Proof That Active Beat Passive?

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grayfox
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Proof That Active Beat Passive?

Post by grayfox » Thu Jan 14, 2010 12:00 pm

Is this proof that two low-cost actively managed funds beat a low-cost index fund?

Image
VWINX = Vanguard Wellesley Income Fund 40/60 (stocks/bonds)
VWELX = Vanguard Wellington Fund 65/35
VBINX = Vanguard Balanced Index Fund 60/40

This is through two bear markets (2000-2003, 2007-2009) and two bull markets (2003-2007, 2009-present). Although some theorists might say the whole period from 2000-present was a secular bear market which may favor actively managed funds?

They all had the same lousy stock market, the same bond market and are all low-cost Vanguard funds. The only difference is Wellesley and Wellington are actively managed and Balanced Index is not.

EDIT: CPI-U which went from 168.3 in 12/1999 to 216.5(est.) in 12/2009 , so $10,000 would have to grow to $12,683 to keep pace with inflation. Balanced Index lost to inflation.
Last edited by grayfox on Tue Jan 19, 2010 5:14 pm, edited 2 times in total.

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Post by woof755 » Thu Jan 14, 2010 12:13 pm

Looks like proof that bonds fared better than stocks over the past 10 years, and that Wellington beat that index fund over the past 10 years. No one said it can't be done with a well-managed, low expense ratio managed fund.

The devil is in picking that fund.
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Re: Proof That Managed Beats Index?

Post by eurowizard » Thu Jan 14, 2010 12:16 pm

grayfox wrote: They all had the same lousy stock market, the same bond market and are all low-cost Vanguard funds. The only difference is Wellesley and Wellington are actively managed and Balanced Index is not.
False.

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Re: Proof That Managed Beats Index?

Post by jeffyscott » Thu Jan 14, 2010 12:27 pm

grayfox wrote:Is this proof that low-cost actively managed funds beat low-cost index funds?
Yes, interpreting "beat" as past tense, this is certainly a fact. The word "these" should be inserted after "that", though. :lol:
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Post by Doc » Thu Jan 14, 2010 12:28 pm

woof755 wrote:Looks like proof that bonds fared better than stocks over the past 10 years, and that Wellington beat that index fund over the past 10 years. No one said it can't be done with a well-managed, low expense ratio managed fund.

The devil is in picking that fund.
An active manager's job performance includes deciding on sector allocation, in this case FI/equity. He should be evaluated against a benchmark that reflect the ability to make that choice. Comparing his performance to a blended benchmark that eliminate the effect of that decision is equivalent to a blind man sorting marbles by color.

That being said the data does not prove that active beats passive only that it can. And like wolf implied, picking that fund is not easy.
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Post by Sheepdog » Thu Jan 14, 2010 12:45 pm

I like that graph, especially since Wellesley Admiral was and is my largest fund investment.
What I need, though, is a graph showing the next 10 years.
Will someone please make one for me?
Jim
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Re: Proof That Managed Beats Index?

Post by CyberBob » Thu Jan 14, 2010 12:50 pm

grayfox wrote:They all had the same lousy stock market, the same bond market and are all low-cost Vanguard funds. The only difference is Wellesley and Wellington are actively managed and Balanced Index is not.
Not quite an apples to apples comparison.
Wellington and Wellesley included international stocks, while Balanced Index did not.
Wellington and Wellesley stock components were value-tilted, whereas Balanced Index was not.
Wellington and Wellesley had higher bond duration numbers than Balanced Index and also had a lower average credit quality.
And while Balanced Index always had a 60/40 stock/bond allocation, Wellington and Wellesley had different and non-static stock/bond allocations.
If you adjusted for all of the above factors, and others, I'd bet that the active management advantage would likely be significantly reduced, if not eliminated altogether.

Bob

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Proof ?

Post by Taylor Larimore » Thu Jan 14, 2010 12:51 pm

Hi Greyfox:
Is this proof that low-cost actively managed funds beat low-cost index funds?
Of course not. There will ALWAYS be low-cost (and high-cost) actively managed funds that beat low-cost index funds--in the past.

The problem is picking funds that will be winners in the future. Winning performance seldom persists.
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Post by GammaPoint » Thu Jan 14, 2010 12:51 pm

Sheepdog wrote:I like that graph, especially since Wellesley Admiral was and is my largest fund investment.
What I need, though, is a graph showing the next 10 years.
Will someone please make one for me?
Jim
I think I can. I'm a little busy now but I'll try to finish it in say, 10 years.

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Post by grayfox » Thu Jan 14, 2010 12:57 pm

Here is another look at it. Vanguard Balanced Income which is 60/40 stocks bonds had a return that was between stocks and bonds, as you would expect. It is a little closer to stocks than bonds.

Image
VTSMX = Vanguard Total Stock Market
VBMFX = Vanguard Total Bond Market
VBINX = Vanguard Balanced Index Fund


But Wellesley which is 40/60 had a higher return than 100% bonds, even though adding stocks should have made it worse.

