Is There Hope for Active Managers?

[JEast]

Nice article on the distortions of ZIRP with respect to value investors.

the Fed keeping interest rates near zero for the past six years has had the “unintended consequence” of boosting the stocks of companies with heavy debt and little or no earnings.  Typically after a recession, such companies lose out to firms that generate more cash and have better balance sheets. This time, no “Darwinian” shakeout happened and low-quality stocks ruled

 

http://www.bloomberg.com/news/articles/2015-02-24/wall-street-s-best-stock-pickers-pin-rut-on-warped-market

 

Neuberger Berman’s paper “Is There Hope for Active Managers?”

http://pa-pers.org/newweb/documents/Fall2013-NeubergerBerman-FullArticle.pdf

 

 

Cheers

JEast

[Picasso]

I'm waiting for the day that an asset manager, in this case Neuberger Berman, comes out with a paper on why active management is not the place to be. 

[Packer16]

This IMO thus is an excuse for underperforming an index.  They also do not point out that most mutual fund value investors are looking for the same thing a undervalued good business and most of these businesses are fairly efficiently priced due to the large number of players competing in this space.  Over the past year the leveraged type of firms have been hit hard and these guys are still underperforming on average by the amount of there fees.  The mutual fund format and approach to investing is a dinosaur with investors paying high fees regardless of performance as mutual funds are marketed as consumer products versus investment vehicles.

 

Packer

[Guest longinvestor]

This IMO thus is an excuse for underperforming an index.  They also do not point out that most mutual fund value investors are looking for the same thing a undervalued good business and most of these businesses are fairly efficiently priced due to the large number of players competing in this space.  Over the past year the leveraged type of firms have been hit hard and these guys are still underperforming on average by the amount of there fees.  The mutual fund format and approach to investing is a dinosaur with investors paying high fees regardless of performance as mutual funds are marketed as consumer products versus investment vehicles.

 

Packer

+1

Relative to most other consumer products where value is exchanged at the time of sale, with mutual funds, the fees go one way, mere hope the other way. Most consumer products carry a warranty or some minimal satisfaction guaranteed. Mutual funds?

 

 

[CorpRaider]

I agree that the traditional mutual fund, with the tax, cost and fee drags, is almost obsolete.  I probably would never expect a large percentage to outperform over the long term (I mean, mathematically, as Jack Bogle has long pointed out, the average fund will underperform the index by its excess costs).  I can, however, buy into the arguments that it has been even harder for the active value guys, with better processes and good long term track records, to outperform in this ripping extended bull market.  Mr. Buffett, obviously, has been talking about this since the days of his partnerships.  Then again, a simple, cheap, value strategy like RPV has managed to do well versus the indexes over the same period.

[rb]

In my opinion the issue with the funds is not just the fees or what's going on with the markets at that particular time (there's always an excuse). I think the bigger issue is the one of failing conventionally vs. succeeding unconventionally.

 

Most fund managers make very nice salaries and have no incentive to do anything out of the ordinary no matter how profitable it may be. You do something out of the ordinary and it works out you get a pat on the back and an attaboy. If it doesn't work out well you're fired. So the portfolio managers in effect screw the clients for job security.

[Jurgis]

You do something out of the ordinary and it works out you get a pat on the back and an attaboy.

 

Actually, if you read the story of Mike Burry, you make hugely outsized returns for your investors and they still fire you. IIRC, most of his clients complained hugely when they got locked out during 2007-09 crash and left immediately when he removed the lock even though the results were extraordinary.

[rb]

You do something out of the ordinary and it works out you get a pat on the back and an attaboy.

 

Actually, if you read the story of Mike Burry, you make hugely outsized returns for your investors and they still fire you. IIRC, most of his clients complained hugely when they got locked out during 2007-09 crash and left immediately when he removed the lock even though the results were extraordinary.

I was referring more to the big fund managers that control most of the money.

 

Excellent point thought on Mike Burry though!

[Jurgis]

Yep, I know that is was a bit outside example.

 

In mutual funds, the politics might be more complicated and different. E.g., can you really close the fund before it becomes too big to outperform? Even if you are a great manager and you want to close it, it's not an easy fight. And why would you want?

[constructive]

You do something out of the ordinary and it works out you get a pat on the back and an attaboy.

 

Actually, if you read the story of Mike Burry, you make hugely outsized returns for your investors and they still fire you. IIRC, most of his clients complained hugely when they got locked out during 2007-09 crash and left immediately when he removed the lock even though the results were extraordinary.

 

In their defense, they hired him thinking he was going to run a long-short value fund and he style drifted into global macro credit. Just because CDS and sidecars were in the fund prospectus doesn't mean partners actually expected them to be used.

