Index vs. actively managed funds....is there a good tool to compare?

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cody508
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Index vs. actively managed funds....is there a good tool to compare?

Post by cody508 » Mon Oct 08, 2018 10:46 am

I know there are different schools of thought on this but would be curious to hear people weigh in on this.

I read John Bogle's book and obviously he is a big fan of indexing (along with Buffet and many others). The book made complete sense and the argument favoring indexing is strong.

I then had a call with my adviser at T. Rowe Price where I ran side by sides on most of my actively managed funds at T. Rowe and compared them to a few of Vanguards index funds and virtually all my T. Rowe Price outperformed the S&P in a 1, 3, 5 and 10 year period.

With that said, I still cannot get a straight answer on whether or not those returns INCLUDED FUND FEES.

So, my main question is......can anyone recommend a good tool that does a TRUE SIDE BY SIDE comparison of mutual funds? I like Fidelity's fund screener tool as it gives a nice chart that shows the hypothetical growth of a 10k investment but then there are some fine print disclaimers that seem to indicate that fee deductions are not included? The Morningstar tool didn't seem to show any 10 year comparisons, Vanguards tool is pretty nice but once again, I'm not sure if that tool takes all fees into consideration. There are different sections with 'after taxes on distribution' and 'after taxes on distributions and sales of fund shares'. Being a novice to investing in general, I want to make sure that I'm getting a true side by side comparison when I look at average return rates over a period of time.

Ideally, I'd love to find something with a clean user interface, nice graphs etc.....where I can simply plug in some funds (TRBCX, FUSEX, RPMGX, VFIAX etc.....) and just have it graph out a true side by side once again, INCLUDING ALL FEES so I can decide for myself how I want to invest now and for the future. Just can't seem to figure it out. Also, I'd love for it to go back more than 10 years (can't seem to find any that do this).

Thanks very much!

HEDGEFUNDIE
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by HEDGEFUNDIE » Mon Oct 08, 2018 11:40 am

https://www.portfoliovisualizer.com/bac ... sisResults

This will show you returns net of fees, with dividend reinvestment.

It is important not just to compare returns, but the risk you had to bear to get those returns. Risk is commonly defined as standard deviation. The Sharpe ratio is a combination of risk and return: the higher the Sharpe ratio, the better risk-adjusted return.

ExitStageLeft
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by ExitStageLeft » Mon Oct 08, 2018 12:37 pm

The problem with taking the advisor's argument at face value is that it is essentially the Texas Sharpshooter fallacy. You don't reach your destination driving forward while looking through the rear-view mirror.

What were the hot funds from 2008, and how did they do over the last decade? That's the comparison you should be doing. I did a quick search and came up with this article at Kiplinger: https://www.kiplinger.com/article/inves ... -2008.html

Pick any of the funds listed and see how they've done over the last decade. You'll find that a few did better, most under-performed, and some have been wiped off the face of the earth.

Here are a few of the funds recommended from that article. Ten-year performance then was stellar: https://www.portfoliovisualizer.com/bac ... ion3_3=100

Here is how those same three funds have done since: https://www.portfoliovisualizer.com/bac ... ion3_3=100

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FiveK
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by FiveK » Mon Oct 08, 2018 12:57 pm

cody508 wrote:
Mon Oct 08, 2018 10:46 am
The Morningstar tool didn't seem to show any 10 year comparisons....
Have you seen How to use Morningstar growth charts - Bogleheads?

cody508
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by cody508 » Mon Oct 08, 2018 6:03 pm

Thanks very much for the info. Portfoliovisualizer and Morningstar were perfect.

The funds that I was most interested in tracking are TRP's Blue Chip Growth (TRBCX) and mid cap growth (RPMGX) against the S&P 500.

Assuming that I'm doing this right (and its probable that I'm messing something up - given that I'm a novice).......TRBCX consistently beat the S&P 500 for the past 25 years. Looks like there could be a slight inconsistency in 1997-1999 but other than that TRBCX came out on top.