And Wellington, although it was 60/40 like Balanced Index, did as well as 100% bonds, even though it had the "drag" of 60% stocks.

Image
VTSMX = Vanguard Total Stock Market 100/0
VBMFX = Vanguard Total Bond Market 0/100
VWINX = Vanguard Wellesley Income Fund 40/60
VWELX = Vanguard Wellington Fund 65/35

The only thing I can attribute this to is the active management.

Now maybe they just got lucky over the past ten years. But it does include two full market cycles bear-bull-bear-bull. I would have to say that the Wellesley and Wellington fund managers "delivered the goods".
Last edited by grayfox on Thu Jan 14, 2010 1:06 pm, edited 1 time in total.

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Post by Kenster1 » Thu Jan 14, 2010 1:05 pm

Time-tested principles

The continuity of the fund's management has instilled a consistent investment philosophy. The principles that guided Wellington Fund through the Great Depression are the same ones it adheres to today.

Prudent management. The fund's skilled managers and analysts have long favored stocks and bonds of high-quality companies that can provide both current income and long-term growth in income and principal. The fund's "personality" has never been flashy. As it did in its early days, the fund still invests in the basic building blocks of the U.S. economy, though today that means securities issued by firms ranging from computer makers to pharmaceutical concerns (as well as those of railroads, utilities, manufacturers, and oil companies).

Balance and diversification. Wellington Fund is the nation's oldest balanced fund. Its allocation to a widely diversified list of both stocks and bonds (regarded perhaps as stodgy in both the Roaring Twenties and the 1990s bull market) has enabled the fund and its shareholders to withstand many short-term market fluctuations.

Long-term perspective. In today's culture of instant information and a focus on the latest quarterly financial results, Wellington's tradition of patience and discipline can seem downright antiquated. But it has helped the fund avoid big missteps in investment fads over the decades.

"The Wellington Fund is a compelling case for the power of skilled management, balance, diversification, and a long-term outlook," said Vanguard CEO Bill McNabb. "In many ways, it represents what Vanguard is all about."
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Post by Kenster1 » Thu Jan 14, 2010 1:16 pm

Jack Bogle's nice remarks and reflection on the Wellington Fund several years ago:

=====

Before the events of Wellington Fund’s past 75 years vanish into the dustbin of history, I’m pleased to contribute a few memories of that era of, as we said a half-century ago, “prosperity and depression, war and peace, and political change.” In the years since then, we’ve clearly seen more of the same—except that recession has, so far at least, replaced depression.

Founded by Walter L. Morgan on December 27, 1928, Wellington Fund has followed the same balanced approach to investing ever since it began operations in mid-1929. Without exception, it has maintained an extremely broad diversification of stock and bond investments, and, with only a few intermittent aberrations (later corrected), a relentless focus on high investment quality.

From the very outset, Wellington’s three-fold objective has remained constant: (1) Conservation of Capital, (2) Reasonable Current Income, and (3) Profits Without Undue Risk. These goals have stood the test of time, and have been importantly responsible for the remarkable string of 298 consecutive quarterly dividends paid to the Fund’s shareholders. The Fund’s stalwart consistency in hewing to its conservative investment approach has played a major role in its asset growth and acceptance by millions of investors.

But while consistency has been the hallmark of the Fund’s role as trustee of other people’s money, change has punctuated its business activities. As was the mode of the early mutual fund industry, the Fund was formed as a “stand-alone” fund, and didn’t even adopt the Wellington Fund name until 1935. Three decades passed before it was joined by Windsor Fund in 1958 as the second member of today’s 118-fund Vanguard family. Further, during almost all of Wellington’s first half-century, its shares were distributed to investors by stockbrokers who were paid sales loads for their efforts, a system abandoned in 1977 when shares began to be offered directly to investors on a commission-free basis.

Perhaps the biggest change of all came in 1974, when The Vanguard Group was formed and Wellington became a charter member. With the creation of this innovative mutual structure, Wellington and its sister funds assumed responsibility for, in effect, the trusteeship side of the enterprise, with Wellington Management Company, the fund’s long-time investment adviser, handling the management of the Fund’s securities portfolio in accordance with the policies established by the Fund’s board of directors.

The change in structure resulted in a sharp reduction in the Fund’s management fees and operating costs, and recognition by the advisor that improved performance was essential to the firm’s continuing engagement. At the same time, the climate of the stock and bond markets began an improvement that would continue for most of the subsequent quarter-century-plus. These changes, along with, most importantly, the modifications in Wellington’s investment strategy that the Board adopted in 1978 would lead to an era that would prove to be by far the most productive in the Fund’s long history.

Asset growth has been remarkable. Wellington Fund began, all those 75 years ago, with just $100,000 of assets. When assets crossed the $1,000,000 mark in 1934, Mr. Morgan was exuberant. The $10-million mark was crossed in 1943, the $100 million mark in 1949, and the $1-billion mark in 1959. After cresting at $2 billion in 1965, the Wellington’s long era of growth came to a temporary halt. Performance faltered badly, the dividend tumbled, and fund assets plummeted by 75 percent, to $470 million by mid-1982. Then the renaissance began. The performance laggard became a performance leader among its balanced fund peers, and self-motivated, independent investors joined the fund in droves. Fund assets steadily rose, and now total $27 billion, the largest balanced fund in the world.

