Advisor laying out a convincing argument for active management?

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Darth Vanguard
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Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

I was over at a friends house watching football this past weekend when the topic of investments came up. He has been using an independent advisor for roughly 20 years and has been quite pleased with him. The advisor is a strong advocate of active management and uses it almost exclusively through wrap (AUM) accounts. To the credit of the advisor, he does not seem to be chasing performance & replacing funds on a regular basis. According to my friend, who stays on top of things, while there is an occasional new fund added/replaced, the majority of the funds have been held the entire term. Essentially, the advisor is just investing new money and doing an annual rebalance for him.

I asked him if he thought of doing this himself since it didn't seem too complicated, talked about costs, index funds, discussed the SPIVA scorecard, etc. He pretty casually dismissed everything and said he was doing better than he would on his own. Fine, he's happy - I'm not trying to change his mind. Back to football. :happy

He did, however, show me some of the funds he was using and it really threw me for a loop. Here are a handful that I wrote down:
JP Morgan Small Cap Equity (VSEAX)
JP Morgan Large Cap Core +(JLCAX)
Artisan Mid Cap Fund (ARTMX)
Oakmark International (OAKIX)
Franklin Growth (FKGRX)
MFS International Diversified (MDIDX)

I entered these into Portfolio Visualizer and compared them to their benchmarks. They have all outperformed over the long term, and I was hard pressed to find any reasonable time period (5+ years) where they were not outperforming their benchmark. VSEAX was a huge discrepancy - almost twice as much ending value over a 25 year period.

What am I missing? Especially in the VSEAX case, 25 years of significant out-performance is nothing to sneeze at. I understand that there is no guarantee this will happen in the future, but again, 25 years is significant. It started to make me think maybe active can play a role, but that goes against almost everything I have learned here.

Maybe some of you guys can pick these funds apart better than I can, or point out what I am overlooking in my assessment.

Thanks,
Darth
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PVW
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Re: Advisor laying out a convincing argument for active management?

Post by PVW »

In hindsight, there will always be funds that outperform their benchmarks. Even over long periods. Probably some of it is luck, probably some of it is skill.

The real question you need to ask is "How well have the funds done since they were purchased?". It's possible the funds have been chosen for the very reason you have noted - that their past performance reflects well on the advisor that chose them.
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Re: Advisor laying out a convincing argument for active management?

Post by GrowthSeeker »

I haven’t checked them out, but is it possible that these funds track 90% the benchmark and 10% TSM or something? i e take on more risk than the benchmark?
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Re: Advisor laying out a convincing argument for active management?

Post by soccerrules »

I looked up VSEAX on Morningstar with an ER of 1.25% and then probably a 1% AUM. So the fund will need to perform at least 2.25% ahead of the benchmark to break even, yes ?
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Re: Advisor laying out a convincing argument for active management?

Post by David Jay »

First, an active management strategy is pretty much assured to over-perform or under-perform the market. So yes, some portfolios over-perform. There is no way to differentiate between outperformance due to skill or due to luck.

Don’t forget to include the AUM cost over those 25 years.
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Re: Advisor laying out a convincing argument for active management?

Post by Steve Reading »

PVW wrote: Wed Jan 08, 2020 1:54 pm In hindsight, there will always be funds that outperform their benchmarks. Even over long periods. Probably some of it is luck, probably some of it is skill.

The real question you need to ask is "How well have the funds done since they were purchased?". It's possible the funds have been chosen for the very reason you have noted - that their past performance reflects well on the advisor that chose them.
That’s not even the real question because there’s a sampling bias with the OP. If the OP had friends who had Advisors that invested in badly performing funds, they probably wouldn’t freely discuss that advisor or might even fire them. So the fact that these funds did well means that it is more likely that advisors that happened to choose them would come up in conversation

This happens often in BHs. People start a thread with a strategy they like and test it going forward. If it does poorly, the thread is forgotten. If it does well, then we might remember it and foolishly think it passed the “out of sample” barrier when in fact it might still be chance.
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Re: Advisor laying out a convincing argument for active management?

Post by celia »

David Jay wrote: Wed Jan 08, 2020 2:03 pm First, an active management strategy is pretty much assured to over-perform or under-perform the market. So yes, some portfolios over-perform. There is no way to differentiate between outperformance due to skill or due to luck.

Don’t forget to include the AUM cost over those 25 years.
OP, To analyze this properly, you should look at ALL his funds that have been held 5+ years. It appears you are only looking at the over-performers, not the under-performers here.
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Re: Advisor laying out a convincing argument for active management?

