A bump on the road from active to passive

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restingonmylaurels
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A bump on the road from active to passive

Post by restingonmylaurels » Fri Sep 21, 2018 7:23 am

I have been looking for ways to increase my percentage of index funds. This is easiest to do in an IRA due to tax issues.

I have owned the STAR fund in my IRA since the beginning of the fund itself and although it would feel odd to part with such an old friend, I looked around for its closest index counterpart.

I assumed this was the LS Moderate Growth fund, which is 60.19% equity or the Target Date 2025 fund, which is 62.85% versus 62.91% for STAR. (Balanced Index fund has no international so was not considered).

Given the lower ER on the component index funds, I expected LS’ and TD’s returns to be slightly better than STAR.

And given this comment from Morningstar about TSM, “Most active funds, if you could go back 10 years ago and you look at all U.S. active funds in the large-blend category, only 8% that were around at the beginning of September of 2008 went on to survive and beat this fund. It's been a very, very difficult fund to beat,” I would surely expect the passive LS and TD funds to outperform active STAR.

What I found those was surprising, with STAR having the better average annual returns than the LS and TD funds over 1-year (10.11% v. 7.69% and 8.15%), 3-year (10.00% v. 8.56% and 9.01%), 5-year (9.08% v. 7.87% and 8.34%), and 10-year (7.94% v. 6.56% and 7.08%).

Does anyone have any insight on why the active STAR fund has performed better than these passive market indices funds over all these periods?

Is it related to alpha generated by the equity wizards at Wellington, Primecap, etc., differing international exposure, better bond selection, differing credit exposure, or something else?

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Re: A bump on the road from active to passive

Post by PFInterest » Fri Sep 21, 2018 7:29 am

yes it had better components than the other funds. the bond selection alone will give you most of that difference.
the past is no indication of the future, thats your problem.

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Re: A bump on the road from active to passive

Post by Jack FFR1846 » Fri Sep 21, 2018 7:39 am

Stop looking at past performance. Callan's periodic table of returns certainly brings that point home. In short, it shows how the top performing funds one year are the absolute worst the following year a number of times. ER will tell you how you're going to do going forward. As mentioned, stocks tend to return a bit more than bonds with more volatility.
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Re: A bump on the road from active to passive

Post by ReformedSpender » Fri Sep 21, 2018 7:46 am

Allocation AND selection of underlying funds has been the key to the STAR success

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Re: A bump on the road from active to passive

Post by HEDGEFUNDIE » Fri Sep 21, 2018 7:47 am

People don’t invest in index funds because they will perform better than a good active fund. They invest in index funds because they will never regret that they underperformed the market, because they own the whole market.

You can go for 20 years owning VTSAX and be perfectly ok that it has underperformed Primecap that whole time, or Total Bond Market underperforming PIMCO Total Return (yes in both cases even on a risk-adjusted, after-fees basis).

Index fund investing is a psychological defense mechanism against regret, which to be fair is a big driver of poor investment decision making.
Last edited by HEDGEFUNDIE on Fri Sep 21, 2018 8:32 am, edited 1 time in total.

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Re: A bump on the road from active to passive

Post by jeffyscott » Fri Sep 21, 2018 7:52 am

restingonmylaurels wrote:
Fri Sep 21, 2018 7:23 am
I have owned the STAR fund in my IRA since the beginning of the fund itself and although it would feel odd to part with such an old friend, I looked around for its closest index counterpart.

I assumed this was the LS Moderate Growth fund, which is 60.19% equity or the Target Date 2025 fund, which is 62.85% versus 62.91% for STAR. (Balanced Index fund has no international so was not considered).
Not an index, but assuming you have enough for admiral shares, you could go with Wellington at ER of 0.17%. That seems comparable to STAR and cost is not much more than the index alternatives you are considering (at 0.13% and 0.14%), which apparently do not offer admiral shares.

IMO, costs are what matters. Indexing is not magically better it just costs less.
press on, regardless - John C. Bogle

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Re: A bump on the road from active to passive

Post by Phineas J. Whoopee » Fri Sep 21, 2018 2:39 pm

HEDGEFUNDIE wrote:
Fri Sep 21, 2018 7:47 am
...
Index fund investing is a psychological defense mechanism against regret, which to be fair is a big driver of poor investment decision making.
Quite the subtle argument.