Walter Morgan served as Wellington’s Chairman for 42 years before turning the reins over to me in 1972. I’m proud to have served in that role for another 27 years, including two years as senior chairman. As an employee ever since 1951, to say nothing of being a pleased and proud shareholder throughout that entire long period, I have been a witness to more than 52 years of Wellington’s 75-year history, and privileged to play a major role in shaping that history. In each of these capacities—leader, servant, and owner—I’m proud to dedicate this extensive 75th birthday card to the memory of Mr. Morgan, my predecessor, my sponsor, my mentor, my hero, and my friend for a full half-century.

Walter Morgan would want you to enjoy reading this history, to learn from it, and to take from it what you may. Happy 75th Birthday to Wellington Fund!

Sincerely,


John C. Bogle
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Past performance does not guarantee future performance !!!

Post by Taylor Larimore » Thu Jan 14, 2010 1:28 pm

Greyfox:

In your chart you show Wellesley (VWINX) as the best performing fund during the past 10 years and Total Stock Market (VTSMX) as the worst performing fund.

I have Morningstar's performance of both Wellsley (VWINX), Balanced Index VBINX), and Total Stock Market (VTSMX) for the 5-years ending 12-31-99 (Balanced Index did not yet have a 10-year record).

Wellsley's 5-year return averaged 12.69%.
Balanced Index's 5-year return averaged 19.13%
Total Stock Market's 5-year return averaged 26.84%

Exactly the reverse.

"Past performance does not guarantee future performance"
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Post by KyleAAA » Thu Jan 14, 2010 1:33 pm

All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.

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Post by Doc » Thu Jan 14, 2010 1:43 pm

KyleAAA wrote:All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.
So to be "fair", we can only compare an active fund to an index fund if the active fund holds exactly the same portfolio as the index fund? Will you please explain this concept of fairness a little more deeply? Having different asset allocations and risk profiles from an index or blended index is what defines the fund as active in the first place.
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Post by KyleAAA » Thu Jan 14, 2010 1:49 pm

Doc wrote:
KyleAAA wrote:All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.
So to be "fair", we can only compare an active fund to an index fund if the active fund holds exactly the same portfolio as the index fund? Will you please explain this concept of fairness a little more deeply? Having different asset allocations and risk profiles from an index or blended index is what defines the fund as active in the first place.
No, active management implies attempting to outguess the market WITHIN ITS CHOSEN MARKET SEGMENT. A go-anywhere fund that can invest in German stocks when the German market is skyrocketing will obviously do better than a U.S. total stock market index fund. But that's a stupid comparison because a.) no reasonable investor would hold ONLY U.S. domestic stocks and no other asset classes and b.) those two funds have totally different risk profiles. A large-cap domestic actively-managed fund would be a fair comparison. A fund that invests a significant portion of it's assets overseas isn't.

Comparing a 40/60 fund to a 60/40 fund during a decade defined by 2 giant bear markets is dumb. Of course the 40/60 fund won, and it had nothing to do with the fact that it's actively-managed.

Asset allocation is not a primarily active management decision (although it can be if you change it a lot).

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Post by Indexer88 » Thu Jan 14, 2010 1:50 pm

Mr. Bogle wisely writes, "After cresting at $2 billion in 1965, the Wellington’s long era of growth came to a temporary halt. Performance faltered badly, the dividend tumbled, and fund assets plummeted by 75 percent, to $470 million by mid-1982."

17 years is a long plummet.

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Re: Proof ?

Post by S&L1940 » Thu Jan 14, 2010 2:23 pm

Taylor Larimore wrote:Hi Greyfox:
Is this proof that low-cost actively managed funds beat low-cost index funds?
Of course not. There will ALWAYS be low-cost (and high-cost) actively managed funds that beat low-cost index funds--in the past.

The problem is picking funds that will be winners in the future. Winning performance seldom persists.
Taylor, your contributions and words of wisdom have provided me (and I am sure others on this forum) with the support I needed to stay the course. Yet, the mantra:
"Past performance does not guarantee future performance" needs to be broken down a bit. without my crystal ball and the whisperings of the fairies, there is little I have to go on. so, past performance does have to be part of the formula when one makes asset allocation and stay the course decisions. Wellington is a major part of my wife's holdings and I believe will remain so. whatever it is; the culture, the heritage, the intelligence of Wellington's 75 year history has to count for something when we "place our bets".
my humble opinion (and I have much to be humble about...)
Rich

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Post by Rodc » Thu Jan 14, 2010 2:28 pm

Indexer88 wrote:Mr. Bogle wisely writes, "After cresting at $2 billion in 1965, the Wellington’s long era of growth came to a temporary halt. Performance faltered badly, the dividend tumbled, and fund assets plummeted by 75 percent, to $470 million by mid-1982."

