Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

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CycloRista
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Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by CycloRista »

In case you missed it, Jeff Sommer's Sunday NYT article about momentum effect is a good one.

"...the message of the new study by James Choi, a finance professor at Yale, and Kevin Zhao, a graduate student there. Their paper, “Did Mutual Fund Persistence Persist?” follows directly in the footsteps of Mr. Carhart, who studied mutual fund returns from 1962 to 1993. They examined what happened from 1994 until 2018, and found that the momentum effect in mutual fund performance that Mr. Carhart discerned is no longer apparent."
livesoft
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by livesoft »

As I read this I was thinking that Peter Lynch ran the Fidelity Magellan fund "between 1977 and 1990" which was kinda the heyday of hype of active fund managers. I wonder if just by removing Fidelity Magellan from the data set if the effect found by Carhart back then was diminished.

Nowadays Louis Rukeyser and W$W have been replaced by Bogleheads.org cheerleading on the Total Stock Market Index fund which is now the momentum play.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by Seasonal »

livesoft wrote: Mon Aug 03, 2020 7:34 am As I read this I was thinking that Peter Lynch ran the Fidelity Magellan fund "between 1977 and 1990" which was kinda the heyday of hype of active fund managers. I wonder if just by removing Fidelity Magellan from the data set if the effect found by Carhart back then was diminished.
It seems the effect was largely gone by 1980, well before the end of Lynch's tenure. According to the NYT article "He and Mr. Zhao found that the strategy does not work in picking mutual funds; in fact, Professor Choi said, its effectiveness had diminished appreciably by about 1980, an apparent precursor of worse returns in subsequent years."
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by livesoft »

August 1982 began a great bull run for stock market investors. Folks who were lucky enough to start investing then have done really well.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by nisiprius »

What, you mean "past performance may not be indicative of future results?" :shock:

Very "significant" in the everyday sense of the word:
Mr. Carhart, who reviewed it for the publication, called it “very solid. The efficacy of the momentum effect has declined over time. That’s in the data and I buy that.” He added that the strategy is no longer effective for picking mutual funds.
This is rather reminiscent of the first academic study I'm aware of that presented momentum and mean reversion (under the name "inertia" and "reversals.") Effects like momentum and mean version probably exist, but I suspect they are like quantum "vacuum energy." It exists, but there's no known way to harness it for any practical purpose.

The first paper I've ever heard of that discussed momentum was published in 1937, (Cowles 3rd, Alfred E. and Herbert E. Jones (1937). "Some A Posteriori Probabilities in Stock Market Action". Econometrica 5 (3): 280–294). They found, as others have since, that stock prices show momentum over time periods of several months, and mean reversion ("reversals") over time periods of several years.

They didn't look at profiting from "inertia," but they did spend several pages looking at idea for profiting from "reversals," and concluded that even though it was real it "could not be employed by speculators with any assurance of consistent or large profits."

As an intellectual phenomenon, momentum--as well as mean reversion, and "factors"--may be real, but it doesn't necessarily mean you can profit by exploiting them.

Here's the chart they published:

Image
Last edited by nisiprius on Mon Aug 03, 2020 12:06 pm, edited 2 times in total.
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RocketShipTech
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by RocketShipTech »

nisiprius wrote: Mon Aug 03, 2020 11:30 am
As an intellectual phenomenon, momentum--and mean reversion, and the Fama-French factor may well exist, but it doesn't necessarily mean you can profit by exploiting them.
7 years of MTUM seems to suggest otherwise.

https://www.portfoliovisualizer.com/fun ... chmark=VOO
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by nisiprius »

The (Non) Lessons of History—and the (Real) Lessons of Return Sources and Investment Costs
Remarks by John C. Bogle Founder, The Vanguard Group
Before The American Philosophical Society Philadelphia, PA November 10, 2012
The Intellectual Basis for Indexing*

Indexing—owning all of the stocks in the U.S. market... works, as it must. At the outset, the intellectual basis for indexing was the EMH—the Efficient Market Hypothesis—which suggests that by reflecting the informed opinion of the mass of investors, stocks are continuously valued at prices that accurately reflect the totality of investor knowledge, and are thus fairly valued. But the reality is that sometimes the stock market is efficiently priced, and sometimes it is not. But few—if any—investors can consistently tell which is which. But whether or not markets are efficient, investors as a group must fall short of the market return by the amount of the costs they incur.

Whether or not markets are efficient, investors as a group must fall short of the market return by the amount of the costs they incur.
Therefore, we don’t need to accept the EMH to be index-fund believers. There is a better reason for the triumph of indexing, and it is not only more compelling but unarguably universal. As I mentioned earlier, I call it the CMH—the Cost Matters Hypothesis—and it is all that we need to explain why indexing must work and does work, and it in fact enables us to quantify with some precision how well it works. Investors, in totality, are the market. On average, those investors must be, well, average. But investors fail to match the market’s return precisely by the total of their investment costs. By matching the market with only minimal costs, indexing is mathematically certain to win. Whether or not the markets are efficient, the explanatory power of the CMH holds.