Index fund investing is acknowledgement of basic arithmetic.

PJW
Last edited by Phineas J. Whoopee on Fri Sep 21, 2018 5:45 pm, edited 1 time in total.

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Re: A bump on the road from active to passive

Post by MJW » Fri Sep 21, 2018 3:15 pm

OP – If your goals is simply to have more of your investments be comprised of index funds my recommendation is to just do it as long as you are clear on why you think it’s the appropriate move. Trying to pretend that the last 10 years didn’t happen, or that indexing will magically yield better results for some reason going forward are not justifiable reasons for doing it, IMO. You will have to accept that other fund options might outperform your selection over whatever time period you are looking at, and you certainly can’t worry about whether LS Moderate or whatever you choose will underperform STAR going forward.

For what it’s worth, I think STAR is a fine albeit more expensive fund, and could very well be as appropriate for achieving your investment goals as LS Moderate or similar options. None of us know that. Going by cost alone, you might as well take the less expensive choice.

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Re: A bump on the road from active to passive

Post by HEDGEFUNDIE » Fri Sep 21, 2018 6:00 pm

Phineas J. Whoopee wrote:
Fri Sep 21, 2018 2:39 pm
HEDGEFUNDIE wrote:
Fri Sep 21, 2018 7:47 am
...
Index fund investing is a psychological defense mechanism against regret, which to be fair is a big driver of poor investment decision making.
Quite the subtle argument.

Index fund investing is acknowledgement of basic arithmetic.

PJW
the returns earned by investors as a group must fall short of the market returns by precisely the amount of the aggregate costs they incur
This is a truism, not a hypothesis. It also does not say anything about the performance of any particular active fund.
Last edited by HEDGEFUNDIE on Fri Sep 21, 2018 11:05 pm, edited 1 time in total.

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Re: A bump on the road from active to passive

Post by Kenkat » Fri Sep 21, 2018 6:47 pm

Star Fund is cheap. Not as cheap as an index fund, but close enough that it doesn’t have a huge impact. You are talking about a difference of 0.19% per year. It doesn’t take much to make up with that either through a different (and perhaps better) asset mix or just random chance. What makes index funds good when it comes to performance is basically costs. Vanguard active funds are also low cost, almost as low as their index funds. So it is not a big surprise that Star Fund outperformed. Both funds are cut from similar cloth.
Last edited by Kenkat on Sat Sep 22, 2018 11:38 am, edited 1 time in total.

restingonmylaurels
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Re: A bump on the road from active to passive

Post by restingonmylaurels » Sat Sep 22, 2018 9:08 am

Jack FFR1846 wrote:
Fri Sep 21, 2018 7:39 am
Stop looking at past performance. Callan's periodic table of returns certainly brings that point home. In short, it shows how the top performing funds one year are the absolute worst the following year a number of times. ER will tell you how you're going to do going forward. As mentioned, stocks tend to return a bit more than bonds with more volatility.
If ten years of out-performance against its two main index-based VG comparative funds does not convince one, then how about a lifetime? Although I know these are not perfect comparisons, since inception STAR has returned 9.54% annual on average (since 1985), while TD 2025 is 6.92% (from 2003) and LS Moderate Growth is 7.69% (from 1994).

While I thoroughly understand the arguments for passive investing, VG makes it hard by offering such outstanding active funds. Not sure I can find a reason to change after this brief analysis.

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Re: A bump on the road from active to passive

Post by jeffyscott » Sat Sep 22, 2018 9:53 am

restingonmylaurels wrote:
Sat Sep 22, 2018 9:08 am
While I thoroughly understand the arguments for passive investing, VG makes it hard by offering such outstanding active funds. Not sure I can find a reason to change after this brief analysis.
Low costs are the key. It is not like you are proposing to keep an active fund with an ER of 1% or something, so I think it is a pretty minor decision. If you have $100K in STAR, your cost is $320 per year. If you shifted to the index funds you have proposed, cost would be $130-140. So that would be a difference of $180-190 per year.

