"Indexes don't search for solutions. People do."

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nisiprius
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"Indexes don't search for solutions. People do."

Post by nisiprius »

Saw this on Morningstar earlier:

Image

OK, I'll consider it.

PGEYX (active) versus VBINX (indexed)

Image

OK, I've considered it.

I'll bet they were glad when 2008 dropped out of the ten-year window.
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neurosphere
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Re: "Indexes don't search for solutions. People do."

Post by neurosphere »

Looks like after 2008 they essentially decided to simply track the index! Plotting 2010 to present shows an identical path.
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David Jay
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Re: "Indexes don't search for solutions. People do."

Post by David Jay »

neurosphere wrote: Thu Sep 03, 2020 2:05 pm Looks like after 2008 they essentially decided to simply track the index! Plotting 2010 to present shows an identical path.
Yup, closet index fund since 2010, except you get to pay an ER of .74 :shock:
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Re: "Indexes don't search for solutions. People do."

Post by bottlecap »

That's really funny. The lesson they learned from 2008 is "If you can't beat 'em, join 'em. But still charge fees like you never joined 'em".

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neurosphere
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Re: "Indexes don't search for solutions. People do."

Post by neurosphere »

David Jay wrote: Thu Sep 03, 2020 2:10 pm
neurosphere wrote: Thu Sep 03, 2020 2:05 pm Looks like after 2008 they essentially decided to simply track the index! Plotting 2010 to present shows an identical path.
Yup, closet index fund since 2010, except you get to pay an ER of .74 :shock:
I didn't look closely, but if one ignores fees, did they actually beat the index for the past 10 years? Maybe they know exactly how much "alpha" they generate, and then charge for exactly that alpha, lol.

No matter though, because when the next big downturn happens they'll likely fall way behind again!
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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Re: "Indexes don't search for solutions. People do."

Post by arcticpineapplecorp. »

few thoughts:

1. maybe people should stop searching for solutions to a problem that doesn't exist. (there's no need to build a better mousetrap).

2. can you imagine how poorly the other 635 asset allocation funds (between 50%-70% equity) must have done if this fund is considered 5 star? Shouldn't that make vanguard's balanced index a 6 star?

3. being passive obviously is hard to market. admen (and women) try to convince us being "active" is better than being passive.

4. when I look at the picture it makes me think she's swimming with sharks in the water. Is Putnam the shark? The expense ratio for this fund is 0.74% vs Vanguard's balanced index fund 0.07%. That's like paying 10X for a fund that's supposed to be better, but isn't. That makes Putnam the shark. Don't swim in shark infested waters.
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Re: "Indexes don't search for solutions. People do."

Post by rossington »

arcticpineapplecorp. wrote: Thu Sep 03, 2020 2:32 pm few thoughts:

1. maybe people should stop searching for solutions to a problem that doesn't exist. (there's no need to build a better mousetrap).

2. can you imagine how poorly the other 635 asset allocation funds (between 50%-70% equity) must have done if this fund is considered 5 star? Shouldn't that make vanguard's balanced index a 6 star?

3. being passive obviously is hard to market. admen (and women) try to convince us being "active" is better than being passive.

4. when I look at the picture it makes me think she's swimming with sharks in the water. Is Putnam the shark? The expense ratio for this fund is 0.74% vs Vanguard's balanced index fund 0.07%. That's like paying 10X for a fund that's supposed to be better, but isn't. That makes Putnam the shark. Don't swim in shark infested waters.
Just another great example of NEVER let other people manage YOUR money.
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Re: "Indexes don't search for solutions. People do."

Post by nisiprius »

arcticpineapplecorp. wrote: Thu Sep 03, 2020 2:32 pm...can you imagine how poorly the other 635 asset allocation funds (between 50%-70% equity) must have done if this fund is considered 5 star?...
Morningstar documents their methodology for star ratings and I give them points for complexity. Actually I respect it as a way of comparing past performance. In this case, the relevant fact is that
For each time period (three, five, and 10 years), Morningstar ranks all funds in a category using Morningstar Risk-Adjusted Return, and the funds with the highest scores receive the most stars. A fund’s peer group for the three-, five-, and 10-year ratings is based on the fund’s current category.
In other words, the star rating only looks back ten years.

I wish I knew how to look up what the star rating was a few years ago, when 2008 would have fallen within the ten-year period... or around 2012, when it would have fallen within both the five- and the ten-year period.
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Re: "Indexes don't search for solutions. People do."

Post by nisiprius »

The George Putnam Balanced Fund, PGEYX, is actually a very old fund, with inception in 1937. For an "index" comparison, I calculated the return of a passive 60/40 portfolio of two Ibbotson SBBI series, "large-company stocks" (S&P 500 and predecessors) and "intermediate-term government bonds). I used annual returns for PGEYX and both series, which means I was effectively assuming annual rebalancing for the passive portfolio.