Post by almostretired1965 »

More importantly, you need to look at how the funds have performed SINCE his advisor bought them ..... Once you control for that, I'm pretty confident there will be no out-performance relative to the appropriate market benchmark, and most likely a loss taking into account expenses.
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Re: Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

celia wrote: Wed Jan 08, 2020 2:08 pm
David Jay wrote: Wed Jan 08, 2020 2:03 pm First, an active management strategy is pretty much assured to over-perform or under-perform the market. So yes, some portfolios over-perform. There is no way to differentiate between outperformance due to skill or due to luck.

Don’t forget to include the AUM cost over those 25 years.
OP, To analyze this properly, you should look at ALL his funds that have been held 5+ years. It appears you are only looking at the over-performers, not the under-performers here.
Yes, those are the only ones I have looked at. According to my friend, the story is the same with most - not all - of the funds he uses.
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Re: Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

almostretired1965 wrote: Wed Jan 08, 2020 2:15 pm More importantly, you need to look at how the funds have performed SINCE his advisor bought them ..... Once you control for that, I'm pretty confident there will be no out-performance relative to the appropriate market benchmark, and most likely a loss taking into account expenses.
Like I mentioned, most of these funds were purchased back when he started working with the advisor. It does not appear the advisor is picking last years winners and moving everything into them. I have not factored in AUM costs.

But regardless of the AUM cost, could it make sense to own some active funds if they can be purchased without an AUM or load? I know Fidelity has quite a few NTF funds...
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Re: Advisor laying out a convincing argument for active management?

Post by Jack FFR1846 »

You say the advisor does nothing more than takes your friend's money and invests it......and rebalances. So for his 15 minutes a year of work, he's paid what? If your friend has $1M invested at 1% and we ignore the kickbacks, that's $10k. At 15 minutes, that's $40k per hour. I would like to cut your friend's lawn. I will supply my own lawn mower, bag the grass and haul it away. And I'll do that at the cut rate of only $20k per hour.


Even if your friend loves these funds.....he can leave the funds as is and fire the advisor. With all this extra money, maybe I should ask $30k an hour to mow his lawn.
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Darth Vanguard
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Re: Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

soccerrules wrote: Wed Jan 08, 2020 2:00 pm I looked up VSEAX on Morningstar with an ER of 1.25% and then probably a 1% AUM. So the fund will need to perform at least 2.25% ahead of the benchmark to break even, yes ?

I don't believe he is in the A share with his platform. I think he gets the institutional share class which would be less.

I would assume Portfolio Visualizer takes the ER into consideration in its projections, but not the AUM. However, the CAGR on Portfolio Visualizer more that offsets the AUM.
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Re: Advisor laying out a convincing argument for active management?

Post by junior »

I don't see an argument for active management in the facts that have been presented.

It seems the argument should be the adviser is a genius who can predict which fund will outperform 25 years in advance? And you should hire him because if one of the listed funds won't outperform 25 years in the future he'll move you to an alternative fund that will outperform 25 years from now since he can predict the future?

I don't necessarily find your friend's account plausible, but if you believe it hire the adviser...
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Re: Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

Jack FFR1846 wrote: Wed Jan 08, 2020 2:28 pm You say the advisor does nothing more than takes your friend's money and invests it......and rebalances. So for his 15 minutes a year of work, he's paid what? If your friend has $1M invested at 1% and we ignore the kickbacks, that's $10k. At 15 minutes, that's $40k per hour. I would like to cut your friend's lawn. I will supply my own lawn mower, bag the grass and haul it away. And I'll do that at the cut rate of only $20k per hour.


Even if your friend loves these funds.....he can leave the funds as is and fire the advisor. With all this extra money, maybe I should ask $30k an hour to mow his lawn.
I agree, it seems expensive. I got the vibe from him pretty quickly that he was fine with what he was doing and wasn't going to change. I'm not going to push it - his money, his choice.

My question was more along the line of could an active strategy be effective if held for the long term...
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Re: Advisor laying out a convincing argument for active management?

Post by Toons »

Pick a low cost fund
Index
Hold forever
Take the dividends in cash when you retire
Ignore "performance"
:idea:
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retiredjg
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Re: Advisor laying out a convincing argument for active management?

Post by retiredjg »

Darth Vanguard wrote: Wed Jan 08, 2020 2:22 pm
celia wrote: Wed Jan 08, 2020 2:08 pm
David Jay wrote: Wed Jan 08, 2020 2:03 pm First, an active management strategy is pretty much assured to over-perform or under-perform the market. So yes, some portfolios over-perform. There is no way to differentiate between outperformance due to skill or due to luck.