FWIW, Wellington has beaten STAR since 1985 while apparently holding a similar portfolio, at least until 2010 when STAR increased foreign stock percentage. VWENX would cost $170 per year, giving you about 80% of the cost savings that TD 2025 or LS Moderate Growth would give.
Although I know these are not perfect comparisons, since inception STAR has returned 9.54% annual on average (since 1985), while TD 2025 is 6.92% (from 2003) and LS Moderate Growth is 7.69% (from 1994).
That is a pretty much meaningless comparison, you are comparing funds over different time periods. You can only compare STAR to TD 2025 from 2003 and to LS Moderate Growth from 1994. Also, I believe both those funds have changed portfolio during their existence as has STAR.
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Re: A bump on the road from active to passive

Post by GrowthSeeker » Sat Sep 22, 2018 10:20 am

HEDGEFUNDIE wrote:
Fri Sep 21, 2018 7:47 am
Index fund investing is a psychological defense mechanism against regret, which to be fair is a big driver of poor investment decision making.
Excellent! Insightful and rings true.
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: A bump on the road from active to passive

Post by columbia » Sat Sep 22, 2018 5:29 pm

What I found those was surprising, with STAR having the better average annual returns than the LS and TD funds over 1-year (10.11% v. 7.69% and 8.15%), 3-year (10.00% v. 8.56% and 9.01%), 5-year (9.08% v. 7.87% and 8.34%), and 10-year (7.94% v. 6.56% and 7.08%).
You also might be surprised to know that Vanguard Total World has underperformed the VG Global Equity fund since it (VTWSX) was created in 2009.

Active management is worse....unless it isn’t; the trick being that it usually is worse.

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Re: A bump on the road from active to passive

Post by LadyGeek » Sat Sep 22, 2018 7:08 pm

I removed a few posts which were in contention and appear to be the result of a misunderstanding - the meaning of "you" as an individual (personal investing strategy) vs. the meaning of "you" as a general case (general suggestion of investing strategy).
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Re: A bump on the road from active to passive

Post by fortyofforty » Sun Sep 23, 2018 6:51 am

columbia wrote:
Sat Sep 22, 2018 5:29 pm
What I found those was surprising, with STAR having the better average annual returns than the LS and TD funds over 1-year (10.11% v. 7.69% and 8.15%), 3-year (10.00% v. 8.56% and 9.01%), 5-year (9.08% v. 7.87% and 8.34%), and 10-year (7.94% v. 6.56% and 7.08%).
You also might be surprised to know that Vanguard Total World has underperformed the VG Global Equity fund since it (VTWSX) was created in 2009.

Active management is worse....unless it isn’t; the trick being that it usually is worse.
And knowing in advance which active funds will outperform is well-nigh impossible.
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Re: A bump on the road from active to passive

Post by restingonmylaurels » Sun Sep 23, 2018 8:10 am

In looking at the components of STAR and the TD 2025, the best I can figure is that the bonds in STAR (LTIG, STIG, GNMA) outperformed the bonds in TD 2025 (TBM, TIBM) and the U.S. equity components of STAR (Morgan Growth, U.S. Growth, Primecap, Explorer, Windsor, and Windsor II) outperformed TSM in total.

These particular active managers beat the index funds over long periods while having (slightly) higher ERs.

While it does not overcome the wisdom that costs matters and it is unlikely that one can pick the successful active managers in advance, does a solid track record, low ERs, and VG's oversight of these managers not provide the confidence that active VG funds could still be the right answer?

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Re: A bump on the road from active to passive

Post by vineviz » Sun Sep 23, 2018 8:12 am

restingonmylaurels wrote:
Sun Sep 23, 2018 8:10 am
In looking at the components of STAR and the TD 2025, the best I can figure is that the bonds in STAR (LTIG, STIG, GNMA) outperformed the bonds in TD 2025 (TBM, TIBM) and the U.S. equity components of STAR (Morgan Growth, U.S. Growth, Primecap, Explorer, Windsor, and Windsor II) outperformed TSM in total.

These particular active managers beat the index funds over long periods while having (slightly) higher ERs.

While it does not overcome the wisdom that costs matters and it is unlikely that one can pick the successful active managers in advance, does a solid track record, low ERs, and VG's oversight of these managers not provide the confidence that active VG funds could still be the right answer?
It provides confidence that these active managers were lucky in the past.

