The average annual alpha, however, was still positive at 0.1%.

Here's the full piece if interested https://www.advisorperspectives.com/articles/2016/01/12/has-vanguard-added-value-as-an-active-manager

Best wishes
Larry


(emphasis mine)

This is all well and fine and I do draw a few conclusions. But let's remember that this is directly relevant only if you want to evaluate the trading strategies of DFA vs. Vanguard / their active strategies. But when it comes to the returns to actual live investors the advisor fees really do matter.

I am curious: Did you consider a 3rd variable in your analysis for the effect of advisor fees (at some typical level -- aware of the wide dispersion in advisor fees) on active management returns to investors?
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Re: Beat the market long-term? Yes, it can be done.

Post by willthrill81 » Fri Feb 17, 2017 7:51 pm

This article has already been discussed in the thread below.

viewtopic.php?t=208678
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Re: Beat the market long-term? Yes, it can be done.

Post by larryswedroe » Fri Feb 17, 2017 8:04 pm

triceratops
First the piece is about much more than DFA vs. Vanguard, but about active vs. two passive alternatives.

Second, advisor fees should of course be considered, but of course it's not a one way street as I pointed out many times, unless the ONLY value of an advisor is access to DFA. If that is not the case then the VALUE added the advisor brings should be added back and it should be more than the fee or there is no logical reason to pay it.

Third, Vanguard's active funds are very much like American's, as they don't style drift and gain exposure to the factors the academics have identified and then like other well run funds can exploit some of the market's inefficiencies that indexers cannot. So it doesn't surprise me that well run active funds that don't charge high fees can at least match, and possibly outperform index funds. Now I would not take that bet because of other risks. But if I HAD to choose active funds American and Vanguard's would be two good choices. And I use to own American funds for the very reasons I have stated.

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Re: Beat the market long-term? Yes, it can be done.

Post by staythecourse » Fri Feb 17, 2017 8:12 pm

Sorry didn't read the fine details of this thread, but curious if this included the active funds that have been closed during the time period, if any? Did they account for survivorship bias?

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Re: Beat the market long-term? Yes, it can be done.

Post by LadyGeek » Fri Feb 17, 2017 10:22 pm

FYI - I merged 4 similar threads into here. Note that articles links from 2016 have been revised to February 07, 2017.

- Beat the market long-term? Yes, it can be done.

Those linking to the "other" threads may see an error message "The requested topic does not exist." (The link is broken due to the merge.)
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Re: Beat the market long-term? Yes, it can be done.

Post by chatbotte » Sun Feb 19, 2017 5:06 pm

Not sure if this video entitled The Wrong Financial Advisor pertains to this thread, but feel free to watch it anyway if you enjoy a good laugh.

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