Author Topic: Managed fund versus index  (Read 10257 times)

Beridian

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Managed fund versus index
« on: January 24, 2015, 08:29:03 AM »
I like the returns I have been earning on midcaps.  It appears that small caps have been more or less stuck in a trading range while the midcaps have been marching steadily higher and have done so fairly reliably for years.  Anyway I have been invested in VANGUARD MID CAP INDEX INVESTOR CL (VIMSX).  My 401K is with Fidelity and I was browsing through their funds and noticed Fidelity Mid Cap Value Fund (FSMVS).  The Fidelity fund is a managed fund and has a .8% fee versus the VIMSX .24.  But get this look at the returns:

Fund      1 year     3 year      5 year      10 year              life
VIMSX   13.6          21.1          16.88       9.34             10.11
FSMVS     16.65     24.53       18.32       9.57             10.52

It appears to me that the mananged Fidelity fund is dependably beating the vanguard index fund.  It also occurs to me that a managed fund might have better protection in a bear market.  Even with the higher fee the returns are significantly better.  The fidelity fund also has a five star morningstar rating.  I am thinking of moving to the Fidelity FSMVS fund (I have other diversified investments).

What do you folks think of this and the whole managed versus index fund debate?

Thank you

Beridian
« Last Edit: January 24, 2015, 08:32:29 AM by Beridian »

iamlindoro

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Re: Managed fund versus index
« Reply #1 on: January 24, 2015, 08:57:57 AM »
Fund      1 year     3 year      5 year      10 year              life
VIMSX   13.6          21.1          16.88       9.34             10.11
FSMVS     16.65     24.53       18.32       9.57             10.52

Doesn't this show that as time horizons get longer, the managed fund performance deteriorates and grows closer to the unmanaged, and after figuring in fees, returns less?  Look at the 10 year and lifetime values and then subtract fees.  Which wins? 

Seems like a pretty compelling example of exactly why we use low fee unmanaged funds-- beating the index in 1 year, or even 5 years, is fairly easy.  It's doing it in the long run that is nearly impossible.

Spork

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Re: Managed fund versus index
« Reply #2 on: January 24, 2015, 09:33:08 AM »
This is also a pretty small sample size.  While I believe in index funds, I know damn well there are a minority of managed funds that will win out big.  The problem is, I tripped and broke my crystal ball and I have no idea which one is the winner.

It's simple to find a handful that won over the last X years.  It's harder to find the one that will win out over the NEXT X years.

trailrated

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Re: Managed fund versus index
« Reply #3 on: January 24, 2015, 10:01:46 AM »
Correct me if I am wrong but once fees are taken into account

VIMSX total return 9.87%
FSMVS total return 9.72%

Index wins again

Spork

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Re: Managed fund versus index
« Reply #4 on: January 24, 2015, 10:07:51 AM »
Correct me if I am wrong but once fees are taken into account

VIMSX total return 9.87%
FSMVS total return 9.72%

Index wins again

I think Beridian was more concerned with short term.  (I'm personally not at all concerned about it.)

PEIslander

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Re: Managed fund versus index
« Reply #5 on: January 24, 2015, 12:20:14 PM »
Fidelity Mid Cap Value Fund (FSMVS).

Isn't the correct ticker for Fidelity's Mid Cap Value Fund FSMVX?

Look at the 10 year and lifetime values and then subtract fees.  Which wins?

I'm pretty sure all the performance figures Beridian posted are already net of Management Expense Ratios (MERs) so in this case the Fidelity fund has had better performance right across the board from 1yr returns through lifetime -- even though it had a higher MER. Am I missing something here?

MDM

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Re: Managed fund versus index
« Reply #6 on: January 24, 2015, 12:25:57 PM »
Correct me if I am wrong but once fees are taken into account

VIMSX total return 9.87%
FSMVS total return 9.72%

Index wins again

Depends on whether the returns quoted in the OP were before or after fees - OP?

PEIslander

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Re: Managed fund versus index
« Reply #7 on: January 24, 2015, 01:19:34 PM »
Depends on whether the returns quoted in the OP were before or after fees - OP?

I looked at the Vanguard & Fidelity sites. The returns are as posted at their respective sites and are net of fees.