That doesn’t tell us much about how lucky they will be in the future.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: A bump on the road from active to passive

Post by restingonmylaurels » Sun Sep 23, 2018 8:37 am

vineviz wrote:
Sun Sep 23, 2018 8:12 am
It provides confidence that these active managers were lucky in the past.

That doesn’t tell us much about how lucky they will be in the future.
It is more than just luck. Having held this fund for decades, I recall times when the U.S. Growth fund was not performing well and by changing sub-advisors, VG eventually righted that ship.

If a company hires bright people who work together intelligently to make the company successful, were they just lucky?

Success in any economic venture is rarely due merely to luck.

Whether their particular skills and techniques will continue to outperform the indices is an unknown.

But then again, neither is the outcome of your next surgery. You are just trusting in the skills and techniques of the physician you have used for several decades. :o

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Re: A bump on the road from active to passive

Post by amitb00 » Sun Sep 23, 2018 9:10 am

Many years back I got exposed to Fairholme fund. They were beating S&P 500 by 15% (I may be off by few points)for over a decade. Its manager Borkowitz was lauded as manager of the year and decade by Morningstar and others. He will show up on numerous channels giving his view and folks will listen.
I bought and started DCAing. Just for one or two year I did fine on paper. Fast forward and fund lagged big time. Even in 2017 it returned negative. I DCAed into it till July 2018 and am now DCAing Out. Really bad experience for me. Fund was at one time 30B and now is less than 2B. Money I put was not significant compared to my worth but I still lost 10K or so.
As always YMMV.
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Re: A bump on the road from active to passive

Post by afan » Sun Sep 23, 2018 9:14 am

There is a voluminous research literature that says it is overwhelmingly luck on the part of the active managers. There is a small component of luck in choosing active managers who are either lucky or skilled. That part is luck because there is no way to tell distinguish luck from skill on the part of any particular active manager.

Fama and French did a deep analysis in their "Luck vs Skill" paper in Journal of Finance.
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Re: A bump on the road from active to passive

Post by Kenkat » Sun Sep 23, 2018 9:31 am

Long term measures of Vanguard active funds have shown that there is about a 50/50 chance of them beating their benchmark index. How is this possible when other studies show 80-90% of active funds fail to beat their index? Because the Vanguard active funds are also low cost - just like the index funds.

Luck really doesn’t matter - for every lucky manager, there is an unlucky manager, so in total, the lucky and unlucky managers will offset. It’s just when you add in the costs of both the lucky and unlucky manager that they both underperform the index funds.

Fairholme Fund? Too expensive, in the long run it is doomed to underperform. Vanguard funds don’t have the same cost issue though.

After 20 years of back and forth on this topic, both on this forum and the predecessor Morningstar forum, I have concluded that when it comes to performance, it doesn’t really matter whether you buy a Vanguard index fund or a Vanguard active fund. They are all really good choices.

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Re: A bump on the road from active to passive

Post by nedsaid » Sun Sep 23, 2018 9:33 am

If Star Fund has been successful, just enjoy your success. I would not let your commitment to passive indexing cause you to bail from a fund that has been wildly successful. Sort of like when people complained to President Lincoln about General Grant's drinking. Lincoln wanted to know what Grant was drinking and have it issued to the other Generals!

In my "New 'Doo" thread, I was trying to benchmark my own portfolio performance and someone mentioned the performance of the Star Fund. It was utterly fantastic, I just could not believe how well that fund had performed. So pretty much I would keep the Star Fund if I were the original poster and then find out what they are drinking! I just don't argue with success.
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Re: A bump on the road from active to passive

Post by jeffyscott » Sun Sep 23, 2018 9:36 am

restingonmylaurels wrote:
Sun Sep 23, 2018 8:10 am
While it does not overcome the wisdom that costs matters and it is unlikely that one can pick the successful active managers in advance, does a solid track record, low ERs, and VG's oversight of these managers not provide the confidence that active VG funds could still be the right answer?
It is certainly easier for a fund manager to add enough value to overcome an ER in the range of 0.2% to 0.4% than it is to overcome an ER of 1% or more. But the competition may also be tougher now, according to this: https://www.morningstar.com/articles/88 ... agers.html
press on, regardless - John C. Bogle

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Re: A bump on the road from active to passive

Post by vineviz » Sun Sep 23, 2018 11:55 am

restingonmylaurels wrote:
Sun Sep 23, 2018 8:37 am
vineviz wrote:
Sun Sep 23, 2018 8:12 am
It provides confidence that these active managers were lucky in the past.