* But what, one might ask, is the intellectual basis for active management? I know of none.
He not only does not assume the EMH, he says "the reality is that sometimes the stock market is efficiently priced, and sometimes it is not."

Numerical evidence of the validity of the "cost matters hypothesis" has been found over and over again by Morningstar, which has reported several times that cost is the most reliable predictor--by a large margin--of future fund performance.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by alluringreality »

RocketShipTech wrote: Mon Aug 03, 2020 12:02 pm
nisiprius wrote: Mon Aug 03, 2020 11:30 am
As an intellectual phenomenon, momentum--and mean reversion, and the Fama-French factor may well exist, but it doesn't necessarily mean you can profit by exploiting them.
7 years of MTUM seems to suggest otherwise.

https://www.portfoliovisualizer.com/fun ... chmark=VOO
etfrc.com might tend to question if there may be more closely aligned benchmarks for the last 7 years than VOO for comparison.
https://www.portfoliovisualizer.com/fun ... hmark=SCHG
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by rgs92 »

livesoft wrote: Mon Aug 03, 2020 7:34 am
Nowadays Louis Rukeyser and W$W have been replaced by Bogleheads.org cheerleading on the Total Stock Market Index fund which is now the momentum play.
I can relate. 20 years ago I started up my Roth IRA in T Rowe Price Equity Income (PRFDX) because I used to see Brian Rogers, its fund manager, all the time on Lou's panel.
LOL, it's still there because I was just too lazy to bother transferring it somewhere better. (64 basis points!).
I tell myself that at least it's not Edward Jones.
(Now about $25,000 in it.)
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by RocketShipTech »

alluringreality wrote: Mon Aug 03, 2020 12:46 pm
RocketShipTech wrote: Mon Aug 03, 2020 12:02 pm
nisiprius wrote: Mon Aug 03, 2020 11:30 am
As an intellectual phenomenon, momentum--and mean reversion, and the Fama-French factor may well exist, but it doesn't necessarily mean you can profit by exploiting them.
7 years of MTUM seems to suggest otherwise.

https://www.portfoliovisualizer.com/fun ... chmark=VOO
etfrc.com might tend to question if there may be more closely aligned benchmarks for the last 7 years than VOO for comparison.
https://www.portfoliovisualizer.com/fun ... hmark=SCHG
When you are assessing the performance of a factor you assess it against market beta. That is the whole point of the factor, that it produces risk adjusted returns in excess of market beta.

So if you want figure out if Momentum is a thing, you compare it against the S&P 500. The fact that you can find other random funds that beat MTUM is irrelevant to the question.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by alluringreality »

RocketShipTech wrote: Mon Aug 03, 2020 1:01 pm When you are assessing the performance of a factor you assess it against market beta. That is the whole point of the factor, that it produces risk adjusted returns in excess of market beta.
This assertion is entirely debatable. What I want to view is what happens when trends change. The history for the fund has generally favored growth, so comparing to market is debatable. Someone could have just bought a growth fund too. It may be a wait and see, since the timeline for the fund has primarily favored growth. As noted in the other thread, someone chasing performance can potentially put themselves in a bad position for the future, depending on various details of how things change.
The fact that you can find other random funds that beat MTUM is irrelevant to the question.
The link you provided classified the fund as large growth, so I compared it to a random large growth fund. Etfrc.com simply confirmed there was more overlap by weight.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by RocketShipTech »

alluringreality wrote: Mon Aug 03, 2020 1:13 pm
RocketShipTech wrote: Mon Aug 03, 2020 1:01 pm When you are assessing the performance of a factor you assess it against market beta. That is the whole point of the factor, that it produces risk adjusted returns in excess of market beta.
This assertion is entirely debatable. What I want to view is what happens when trends change. The history for the fund has generally favored growth, so comparing to market is debatable. Someone could have just bought a growth fund too. It may be a wait and see, since the timeline for the fund has primarily favored growth. As noted in the other thread, someone chasing performance can potentially put themselves in a bad position for the future, depending on various details of how things change.
The fact that you can find other random funds that beat MTUM is irrelevant to the question.
The link you provided classified the fund as large growth, so I compared it to a random large growth fund. Etfrc.com simply confirmed there was more overlap by weight.
Please show me where in the MTUM fund documentation it says that it tracks “Growth” of any kind.

