how do I compare a managed fund to a Vanguard fund?

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moretolearn
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how do I compare a managed fund to a Vanguard fund?

Post by moretolearn »

As I've mentioned in other threads (like "how fees affect returns - do I have this right?", http://www.bogleheads.org/forum/viewtopic.php?t=68501 ), I have a friend who knows very little about her portfolio and one of her advisors gave her some Morningstar printouts that I was looking at for her.

I believe a Vanguard index fund is probably going to beat most other funds in the long term, because of costs, but I want to be able to show her and of course see for myself.

One of the funds her advisor mentioned is Blackrock Global Allocation. (MCLOX)

I wanted to use the Morningstar Compare feature that livesoft pointed out to me to compare Blackrock to a Vanguard fund; but I don't know which fund to compare to.

How could I find a good Vanguard fund to use in the Compare graph?

Is there any way I could compare a collection of Vanguard index funds to Blackrock? Blackrock is 34% US stock, 28% non-US stock, bonds 22%, and "Other" 15%, which includes gold. Could I somehow put together a combo of Total Market, Total International, and Total Bond, and compare that to Blackrock?

I see Morningstar calls Blackrock a World Allocation fund. How do I find Vanguard funds that are World Allocation, or close to World Alloc if there aren't any Vanguard World Alloc funds?

Thanks!

moretolearn
livesoft
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Post by livesoft »

If you go the Vanguard web site and search for fund with "world" in the name, what happens? What about just finding a list of Vanguard funds and then guessing? There may not be an exact fund for comparison.
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mickeyd
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Re: how do I compare a managed fund to a Vanguard fund?

Post by mickeyd »

moretolearn wrote:I have a friend who knows very little about her portfolio and one of her advisors gave her some Morningstar printouts that I was looking at for her.


moretolearn
Hey moretolearn,

It may me asking a new investor too darn much to get into the weeds over this kind of issue. May I suggest another path? Steer your friend to the Bogleheads books that are suggested here http://www.bogleheads.org/wiki/Category ... nd_Authors

Reading a few excellent books on investing the Boglehead way is the best way to understand that passive investing in a better long term way to invest for most of us.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
JDCPAEsq
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Post by JDCPAEsq »

MCLOX has an expense ratio of 1.96%. I don't think you need to know much more.
John
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moretolearn
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Post by moretolearn »

Hi livesoft,
livesoft wrote:If you go the Vanguard web site and search for fund with "world" in the name, what happens? What about just finding a list of Vanguard funds and then guessing? There may not be an exact fund for comparison.
Good suggestion, thanks! I get a list of 91 funds, starting with Total World:

Total World
FTSE All World ex-US
FTSE All World ex-US Small-Cap
Total World Institutional
Strategic Small-Cap Equity
Tax-Managed Small-Cap
Emerging Markets Stock Index
Global Ex-US Real Estate Index
Total Intl Stock
Vanguard 500

I have tried just comparing Total World and Total Internatl, but those don't have the stabilizing effects of the bonds. I thought about target retirement funds too (even though my friend is already retired) but those didn't seem a very close match either.

I've tried comparing it to these funds:

Vanguard Total World Stock Index Fund Investor Shares (VTWSX)
Vanguard Total International Stock Index Fund Investor Shares (VGTSX)

Vanguard Target Retirement 2010 Fund (VTENX)
Vanguard Target Retirement 2005 Fund (VTOVX)

but Blackrock tends to come out ahead. Except: it changes depending on the time frame.

best over 1 year:
VG Total World
VG Total Intl
VG Target 2010
Blackrock
VG Target 2005

best over 3 years:
VG Target 2005
VG Target 2010
Blackrock
VG Total World
VG Total Intl

best over 5 years:
Blackrock
VG Total World
VG Target 2010
VG Target 2005
VG Total Intl

best over 10 years:
Vlackrock
VG Total World
VG Target 2010
VG Total Intl
VG Target 2005

When you're comparing, do you pay most attention to shorter terms or longer terms?




I've also tried to find World Allocation category Vanguard funds at the Morningstar site but haven't been successful.


