Time for an additional M* 9-box grid?

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Gaston
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Time for an additional M* 9-box grid?

Post by Gaston »

Background
I believe the M* 9-box style grid helps in severals ways:
  • It helps investors understand how a specific fund invests its assets.
  • It helps investors compare funds across fund companies.
  • It reinforces a standard nomenclature. On this point, we might not all agree on the definition of value versus growth, or small cap versus large cap, but at least we all have a somewhat common understanding of what the grid is communicating.
The Thought
I would like to see M* introduce a similar 9-box grid, which I’ll call the management grid. As the name implies, it would position mutual funds and ETFs within the grid based on management approach (active versus passive) and cost (low versus high). The grid might look something like this:

Image

  • M* would have to come up with definitions for the grid. For “passive”, for example, M* might use Cliff Asness’ definition of “a market cap weighted portfolio with minimal trading” (say, less than 10% annual turnover). Active might mean “individual stock analysis with more than 50% annual turnover”.
  • Similarly, cost would be low if less than 25 basis points, or high if greater than 75 basis points.
  • We won’t all agree on the definitions, but whatever M* came up with, it would at least put a common stake in the ground. And with just a quick glance, the grid would communicate important information based on common definitions.
Useful? Not useful?
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nisiprius
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Re: Time for an additional M* 9-box grid?

Post by nisiprius »

What would be some examples of funds or ETFs with a management "mix" of active and passive?

I'm not sure that's "mix" is a helpful category.
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DVMResident
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Re: Time for an additional M* 9-box grid?

Post by DVMResident »

The problem with active funds is they tend to have high fees. Low cost active funds are just fine and some VG active MF are even recommended here on the board regularly. Passives funds tend to have lower fees, but some passive funds are embarrassingly expensive.

I don’t think you need the passive/active axis.
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Gaston
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Re: Time for an additional M* 9-box grid?

Post by Gaston »

DVMResident wrote: Tue Aug 09, 2022 5:12 pm The problem with active funds is they tend to have high fees.
Maybe it's just my Boglehead bias. If lots of active funds appear in the "high cost' box, it'll reinforce an important message to all investors. High cost active managers, however, would hate the new grid. :happy
DVMResident wrote: Tue Aug 09, 2022 5:12 pm I don’t think you need the passive/active axis.
Maybe it's less important to others, but I would welcome a common definition of "passive", even if it does not appear in a 9-box grid. When people use the term, they rarely define it. And when they do define it, they each seem have their own definition. Worse still, IMHO, a lot of fund/ETF managers say they are passive when in fact they are active. They seem to think that simply tracking an index, any index, even one they themselves created, entitles them to call their strategy passive. I find that misleading, and even potentially harmful to the investors who do not bother to look under the covers. So it's kind of a "truth in advertising" thing.

Sorry, not intending to debate the meaning of passive. Just that I would welcome a common definition.
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Gaston
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Re: Time for an additional M* 9-box grid?

Post by Gaston »

nisiprius wrote: Tue Aug 09, 2022 5:04 pm What would be some examples of funds or ETFs with a management "mix" of active and passive?

I'm not sure that's "mix" is a helpful category.
I haven't thought that far ahead. In the worst case, it might be like Blend on the style grid, reflecting a mixture of both growth and value. Or in this case, reflecting a mix of both passive and active approaches. The trick would be to first define passive and active, then see what falls out.
Last edited by Gaston on Tue Aug 09, 2022 7:09 pm, edited 1 time in total.
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RubyTuesday
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Re: Time for an additional M* 9-box grid?

Post by RubyTuesday »

nisiprius wrote: Tue Aug 09, 2022 5:04 pm What would be some examples of funds or ETFs with a management "mix" of active and passive?

I'm not sure that's "mix" is a helpful category.
A not very good example of a mix of active and passive may be some of Vanguard’s target date funds. I may be wrong, but I think they hold a mix of index funds and include some TIPS funds that are active… I could be wrong.
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nisiprius
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Re: Time for an additional M* 9-box grid?

Post by nisiprius »

Gaston wrote: Tue Aug 09, 2022 5:38 pm
nisiprius wrote: Tue Aug 09, 2022 5:04 pm What would be some examples of funds or ETFs with a management "mix" of active and passive?