I've noticed that many here at this site are really into low management expense ratios as if it is always ridiculous to pay a high expense ratio. They seem to be blind to the fact the a fund with a higher expenses really can outperform. Using the OP's example, a 16.65% return was better than a 13.6% return. If I had my choice I'd prefer having higher returns! Of course past performance may not be indicative of future performance -- but should you ignore better past performance just because the fees are higher? We all make our own evaluations...

Beridian

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Re: Managed fund versus index
« Reply #8 on: January 24, 2015, 04:22:37 PM »
Do you folks think that the managed fund might stand up better to a bear market or a downturn?

Ambergris

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Re: Managed fund versus index
« Reply #9 on: January 24, 2015, 04:34:55 PM »
This is also a pretty small sample size.  While I believe in index funds, I know damn well there are a minority of managed funds that will win out big.  The problem is, I tripped and broke my crystal ball and I have no idea which one is the winner.

Bingo. The argument for indexing is a knowledge argument: there's no reliable means to distinguish consistently good managed funds from bad ones.

The argument is simple: the mass of mutual funds represents the overwhelming majority of the stock market. this means that the average mutual fund must, by definition, give you the same as the index, before fees. Which means that, on average, the expected return of the average mutual fund is the same as the index. If you can't pick the good 'uns, you get, on average, the expected average return, before fees. Which means you should take the lowest fees. Which means you should choose the index funds.

Past performance actually tells you nothing. Well, nothing except that index funds have tended to do slightly better on average after fees.

Do you folks think that the managed fund might stand up better to a bear market or a downturn?

No.

I have heard agents from active management companies *cough*Fidelity*cough* occasionally claim this. It is possible some funds have done better than indexes during these periods. Some have also done worse. On average, they've done average.

You can make the argument that some funds' strategy makes them better placed to handle bear markets. This tends to make them less well placed to handle bull markets. Now, if only you could find a crystal ball to tell you when the bear market will arrive, you could switch between them! It would be brilliant!!

Worse, note the fund above: it did slightly better than the index during the last couple of years, when the market was up after the bear market. During the whole of the last ten years, which includes the bear market, it only did as well as the index, before fees.  Which means it must have sucked relatively during the bear market period, worse than the index.
« Last Edit: January 24, 2015, 04:45:21 PM by Ambergris »

PEIslander

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Re: Managed fund versus index
« Reply #10 on: January 24, 2015, 05:54:39 PM »
Worse, note the fund above: it did slightly better than the index during the last couple of years, when the market was up after the bear market. During the whole of the last ten years, which includes the bear market, it only did as well as the index, before fees.  Which means it must have sucked relatively during the bear market period, worse than the index.

Here's a performance chart of the Fidelity fund vs. the Index that is associated with it. Fidelity doesn't state they seek to track the index. From the chart it looks like it has performed better than the index. I'm fairly sure the performance shown is after fees.



In looking at the fund info at Fidelity & Vanguard's sites I noted that the two funds are not associated with the same index. Fidelity uses the Russell US Mid-Cap Value Index and Vanguard uses a "Spliced Mid-Cap Index" that they define as "S&P MidCap 400 Index through May 16, 2003; MSCI US Mid Cap 450 Index through January 30, 2013; CRSP US Mid Cap Index thereafter". It would seem to be very difficult to verify Vanguard's performance relative to that "spliced" set of indicies.

hodedofome

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Re: Managed fund versus index
« Reply #11 on: January 24, 2015, 07:31:14 PM »
2013 was a pretty good year for most value funds. You should not expect that amount of outperformance from value strategies except for every once in a while.

Value stocks did well in the tech bubble aftermath, but got killed during '08. They obviously don't always protect you in bear markets.

trugrit03

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Re: Managed fund versus index
« Reply #12 on: January 24, 2015, 07:47:54 PM »
Depends on whether the returns quoted in the OP were before or after fees - OP?

I looked at the Vanguard & Fidelity sites. The returns are as posted at their respective sites and are net of fees.

I've noticed that many here at this site are really into low management expense ratios as if it is always ridiculous to pay a high expense ratio. They seem to be blind to the fact the a fund with a higher expenses really can outperform. Using the OP's example, a 16.65% return was better than a 13.6% return. If I had my choice I'd prefer having higher returns! Of course past performance may not be indicative of future performance -- but should you ignore better past performance just because the fees are higher? We all make our own evaluations...