Thank you livesoft,

moretolearn
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moretolearn
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Re: how do I compare a managed fund to a Vanguard fund?

Post by moretolearn »

mickeyd wrote:
moretolearn wrote:I have a friend who knows very little about her portfolio and one of her advisors gave her some Morningstar printouts that I was looking at for her.


moretolearn
Hey moretolearn,

It may me asking a new investor too darn much to get into the weeds over this kind of issue. May I suggest another path? Steer your friend to the Bogleheads books that are suggested here http://www.bogleheads.org/wiki/Category ... nd_Authors

Reading a few excellent books on investing the Boglehead way is the best way to understand that passive investing in a better long term way to invest for most of us.
Hi mickeyd,

Thanks, that's a great idea, but unfortunately I'm more of a reader than she is and she's very new to this paying attention to her portfolio at all. (Like many people her spouse has been handling it all these years.) I've gotten her to get some books from the library and we'll see if she can get through them. We might do a little mini book club and I'll read along with her. Maybe that will help. Problem is it's a lot to absorb and take in when there's a little bit of a sense of urgency. Her husband is still doing pretty well but she's having to start making some decisions and she wants to do the right thing.

Thanks,

moretolearn
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moretolearn
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Post by moretolearn »

JDCPAEsq wrote:MCLOX has an expense ratio of 1.96%. I don't think you need to know much more.
John
Right, well, that's what I thought to begin with but when I look at comparisons on Morningstar it still beats the Vangaurd funds I've found at least over certain time periods.

I am happy with VG funds but if she has one person suggesting Blackrock and another person suggesting VG generally but without a particular fund, it's hard to see how VG beats Blackrock.

She's my friend, and I want her to have a good retirement. I want to help her figure out what's best for her. I bet VG funds are best for her - right, 1.96 is way too much. But if I can't figure out what VG funds would be a better choice, it's hard to make any good suggestions.

Do you have any suggestions of a VG fund or combo of funds that might be good for comparing with Blackrock?

thanks John,

moretolearn
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Post by pkcrafter »

MCLOX is a class C fund, meaning a load is added in and is ongoing, year after year. On top of that, it has a redemption fee just in case the investor has figured out the game. In my opinion, it's the worst class of fund an advisor could recommend. Your friend should not consider any advisor who would recommend C share funds.

You simply cannot use short or even intermediate term data for comparison. Indexing is not intuitive because of this problem, but if you study the large amount of academic literature you will see index funds will win out in the end, there is no question about it.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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moretolearn
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Post by moretolearn »

pkcrafter wrote:MCLOX is a class C fund, meaning a load is added in and is ongoing, year after year.
Oh!

I see the 1.96 Prospectus Gross Expense Ratio. Is the Load in addition to that? If I invest $10K in Blackrock and get a 8% return, as I understand it, the 1.96% expense has already been taken out. But is there an additional amount being taken out that's not reflected in the performance? Would I have made $800 (8% performance shown on Vanguard site) but I'd pay something like $108 (1% of my $10K + $800)?
pkcrafter wrote:On top of that, it has a redemption fee just in case the investor has figured out the game. In my opinion, it's the worst class of fund an advisor could recommend. Your friend should not consider any advisor who would recommend C share funds.
Doesn't the redemption fee only apply if you withdraw the funds in less than 30 days? I'm comparing Blackrock with Vanguard funds over on the Vanguard site ( https://personal.vanguard.com/us/funds/vanguard/compare) and it shows Blackrock redemption fee: 2% if held < 30 days. It shows Vanguard Total Stock has a redemption fee of 2% if held < 2 mos. The Target Retirement options don't have a redemption fee listed.
pkcrafter wrote:You simply cannot use short or even intermediate term data for comparison. Indexing is not intuitive because of this problem, but if you study the large amount of academic literature you will see index funds will win out in the end, there is no question about it.

Paul
I know I have a lot moretolearn. From what I've read so far, I believe VG funds are the best option, because of the relentless rules of humble arithmetic. But my friend is probably only going to do a tiny fraction of the reading I do. But she's still going to have to make decisions about what to do with her retirement money. Some of it's in high-fee funds now. I would like to show her that humble arithmetic if I can. I know it's not obvious: I think if it were I would have figured it out by now. But I want to be able to show her.

