Author Topic: Are some classes of active managed funds less bad compared to benchmarks?  (Read 970 times)

ender

  • Walrus Stache
  • *******
  • Posts: 6195
Something I've been pondering is the active managed vs passive funds discussion...

It seems entirely logical in the long run a total stock market fund will out perform almost all funds tracking that which require active management. There are not a lot of inefficiencies in say VTSAX. Or even large cap types of funds.

But what about more specific funds, such as a small cap growth funds. Or even international funds (especially stuff like emerging markets, etc).

Intuitively, it feels these types of funds at least could out perform their respective indices at a higher rate than the more broad/stable indices because they seem less efficient in general with higher turnover/etc.

However it seems most of the active vs passive funds information you read online is totally generalized and not segmented in any capacity. I'm curious if anyone has done any digging on this or if any information exists a bit more along these lines.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2495
  • Location: Seattle, WA
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #1 on: February 23, 2020, 07:29:05 PM »
There seems to be three or so factors in play.  One is that there are some funds that would in fact beat the index except for fees.  So some fund managers anyway, do provide value.  Just not enough value.  Similarly, by the time you have a reasonably large pool of stocks in the fund, the fund itself starts to act like the index, so once you include fees it is hard to be the index. 

And the final nail in the coffin is that if you do something different that the benchmark, there will be times when you under perform.  What happens during the periods of under performance is that investors bail on the fund.  Think Michael Burry in the Big Short.   This can and often does cause the fund to collapse even though, in theory, the fund may have over performed over a longer period of time.   Berkshire Hathaway might be experiencing this right now.  The business seems to be doing fine, but the stock has been pretty meh.   

vand

  • Handlebar Stache
  • *****
  • Posts: 1428
  • Location: UK
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #2 on: February 24, 2020, 10:42:41 AM »
1. Most funds do not benchmark themselves against the S&P so the question is a bit irrelevant
2. The performance should only be considered in the context of the risk that the manager has taken on board to deliver that performance. If a fund captures 80% of the total return of the S&P over 5 years but in all that time it’s maximum peak to trough drawdown was only 1/3rd that of the index then it was a far “better” investment because of the fund manager’s demonstrably exceptional risk control... no question about it.  People tend to think of investing as the search for returns, but returns are a function of accepting risk. They are 2 sides of the same coin. You may as well alternatively define “investing” as the management of risk.  The best investments are those that deliver their gains for as little risk as possible.

Ockhamist

  • Stubble
  • **
  • Posts: 200
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #3 on: February 24, 2020, 12:51:01 PM »
Yes.

You can always beat the market in any asset class by picking the better performing stocks within that asset class.   

It is hard to do that with the S&P 500, because the stocks in its universe are all well known and well followed, and because so much of the movement of all the stocks collectively in that universe is driven by index investing or managed investments that are shooting for "good enough" relative to the index.    It's a pretty efficient market, and it's well-nigh impossible to find enough inefficiencies to beat it, much less to beat it by enough to make up for the higher costs of a managed fund.

But other asset categories allow for much more opportunity to outperform.   Among the small and medium cap stocks in the developed markets, and in emerging markets, there are plenty of opportunities to exercise superior judgment and take advantage of market inefficiencies.   Still not an easy game to win, but one that is winnable.


Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1824
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #4 on: February 24, 2020, 01:38:46 PM »
Cue the Callen Periodic Table of Investment Returns:

https://www.callan.com/periodic-table/

It shows that indeed, active funds can outperform........one year, then come in dead last for the next several.

So in general, yes, there are active funds that outperform index.  The problem is that it's a different fund every year and more often than not, when an active outperforms, it then crashes and burns like a Lithium Ion fire for years to come.

celerystalks

  • Bristles
  • ***
  • Posts: 296
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #5 on: February 24, 2020, 08:14:04 PM »
As others said I think fees would be a big factor.
Also I think foreseeability is a problem. How does one determine in advance which active managers will outperform? Past results?




Ockhamist

  • Stubble
  • **
  • Posts: 200
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #6 on: February 25, 2020, 08:24:04 AM »
I look for management track record of solid past results from the fund manager(s).   If the specific manager experience is a little short, I look for a good track record from the fund group.

The other thing, and this is the biggie, is some rationale behind the manager's investment strategy.   A coherent strategy followed with discipline has a much better chance of holding up over the long term than just a hot hand.   

GoCubsGo

  • Bristles
  • ***
  • Posts: 378
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #7 on: February 25, 2020, 01:16:35 PM »
I think there are definitely some fund managers (and their teams) that can deliver solid performance.  I've owned a couple Large Growth Fidelity funds for 10+ years that when charted against the S&P have done quite well even with fees.  I never sold them for Index based funds because they haven't under performed them.  It they started to, I would definitely consider selling them.

I also have an adviser account (no fees as my friend is the adviser) that holds a fund that is the top performing mutual fund 1,3,5 years per Kiplingers.  I never would have known about it unless he put me in it.  Pure luck?  Maybe, but I do think some managers can pick better than others.

I've also used sector based funds with managers (most recently health care) as I wanted exposure and figured I'd let the experts pick the stocks in that field.

I have probably 60% of my overall investments in index based funds but do like to choose my own stocks and pick fund managers with a portion of my portfolio.  Gives me something to read about and research instead of useless sports info..