Here's something interesting to me, which speaks to the "burstiness" of financial data in general and actively managed funds in particular.

Since inception, over 82 years:

The George Putnam Balanced Fund underperformed the passive 60/40 portfolio. It returned an average (CAGR) of 8.58% per year, versus 8.81% per year for the passive portfolio. As a result, the "terminal wealth" from a $10,000 investment at the end of 2019 would have been $10,142,584 for the active fund, $13,432,410 for the passive portfolio.

Image

The difference turns out to be entirely due to one single bad year, 2008. If we remove that year from the data, then the actively managed fund would have microscopically outperformed the passive portfolio, with an average return of 9.37% per year versus 9.17%, and terminal wealth of $16,941,154 versus $16,175,060.

Image

When active funds outperform index funds, very often almost all the difference is due to "one great shining moment," one single burst of outperformance during the entire life of the fund. And, similarly, when they underperform, very often it is the result of one single period of catastrophe. In this case, one single bad year was enough to outweigh 81 years of history.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: "Indexes don't search for solutions. People do."

Post by Dead Man Walking »

nisiprius wrote: Thu Sep 03, 2020 7:10 pm The George Putnam Balanced Fund, PGEYX, is actually a very old fund, with inception in 1937. For an "index" comparison, I calculated the return of a passive 60/40 portfolio of two Ibbotson SBBI series, "large-company stocks" (S&P 500 and predecessors) and "intermediate-term government bonds). I used annual returns for PGEYX and both series, which means I was effectively assuming annual rebalancing for the passive portfolio.

Here's something interesting to me, which speaks to the "burstiness" of financial data in general and actively managed funds in particular.

Since inception, over 82 years:

The George Putnam Balanced Fund underperformed the passive 60/40 portfolio. It returned an average (CAGR) of 8.58% per year, versus 8.81% per year for the passive portfolio. As a result, the "terminal wealth" from a $10,000 investment at the end of 2019 would have been $10,142,584 for the active fund, $13,432,410 for the passive portfolio.

Image

The difference turns out to be entirely due to one single bad year, 2008. If we remove that year from the data, then the actively managed fund would have microscopically outperformed the passive portfolio, with an average return of 9.37% per year versus 9.17%, and terminal wealth of $16,941,154 versus $16,175,060.

Image

When active funds outperform index funds, very often almost all the difference is due to "one great shining moment," one single burst of outperformance during the entire life of the fund. And, similarly, when they underperform, very often it is the result of one single period of catastrophe. In this case, one single bad year was enough to outweigh 81 years of history.
Do these performance figures take into account the 8.5% upfront load that Putnam charged for several decades before they offered the fund with a deferred load? I remember being offered Putnam funds with an 8.5% upfront load in the 1970’s. The 8.5% load was very common at that time and was charged by most mutual funds offered by brokerages.

DMW
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Re: "Indexes don't search for solutions. People do."

Post by nisiprius »

Dead Man Walking wrote: Fri Sep 04, 2020 12:07 amDo these performance figures take into account the 8.5% upfront load that Putnam charged for several decades before they offered the fund with a deferred load? I remember being offered Putnam funds with an 8.5% upfront load in the 1970’s. The 8.5% load was very common at that time and was charged by most mutual funds offered by brokerages.
I don't even know how to begin to research this kind of thing for an eighty-year-old fund. I used PGEYX as the ticker symbol because that's the one they showed in the ad, but I see that it had inception in 1994 and Morningstar apparently was splicing in older share classes. PGEOX, class A, had inception in 1937. Morningstar does not include the effect of sales load in their data; to put it another way, their $10,000 hypothetical investment is your net investment after paying teh load.

Of course the sales load is paid only once, so what we actually need to know is the sales load for the fund in 1937. And this was before the Investment Company Act of 1940 and I have no idea at all how anyone bought a mutual fund back then or whether the "sales load as we know it" existed or how it worked.

The fact of the matter is that a sales load doesn't amount to much if you are holding a fund for eighty years, but, just for laughs, here are the same two charts, recalculated assuming 8.5% sales load. That is to say, the blue line is "growth of $9,150" while red line, the paper benchmark based on SBBI data series--which couldn't be invested in--is "growth of $10,000."

And, yes, if you do that, then even with 2008 omitted the Putnam fund didn't quite match the paper 60/40 portfolio benchmark.

Image

Image
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Re: "Indexes don't search for solutions. People do."