You've hit the nail on the head. There are a lot of people on this forum that will shout you down for saying so. I'm also not endorsing actively managed funds over indexed funds, I'm just suggesting that people fully understand the concept of expense ratios before making that their sole qualification for choosing a fund.

iamlindoro

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Re: Managed fund versus index
« Reply #13 on: January 24, 2015, 08:31:16 PM »
Depends on whether the returns quoted in the OP were before or after fees - OP?

I looked at the Vanguard & Fidelity sites. The returns are as posted at their respective sites and are net of fees.

I've noticed that many here at this site are really into low management expense ratios as if it is always ridiculous to pay a high expense ratio. They seem to be blind to the fact the a fund with a higher expenses really can outperform. Using the OP's example, a 16.65% return was better than a 13.6% return. If I had my choice I'd prefer having higher returns! Of course past performance may not be indicative of future performance -- but should you ignore better past performance just because the fees are higher? We all make our own evaluations...

You've hit the nail on the head. There are a lot of people on this forum that will shout you down for saying so. I'm also not endorsing actively managed funds over indexed funds, I'm just suggesting that people fully understand the concept of expense ratios before making that their sole qualification for choosing a fund.

I don't think that's true at all-- I think the people who are convinced that they can do better than low cost index funds (whether through actively managed funds, or high cost funds) need to look at the fact that as this particular example shows, the longer you go, the less capable actively managed funds are of beating the market consistently.  By the time you get to the 10 year comparison of the two funds in this thread, you are tenths of a percentage off from one another over time.  One can reasonably expect them to either converge, or statistically more likely, for the passively managed fund to outperform the actively managed one.

Now, given that fact, and given the fact that my passively managed index fund will *always* return the average of the index, and the actively managed and likely high expense ratio funds *may* beat the index, it's foolish not to take the sure thing if you are trying to reliably reach retirement.

It's insane to look at the one year results and proclaim the actively managed fund superior.  I'm not investing for next year.  I'm investing for the rest of my life.

PEIslander

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Re: Managed fund versus index
« Reply #14 on: January 25, 2015, 03:18:32 AM »

I don't think that's true at all-- I think the people who are convinced that they can do better than low cost index funds (whether through actively managed funds, or high cost funds) need to look at the fact that as this particular example shows, the longer you go, the less capable actively managed funds are of beating the market consistently.  By the time you get to the 10 year comparison of the two funds in this thread, you are tenths of a percentage off from one another over time.  One can reasonably expect them to either converge, or statistically more likely, for the passively managed fund to outperform the actively managed one.

Now, given that fact, and given the fact that my passively managed index fund will *always* return the average of the index, and the actively managed and likely high expense ratio funds *may* beat the index, it's foolish not to take the sure thing if you are trying to reliably reach retirement.

It's insane to look at the one year results and proclaim the actively managed fund superior.  I'm not investing for next year.  I'm investing for the rest of my life.

I don't have a problem in principle with what you write. In this case however the OP's two examples are not based on the same index so it isn't really appropriate to compare how similar the results were after 10 years. It is just a coincidence (although less coincidental because they both relate to Mid-Cap Value holdings).


Jags4186

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Re: Managed fund versus index
« Reply #16 on: January 25, 2015, 07:38:56 AM »
The fidelity fund beat the vanguard fund last 5 years. Some 23 year old at his computer beat both fidelity and vanguard the last 5 years. Would you give your money to rando 23 year old if he had better 5 year gains?  The only guaranteed thing about mutual funds are the fees. Stick with the lower cost one.

Dodge

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Re: Managed fund versus index
« Reply #17 on: January 25, 2015, 01:41:36 PM »
There will always be some managed fund which beats the index over a short period of time.  This is a mathematical certainty.  Studies show, however, that it's not always the same funds.  In other words, the funds which outperformed for a five year period, did not have a higher probability to outperform over the next five years.

If circumstances were different (we had another crash instead of a bull market) over the last 5 years, we would see completely different active funds at the top of the list.  Using past performance to predict future returns, is not mathematically sound.  This is why funds are required by law to make this statement when showing off their charts.

innerscorecard

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Re: Managed fund versus index
« Reply #18 on: January 25, 2015, 07:43:28 PM »
Managed funds make sense when you understand and agree with the process of the fund manager, and can stick with them in good times and bad.

They do NOT make sense when you are just the proverbial hot money chasing recent good performance. Unfortunately, that's the majority of investors (including institutional investors) in managed funds.