Don’t forget to include the AUM cost over those 25 years.
OP, To analyze this properly, you should look at ALL his funds that have been held 5+ years. It appears you are only looking at the over-performers, not the under-performers here.
Yes, those are the only ones I have looked at. According to my friend, the story is the same with most - not all - of the funds he uses.
Part of what you are seeing could be "survivorship". The advisor has kept all the funds that have done well. The funds that did not do well are gone - have not survived in the friend's portfolio. The losers could just be sold or they may have been absorbed by other funds that were doing well (this is one way a company can get rid of losers without allowing the fund to actually fail).

So you can see how the current portfolio would be full of funds with great performance and not still have any poor performers. That does not mean the portfolio has not lost money along the way to the poor performers. Smoke and mirrors.

If you want some active management, buy a fund or two yourself and keep the costs low. And don't pay AUM. For example, the Wellesley Income fund and Wellington fund have long been favorites even though they are actively managed funds. If you look at the expense ratios, you'll see they are very low cost for actively managed funds.

Vanguard has other lower cost active funds. Not so sure about the other fund families though.
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Re: Advisor laying out a convincing argument for active management?

Post by CAsage »

There was a girl in my High School who partied all the time, did drugs, barely graduated.... Her parents bribed her to get through High School by buying her a car. Oddly enough, she met a rich guy with a yacht and married him. Did quite well, but it's an anecdotal story not the path I would recommend. Every single analysis of mutual fund performance, survival bias, etc in books by Bogle, Malkiel, Shiller, Burns, Bernstein, has clearly shown that while some actively managed funds can outperform, on average they do not. It's just math - on average, they cannot consistently outperform year in and year out due to the load. Yup, there are a few outliers, but don't plan that way. It's not different this time either.
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Re: Advisor laying out a convincing argument for active management?

Post by ohai »

Maybe the advisor is in fact great at picking outperforming managers. Who knows? What would help convince me that picking managers adds value and the results were not random is a logical explanation of why he picked those managers and why they have outperformed. You should also make sure that they providing superior risk adjusted, i.e. the outperformance is not due to tilt into riskier assets.
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Re: Advisor laying out a convincing argument for active management?

Post by Teague »

Darth Vanguard wrote: Wed Jan 08, 2020 2:43 pm My question was more along the line of could an active strategy be effective if held for the long term...
Sure it could.

The problem is there is no way to tell which active strategy, or which advisor or manager, will outperform going forward. Unfortunately, past performance really is an unreliable way to choose. And there's no way to tell how long the "long term" success will last.

So is it possible? Yes. Is it likely to happen? Unfortunately, the answer seems to be no.
Last edited by Teague on Wed Jan 08, 2020 3:35 pm, edited 1 time in total.
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Re: Advisor laying out a convincing argument for active management?

Post by delamer »

Darth Vanguard wrote: Wed Jan 08, 2020 2:43 pm
Jack FFR1846 wrote: Wed Jan 08, 2020 2:28 pm You say the advisor does nothing more than takes your friend's money and invests it......and rebalances. So for his 15 minutes a year of work, he's paid what? If your friend has $1M invested at 1% and we ignore the kickbacks, that's $10k. At 15 minutes, that's $40k per hour. I would like to cut your friend's lawn. I will supply my own lawn mower, bag the grass and haul it away. And I'll do that at the cut rate of only $20k per hour.


Even if your friend loves these funds.....he can leave the funds as is and fire the advisor. With all this extra money, maybe I should ask $30k an hour to mow his lawn.
I agree, it seems expensive. I got the vibe from him pretty quickly that he was fine with what he was doing and wasn't going to change. I'm not going to push it - his money, his choice.

My question was more along the line of could an active strategy be effective if held for the long term...
No one can promise you that there isn’t some advisor who’d put you into active funds that would beat their benchmarks (even after his/her fees). Nor can anyone promise you that you couldn’t pick active funds on your own that would beat their benchmarks.

But the odds are against it. Which is why Bogleheads invest in index funds.
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Re: Advisor laying out a convincing argument for active management?

Post by NotWhoYouThink »

I asked him if he thought of doing this himself since it didn't seem too complicated, talked about costs, index funds, discussed the SPIVA scorecard, etc. He pretty casually dismissed everything and said he was doing better than he would on his own. Fine, he's happy - I'm not trying to change his mind. Back to football. :happy
This is the case for many, many people who use advisors, and has nothing whatever to do with active management. Most people, left to their own devices, do a lousy job of managing their investments. They buy and sell too often, or ignore their portfolio for years while they are raising families and leave everything in cash, or make any number of investment mistakes that you can see described on this forum

It could be the portfolio is doing well by taking more risk than your friend would otherwise take, or maybe some of the picks are lucky. But that has nothing to do with active or passive management either.