That doesn’t tell us much about how lucky they will be in the future.
It is more than just luck.
Perhaps. But success is never present without luck.
restingonmylaurels wrote:
Sun Sep 23, 2018 8:37 am
Whether their particular skills and techniques will continue to outperform the indices is an unknown.<br/>

But then again, neither is the outcome of your next surgery. You are just trusting in the skills and techniques of the physician you have used for several decades.
First, I'm not using my physician for ANY surgery. I'll go to a surgeon for that.

Second, in surgery there is a direct causal relationship between the "skills and techniques" of the surgeon and the outcomes for the patient. That isn't true in active fund management.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: A bump on the road from active to passive

Post by restingonmylaurels » Mon Sep 24, 2018 7:20 am

vineviz wrote:
Sun Sep 23, 2018 11:55 am
in surgery there is a direct causal relationship between the "skills and techniques" of the surgeon and the outcomes for the patient. That isn't true in active fund management.
Not sure I buy that. There should be a direct casual relationship between active fund management skills and techniques of the best managers and outcomes, before fees. Besides fees, the problem is that you do not know when it is going to show up.

I think you are stating the case against active management generally. I am only looking at active management as practiced or overseen by VG. Within that regime, they seem to have identified in advance certain active managers who have turned out to be successful over time.

And why shouldn't they be able to do what we as individual investors cannot, as they stand at the very summit of the investing world.

So perhaps the advice of BHers should be to indeed invest in passive index funds if starting out or if you can make the change without impacting yourself negatively but if you are with a low-cost active VG fund with a long track record of success (e.g. STAR, Wellesley, Wellington), stay the course with those funds as well.

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Re: A bump on the road from active to passive

Post by vineviz » Mon Sep 24, 2018 8:13 am

restingonmylaurels wrote:
Mon Sep 24, 2018 7:20 am
vineviz wrote:
Sun Sep 23, 2018 11:55 am
in surgery there is a direct causal relationship between the "skills and techniques" of the surgeon and the outcomes for the patient. That isn't true in active fund management.
Not sure I buy that. There should be a direct casual relationship between active fund management skills and techniques of the best managers and outcomes, before fees.
Lots of investors agree with you, despite all the evidence to the contrary.
restingonmylaurels wrote:
Mon Sep 24, 2018 7:20 am
I think you are stating the case against active management generally. I am only looking at active management as practiced or overseen by VG. Within that regime, they seem to have identified in advance certain active managers who have turned out to be successful over time.

And why shouldn't they be able to do what we as individual investors cannot, as they stand at the very summit of the investing world.
Do you think that Fidelity, T. Rowe Price, Morgan Stanley, Black Rock, Capital Group, MFS, etc. aren't at that same "summit"?

In any case, its an easy empirical case to examine: over the past three years, the average active Vanguard fund had a negative alpha. That means, after fees and expenses, the majority of their funds (57%) failed to match or beat a passive benchmark.

Vanguard's asset-weighted alpha was -0.32%, which you can compare to (for example) Fidelity Investment's active funds which had an asset-weighted alpha of +0.01% to see that data don't support the assertion that Vanguard has some special ability to find active fund managers.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: A bump on the road from active to passive

Post by restingonmylaurels » Mon Sep 24, 2018 8:39 am

vineviz wrote:
Mon Sep 24, 2018 8:13 am
In any case, its an easy empirical case to examine: over the past three years, the average active Vanguard fund had a negative alpha. That means, after fees and expenses, the majority of their funds (57%) failed to match or beat a passive benchmark.

Vanguard's asset-weighted alpha was -0.32%, which you can compare to (for example) Fidelity Investment's active funds which had an asset-weighted alpha of +0.01% to see that data don't support the assertion that Vanguard has some special ability to find active fund managers.
That is interesting information. I would be interested to learn more about the details underlying the figures you are quoting, on a fund-specific instead of a firm-specific level. Can you provide a link to where you are getting those numbers?