Thanks Paul!

moretolearn
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Post by grberry »

I've never bought a load fund, so I can't comment on whether the load is in addition to the expense ratio. It may be. Any fees to purchase or redeem are definitely in addition to the expense ratio.

On the comparison periods, you/your friend should be planning to hold stocks for 10 or more years. So 10 years is the best period to look at, 5 years is reasonable, and under five years is pretty much meaningless.
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Taylor Larimore
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Past Performance ?

Post by Taylor Larimore »

Hi moretolearn:
Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea.--Bill Schultheis
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by sometimesinvestor »

in most cases for load familes the expense ratio goes down as the class chages from C to A(most families convert B funds to A with regard to expense ratios after a period of from 5-10 years.If the advisor believes that the load fund will be quite good for many years he certainly ought to be suggesting A shares.
Unfortuateoly if the fund proves unsatisfactory aftera year or two or 3 the c class would hve been proved better unless an alternative fund could be found in the fund family.
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Post by Jacobkg »

Many advisors will pick funds to recommend based on past performance. What this means is that the recommended fund is likely to have outperformed the indexes in the past. Therefore using past performance is unlikely to help your case. I agree with previous posters that education is the best approach. Try recommending some books to read.
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Re: Past Performance ?

Post by moretolearn »

Taylor Larimore wrote:Hi moretolearn:
Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea.--Bill Schultheis
Hi Taylor,

I know! But how do I wrap my head around this: past performance doesn't predict future performance. I know that. But we know that index funds and lower-cost funds beat high-cost funds by comparing them, right?

If I compare 1-year performance of Blackrock vs VG Total Intl, VG Total World, VG Target 2005, and VG Target 2010, all 4 VG funds beat Blackrock. But when you get out to 5 years, Blackrock beats Total Intl and Target 2005. (The other two didn't exist then. Which makes me wonder how Morningstar can include them in comparisons back that far?)

I believe that a VG fund would be better than Blackrock. But I can't explain to myself why, exactly, and I can't explain to my friend, other than just saying the Blackrock fees are too high. But if its total performance is still higher than VGs, it's a better buy, right? But if its total performance doesn't include all the fees - just some of them - then maybe that helps explain why the Blackrock appears to be doing better than the VG. Maybe the numbers are lying.

I just wish this were clearer to see. I've seen some of my friend's statements and it's so hard to see what the fees are and how much they total and when they're taken out. And how much they affect the reinvesting process.

Thanks,

moretolearn
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Post by moretolearn »

sometimesinvestor wrote:in most cases for load familes the expense ratio goes down as the class chages from C to A(most families convert B funds to A with regard to expense ratios after a period of from 5-10 years.If the advisor believes that the load fund will be quite good for many years he certainly ought to be suggesting A shares.
Unfortuateoly if the fund proves unsatisfactory aftera year or two or 3 the c class would hve been proved better unless an alternative fund could be found in the fund family.
Hi sometimesinvestor,

Now I'm really confused.

I thought from the things I'd read that C shares do not convert to A shares. B shares do but C shares don't.

I've been trying to find an answer to how the load in C shares works. If I invest $10K and hold it for 5 years, do they charge 1% * 5 years = 5% (with some compounding and time-based calculations in there somewhere I'm just keeping this simple) and charge me that $500+ when I sell?

Every question leads to another 10 questions. Talk about return on investment.

moretolearn
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Comparing past performance to select funds is ridiculous.

Post by Taylor Larimore »

Hi moretolearn:
But we know that index funds and lower-cost funds beat high-cost funds by comparing them, right?
Mostly right. Index funds and lower-cost funds usually beat high-cost funds.

There are always going to be funds that "beat" low-cost funds during certain periods. This is how many (probably most) brokers and advisors sell funds. They encourage prospects to buy funds that were top performers during previous periods--with the inference these same funds will continue their outperformance--which is nearly always a lie.

If you are trying to convince your friend to use a low-cost fund compared to a recommended highly ranked fund she has been shown, I believe your attempts are doomed to fail.