17 years is a long plummet.
It was a rather horrible time period for both stocks and bonds. I have no idea if Wellington did better or worse than the competition. Not many winners in any absolute sense in those years.

Hopefully we won't be saying the same thing about 2000-2017! (Though we might).

(agree though about the use of the word "plummet" for a 17 year slide.)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Doc » Thu Jan 14, 2010 3:12 pm

KyleAAA wrote:Asset allocation is not a primarily active management decision (although it can be if you change it a lot).
Actually it is active active. We usually call people to do this "market timers" aka active managers.

But the question I asked of you has little to do with active management. The question is what the appropriate benchmark is to measure the performance of any fund. I submit that the appropriate benchmark is the broadest index available that covers that part of the investing universe that the fund manager is allowed to select from. If the manager is allowed to go "anywhere" the appropriate benchmark is an all world index. You don't change the benchmark just because the manager overweights a particular sector during some period of time. Even index managers sometimes overweight or underweight for a time.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Proof ?

Post by Beagler » Thu Jan 14, 2010 3:16 pm

1530jesup wrote:
Taylor Larimore wrote:Hi Greyfox:
Is this proof that low-cost actively managed funds beat low-cost index funds?
Of course not. There will ALWAYS be low-cost (and high-cost) actively managed funds that beat low-cost index funds--in the past.

The problem is picking funds that will be winners in the future. Winning performance seldom persists.
Taylor, your contributions and words of wisdom have provided me (and I am sure others on this forum) with the support I needed to stay the course. Yet, the mantra:
"Past performance does not guarantee future performance" needs to be broken down a bit. without my crystal ball and the whisperings of the fairies, there is little I have to go on. so, past performance does have to be part of the formula when one makes asset allocation and stay the course decisions. Wellington is a major part of my wife's holdings and I believe will remain so. whatever it is; the culture, the heritage, the intelligence of Wellington's 75 year history has to count for something when we "place our bets".
my humble opinion (and I have much to be humble about...)
Rich
From another thread, a classic from bob. u.:
bob u. wrote:I can see a new promotional campaign for Wellington: "The Wellington fund : 80 years of 'luck.'"

Goodness gracious. :roll: Bob U.
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Post by Indexer88 » Thu Jan 14, 2010 3:17 pm

Rodc wrote:
Indexer88 wrote:Mr. Bogle wisely writes, "After cresting at $2 billion in 1965, the Wellington’s long era of growth came to a temporary halt. Performance faltered badly, the dividend tumbled, and fund assets plummeted by 75 percent, to $470 million by mid-1982."

17 years is a long plummet.
It was a rather horrible time period for both stocks and bonds. I have no idea if Wellington did better or worse than the competition. Not many winners in any absolute sense in those years.

Hopefully we won't be saying the same thing about 2000-2017! (Though we might).

(agree though about the use of the word "plummet" for a 17 year slide.)
I believe Wellington did worse than the markets in that period.

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Post by jeffyscott » Thu Jan 14, 2010 3:19 pm

Indexer88 wrote:Mr. Bogle wisely writes, "After cresting at $2 billion in 1965, the Wellington’s long era of growth came to a temporary halt. Performance faltered badly, the dividend tumbled, and fund assets plummeted by 75 percent, to $470 million by mid-1982."

17 years is a long plummet.
That is referring to assets. Fund total return, based on m* chart, was about 0 "only" from about 1965-1975. It more than doubled from 1975-1982 (of course, the CPI was up about 80% from 1975-82, so that was still not all that great).

Since the CPI tripled from 1965-82, fund real return was negative over that 17 years, though.
Time is your friend; impulse is your enemy. - John C. Bogle

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Post by HomerJ » Thu Jan 14, 2010 3:27 pm

Rodc wrote: Hopefully we won't be saying the same thing about 2000-2017! (Though we might).
I'd say it's quite likely...

And fine with me!

1913-1929 - 16 years - good
1929-1947 - 18 years - bad
1947-1966 - 19 years - good
1966-1982 - 18 years - bad
1982-2000 - 18 years - good
2000-2017 - 17 years - bad
2017-2034 - 17 years - good

I retire in 2029 at 60, having accumulated a LOT of stocks cheaply from 2000-2017... Dow goes from 12,000 to 80,000 by 2029 (on it's way to 110,000 by 2034)

I retire HAPPY... (and of course I'm only 25% stocks by the time the 2035 crash happens) :) :)

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Re: Proof ?

Post by gallo146 » Thu Jan 14, 2010 4:10 pm

Taylor Larimore wrote:Hi Greyfox:
Is this proof that low-cost actively managed funds beat low-cost index funds?
Of course not. There will ALWAYS be low-cost (and high-cost) actively managed funds that beat low-cost index funds--in the past.