Indexer

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Re: Managed fund versus index
« Reply #19 on: January 25, 2015, 08:17:33 PM »
I don't even think the issue is Active VS Index.  I think the issue just comes down to two factors that will help any fund outperform and avoid disaster.

Low cost helps you outperform.
Diversification helps you avoid disaster.

Numerous studies have shown that over very long time frames lower cost funds tend to outperform higher cost funds.  Cost is basically the LARGEST predictor of long term performance when comparing similar funds.  A low cost active fund is just as likely to outperform high cost active funds as a low cost index fund is.

Diversification is also the best way to avoid seeing your portfolio tank past the point of no return.  A well diversified portfolio can see a 40-50% drop, but it will have enough quality stuff remaining that it can recover.   You don't have to worry about having too much money just in tech, just in banks, just in Enron, etc. 

It just so happens that low cost index funds tend to rank #1 in both of those categories.  They tend to be the lowest cost, and at least in the case of total market funds they are the most diversified. 

And for proof that low cost outperforms over time....  93% of Vanguard funds outperformed their peer groups over the previous 10 years.  Thats not just the index funds.  That includes the 'low cost' active funds.

source:  http://thereformedbroker.com/2014/11/20/vanguard-takes-a-victory-lap-86-of-its-stock-funds-beat-the-peer-group/
« Last Edit: January 25, 2015, 08:19:10 PM by Indexer »

scottish

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Re: Managed fund versus index
« Reply #20 on: January 25, 2015, 08:30:49 PM »
Use a graph to compare the managed fund's year by year performance to the index fund.   

In many many cases, the fund beat the index in the first few years of its existence.    As people took note and money piled into the fund the performance advantage disappears.

Another case you'll see is that the managed fund had a (as in one!) good year a few years back.    And this one good year has lifted its performance above the index.

Fund companies play all kinds of tricks to try and get your money.    A common one is to start a whack of mutual funds, without opening them to the public.   If they start 20 funds, they pick the 1 with the best performance to open to the public and advertise it's returns.   The other 19 are quietly shut down.

The way I think about it is to imagine I had $1M invested.   With an MER of 0.2 %, I'm paying $2K every year to the fund manager.   With an MER of 2.0% I'm paying $20K every year to the fund manager.    Dude, that's alot of money for marginal performance.      That's pretty close to MMM's annual expenses.

Indexer

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Re: Managed fund versus index
« Reply #21 on: January 25, 2015, 08:34:15 PM »
@Scottishstash:  Sounds like what penny stock brokers do.  They will have 20 stocks they call on, but they always use the one that went up 1000% as the example.  They never use the one that went to 0. 

DavidAnnArbor

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Re: Managed fund versus index
« Reply #22 on: January 25, 2015, 08:45:19 PM »
Seems like since your 401k is in Fidelity you might as well invest in that midcap fund even though it has a high expense ratio.  Does that expense ratio get lower if it has a sufficient amount of money in it to become an advantage class?

thenextguy

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Re: Managed fund versus index
« Reply #23 on: January 26, 2015, 02:24:34 PM »
So what will it do in the next 10 years?

looking for FI

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Re: Managed fund versus index
« Reply #24 on: January 26, 2015, 02:45:03 PM »
I personally invest mostly in managed funds. I find with large caps an index fund and a managed fund will have similar performance. With international, small cap, and mid cap if you do your research you can find managed funds that will beat their respective indexes especially during a down turn. You have to do your research though because all funds are not created equally.

skyrefuge

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Re: Managed fund versus index
« Reply #25 on: January 26, 2015, 03:37:05 PM »
Do you folks think that the managed fund might stand up better to a bear market or a downturn?

Since you like past-performance, why not just look at how FSMVX did perform in bear markets? In the two years of the past 10 where FSMVX and VIMSX had negative returns, FSMVX did 1.28 percentage points better in 2008, and 2.12 percentage points worse in 2011. So if anything, I'd say the managed fund does worse in bad years.