The benefit of passive funds come when investors decide, based on research and reflection, what level of risk to take, and choose funds to take those risks. In that case, since passive funds have lower costs, investors do better with them than with active funds.

If your friend would do little research and flounder on his own, then whatever an advisor who is not a criminal chooses will almost certainly be better. If you wanted a low risk level with passive funds, and your friend wanted to throw caution to the wind with active funds, he would likely see more growth.

The most important thing is how much you put into your investments - high earnings and high savings.
The next most important thing is your asset allocation - how concentrated and risky, or diversified and safe your investments are.
Well below either of those 2 things in importance and impact is cost.

Well, well, below that is active vs. passive. It is important, but pretty far down on the list.
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Re: Advisor laying out a convincing argument for active management?

Post by Kenkat »

soccerrules wrote: Wed Jan 08, 2020 2:00 pm I looked up VSEAX on Morningstar with an ER of 1.25% and then probably a 1% AUM. So the fund will need to perform at least 2.25% ahead of the benchmark to break even, yes ?
The ER is included in fund performance numbers, so that does not come in to play. A AUM/wrap fee does however and that’s usually a significant drag long term and difficult to overcome.
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Re: Advisor laying out a convincing argument for active management?

Post by Blue456 »

305pelusa wrote: Wed Jan 08, 2020 2:05 pm
PVW wrote: Wed Jan 08, 2020 1:54 pm In hindsight, there will always be funds that outperform their benchmarks. Even over long periods. Probably some of it is luck, probably some of it is skill.

The real question you need to ask is "How well have the funds done since they were purchased?". It's possible the funds have been chosen for the very reason you have noted - that their past performance reflects well on the advisor that chose them.
That’s not even the real question because there’s a sampling bias with the OP. If the OP had friends who had Advisors that invested in badly performing funds, they probably wouldn’t freely discuss that advisor or might even fire them. So the fact that these funds did well means that it is more likely that advisors that happened to choose them would come up in conversation

This happens often in BHs. People start a thread with a strategy they like and test it going forward. If it does poorly, the thread is forgotten. If it does well, then we might remember it and foolishly think it passed the “out of sample” barrier when in fact it might still be chance.
Off topic. But you went to medical school? I’m asking because your interpretation is bread and butter of statistical analysis they teach us.
Anyways +1. Great explanation.
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Re: Advisor laying out a convincing argument for active management?

Post by edgeagg »

Assuming a 1% annual = 0.25% quarterly AUM fee, a comparison of VSEAX and VRTIX shows a slight advantage for VRTIX.
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Re: Advisor laying out a convincing argument for active management?

Post by financeperchance »

These are not the results that I get. Go to:
https://www.portfoliovisualizer.com/backtest-portfolio

Portfolio 1 is this:
Ticker Name Allocation
VSEAX JPMorgan Small Cap Equity A 16.00%
JLCAX JPMorgan US Large Cap Core Plus A 17.00%
ARTMX Artisan Mid Cap Investor 16.00%
OAKIX Oakmark International Investor 17.00%
FKGRX Franklin Growth A 17.00%
MDIDX MFS Intl Diversification A 17.00%

Portfolio 2 is this:
Ticker Name Allocation
VTI Vanguard Total Stock Market ETF 100.00%

Results Dec 2005 - Dec 2019:
The active portfolio got a CAGR of 9.17%, sharpe ratio of 0.57, sortino of 0.84
Total stock market index got a CAGR of 9.34%, sharpe ratio of 0.61, sortino of 0.87

EDIT: I was able to figure out how to link to it: https://www.portfoliovisualizer.com/bac ... ion7_2=100
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Re: Advisor laying out a convincing argument for active management?