The problem is picking funds that will be winners in the future. Winning performance seldom persists.
TAylon,
I do have Wellington Admiral and sleep well at nite. Thinking of adding Windsor rather than Index fund primarily cause the active management is also the Wellingto group ...any Comments?
"Life is like riding a bicycle. To keep your balance you must keep moving". Albert Einstein

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Post by BrandonT » Thu Jan 14, 2010 4:23 pm

I've just started to educate myself on investing so take this for what it's worth...but you have to compare over many different slices of time. I've found most of the best managed funds that beat the SP500 since 2000 have a similar trend, in that all of the gain was made in 2000-2002. After that they were lucky to match the market over the next seven years, most fell behind. It's really an amazingly similar situation for all of them. I was just starting my first "real job" back then so I don't know why this would be. I've heard that midcaps didn't do so bad back then, and maybe some of these funds moved into bonds. Either way it is really an asset allocation phenomenon, and the average investor could have done this themselves by balancing among funds like VFINX, VIMSX, and VBMFX.

Strangely, all of these funds dropped as much or more than the SP500 during this last bear market. So I have more faith in my own method preserving my capital during downturns as I do for a active fund manager. Looks like they got lucky once.

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Re: Proof ?

Post by woof755 » Thu Jan 14, 2010 4:25 pm

Beagler wrote:
1530jesup wrote:
Taylor Larimore wrote:Hi Greyfox:
Is this proof that low-cost actively managed funds beat low-cost index funds?
Of course not. There will ALWAYS be low-cost (and high-cost) actively managed funds that beat low-cost index funds--in the past.

The problem is picking funds that will be winners in the future. Winning performance seldom persists.
Taylor, your contributions and words of wisdom have provided me (and I am sure others on this forum) with the support I needed to stay the course. Yet, the mantra:
"Past performance does not guarantee future performance" needs to be broken down a bit. without my crystal ball and the whisperings of the fairies, there is little I have to go on. so, past performance does have to be part of the formula when one makes asset allocation and stay the course decisions. Wellington is a major part of my wife's holdings and I believe will remain so. whatever it is; the culture, the heritage, the intelligence of Wellington's 75 year history has to count for something when we "place our bets".
my humble opinion (and I have much to be humble about...)
Rich
From another thread, a classic from bob. u.:
bob u. wrote:I can see a new promotional campaign for Wellington: "The Wellington fund : 80 years of 'luck.'"

Goodness gracious. :roll: Bob U.
Great, so someone who has held the fund in a buy-and hold fashion fo r80 years has done well. However, we all know that no one (except for a few bright Bogleheads) buys an actively managed fund with the intent to keep it until he / she retires.

The OP was using a 10 year performence of a low-cost, actively managed VANGUARD fund to prove that active management wins out? Come on.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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Post by woof755 » Thu Jan 14, 2010 4:28 pm

Doc wrote:
KyleAAA wrote:Asset allocation is not a primarily active management decision (although it can be if you change it a lot).
Actually it is active active. We usually call people to do this "market timers" aka active managers.

But the question I asked of you has little to do with active management. The question is what the appropriate benchmark is to measure the performance of any fund. I submit that the appropriate benchmark is the broadest index available that covers that part of the investing universe that the fund manager is allowed to select from. If the manager is allowed to go "anywhere" the appropriate benchmark is an all world index. You don't change the benchmark just because the manager overweights a particular sector during some period of time. Even index managers sometimes overweight or underweight for a time.
If you are trying to construct a reasonably predictable portfolio, such that you want to know what you're actually invested in from year to year, then good luck keeping up with churning, go-anywhere actively managed funds. And I wish one even better luck if this fund is held in a taxable account.

The point is, if a fund is investing in domestic and international markets, comparing to a domestic fund isn't a clean comparison. Fair or not fair, it's not comparable.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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Post by dumbmoney » Thu Jan 14, 2010 5:49 pm

BrandonT wrote:I've just started to educate myself on investing so take this for what it's worth...but you have to compare over many different slices of time. I've found most of the best managed funds that beat the SP500 since 2000 have a similar trend, in that all of the gain was made in 2000-2002. After that they were lucky to match the market over the next seven years, most fell behind. It's really an amazingly similar situation for all of them. I was just starting my first "real job" back then so I don't know why this would be.
That's when the stock market bubble popped. The same funds badly trailed the index in the preceeding years. At the height of the bubble, the S&P 500 was beating 90% of actively managed funds. That couldn't last, and didn't.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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Post by Doc » Thu Jan 14, 2010 5:58 pm

woof755 wrote: The point is, if a fund is investing in domestic and international markets, comparing to a domestic fund isn't a clean comparison. Fair or not fair, it's not comparable.
I think you are completely missing the point. I never said you should do anything of the kind. Say you have a fund like Vanguard 500 Index fund which is considered a domestic fund. You might benchmark it against the the Wilshire 5000. Then you have another fund that by its charter can invest world wide. You might benchmark the second fund against the MSCI World Index. Now suppose in 2008 that fund was 60% US and in 2009 it was only 40% US. Would you change its benchmark to 60% Wilshire 5000/40% MSCI World ex US for 2008 and then to 40% Wilshire 5000/ 60% MSCI World ex US for 2009? I think not.