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Re: A bump on the road from active to passive

Post by vineviz » Mon Sep 24, 2018 9:51 am

restingonmylaurels wrote:
Mon Sep 24, 2018 8:39 am
vineviz wrote:
Mon Sep 24, 2018 8:13 am
In any case, its an easy empirical case to examine: over the past three years, the average active Vanguard fund had a negative alpha. That means, after fees and expenses, the majority of their funds (57%) failed to match or beat a passive benchmark.

Vanguard's asset-weighted alpha was -0.32%, which you can compare to (for example) Fidelity Investment's active funds which had an asset-weighted alpha of +0.01% to see that data don't support the assertion that Vanguard has some special ability to find active fund managers.
That is interesting information. I would be interested to learn more about the details underlying the figures you are quoting, on a fund-specific instead of a firm-specific level. Can you provide a link to where you are getting those numbers?
I pulled them from Morningstar because it was easy and quick, but there are other ways to do it that are even more accurate and complicated.

Not sure if this link will work if you aren't a subscriber but: http://performance.morningstar.com/fund ... ture=en-US

Under the "Ratings & Risk" tab, you're looking for the section called "MPT Statistics". You can view the alpha versus the best-fit index for a three year period (which I think is the most relevant number to look at).

You can also see alpha for 5, 10 and 15 year period against a standard index. This can be helpful, but it might not be as accurate a reflection of the fund style or current assets (alpha is harder to replicate as funds grow in size).

One thing Morningstar doesn't tell you is whether the alpha (positive or negative) is statistically significant. It rarely is, which is why its reasonable to assume that any active fund has an expected alpha (net of fess) of zero regardless of its recent performance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: A bump on the road from active to passive

Post by restingonmylaurels » Mon Sep 24, 2018 11:28 am

vineviz wrote:
Mon Sep 24, 2018 9:51 am
restingonmylaurels wrote:
Mon Sep 24, 2018 8:39 am
vineviz wrote:
Mon Sep 24, 2018 8:13 am
In any case, its an easy empirical case to examine: over the past three years, the average active Vanguard fund had a negative alpha. That means, after fees and expenses, the majority of their funds (57%) failed to match or beat a passive benchmark.

Vanguard's asset-weighted alpha was -0.32%, which you can compare to (for example) Fidelity Investment's active funds which had an asset-weighted alpha of +0.01% to see that data don't support the assertion that Vanguard has some special ability to find active fund managers.
That is interesting information. I would be interested to learn more about the details underlying the figures you are quoting, on a fund-specific instead of a firm-specific level. Can you provide a link to where you are getting those numbers?
I pulled them from Morningstar because it was easy and quick, but there are other ways to do it that are even more accurate and complicated.

Not sure if this link will work if you aren't a subscriber but: http://performance.morningstar.com/fund ... ture=en-US

Under the "Ratings & Risk" tab, you're looking for the section called "MPT Statistics". You can view the alpha versus the best-fit index for a three year period (which I think is the most relevant number to look at).

You can also see alpha for 5, 10 and 15 year period against a standard index. This can be helpful, but it might not be as accurate a reflection of the fund style or current assets (alpha is harder to replicate as funds grow in size).

One thing Morningstar doesn't tell you is whether the alpha (positive or negative) is statistically significant. It rarely is, which is why its reasonable to assume that any active fund has an expected alpha (net of fess) of zero regardless of its recent performance.
I have had a look at the MPT numbers on the three VG funds I was referring to (STAR, Wellesley, Wellington) and all have significantly positive three-years alphas against the best-fit indices, which I assume is after fees. Is that correct?

And this is against best-fit indices that sometimes are not a close match. STAR’s best-fit index is the Morningstar Moderately Aggressive Target Risk Allocation, which has 80% in stocks and 20% in bonds (STAR is about 63% and 37% stocks and bonds). It also has 49% US stock and 31% international, while STAR is 44% and 19%. It also has 2% long bonds and 3% short bonds, while STAR has 12% and 12%. Not sure why the M* Moderate TR Allocation is not more appropriate.

My first impression is that STAR is being compared against a more aggressive index and still is showing alpha over all the periods against both the best-fit and standard indices (not to mention the comparable Life Strategy and Target Date funds I looked at above). The Sharpe and Sortino ratios look good as well.