Post by Darth Vanguard »

financeperchance wrote: Wed Jan 08, 2020 3:51 pm These are not the results that I get. Go to:
https://www.portfoliovisualizer.com/backtest-portfolio

Portfolio 1 is this:
Ticker Name Allocation
VSEAX JPMorgan Small Cap Equity A 16.00%
JLCAX JPMorgan US Large Cap Core Plus A 17.00%
ARTMX Artisan Mid Cap Investor 16.00%
OAKIX Oakmark International Investor 17.00%
FKGRX Franklin Growth A 17.00%
MDIDX MFS Intl Diversification A 17.00%

Portfolio 2 is this:
Ticker Name Allocation
VTI Vanguard Total Stock Market ETF 100.00%

Results Dec 2005 - Dec 2019:
The active portfolio got a CAGR of 9.17%, sharpe ratio of 0.57, sortino of 0.84
Total stock market index got a CAGR of 9.34%, sharpe ratio of 0.61, sortino of 0.87

EDIT: I was able to figure out how to link to it: https://www.portfoliovisualizer.com/bac ... ion7_2=100
I didn't compare the funds as a portfolio. I compared each fund individually to its benchmark.
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Re: Advisor laying out a convincing argument for active management?

Post by retiredjg »

Darth Vanguard wrote: Wed Jan 08, 2020 4:06 pm I didn't compare the funds as a portfolio. I compared each fund individually to its benchmark.
Something you should know about benchmarks.... Sometimes they just don't fit or match up very well with the fund that is "benchmarked" to them. They might even be so different as to be an apples and oranges comparison.

Some of this might be a fund company trying to make a fund look better, but I suspect most of it is just because there are no indexes that are comparable to many funds. So they might approximate or just use the least worst option.

Or maybe they just use the 500 index for pretty much everything under the notion that if you compare everything to just one known thing, you get a more accurate comparison between other funds. This is purely speculation on my part. I have no idea if anyone actually does this.
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Re: Advisor laying out a convincing argument for active management?

Post by rascott »

I just comapred VSEAX to IJR (Sp600 small cap index).

It's within a half a point over the last 10 years. That's before counting for any load / AUM fee. And that's the best of the bunch?

Don't see the point.
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Re: Advisor laying out a convincing argument for active management?

Post by lifeisinmirrors »

The main value of an advisor is encouraging clients to invest more and knowing how investing works. That is a big help to people who would otherwise not invest. But the expected return when you're paying two 1%+ fees is less than the total market.
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Re: Advisor laying out a convincing argument for active management?

Post by Makefile »

First, don't forget about the capital gain distributions if it's outside of an IRA or retirement account. JP Morgan Small Cap (VSEAX), for example, per their website, reinvested 2.3805 per share at 50.32 back in December, or 4.7% of its value, which is then subject to federal and state income tax. That in turn could cause IRMAA, increased taxation of Social Security, loss of ACA credits, and other such nightmares frequently posted on this site by those who manage their AGI and taxable income carefully.

Even Dave Ramsey, obviously a proponent of active funds, says to buy active funds in your IRA and retirement account, and to stick to inside funds outside of them due to the capital gain distributions.

Second, remember the argument has never been that index funds outperform all active funds. Rather, it is a sort of Pascal's wager situation of knowingly accepting 70th-to-90th percentile performance among all funds by taking the index fund, versus rolling the dice on whether a particular active fund will fall in the 10-to-30% of funds that outperform the index.

If you haven't read Common Sense on Mutual Funds I'd suggest picking it up and read the On Indexing chapter, which I just consulted for this post (figure 5.5). Similarly the book has arguments on why cost, not past performance, is the best predictor of future performance. And similar discussions on why outperformance attracts more assets which makes outperformance harder, and so forth.
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Re: Advisor laying out a convincing argument for active management?

Post by brad.clarkston »

There's a difference between "Active Management" and "Active Funds". Without having the full fund list with %'s the only thing we can look at is the active fund part. There are some really good active funds out there especially in the bond world.

The only one in that list that has ever interested me is OAKIX (Oakmark International) mostly due to it not being top heavy on tech companies like every other stock fund. That and they are located here in Kansas City ;) The downside ... that ER and turn over %'s. Which is the point but still.

The trick with these top tier'ish active funds is the manager Mr. Herro is what makes OAKIX what it is once he leaves it's not going to be the same fund. That pretty much goes for all of them other than maybe Wellesley/Wellington but there in a class by themselves.

I've owned active funds in the past (bond's) and I might again some day. It's not all that dirty of a thought as long as your not stupid about it.
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Re: Advisor laying out a convincing argument for active management?