But Kyle wanted to change benchmarks for a 40/60 (fund A) and a 60/40 (fund B). Think about the result. Lets say that the split here was Total Stock Market and Total Bond Market. If we use a different mixed benchmark for each both Fund A and fund B track their benchmark exactly. So therefore they are equal? No of course not except by chance. When you go to far with tailoring benchmarks to an individual fund you begin to lose data that may be very important.

Cheers,

Doc

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Post by unclemick » Thu Jan 14, 2010 6:24 pm

I'm surprised no poster has mentioned Bill Bernstein's heroic quest in the past to catch 'the value premium' and choke that sucker into coughing up it's secrets as to why it seems to persist over long periods.

Ahem - the Norwegian widow in times past has been known to peruse top ten stock holdings of both Wellington and Wellesley for DRIP dividend stocks. A fruitful hunting ground income wise for dividends/div. growth/interest income. Hot rod performance was not a consideration.

:lol: :lol: :lol: :roll: :wink:

heh heh heh - Target Retirement here - but the siren song of value still/yet calls to me once in a while. 8)

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Post by stratton » Thu Jan 14, 2010 8:56 pm

Both funds are value tilted like unclemick mentioned. The bond duration may be longer too and Wellington has 20% of equities in foreign stocks.

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Post by Beagler » Thu Jan 14, 2010 9:03 pm

stratton wrote:...Wellington has 20% of equities in foreign stocks.
I wish that were true. Wellington <a href="https://personal.vanguard.com/us/funds/ ... >currently has 13.1%</a> foreign equity holdings.
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Post by stratton » Thu Jan 14, 2010 9:09 pm

Beagler wrote:
stratton wrote:...Wellington has 20% of equities in foreign stocks.
I wish that were true. Wellington currently has 13.1% foreign equity holdings.

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Re: Past performance does not guarantee future performance !

Post by grayfox » Fri Jan 15, 2010 11:16 am

So it appears that indexing beat managed from 1995 to 2000
Then managed beat indexing from 2000 to 2010

I think I might understand what is going on here. I'll look at Wellington

From 1995 to 1999 the stock market grew into a bubble. The period irrational exuberance.

Code: Select all

Date   S&P 500   Well Index  Wellington
1995     37.58     33.72     32.92
1996     22.96     15.08     16.19
1997     33.36     26.27     23.23
1998     28.58     22.65     12.06 <-- P/E10=30 Wellington lags index
1999     21.04     10.61      4.41 <-- P/E10=40 Wellington lags index

(Wellington Index is the benchmark for Wellington 65% S&P 500/35% Bonds)

Naturally the index funds grew right along with the bubble.
But the Wellington managers were more cautious so they missed out on some of those big returns, especially in 1998 and 1999 when P/E10 was in the 30s and 40s.

Then the market crashed

Code: Select all

Date   S&P 500   Well Index  Wellington
2000    -9.11      -2.37     10.40 <-- Index crashes over three years
2001    -11.89     -4.11      4.19 <--
2002    -22.10    -10.98     -6.90 <-- but just a minor downturn for Wellington 
And the index funds dropped along with market
But the Wellington who had been more cautious didn't lose much.

During the next bull market from 2003 to 2007, the market was not so obviously over-valued (P/E10=26) so Wellington took on more risk and gained similar to its index. Actually better.

Code: Select all

Date   S&P 500   Well Index  Wellington
2003     28.68     20.27     20.75 <-- Wellington beat index
2004     10.88      8.70     11.17
2005      4.91      4.10      6.82
2006     15.79     11.63     14.97
2007      5.49      5.54      8.34 <-- every year of the bull market
But then during the crash of 2008, Wellington managers did not sidestep like the previous crash. Although they still did slightly better than their index.

Code: Select all

Date   S&P 500   Well Index  Wellington
2008    -37.22    -25.58    -22.30 <-- this time Wellington gets hammered along with index
2009     26.86     21.30     22.20
The result was a smoother ride with Wellington than with the Wellington Index. Plus generally a little better performance.

Image

So my conclusion is if you follow the index, you will rise and fall with the market including any bubbles. Even if it is obviously overvalued, indexers stay fully invested all the time.
But with Wellington, you may miss out on the bubble growth but also avoid the inevitable crash afterwards.

So I think that explains how index funds outperformed Wellington during the late 1990s.

Here is the lesson I learn: Those who live by the index, die by the index.
Last edited by grayfox on Fri Jan 15, 2010 1:25 pm, edited 1 time in total.

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Post by woof755 » Fri Jan 15, 2010 11:46 am

Glad you have it all figured out, then.

:roll:
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Post by camper » Fri Jan 15, 2010 11:57 am

I think what your conclusion is missing, is what re-balancing will do for a diversified buy-and-hold indexed portfolio in a bubble environment.

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Post by bhmlurker » Fri Jan 15, 2010 12:34 pm

Looks to me like there's nothing special about Wellington. It is simply a 65/35 stock/bond portfolio, except the bonds are mostly investment-grade corporates and stocks has some international exposure. With this in mind it's not surprising that when large caps were surging, Wellington underperformed, and when bonds did well, so did it.