Post by MBB_Boy »

It's even worse than you think! You don't have to have a bad year to outweigh 80 years of history, you just need a few bad days!

https://www.fool.com/investing/2019/04/ ... he-st.aspx

There are a bunch of different articles talking about these same studies (and I'm pretty sure there was a forum discussion) but you can lose half your return over a 20 year period just by missing the 10 best days. Reframed, you don't even have to have "bad days", even being on the sideline at the wrong time can really jack things up.

All of this really just reinforces the maxim, "Stay the course!".
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Re: "Indexes don't search for solutions. People do."

Post by Dead Man Walking »

nisiprius wrote: Fri Sep 04, 2020 8:35 am
Dead Man Walking wrote: Fri Sep 04, 2020 12:07 amDo these performance figures take into account the 8.5% upfront load that Putnam charged for several decades before they offered the fund with a deferred load? I remember being offered Putnam funds with an 8.5% upfront load in the 1970’s. The 8.5% load was very common at that time and was charged by most mutual funds offered by brokerages.
I don't even know how to begin to research this kind of thing for an eighty-year-old fund. I used PGEYX as the ticker symbol because that's the one they showed in the ad, but I see that it had inception in 1994 and Morningstar apparently was splicing in older share classes. PGEOX, class A, had inception in 1937. Morningstar does not include the effect of sales load in their data; to put it another way, their $10,000 hypothetical investment is your net investment after paying teh load.

Of course the sales load is paid only once, so what we actually need to know is the sales load for the fund in 1937. And this was before the Investment Company Act of 1940 and I have no idea at all how anyone bought a mutual fund back then or whether the "sales load as we know it" existed or how it worked.

The fact of the matter is that a sales load doesn't amount to much if you are holding a fund for eighty years, but, just for laughs, here are the same two charts, recalculated assuming 8.5% sales load. That is to say, the blue line is "growth of $9,150" while red line, the paper benchmark based on SBBI data series--which couldn't be invested in--is "growth of $10,000."

And, yes, if you do that, then even with 2008 omitted the Putnam fund didn't quite match the paper 60/40 portfolio benchmark.
Nisiprius,

I want to make it perfectly clear that my previous post was not a criticism of you or your calculations. I’m not sure how Morningstar or others can calculate the performance of a benchmark that didn’t exist over the entire time period. I suppose that my real problem is that I am a cantankerous septuagenarian who still gets angry when he remembers 8.5% loads and 12b1 fees charged by many fund providers when I began investing. Those loads were charged every time new money was invested and the fees were assessed annually. I may be too skeptical about the effect of those charges over time. My greatest claim to being a Boglehead is that I believe that costs matter.

DMW
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Re: "Indexes don't search for solutions. People do."

Post by nisiprius »

I thought it was a legitimate question and I answered it in that spirit.

As I say, the problem, especially over long periods of time, that I don't even know how to research what it would have cost to invest in the fund in 1937... nor do I know whether 60% SBBI Large-Company Stocks + 40% SBBI Intermediate-term Government Bonds is a perfectly fair benchmark.

What's clear is that you had a fund that actually would have been pretty close to tracking that benchmark except for a really humongous shortfall in one single year.
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Re: "Indexes don't search for solutions. People do."

Post by Northern Flicker »

neurosphere wrote: Thu Sep 03, 2020 2:12 pm
David Jay wrote: Thu Sep 03, 2020 2:10 pm
neurosphere wrote: Thu Sep 03, 2020 2:05 pm Looks like after 2008 they essentially decided to simply track the index! Plotting 2010 to present shows an identical path.
Yup, closet index fund since 2010, except you get to pay an ER of .74 :shock:
I didn't look closely, but if one ignores fees, did they actually beat the index for the past 10 years? Maybe they know exactly how much "alpha" they generate, and then charge for exactly that alpha, lol.
Don't laugh. That is business as usual for many active funds, both equity and fixed income. Take a little more risk to cover the ER. The risk flows to the investor and the risk premium flows to the fund company. The caper gets exposed in times like 2008/2009.
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anon_investor
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Re: "Indexes don't search for solutions. People do."

Post by anon_investor »

That's funny. A recent Morningstar podcast (https://youtu.be/SbWf7fyLeNE) segment had a piece comparing active management vs. indexing during the recent drop. Guess what, active management did not out perform.
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Re: "Indexes don't search for solutions. People do."

Post by firebirdparts »

i remember in one of Jack's last speeches at the boglehead conference he said "look at poor Putnam" and their tiny and shrinking market share. He said he tried to convince them to mutualize.
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Re: "Indexes don't search for solutions. People do."

Post by absolute zero »

Portfolio visualizer takes fees/ER into account, correct?

Either way this thread and OP is very funny. :happy
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