Just focusing on this fund, do you believe that the alpha shown is statistically significant?

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vineviz
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Re: A bump on the road from active to passive

Post by vineviz » Mon Sep 24, 2018 1:50 pm

restingonmylaurels wrote:
Mon Sep 24, 2018 11:28 am
Just focusing on this fund, do you believe that the alpha shown is statistically significant?
I don't think so.

For one thing, STAR is a fund-of-funds and the active Vanguard US funds that STAR holds had a negative alpha.

Another way to look at it is to see what a similar combination of index funds would have done over a similar period of time. Here's what an index fund that mired the asset allocation of STAR would have done since 2010 (thats the oldest corporate bond index funds I could find quickly).

https://www.portfoliovisualizer.com/bac ... ation7_1=9

STAR failed to beat this "custom benchmark" over 8 years. I'd say any perceived alpha is coming from an unusual asset allocation rather than active management success.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

restingonmylaurels
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Re: A bump on the road from active to passive

Post by restingonmylaurels » Tue Sep 25, 2018 6:46 am

vineviz wrote:
Mon Sep 24, 2018 1:50 pm
restingonmylaurels wrote:
Mon Sep 24, 2018 11:28 am
Just focusing on this fund, do you believe that the alpha shown is statistically significant?
I don't think so.

For one thing, STAR is a fund-of-funds and the active Vanguard US funds that STAR holds had a negative alpha.
I looked at the M* MPT stats for each of the 11 component funds and generally the growth funds (both US and international) had positive alpha and the value funds (both US and international) negative alpha. One of the bond funds had positive alpha. The positive alphas were significantly higher than in absolute terms than the negative alphas. Again, while these indices are best-fit, they are by no means perfect-fit indices and so the alpha could be off either way.
vineviz wrote:
Mon Sep 24, 2018 1:50 pm
Another way to look at it is to see what a similar combination of index funds would have done over a similar period of time. Here's what an index fund that mired the asset allocation of STAR would have done since 2010 (thats the oldest corporate bond index funds I could find quickly).

https://www.portfoliovisualizer.com/bac ... ation7_1=9.

STAR failed to beat this "custom benchmark" over 8 years.
Not sure the custom portfolio you have derived actually mirrored STAR (you ignored the GNMA contribution). So I put in the iShares GNMA bond ETF, which started in 2012, and ran the comparison again from Jan 2013 to Aug 2018. STAR had better CAGR and Sharpe ratios against your revised custom index over this most recent 5 1/2 year period, despite a higher ER.
vineviz wrote:
Mon Sep 24, 2018 1:50 pm
I'd say any perceived alpha is coming from an unusual asset allocation rather than active management success.
That would be an interesting thing to measure, alpha from fund of funds allocation percentages.

In any case, my comparators for STAR are easily investable one-fund VG alternatives, not a multi-fund custom portfolio. These alternatives seem to be the index fund of funds TD 2025 and LS Moderate Growth. Based on what I have seen, STAR beat them both in all past periods noted, despite a slightly ER. Whether it will again in future periods is unknown.

While your analysis certainly has provided some new ways to think about the component parts of a fund of funds, in the end it is the total results that matter, just like it is the risk of your whole portfolio that matters, not the risk of the individual components.

I remain open to any new insights that instruct me that is wiser to move from this particular VG active fund to a VG index fund.

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fortyofforty
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Re: A bump on the road from active to passive

Post by fortyofforty » Wed Sep 26, 2018 9:20 pm

For me the best feature of STAR is the $1,000 price of entry. Even a very small investor can begin the process of building wealth, within the framework of a good company like Vanguard. If they choose later to move to another fund or ETF, once they've built up a little nest egg, great. If not, they could do a lot worse than a steady balanced fund like STAR.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

wrongfunds
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Re: A bump on the road from active to passive

Post by wrongfunds » Thu Sep 27, 2018 12:23 pm

I DCAed into it till July 2018 and am now DCAing Out.
How does DCAing Out soften the blow? Why not liquidate it fully? Just curious as I do have some "wrong" funds which I am not sure if slowly DCAing out makes sense or not.

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