It is probably a good choice for people who do not want to slice and dice and just want to invest in one fund, and in a way it's the lifecycle fund before they came out.

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Post by JOJO123 » Fri Jan 15, 2010 12:56 pm

*****
Last edited by JOJO123 on Sun Dec 22, 2019 8:10 am, edited 1 time in total.

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Post by S&L1940 » Fri Jan 15, 2010 1:00 pm

bhmlurker wrote:Looks to me like there's nothing special about Wellington. It is simply a 65/35 stock/bond portfolio, except the bonds are mostly investment-grade corporates and stocks has some international exposure. With this in mind it's not surprising that when large caps were surging, Wellington underperformed, and when bonds did well, so did it.

It is probably a good choice for people who do not want to slice and dice and just want to invest in one fund, and in a way it's the lifecycle fund before they came out.
the one thing special about Wellington is that for all the years of its existence it has been a dependable investment. true there have been dips yet for the long term you get in a Lexus and expect it to start and you give the ball to Kobe when you need some points. sometimes past performance does give a reasonable expectation of continued satisfaction.

and I would suspect that Wellington usually does not sit as a standalone portfolio for most folks as with a TR or Lifestyle asset. it is part of the AA and can be modified or enhanced by the other funds being held.

Rich

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Post by grayfox » Fri Jan 15, 2010 1:06 pm

camper wrote:I think what your conclusion is missing, is what re-balancing will do for a diversified buy-and-hold indexed portfolio in a bubble environment.
I think the results of the Wellington Composite Index*, which is the benchmark that Vanguard uses for Wellington Fund, would take into account annual re-balancing because I looked annual returns. In other words, re-balanced back to 65/35 every year.

Also notice that the Wellington Composite Index uses AA or A which sounds to me like investment-grade corporate bonds.

*65% S&P 500 Index and 35% Lehman Long Credit AA or Better Index through February 29, 2000; 65% S&P 500 Index and 35% Barclays Capital U.S. Credit A or Better Bond Index thereafter.

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Post by leonard » Fri Jan 15, 2010 1:23 pm

comparing managed to index needs to control for the following before you can draw any conclusions about whether managed beat index in the past

1. growth/value mix
2. domestic/int'l mix
3. capitalization mix
4. equity/bond mix
5. rebalancing timing
6. tax efficiency (for average investor)

Without controlling for these factors and comparing to the appropriate benchmarks, you can't really answer the question of how well Wellington did vs an indexed portfolio in the past. Even with this comparison, you still can't say which will be better in the future.
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Post by Alex Frakt » Fri Jan 15, 2010 1:43 pm

Doc wrote:
KyleAAA wrote:All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.
So to be "fair", we can only compare an active fund to an index fund if the active fund holds exactly the same portfolio as the index fund? Will you please explain this concept of fairness a little more deeply? Having different asset allocations and risk profiles from an index or blended index is what defines the fund as active in the first place.
No, there is a proper way to do this. To be fair you have to compare it to the returns of a synthetic index that has the same average characteristics. The ones that matter are:

For equities:
- size (market cap)
- value or growth tilt (book to market)
- if there are international holdings, you have to do this separately for the domestic and international and also developed int'l versus EM

For bonds:
- quality
- duration
- taxable versus munis

Wellesley and Wellington have a pronounced tilt to value in equities and lower-quality and longer-duration in bonds. You would therefore expect returns to be different, and in the long run higher, than Balanced Index.

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Post by Doc » Fri Jan 15, 2010 2:14 pm

Alex Frakt wrote:
Doc wrote:
KyleAAA wrote:All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.
So to be "fair", we can only compare an active fund to an index fund if the active fund holds exactly the same portfolio as the index fund? Will you please explain this concept of fairness a little more deeply? Having different asset allocations and risk profiles from an index or blended index is what defines the fund as active in the first place.
No, there is a proper way to do this. To be fair you have to compare it to the returns of a synthetic index that has the same average characteristics.
Alex, NO. If you want to explain the performance of an active fund you might want to use such a synthetic index. But if the fund manager is free to pick and choose his portfolio among a broad spectrum of sectors you must use a broader index that covers all his choices. Suppose a manage has all small cap for years 1 through 4 and all large cap in year 5. Would you benchmark his 5 year return against the 5 year return of a large cap fund? I don't think so. Would you use a synthetic benchmark of 4 small and 1 large? What time periods would you use for each? And if the manager actually had some skill at market timing your synthetic benchmark is going to cover up any measure of that skill.

What question do you want to ask? Is it: does active beat passive but only in the case that the manger has no choice but to use only those investments contained in a certain index and only in proportion to the sectors in that index? This is a description of index fund not an active fund. OK maybe an index fund with some blended index. You've shown nothing.
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Re: Proof That Managed Beats Index?