Post by Carlos Danger »

financeperchance wrote: Wed Jan 08, 2020 3:51 pm These are not the results that I get. Go to:
https://www.portfoliovisualizer.com/backtest-portfolio

Portfolio 1 is this:
Ticker Name Allocation
VSEAX JPMorgan Small Cap Equity A 16.00%
JLCAX JPMorgan US Large Cap Core Plus A 17.00%
ARTMX Artisan Mid Cap Investor 16.00%
OAKIX Oakmark International Investor 17.00%
FKGRX Franklin Growth A 17.00%
MDIDX MFS Intl Diversification A 17.00%

Portfolio 2 is this:
Ticker Name Allocation
VTI Vanguard Total Stock Market ETF 100.00%

Results Dec 2005 - Dec 2019:
The active portfolio got a CAGR of 9.17%, sharpe ratio of 0.57, sortino of 0.84
Total stock market index got a CAGR of 9.34%, sharpe ratio of 0.61, sortino of 0.87

EDIT: I was able to figure out how to link to it: https://www.portfoliovisualizer.com/bac ... ion7_2=100
This is a bad comparison.

(1) Most people invest in regular intervals (i.e. payday) instead having a lump sum they invest all at once.

(2) The portfolio you constructed of equal parts the mentioned actively managed funds is 1/3 non-U.S. equities. VTI is an innapropriate comparison, as it is 0% non-U.S. equities.

Assuming equal monthly contributions, and comparing to a portfolio of 66% Vanguard Total U.S. Stock Market and 34% Vanguard Total Int. Stock Market, the portfolio of active funds outperforms since Dec. of 2005:

https://www.portfoliovisualizer.com/bac ... tion8_2=66

That being said, I wouldn't invest in it. The winners today could be the losers tomorrow.
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Kenkat
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Re: Advisor laying out a convincing argument for active management?

Post by Kenkat »

financeperchance wrote: Wed Jan 08, 2020 3:51 pm These are not the results that I get. Go to:
https://www.portfoliovisualizer.com/backtest-portfolio

Portfolio 1 is this:
Ticker Name Allocation
VSEAX JPMorgan Small Cap Equity A 16.00%
JLCAX JPMorgan US Large Cap Core Plus A 17.00%
ARTMX Artisan Mid Cap Investor 16.00%
OAKIX Oakmark International Investor 17.00%
FKGRX Franklin Growth A 17.00%
MDIDX MFS Intl Diversification A 17.00%

Portfolio 2 is this:
Ticker Name Allocation
VTI Vanguard Total Stock Market ETF 100.00%

Results Dec 2005 - Dec 2019:
The active portfolio got a CAGR of 9.17%, sharpe ratio of 0.57, sortino of 0.84
Total stock market index got a CAGR of 9.34%, sharpe ratio of 0.61, sortino of 0.87

EDIT: I was able to figure out how to link to it: https://www.portfoliovisualizer.com/bac ... ion7_2=100
This is comparing a 100% US Equity Portfolio with one holding 34% International Equities. If you substitute Vanguard Intl Stock at 34%, the active portfolio outperforms 9.17 to 7.76.

https://www.portfoliovisualizer.com/bac ... tion8_2=34

One thing I noticed with VSEAX is that it is low turnover which is good. It also is using the Russell 2000 as a benchmark which is one of the poorer performing benchmarks for small caps.

It is possible for some active funds to be ok. I think low turnover is important. I happen to own Oakmark International and that is one positive attribute of it. There’s some good active funds out there - lower cost, low turnover ones should be better as a whole but without knowing the whole picture, it’s hard to say how your friend is doing. Maybe ok and that’s fine.

I would note that even if you adjust the overall portfolio to include international, if you add in a 1% per year AUM, the active portfolio is just slightly ahead at that point.
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White Coat Investor
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Re: Advisor laying out a convincing argument for active management?

Post by White Coat Investor »

Darth Vanguard wrote: Wed Jan 08, 2020 1:44 pm I was over at a friends house watching football this past weekend when the topic of investments came up. He has been using an independent advisor for roughly 20 years and has been quite pleased with him. The advisor is a strong advocate of active management and uses it almost exclusively through wrap (AUM) accounts. To the credit of the advisor, he does not seem to be chasing performance & replacing funds on a regular basis. According to my friend, who stays on top of things, while there is an occasional new fund added/replaced, the majority of the funds have been held the entire term. Essentially, the advisor is just investing new money and doing an annual rebalance for him.