That MTUM happens to contain mostly growth stocks right now is an entirely contingent fact. If and when Value stocks begin outperforming I fully expect this fund to include more of those.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by ResearchMed »

RocketShipTech wrote: Mon Aug 03, 2020 1:44 pm
alluringreality wrote: Mon Aug 03, 2020 1:13 pm
RocketShipTech wrote: Mon Aug 03, 2020 1:01 pm When you are assessing the performance of a factor you assess it against market beta. That is the whole point of the factor, that it produces risk adjusted returns in excess of market beta.
This assertion is entirely debatable. What I want to view is what happens when trends change. The history for the fund has generally favored growth, so comparing to market is debatable. Someone could have just bought a growth fund too. It may be a wait and see, since the timeline for the fund has primarily favored growth. As noted in the other thread, someone chasing performance can potentially put themselves in a bad position for the future, depending on various details of how things change.
The fact that you can find other random funds that beat MTUM is irrelevant to the question.
The link you provided classified the fund as large growth, so I compared it to a random large growth fund. Etfrc.com simply confirmed there was more overlap by weight.
Please show me where in the MTUM fund documentation it says that it tracks “Growth” of any kind.

That MTUM happens to contain mostly growth stocks right now is an entirely contingent fact. If and when Value stocks begin outperforming I fully expect this fund to include more of those.

From iShares:
[ https://www.ishares.com/us/products/251 ... factor-etf ]

"INVESTMENT OBJECTIVE
The iShares Edge MSCI USA Momentum Factor ETF seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum characteristics, before fees and expenses.
"

And:

"Why MTUM?
1. Exposure to large- and mid-cap U.S. stocks exhibiting relatively higher price momentum

2. Index-based access to a specific factor which has historically driven a significant part of companies' risk and return1

3. Use to help manage exposure and risk within a stock allocation
"

Whether this description is a constant, or might change with the investment environment... I have no idea.
Or whether "large & mid cap" might be a better "match" rather than "growth"?

But the info from Portfolio Visualize does indeed say Category is "Large Growth".
It isn't clear if this reflects anything directly from iShares.
Whether that is more accurate...?

RM
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by alluringreality »

RocketShipTech wrote: Mon Aug 03, 2020 1:44 pm Please show me where in the MTUM fund documentation it says that it tracks “Growth” of any kind.
Your initial thread reply was about past performance. The 5 year Factor Profile from the link below, and the Historical Stock Style, suggests that Morningstar has generally classified this fund as large growth over much of the fund's history. MTUM is also currently in their Large Growth category, due to present holdings. Of course many people chasing performance may have also chosen growth when this fund started, since 2009 to the start of this fund generally favored growth. To this point the fund seems to have had a history of primarily tilting growth, and it looks like the event earlier this year probably didn't favor this fund over others in the category.
https://www.morningstar.com/etfs/bats/mtum/portfolio
That MTUM happens to contain mostly growth stocks right now is an entirely contingent fact. If and when Value stocks begin outperforming I fully expect this fund to include more of those.
I think it's interesting that an author of a paper about the "disappearance of significant performance persistence" is using such a strategy. As someone that is familiar with Jack Bogle's writing, I would have found the article link more interesting if the reporter had explained the discrepancy. Of course many retail investors are chasing performance and expect their strategy to continue into the future, so I get why the original link went in the direction it did.
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Re: Sunday NYT article Mutual Fund Winners Don't Stay Ahead for Long

Post by garlandwhizzer »

RocketShipTech wrote:

That MTUM happens to contain mostly growth stocks right now is an entirely contingent fact.
The point is that RST originally posted the importance of MTUM's outperformance over the past 7 years. In response alluringreality pointed out that a simple LCG index, SCHG, actually outperformed MTUM over the same time frame. Positive momentum in the last 7 years has been concentrated in LCG and I believe SCHG is an entirely appropriate and accurate comparison. The exact location of the portfolios of these two funds on the Morningstar grid of cap weight versus V/B/G boxes are almost right on top of each other, clearly in the LCG box which is why they performed so similarly with a slight edge to SCHG. Some like RST believes that what drove their outperformance was MOM. Others like alluringreality and me, believe that what drove it was growth, the robust and ever increasing profit and revenue growth of LCG tech darlings. The numbers alone don't tell us which is the correct conclusion.

Factor adherents always point to MTUM when discussing MOM and fail to consider that this is cherry picking. Any investing strategy produces both losers and winners according to how the strategy is executed. Finding a winner does not validate an investing strategy but instead only the particular way this particular fund pursued that strategy during a particular time period. As the article from the NYT points out, most MOM funds fail to produce outperformance.

The final conclusion in the article is the take home message:
The safest bet is a simpler one: Invest in plain-vanilla, broad, low-cost index funds, in a portfolio allocated appropriately between stocks and bonds for your own goals and risk tolerance.

This doesn’t guarantee that you will prosper. While stocks have risen over long periods, they sometimes have calamitous declines — most recently, in February and March of this year. When the stock market falls, you will lose money in stock index funds.

But that’s why it makes sense to allocate some of your money to bond funds, which, as I’ve pointed out in a recent column, have performed exceptionally well over the last 20 years. No one knows what the next month will bring — to say nothing of the next 20 years — so it is wise to hedge your bets.

One thing the new research certainly shows is that picking mutual funds based on recent performance doesn’t make sense, while long-term investing in the overall market through low-cost index funds still does.
Garland Whizzer
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