Post by dkturner » Fri Jan 15, 2010 2:32 pm

CyberBob wrote:
grayfox wrote:They all had the same lousy stock market, the same bond market and are all low-cost Vanguard funds. The only difference is Wellesley and Wellington are actively managed and Balanced Index is not.
Not quite an apples to apples comparison.
Wellington and Wellesley included international stocks, while Balanced Index did not.
Wellington and Wellesley stock components were value-tilted, whereas Balanced Index was not.
Wellington and Wellesley had higher bond duration numbers than Balanced Index and also had a lower average credit quality.
And while Balanced Index always had a 60/40 stock/bond allocation, Wellington and Wellesley had different and non-static stock/bond allocations.
If you adjusted for all of the above factors, and others, I'd bet that the active management advantage would likely be significantly reduced, if not eliminated altogether.

Bob
Isn't one of the advantages of active management the ability of the manager to tilt his portfolio to international stocks, or to value stocks, or increase, or decrease his allocation to fixed income as he deems it to be in the best interests of his shareholders?

This tilting makes it difficult to arrive at an appropriate benchmark for comparison purposes. This is not a problem for the manager, it is a problem for his critics. If you disagree with the benchmark, why don't you show us the appropriate benchmark(s) and demonstrate that the managers of Wellesley and Wellington have not added any value? While you're doing that you might also explain why an active manager get no credit for correctly tilting his portfolio, but gets blamed when his tilt misfires.

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Post by Alex Frakt » Fri Jan 15, 2010 2:39 pm

Doc wrote:
Alex Frakt wrote:
Doc wrote:
KyleAAA wrote:All three of those funds have different asset allocations and risk profiles. Of course they didn't all perform the same. Wellington and Wellesley both invest a portion of their portfolio overseas and tend to hold higher-yielding, riskier corporate bonds than the index. Not a fair comparison at all.
So to be "fair", we can only compare an active fund to an index fund if the active fund holds exactly the same portfolio as the index fund? Will you please explain this concept of fairness a little more deeply? Having different asset allocations and risk profiles from an index or blended index is what defines the fund as active in the first place.
No, there is a proper way to do this. To be fair you have to compare it to the returns of a synthetic index that has the same average characteristics.
Alex, NO. If you want to explain the performance of an active fund you might want to use such a synthetic index. But if the fund manager is free to pick and choose his portfolio among a broad spectrum of sectors you must use a broader index that covers all his choices. Suppose a manage has all small cap for years 1 through 4 and all large cap in year 5. Would you benchmark his 5 year return against the 5 year return of a large cap fund? I don't think so. Would you use a synthetic benchmark of 4 small and 1 large? What time periods would you use for each? And if the manager actually had some skill at market timing your synthetic benchmark is going to cover up any measure of that skill.

What question do you want to ask? Is it: does active beat passive but only in the case that the manger has no choice but to use only those investments contained in a certain index and only in proportion to the sectors in that index? This is a description of index fund not an active fund. OK maybe an index fund with some blended index. You've shown nothing.
You have a point if you are discussing a true "anything goes" fund. But this is not the case here. Wellington and Wellesley always tilt to value, always hold international, and always hold lower quality bonds (on average) than Balanced Index. If you have a consistent portfolio in terms of asset mix, then benchmarking against an indexed mix with the same characteristics is absolutely appropriate.

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Post by dkturner » Fri Jan 15, 2010 3:08 pm

"You have a point if you are discussing a true "anything goes" fund. But this is not the case here. Wellington and Wellesley always tilt to value, always hold international, and always hold lower quality bonds (on average) than Balanced Index. If you have a consistent portfolio in terms of asset mix, then benchmarking against an indexed mix with the same characteristics is absolutely appropriate."

Alex,

Wellington and Wellesley may always tilt to value and hold international stocks, but their value tilts, and international exposure, varies considerably from time to time. How do you suggest accurately measuring this? Shareholders of these funds expect the managers to make these adjustments when they believe them to be appropriate.

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Proof

Post by nick22 » Fri Jan 15, 2010 3:17 pm

Hard to prove anything in life, but the initial assertion is wrong. The graph is just proof that an index fund does not always beat an actively managed fund over all chosen periods of time.
Nick22

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Post by bhmlurker » Fri Jan 15, 2010 5:18 pm

We should realize that an actively managed fund can always appear to outperform an index depending on the index chosen. What index does a fund benchmark against, if the fund is comprised of the 501st highest-capitalization stock from each country?

For that matter, there's no reason why index investing should be automatically profitable or superior. If one invested during the times of the Roman Empire, anyone who invested in Total Roman Index would have vastly outperformed Total World Index. What if we invested during the Dark Ages? We might have suffered through a few centuries of equity under-performing gold. In the end, an index only performs as well as its underlying assets. It makes sense to diversify into investing in indices of top 25 or 50 nations with strong economies, but I fail to see the logic of investing in every nation. Some downtrodden ones may not rise up in our children's lifetime.

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A Nobel Laurete disagrees

Post by Taylor Larimore » Fri Jan 15, 2010 5:33 pm

Hi bhm:
"There's no reason why index investing should be automatically profitable or superior."
William Sharpe disagrees:

The Arithmetic of Active Management
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