I'm not sure that's "mix" is a helpful category.
I haven't thought that far ahead. In the worst case, it might be like Blend on the style grid, reflecting a mixture or both growth and value. Or in this case, reflecting a mix of both passive and active approaches. The trick would be to first define passive and active, then see what falls out.
A few years ago, there was a brief flurry of interest in a measure called "active share." It was intended to distinguish "closet index funds" which played it safe and didn't depart very far from the index from truly active funds focusing on a manager's "high conviction" picks.

There were some papers on "active share" that... well, in order to get significant outperformance you needed to have high active share, and somehow there were popular articles and marketing material that could have left you with the impression that the converse was true--that high active share implied outperformance. That all seems to have died out.

But maybe the axis could be it could be "active share," with categories of low/medium/high.

Three categories isn't sacred, though. The original Fama-French studies split value into three categories (high, blend, low) but only split capitalization into two (big, small).

Here's an annoying thing. Morningstar published a judgement of "fee level" for mutual funds--I think the scale is "low," "below average," "average," "above average," and "high." It's based on comparison with other funds in the same category, not any specific expense ratio. But for ETFs, they don't do this. For example, ARKK, the ARK Innovation ETF has an expense ratio of 0.75%, but Morningstar offers no guidance as to whether they think ARKK's fees are low, high, or average.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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nisiprius
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Re: Time for an additional M* 9-box grid?

Post by nisiprius »

I am waiting for M* to introduce a six-dimensional hypercube for the size, value, momentum, quality, profitability, and limerance factors--a total of 729 style categories in all--with support for VR headsets and a joystick for rotation.
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marcopolo
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Re: Time for an additional M* 9-box grid?

Post by marcopolo »

nisiprius wrote: Tue Aug 09, 2022 5:04 pm What would be some examples of funds or ETFs with a management "mix" of active and passive?

I'm not sure that's "mix" is a helpful category.
Maybe some of the "four horseman" alternative funds that say they are active in the prospectus, but their proponents insist are passive?
Once in a while you get shown the light, in the strangest of places if you look at it right.
MarkRoulo
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Re: Time for an additional M* 9-box grid?

Post by MarkRoulo »

Gaston wrote: Tue Aug 09, 2022 5:02 pm Background
I believe the M* 9-box style grid helps in severals ways:
  • It helps investors understand how a specific fund invests its assets.
  • It helps investors compare funds across fund companies.
  • It reinforces a standard nomenclature. On this point, we might not all agree on the definition of value versus growth, or small cap versus large cap, but at least we all have a somewhat common understanding of what the grid is communicating.
The Thought
I would like to see M* introduce a similar 9-box grid, which I’ll call the management grid. As the name implies, it would position mutual funds and ETFs within the grid based on management approach (active versus passive) and cost (low versus high). The grid might look something like this:

Image

  • M* would have to come up with definitions for the grid. For “passive”, for example, M* might use Cliff Asness’ definition of “a market cap weighted portfolio with minimal trading” (say, less than 10% annual turnover). Active might mean “individual stock analysis with more than 50% annual turnover”.
  • Similarly, cost would be low if less than 25 basis points, or high if greater than 75 basis points.
  • We won’t all agree on the definitions, but whatever M* came up with, it would at least put a common stake in the ground. And with just a quick glance, the grid would communicate important information based on common definitions.
Useful? Not useful?
I think not useful because there are already two metrics for what you (mostly) want:
  • Portfolio Turnover
  • Expense Ratio
There isn't much need to turn two clearly defined numbers into one of nine boxes -- just report the numbers.

There isn't such an obvious metric for value vs growth or small vs large so the box approach makes sense because it avoids having to explain the non-obvious metric (though a metric would still be "better". Clearly the least growthy stock to get binned in the growth bucket isn't any different from the most growthy stock binned in blend).
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Re: Time for an additional M* 9-box grid?

Post by asset_chaos »

nisiprius wrote: Wed Aug 10, 2022 10:57 am I am waiting for M* to introduce a six-dimensional hypercube for the size, value, momentum, quality, profitability, and limerance factors--a total of 729 style categories in all--with support for VR headsets and a joystick for rotation.
Full props for sending me to the dictionary. (underlining mine)
Regards, | | Guy
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