I asked him if he thought of doing this himself since it didn't seem too complicated, talked about costs, index funds, discussed the SPIVA scorecard, etc. He pretty casually dismissed everything and said he was doing better than he would on his own. Fine, he's happy - I'm not trying to change his mind. Back to football. :happy

He did, however, show me some of the funds he was using and it really threw me for a loop. Here are a handful that I wrote down:
JP Morgan Small Cap Equity (VSEAX)
JP Morgan Large Cap Core +(JLCAX)
Artisan Mid Cap Fund (ARTMX)
Oakmark International (OAKIX)
Franklin Growth (FKGRX)
MFS International Diversified (MDIDX)

I entered these into Portfolio Visualizer and compared them to their benchmarks. They have all outperformed over the long term, and I was hard pressed to find any reasonable time period (5+ years) where they were not outperforming their benchmark. VSEAX was a huge discrepancy - almost twice as much ending value over a 25 year period.

What am I missing? Especially in the VSEAX case, 25 years of significant out-performance is nothing to sneeze at. I understand that there is no guarantee this will happen in the future, but again, 25 years is significant. It started to make me think maybe active can play a role, but that goes against almost everything I have learned here.

Maybe some of you guys can pick these funds apart better than I can, or point out what I am overlooking in my assessment.

Thanks,
Darth
It's easy to pick the winners in retrospect, which is what usually happens. But it isn't impossible to pick better than average active funds giving you a little better chance of beating index funds.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
brad.clarkston
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Re: Advisor laying out a convincing argument for active management?

Post by brad.clarkston »

rascott wrote: Wed Jan 08, 2020 4:31 pm I just comapred VSEAX to IJR (Sp600 small cap index).

It's within a half a point over the last 10 years. That's before counting for any load / AUM fee. And that's the best of the bunch?

Don't see the point.
Keep in mind IJR is a true small cap while VSEAX is very much a mid cap pretending to be a small cap (61% mid).
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Re: Advisor laying out a convincing argument for active management?

Post by edgeagg »

financeperchance wrote: Wed Jan 08, 2020 3:51 pm These are not the results that I get. Go to:
https://www.portfoliovisualizer.com/backtest-portfolio

Portfolio 1 is this:
Ticker Name Allocation
VSEAX JPMorgan Small Cap Equity A 16.00%
JLCAX JPMorgan US Large Cap Core Plus A 17.00%
ARTMX Artisan Mid Cap Investor 16.00%
OAKIX Oakmark International Investor 17.00%
FKGRX Franklin Growth A 17.00%
MDIDX MFS Intl Diversification A 17.00%

Portfolio 2 is this:
Ticker Name Allocation
VTI Vanguard Total Stock Market ETF 100.00%

Results Dec 2005 - Dec 2019:
The active portfolio got a CAGR of 9.17%, sharpe ratio of 0.57, sortino of 0.84
Total stock market index got a CAGR of 9.34%, sharpe ratio of 0.61, sortino of 0.87

EDIT: I was able to figure out how to link to it: https://www.portfoliovisualizer.com/bac ... ion7_2=100
Umm. You have to compare apples to apples. Both funds claim to track the Russell 2000. I don't know the actual allocation of the person so I couldn't build a true portfolio
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Raybo
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Re: Advisor laying out a convincing argument for active management?

Post by Raybo »

Active or passive is not the issue. The key is meeting your financial goals with the lowest risk investments. To me, the key is if the advisor either a) kept investing/rebalancing in the 2008 debacle or b) stayed the course in the same timeframe. If the advisor didn't do either a) or b) then which funds s/he chose is not all that relevant.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
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Re: Advisor laying out a convincing argument for active management?

Post by danielc »

Darth Vanguard wrote: Wed Jan 08, 2020 1:44 pm What am I missing? Especially in the VSEAX case, 25 years of significant out-performance is nothing to sneeze at. I understand that there is no guarantee this will happen in the future, but again, 25 years is significant. It started to make me think maybe active can play a role, but that goes against almost everything I have learned here.

Maybe some of you guys can pick these funds apart better than I can, or point out what I am overlooking in my assessment.
Is it possible that the active manager got rid of the funds that underperformed and kept the ones that did well?
columbia
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Re: Advisor laying out a convincing argument for active management?

Post by columbia »

She/he is reliant on clients believing in their ability to pick the “right” active funds.

Secret answer: they don’t have that ability.
fourwheelcycle
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Re: Advisor laying out a convincing argument for active management?

Post by fourwheelcycle »

I have to ask - why do people post questions about whether a particular AUM advisor has helped their client beat the market by investing in actively managed funds, and why do people (except me, of course) become involved in these threads?

As far as I know this is a settled question. I have never seen an academic study that concludes actively managed funds perform better, over the long term, than passive index funds. This conclusion applies to the actual funds themselves; when you add an AUM fee the question about improved performance becomes even less of an issue. Certainly some actively managed funds, and some AUM advisors who primarily recommend actively managed funds, do perform better than passive index funds over discrete time periods. But to paraphrase Abe Lincoln, no one has found a portfolio of actively managed funds, let alone such a portfolio plus an AUM fee, that has performed better than all passive index fund portfolios all of the time.