But the fact that you're comparing to VIMSX to FSMVX just shows what a performance-chasing fools-errand you're putting yourself into. FSMVX is mid-cap value fund. The true managed-fund comparison to VIMSX is FMCSX, Fidelity's Mid-Cap Stock Fund (which has neither a value nor a growth bias, just like VIMSX). Turns out (spoiler alert!) that VIMSX outperformed FMCSX over all of the measured periods. Hopefully if you recognize the cognitive error that led you to use FSMVX as the only comparison, you'll grasp why index funds are a better choice: something will always outperform the index, but you have no way of predicting what that will be, and your bad guesses will cost you more than your good guesses gain you.


Fund      1 year     3 year      5 year      10 year     
VIMSX      13.6       21.1        16.88       9.34           
FMCSX      7.11       19.6        15.59       9.23
 


skyrefuge

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Re: Managed fund versus index
« Reply #26 on: January 26, 2015, 03:41:44 PM »
if you do your research you can find managed funds that will beat their respective indexes especially during a down turn. You have to do your research though because all funds are not created equally.

haha, so you're just being a dick here then? "I've done the research and know what funds will beat their indexes, but I'm not going to tell you losers!"

Generally in this community when we discover factual information that others will find useful (e.g., the difference between the two types of 5-year waiting periods for Roth IRAs), we share it to help each other out.

looking for FI

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Re: Managed fund versus index
« Reply #27 on: January 26, 2015, 04:47:35 PM »
if you do your research you can find managed funds that will beat their respective indexes especially during a down turn. You have to do your research though because all funds are not created equally.

haha, so you're just being a dick here then? "I've done the research and know what funds will beat their indexes, but I'm not going to tell you losers!"

Generally in this community when we discover factual information that others will find useful (e.g., the difference between the two types of 5-year waiting periods for Roth IRAs), we share it to help each other out.

Wow that was harsh. All you had to do was ask. I didnt post my holdings since I invest a bit differently...ie less diversified and more agressive than most here probably do... but for the record I do own tedix, fbdix, fingx, which are managed with high expenses. I also own xlu, rwr and vfiax. I watch the performance closely and rebalance or exchange as necessary.

skyrefuge

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Re: Managed fund versus index
« Reply #28 on: January 26, 2015, 05:13:29 PM »
Wow that was harsh. All you had to do was ask. I didnt post my holdings since I invest a bit differently...ie less diversified and more agressive than most here probably do... but for the record I do own tedix, fbdix, fingx, which are managed with high expenses. I also own xlu, rwr and vfiax. I watch the performance closely and rebalance or exchange as necessary.

heh, it was only harsh if you missed the joke; I was facetiously going along with your statement that implied that you know the future and had indisputably found funds that will beat their indexes going forward. If you had such simple, factual knowledge, it should be shared far and wide!

In reality I think such prediction is impossible, so your particular picks aren't very valuable, and thus, I don't actually think you're a dick for not sharing them.

But thanks for sharing them anyway; I must say I find it to be an amazing coincidence that after researching far and wide, the three managed funds you hold all just happened to come from the same investment firm. What are the odds!?

looking for FI

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Re: Managed fund versus index
« Reply #29 on: January 26, 2015, 05:25:17 PM »
Quote from: skyrefuge link=t=30327.msg531549#msg531549 date=1422317609
Quote
author=looking for FI link=topic=30327.msg531522#msg531522 date=1422316055]Wow that was harsh. All you had to do was ask. I didnt post my holdings since I invest a bit differently...ie less diversified and more agressive than most here probably do... but for the record I do own tedix, fbdix, fingx, which are managed with high expenses. I also own xlu, rwr and vfiax. I watch the performance closely and rebalance or exchange as necessary.

heh, it was only harsh if you missed the joke; I was facetiously going along with your statement that implied that you know the future and had indisputably found funds that will beat their indexes going forward. If you had such simple, factual knowledge, it should be shared far and wide!

In reality I think such prediction is impossible, so your particular picks aren't very valuable, and thus, I don't actually think you're a dick for not sharing them.

But thanks for sharing them anyway; I must say I find it to be an amazing coincidence that after researching far and wide, the three managed funds you hold all just happened to come from the same investment firm. What are the odds!?

Paid the up front fee years ago. I thought about moving all my funds to low cost etfs but after looking through their offerings I found those three and moved my money to them in 2013 I have been very happy with the performance and I watch the performance closely. If at some point in the furure managers are changed or performance begins to lag the index I can always switch at that point.

I know it is stated that past performance is not an indicator of future results, but that is the only measure we have. It is how we make most decisions in life. Who we marry, how we invest, what we buy.