RPMGX is probably not a good comparison to the S&P 500 but that also looks like that consistently beat the S&P 500. Looks like mid 90's thru 2000 was an exception but not by much.

What am I missing here? Must be something obvious. If Morningstar is taking ALL FEES into account when showing this graph, wouldn't this be a compelling reason not to invest in an S&P index and instead go for TRBCX or an equivalent? At what period in time over the past 25 years would the S&P have outperformed TRBCX? Pre 2008, post 2008 - still can't find anytime where S&P beat TRBCX.

Thanks again

livesoft
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by livesoft » Mon Oct 08, 2018 6:12 pm

It might be compelling to go to a mid-cap index fund or blue-chip growth index fund.

You essentially compared different equity classes.

Or why not pick something that beat your two funds going forward even if that something is in a different asset class?s

Another thing to consider is [annual] taxes if your funds are not in a Roth, 401(k), IRA, or other tax-advantaged account.
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FiveK
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by FiveK » Mon Oct 08, 2018 6:20 pm

cody508 wrote:
Mon Oct 08, 2018 6:03 pm
What am I missing here? Must be something obvious. If Morningstar is taking ALL FEES into account when showing this graph, wouldn't this be a compelling reason not to invest in an S&P index and instead go for TRBCX or an equivalent? At what period in time over the past 25 years would the S&P have outperformed TRBCX? Pre 2008, post 2008 - still can't find anytime where S&P beat TRBCX.
Missing a few things:
1) You don't have a time machine in which to return to 1993 and invest in TRBCX when it started.
2) See livesoft's note about apples vs. apples.
3) It's not that index funds beat managed funds 100% of the time - so there may be exceptions - but they do so most of the time.
4) And the biggest one: past performance is no guarantee of future results.

It is possible that TRBCX or other will beat the S&P 500 index going forward. So the question you need to ask yourself is "do you feel lucky?"

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Steelersfan
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by Steelersfan » Mon Oct 08, 2018 6:41 pm

Did the T. Rowe Price comparison include consideration of how tax efficient their funds were? Actively managed funds typically through off more capital gains than index funds, which reduces your returns by whatever amount of tax you pay. That only matters if the funds are in your taxable account.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by rgs92 » Mon Oct 08, 2018 7:54 pm

Comparing a relatively narrow slice of the market (like the midcap-growth and bluechip-growth areas mentioned) to the broader S&P 500 is not a fair fight. First of all there is higher volatility in growth funds.

For instance, I'm sure comparing a tech-sector fund would show superior returns to the S&P.
But putting all your eggs in a technology fund would be a wild and crazy ride that most people would not want to handle.

And it's crazy to gamble everything on a limited area of investment, no matter what the statistics show.
The Nasdaq dropped about 80% in the 2000 tech crash. A 100% tech-invested portfolio is therefore not prudent.

And I think those midcap/bluechip funds are tech-heavy, and that is what is showing up in the results.

Back in the 1970s, I'm sure an energy-heavy portfolio would have looked great in backtesting.
But it would have been a disaster later on.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by HEDGEFUNDIE » Mon Oct 08, 2018 7:55 pm

Just going to copy-paste what I wrote yesterday in a different thread:
If the OP was deciding between an active fund vs. a passive fund, to be invested using the same pot of money, it doesn't matter whether the passive fund is the "proper" benchmark for the active fund. For the OP's context they would be properly comparable. Especially as the active fund manager can always choose to change investment strategies.

What it comes down to is, does the OP believe the active manager will continue to outperform whatever passive index fund the OP would have otherwise invested in with that money, and if it doesn't pan out, would the OP regret underperforming that index? (Most BHs would say yes; they've ignored Jack Bogle's advice and now they're paying for it...)

The OP should also ask this question in reverse: if the active fund continues outperforming, would the OP regret investing in the passive index instead? (Most BHs would say no; they are happy to take what the market gives, and odds are the active manager's outperformance is just temporary...)