I have two good friends that rely on AUM advisors who have put them primarily in DFA mutual funds. I realize DFA funds vs. 100% passive index funds is a close call. However, both of my friends say the main value of their AUM advisors is to have someone who will sit down with them and their spouses, in their home, and guide them through their overall family financial planning needs. My friends are Bogleheads in their spending and saving habits, but they do not devote significant time researching investing principles, SWRs, SSA claiming strategies, etc. They rely on their AUM advisors to educate them and advise them on current and upcoming issues in their financial lives. I can't argue with their decision on how to spend their time or their money, but neither of them thinks they are paying their AUM advisor to help them beat the market.
sambb
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Re: Advisor laying out a convincing argument for active management?

Post by sambb »

people can do well with active. Nohting wrong with that. Odds are against it, but not always.
active management on this board is often criticized, unless it is Buffet, Wellington, or Wellesley doing active management. In whcih case it seems more acceptable on this board. Other active management for some reason isnt ok. Seem inconsistent on threads here. I see the same on expense ratios - its better to be low, unless it is fidelity zero, in which case it is sometimes criticized.

Buffet and Wellington may just be lucky.

Stay with indexing instead of trying to make sense of it all. Some do well with active, thats good luck or maybe the advisor knows something the rest of us dont, but staying in indexes is far easier.
columbia
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Re: Advisor laying out a convincing argument for active management?

Post by columbia »

sambb wrote: Wed Jan 08, 2020 8:31 pm people can do well with active. Nohting wrong with that. Odds are against it, but not always.
active management on this board is often criticized, unless it is Buffet, Wellington, or Wellesley doing active management. In whcih case it seems more acceptable on this board. Other active management for some reason isnt ok. Seem inconsistent on threads here. I see the same on expense ratios - its better to be low, unless it is fidelity zero, in which case it is sometimes criticized.

Buffet and Wellington may just be lucky.

Stay with indexing instead of trying to make sense of it all. Some do well with active, thats good luck or maybe the advisor knows something the rest of us dont, but staying in indexes is far easier.
There’s no magic sauce for Wellington and Wellesley: large cap value + longer (than TBM) corporate bonds. (They seemingly operate on a pretty tight rules based system.) They just make it easy for an investor to achieve those styles at a pretty low cost. I have no knowledge of any other active funds, but the record shows - after costs and in the long run - they underperform.
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Steve Reading
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Re: Advisor laying out a convincing argument for active management?

Post by Steve Reading »

Blue456 wrote: Wed Jan 08, 2020 3:48 pm
305pelusa wrote: Wed Jan 08, 2020 2:05 pm
PVW wrote: Wed Jan 08, 2020 1:54 pm In hindsight, there will always be funds that outperform their benchmarks. Even over long periods. Probably some of it is luck, probably some of it is skill.

The real question you need to ask is "How well have the funds done since they were purchased?". It's possible the funds have been chosen for the very reason you have noted - that their past performance reflects well on the advisor that chose them.
That’s not even the real question because there’s a sampling bias with the OP. If the OP had friends who had Advisors that invested in badly performing funds, they probably wouldn’t freely discuss that advisor or might even fire them. So the fact that these funds did well means that it is more likely that advisors that happened to choose them would come up in conversation

This happens often in BHs. People start a thread with a strategy they like and test it going forward. If it does poorly, the thread is forgotten. If it does well, then we might remember it and foolishly think it passed the “out of sample” barrier when in fact it might still be chance.
Off topic. But you went to medical school? I’m asking because your interpretation is bread and butter of statistical analysis they teach us.
Anyways +1. Great explanation.
No med school, but I am a big fan of Nassim Taleeb's Fooled by Randomness.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Advisor laying out a convincing argument for active management?

Post by GrowthSeeker »

I think the OP's main point is about active funds beating their benchmark.

But on the related question of the friend's money manager's ability to beat the market, I would want to see the amounts and dates of money the friend transferred into the account, and the year end account balances. If the AUM fee had not been paid each year from the same account, then adjust the data appropriately.

Then compare that to a hypothetical account receiving the same cash inflows on the same dates, with lump sum investments into some other benchmark, say TSM or 60:40 TSM:TBM or a 3fp. Compare not just the overall CAGR but also the standard deviation.
Just because you're paranoid doesn't mean they're NOT out to get you.
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