 




JSMustachian

  • Stubble
  • **
  • Posts: 156
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #8 on: February 26, 2020, 02:56:18 PM »
I own two active Vanguard funds that have outperformed the Vanguard Total Stock by 1.25-1.5% over the last 10 years or so. The expense ratios are still fairly low ~.30%.

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 3752
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #9 on: February 26, 2020, 06:49:33 PM »
Yes.

You can always beat the market in any asset class by picking the better performing stocks within that asset class.   
Not sure if I read this as you intended - I read this as past performers will continue to outperform.  The SEC says:
"That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results."
https://www.sec.gov/answers/mperf.htm

Ockhamist

  • Stubble
  • **
  • Posts: 200
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #10 on: February 27, 2020, 08:41:45 AM »
Not sure how you were reading it as quite that determinative but no, I certainly don't mean that you can necessarily pick next year's winners *simply* by selecting last year's, or anything like that.   But I do think past outperformance is at least potentially indicative of future outperformance.

The SEC requires the truth:  that past performance does not necessarily indicate future results.

Just because a fund manager has had good luck and a hot hand in the past indeed does not in any way guarantee that the luck will continue.

It's not always luck though. 

The fact that Roger Federer, Rafa Nadal, and Novak Djokovic have had great past performance in major tennis tournaments does not mean they will continue to win.   Their past performance may not necessarily indicate their future results. 

So, who would you bet on to win Wimbledon this year?   

There are players outside the big three that I'd be willing to bet on, despite never having won a major, and I wouldn't bet on Federer despite his great past performance.   Past performance doesn't tell the whole story and can't be relied on by itself.   Still, if you're looking for next year's winners, past years' winners make a good list to start from.   I'd still bet on Djokovic;  I think his past performance is telling me something about his future chances.
« Last Edit: February 27, 2020, 11:43:24 AM by Ockhamist »

Wintergreen78

  • Bristles
  • ***
  • Posts: 403
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #11 on: February 27, 2020, 11:17:58 AM »
Cue the Callen Periodic Table of Investment Returns:

https://www.callan.com/periodic-table/

It shows that indeed, active funds can outperform........one year, then come in dead last for the next several.

So in general, yes, there are active funds that outperform index.  The problem is that it's a different fund every year and more often than not, when an active outperforms, it then crashes and burns like a Lithium Ion fire for years to come.

Thanks! That is a great chart that I had seen before, but didn’t know where it came from. It is a great way to show how ridiculous it is to try and pick winners and losers over the long term.

swashbucklinstache

  • Bristles
  • ***
  • Posts: 393
  • Location: Midwest U.S.
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #12 on: February 27, 2020, 03:42:37 PM »
Something I've been pondering is the active managed vs passive funds discussion...

It seems entirely logical in the long run a total stock market fund will out perform almost all funds tracking that which require active management. There are not a lot of inefficiencies in say VTSAX. Or even large cap types of funds.

But what about more specific funds, such as a small cap growth funds. Or even international funds (especially stuff like emerging markets, etc).

Intuitively, it feels these types of funds at least could out perform their respective indices at a higher rate than the more broad/stable indices because they seem less efficient in general with higher turnover/etc.

However it seems most of the active vs passive funds information you read online is totally generalized and not segmented in any capacity. I'm curious if anyone has done any digging on this or if any information exists a bit more along these lines.
I've never looked at this and haven't seen any data driven approaches to it either. I can rationalize it, along the lines of your thinking, but I don't put too much weight on that =). If I ever come across anything I'll let you know but it is unlikely in my case because I'm unlikely to deviate from a 2 or 3 fund portfolio in the near term if at all.

To others, I think the question is specifically about relative value (risk vs. marginal gain) of active vs. passive management within smaller sector or subset(s) of the market. I think that, for instance, the Callan table tells us that different subsets of the market will perform differently each year but doesn't address the topic of the thread. I'd add too that general discussion of active vs. passive overall in this thread is sort of highlighting the point that stepping one level deeper in the conversation on this topic is hard to do on the internet =).

I doubt this is the case, because I'm sure these sorts of things have been looked at (just not by me), but you could squint at this and see the "passive > active" powerpoint-slide-level advice being meaningfully bad advice in a Simpsons paradox sense: https://en.wikipedia.org/wiki/Simpson%27s_paradox.

For me I shy away from this conclusion because it seems like you logically walk yourself down this path to saying that smaller subsets of the market have higher fees in general (which is true) causally because they can generate > index returns (i.e. they outcompete) in these sectors as compared to larger ones. I don't like that argument because we also see basic SP500 fees with huge fees but not meaningfully better performance so I'm kind of of the opinion that it is not comparative advantage driving fees in any generalizeable sense...

Systems101

  • Stubble
  • **
  • Posts: 199
Re: Are some classes of active managed funds less bad compared to benchmarks?
« Reply #13 on: February 27, 2020, 10:39:45 PM »
But what about more specific funds, such as a small cap growth funds. Or even international funds (especially stuff like emerging markets, etc).

However it seems most of the active vs passive funds information you read online is totally generalized and not segmented in any capacity. I'm curious if anyone has done any digging on this or if any information exists a bit more along these lines.

It's very hard, in any portion of stocks.  Emerging markets certainly held on longer for active managers to produce alpha, but the data is showing them now also falling behind passive, see: https://us.spindices.com/indexology/core/fleeting-alpha-evidence-from-spiva-and-persistence-scorecards (if you click the download link you get a full PDF).

Outside of stocks, inefficiencies and other differences allow active managers of bond funds to outperform