I suggest you have your friend read a few of the excerpts and purchase the book of her choice on this list:

Investment Gems
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Post by pkcrafter »

Investors really need to educate themselves. It's very difficult to appreciate the advantages of indexing at first glance. You need to know things like this:

Persistence of active funds:

http://www.standardandpoors.com/servlet ... lue3=UTF-8
Very few funds have managed to consistently repeat top-half or top-quartile performance. Over the five years ending September 2010, only 4.10% of large-cap funds, 3.80% of mid-cap funds, and 4.60% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Expectations of a random outcome would suggest a rate of 6.25%.
If performance does not persist, then you should turn to things you can control: the low costs of index funds and their immunity to problems that active funds routinely encounter. You can find past performance, but with no persistence in performance, you can't find future performance. Costs have a higher correlation to performance than any other metric.

Investing Essentials- A Primer

http://investingroadmap.wordpress.com/


Paul
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Post by tarnation »

One other point other than the expense ratio, does this person have both taxable and tax advantaged accounts? If so, then a balanced fund may not the best choice, due to inefficient fund location.
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Post by pkcrafter »

As far as I know, C shares do not convert, but B shares do. The redemption fee is usually 1 year. The returns you see are net of expenses, but that doesn't mean much. It would be a big mistake to invest in a fund with expenses this high. It's nothing more than a long-shot bet.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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"Investing Essentials - A Primer"

Post by Taylor Larimore »

Hi Paul:

Thank you for posting a link to your "Investing Essentials - A Primer."

It's a Gem!
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Post by JW-Retired »

moretolearn wrote:I know I have a lot moretolearn. From what I've read so far, I believe VG funds are the best option, because of the relentless rules of humble arithmetic. But my friend is probably only going to do a tiny fraction of the reading I do. But she's still going to have to make decisions about what to do with her retirement money. Some of it's in high-fee funds now. I would like to show her that humble arithmetic if I can. I know it's not obvious: I think if it were I would have figured it out by now. But I want to be able to show her.
Sorry, but you can't "show her" by comparing baskets of index funds to a hot fund the salesman has picked out to sell her. He can search through the 1000's of high expense funds and always find some that were lucky and did well recently. Index funds only do average. The hot fund won't continue to do well but so what, he makes the sale and starts collecting the big fees.

You have to somehow make the case that hot funds don't stay hot. That will take getting her to do a little reading.
JW
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Re: Past Performance ?

Post by ObliviousInvestor »

moretolearn wrote:We know that index funds and lower-cost funds beat high-cost funds by comparing them, right?
A very smart man by the name of William Sharpe once wrote a paper called The Arithmetic of Active Management, in which he uses simple arithmetic to show that the average passively-invested dollar will always beat the average actively-invested dollar. You can find it here: http://www.stanford.edu/~wfsharpe/art/active/active.htm

For me, that alone goes a long way toward setting the discussion of active vs. passive (because I'm OK with earning returns that are "guaranteed to be above average, though very unlikely to be the absolute best.") Also, I find that it's a concept that pretty much everyone can grasp with a little explanation.
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Re: Past Performance ?

Post by mickeyd »

moretolearn wrote:[I just wish this were clearer to see. I've seen some of my friend's statements and it's so hard to see what the fees are and how much they total and when they're taken out. And how much they affect the reinvesting process.

Thanks,

moretolearn
This kind of vague investment return communication is complex, and often indecipherable, because that's how the industry wants it to be. The more confused the investor is, the smarter that the "investment pro" seems to be. Hide the fees, use garbled acronyms, talk down to the ignorant plan participant~that's how it works. A good financial education will cut through this jungle.
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moretolearn
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Post by moretolearn »

Thank you all for your terrific replies.

pkcrafter, thank you very much for the Investing Essentials link. That looks really great. I was just scanning it quickly and this quote caught my eye:

"Performance can come and go, but costs are forever. "

which may help my friend (and me!) understand better why low-fee funds are better, even when compared to a high-fee fund that seems like a good performer.

Thank you!

moretolearn
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