Regret is what drives portfolio churn, buying high and selling low, so it is critically important to confront the possibility of regret upfront and invest with a strategy that you are confident in, to stay the course, whether it's a "good" active fund or an index fund.

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sometimesinvestor
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by sometimesinvestor » Mon Oct 08, 2018 8:04 pm

Many Price funds have a great long term record and I am confident performance statistics there from web site reflect fees, The issue is whether out performance will continue in the future and there is no way to know for sure. I am certain you have read the disclaimer that past performance is no guarantee of future returns,Many Bogleheads (but surely not close to 50% have some investments with T. Rowe-Price.
I would have no problem in your investing some money with Price but it might work out well or less well(I doubt it will work out badly)

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by onourway » Mon Oct 08, 2018 8:14 pm

There is a reason that every fund prospectus must contain the language Past performance is no guarantee of future results.

It's clear you haven't yet really digested the meaning in those words. You are picking the winners for the past 10-25 years with the benefit of hindsight. What you need to do is pick the funds that people will be asking the same questions about 10-25 years from now. Much, much harder to do.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by Dead Man Walking » Mon Oct 08, 2018 9:00 pm

I'm not familiar with the funds about which you're asking; however, it sounds like their performance should be compared to Vanguard growth index fund and Vanguard midcap growth index fund.

DMW

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by rakamaka » Tue Oct 09, 2018 8:20 am

Just look at Vanguard site. Arrange according to 5 yr or 3 yr returns.
Surprisingly Vanguard's actively managed funds (wrong term for Vanguard funds?) perform much better than Vanguard's own index funds !!
https://investor.vanguard.com/mutual-fu ... nd-returns

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by snailderby » Tue Oct 09, 2018 10:32 am

1. I used to own TRBCX and was happy with its performance. Its expense ratio is higher than most index funds but lower than many (if not most) active funds. You certainly could do a lot worse.

2. Like DMW said, a better comparison for TRBCX would probably be VUG or MGK because TRBCX focuses on blue-chip growth companies. But whether you compare TRBCX to MGK (Vanguard Megacap Growth), VUG (Vanguard [Large-Cap] Growth), or VTI (Vanguard Total Stock Market), there's no question that TRBCX has outperformed all those other funds in the past. And this was after factoring in fees.

3. That said, you have to ask yourself how much you believe [good] past performance is correlated to [good] future performance. See https://www.wsj.com/articles/the-mornin ... 1508946687. Can investors beat the market on a 1-, 3-, or even 10-yr basis? Absolutely. Is it hard to do that consistently over a 40-yr period without the benefit of hindsight? You bet. See http://fortune.com/2017/04/13/stock-ind ... ual-funds/, http://www.aei.org/publication/more-evi ... ant-do-it/, https://us.spindices.com/documents/spiv ... d-2017.pdf.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by inbox788 » Tue Oct 09, 2018 10:53 am

rakamaka wrote:
Tue Oct 09, 2018 8:20 am
Just look at Vanguard site. Arrange according to 5 yr or 3 yr returns.
Surprisingly Vanguard's actively managed funds (wrong term for Vanguard funds?) perform much better than Vanguard's own index funds !!
https://investor.vanguard.com/mutual-fu ... nd-returns
I would expect there may be some survivor bias involved, but I took a look at funds and didn't come to the same conclusion. The 5 year performance of index funds were generally competitive to superior from what I saw, especially if you looked for equivalent pairs, which there were surprisingly few IMO.

What funds are you comparing directly? When I looked, bonds, balanced, midcap and emerging markets were slightly favoring the index at 5 year and often more shorter term (vlgsx vs vustx, VSIGX vs vfitx, VWELX vs VBIAX (65/35 vs 60/40), VMGMX vs VMGRX, VGAVX vs VEMBX). The only equivalent pair of funds I noticed active may have outperformed was large cap (VWUSX vs VIGAX).

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by pkcrafter » Tue Oct 09, 2018 11:52 am

Cody, here are the persistence scoreboards from S&P. Take a look at first link, March 2018.

https://us.spindices.com/resource-cente ... hip/spiva/

Active vs Passive. Download "Latest Reports, SPIVA® U.S. Year-End 2017," then look at page 6 to see performance data over multiple years.

https://us.spindices.com/spiva/#/reports

Note: the Bogleheads strategy is something like index performance over time is "good enough," however it's really Very Good Enough. Basically, Bogleheads eliminate the idiosyncrasies of active funds.


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.

cody508
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by cody508 » Thu Oct 11, 2018 12:48 pm

When I look at this type of report, one would have to be crazy to NOT invest in an Index.

I thought the indexes were these:

Dow
S&P 500
Nasdaq
Russell 2000.

The SPIVA document listed benchmark index's such as:

S&P 1500
S&P MidCap 400
S&P SmallCap 600
S&P Growth

I'm not sure I understand what these actually are. Are these just a subsections of the S&P 500? John Bogle's book pretty much says to simply invest in the S&P 500 and call it a day. Who creates these indexes? As you can tell, I'm still confused. Is there a good article out there that explains EVERY different type of index out there -- or am I totally missing the point?

Thanks again

RetiredCSProf
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by RetiredCSProf » Thu Oct 11, 2018 2:26 pm

I am invested in the TRP funds you mentioned, Blue Chip Growth and Mid-Cap Growth. These funds are both more growth-oriented than an S&P 500 index fund. The Mid-Cap Growth fund is more concentrated in companies with a smaller capitalization than an S&P 500 index fund. Given that growth has outperformed value in the past several years (but maybe not in the past few days), looking backward, both Blue Chip and Mid-Cap Growth funds have outperformed the S&P 500.

I am invested in two TRP large-cap blend funds, Capital Opportunity (PRCOX) and Dividend Growth (PRDGX). Capital Opportunity's objective is to mimic the S&P 500 weighting -- I would choose this fund to compare with an S&P 500 index. Dividend Growth's objective is to focus on large-cap funds that generate dividends; the result is a large-cap blend with less volatility than the S&P 500.

I am also invested in Fidelity 500 Index Premium (FUSVX), which is an S&P 500 index fund. Over the past ten years, PRCOX has slightly outperformed FUSVX, probably enough to make up the difference in the expense ratio.

Theoretically, an actively-managed fund can "override" computer-driven decisions regarding a fund's composition, reacting more quickly to market shifts.

What is your objective? Are you looking for a measure to compare index with actively managed funds? Or are you trying to choose an S&P 500 fund?

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by pkcrafter » Thu Oct 11, 2018 2:33 pm

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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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by cody508 » Thu Oct 11, 2018 4:27 pm

Hello RetiredCSProf --- I guess my objective is to just get an understanding of index vs. actively managed funds to determine if that expense ratio for active management is even worth it. After reading John Bogle's book, I wanted to rethink things a bit. Do I just put everything into an FUSVX type fund and look at it 15-20 years from now? It's very easy to look back at my T. Rowe's TRBCX (Blue Chip growth) and RPMGX (mid cap growth) and wish my entire portfolio was in it. Those returns have been amazing! But as many on this board have reminded me, it's not a fair fight to put those against an S&P Index.

Had a call with TRP and they had what seemed like a very solid argument that I am better off (consistently) going with their actively managed funds. Went through all my TRP funds and compared them to the corresponding index (or at least that's what they told me), and most all of them beat the index. 10 minutes later I'm on a call with Vanguard and they tell me that 'rarely' do actively managed funds beat the benchmark index. I'm plugging in a bunch of numbers into the Morningstar tools and the more I do, the more confused I get!

I was also confused about how many indexes there actually are. When I hear the word index I just think S&P 500 but apparently that's only 1 of what looks like hundreds out there. I guess there are different schools of thought on this --- depends on preference I guess.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by grabiner » Thu Oct 11, 2018 5:47 pm

cody508 wrote:
Thu Oct 11, 2018 12:48 pm
When I look at this type of report, one would have to be crazy to NOT invest in an Index.

I thought the indexes were these:

Dow
S&P 500
Nasdaq
Russell 2000.
These are the most popular indexes, because they are widely published. However, there are many more. Most index providers have a total-market index, and indexes for various segments of the market. For example, the Russell 2000 is the best-known small-cap index; it tracks stocks 1001-3000 by size. There is also a Russell 1000 which tracks the 1000 largest stocks, which is a large-and-mid-cap index, and a Russell 3000 which includes both and is a total-market index.

Also, the published values of most of these indexes ignore dividends. If the S&P 500 doesn't change during a year, an investor in an S&P 500 index fund made about a 2% profit.
The SPIVA document listed benchmark index's such as:

S&P 1500
S&P MidCap 400
S&P SmallCap 600
S&P Growth

I'm not sure I understand what these actually are. Are these just a subsections of the S&P 500?
SPIVA compares active funds to the S&P index in the same asset class. This is the right thing to do, as whether a small-cap fund outperforms the large-cap S&P 500 index will be determined more by whether small-caps outperformed large-caps than by how well the fund picked small-caps.

Therefore, S&P compares large-cap funds to the S&P 500; mid-cap funds to the S&P 400, which is 400 stocks chosen by S&P to be representative of the mid-cap market; and small-cap funds to the S&P 600, which is 600 stocks chosen by S&P to be representative of the small-cap market. The mid-cap and small-cap indexes do not come close to covering all stocks in their market segments, but they do track the segments well; the S&P 600 and Russell 2000 have stocks of similar size and usually behave similarly.

The S&P 1500 includes the S&P 500, 400, and 600, so S&P uses it as a benchmark for an all-cap fund. Similarly, the S&P Growth is the growth half of the S&P 500, so S&P uses it as a benchmark for a large-cap growth fund.
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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by MotoTrojan » Thu Oct 11, 2018 5:54 pm

I bet 25% Bitcoin, 25% Netflix, 25% Apple, 25% Amazon beat all your funds. Why not invest in my fund? There is no fee to set it up.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by RetiredCSProf » Thu Oct 11, 2018 6:51 pm

I am hearing two different questions:
1) Do actively-managed funds routinely beat index funds? (by a wide enough margin to justify the higher net expense ratio)?
2) Will growth stocks continue to outpace value stocks?

As a computer scientist, I can attempt to answer the first question. An index fund is only as good as the underlying computer models. An actively-managed fund is driven by the research analysts' convictions in stock selections. The stock pickers use computer models in their analysis. Both approaches rely on computer models, but from different perspectives.

TRP Capital Opportunity has the same weighting in each sector as its benchmark, the S&P 500 index. The difference is that the managers over- or under-weight specific stocks while keeping allocations close to their weightings in the index. For example, they may underweight GE because of disappointing earnings and overweight Facebook due to their expectation of increased growth prospects.

Computer models are better at some things than others. Computers find it difficult to distinguish low clouds from snow on mountain peaks. In the 1800's, computer pioneers Charles Babbage and Ada Lovelace tried unsuccessfully to build a computer system to predict the outcome of horse races.

As computer models improve, index funds may push out in front of actively-managed funds. At the moment, it may be a toss-up.

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Re: Index vs. actively managed funds....is there a good tool to compare?

Post by BoglePaul » Fri Oct 12, 2018 8:53 am

rakamaka wrote:
Tue Oct 09, 2018 8:20 am
Just look at Vanguard site. Arrange according to 5 yr or 3 yr returns.
Surprisingly Vanguard's actively managed funds (wrong term for Vanguard funds?) perform much better than Vanguard's own index funds !!
https://investor.vanguard.com/mutual-fu ... nd-returns
Make sure you are doing an apples to apples comparison. For example, may of the primecap funds contain 10+% international stocks.

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