[Jurgis]

You do something out of the ordinary and it works out you get a pat on the back and an attaboy.

 

Actually, if you read the story of Mike Burry, you make hugely outsized returns for your investors and they still fire you. IIRC, most of his clients complained hugely when they got locked out during 2007-09 crash and left immediately when he removed the lock even though the results were extraordinary.

 

In their defense, they hired him thinking he was going to run a long-short value fund and he style drifted into global macro credit. Just because CDS and sidecars were in the fund prospectus doesn't mean partners actually expected them to be used.

 

Which proves my point: the clients will punish managers who step out of the ordinary.

[rb]

Yep, I know that is was a bit outside example.

 

In mutual funds, the politics might be more complicated and different. E.g., can you really close the fund before it becomes too big to outperform? Even if you are a great manager and you want to close it, it's not an easy fight. And why would you want?

Of course you can't close the fund, you're just an employee and the company is making tons of dough. I guess you have virtually no shot at beating the market after fees with a large manager. Chances are better I guess with a smaller manager but even in that case as you point out the investor is his own enemy.

 

It amazes me to no end how people would spend so much time researching that car or that tv they want to buy but are so indifferent when it comes to financial products.

[Jurgis]

It amazes me to no end how people would spend so much time researching that car or that tv they want to buy but are so indifferent when it comes to financial products.

 

This is sidetopic a bit.

 

Unfortunately, it is not clear that research adds value beyond "buy index funds 80%-100% of portfolio, rest bonds/cash".

 

E.g. I have couple 401(k)s that I have to manage (mine and wife's). Can't buy stocks there. There's a list of funds. How the heck am I supposed to research it? OK, I held index funds 80%, bonds 20% so far. 80% split roughly 40% US, 40% international. Now:

- SP500 is high. Should I move 40% US to actively managed funds which might perform better during any correction?

- International index funds hugely underperform actively managed funds. Should I move to actively managed funds?

- Should I change US/international allocation?

- Bonds: should I hold generic bond fund? high yield bond fund? cash?

 

I am sure there are financial advisors who would give me 100 page report on how this should be adjusted. But I am not sure their report will have any insight. And neither do I...

 

Anyway, I don't want to sidetrack this topic too much. :)

[rb]

It amazes me to no end how people would spend so much time researching that car or that tv they want to buy but are so indifferent when it comes to financial products.

 

This is sidetopic a bit.

 

Unfortunately, it is not clear that research adds value beyond "buy index funds 80%-100% of portfolio, rest bonds/cash".

 

E.g. I have couple 401(k)s that I have to manage (mine and wife's). Can't buy stocks there. There's a list of funds. How the heck am I supposed to research it? OK, I held index funds 80%, bonds 20% so far. 80% split roughly 40% US, 40% international. Now:

- SP500 is high. Should I move 40% US to actively managed funds which might perform better during any correction?

- International index funds hugely underperform actively managed funds. Should I move to actively managed funds?

- Should I change US/international allocation?

- Bonds: should I hold generic bond fund? high yield bond fund? cash?

 

I am sure there are financial advisors who would give me 100 page report on how this should be adjusted. But I am not sure their report will have any insight. And neither do I...

 

Anyway, I don't want to sidetrack this topic too much. :)

I agree with you we shouldn't sidetrack this too much. Maybe we could start a new thread if necessary but as I mention below I don't think this is too relevant to the membership of this board.

 

In your example and with other 401(k)s I admit that you're stuck and for what it's worth I think your allocation is spot on. Anyway the indifference of ppl I was mentioning is more basic than even that. I'm talking about the ppl that blindly buy whatever they local bank branch or two-bit IA is pushing, not asking any questions, not caring.

 

The type of research I talk about is basic one, do a bit of reading to learn what the characteristics of good fund managers are, learn what questions to ask, don't just blindly buy stuff, I'm not talking about becoming an investment savant. Hell, just by reading the BH letters over the past 30 years would enable one to do better than probably 80% of the ppl out there. And those letters are free! Obviously anyone that is on this board is way past this basic level of research. But most ppl don't do it so the fund managers take advantage because it's so easy.

[cloud]

There's no hope for the most brilliant active fund managers if the job is at stake and their actions are controlled by the emotions of their customers.

 

[Guest Schwab711]

There's no hope for the most brilliant active fund managers if the job is at stake and their actions are controlled by the emotions of their customers.

 

How bright can an active manager really be if this is the fight they have decided to take on? They could have picked different companies/firms to climb. Or they could have started their own firm once they gained credibility. If you aren't investing with Vanguard (or your best available substitute) then you should be doing a disgusting amount of research or investing with the brightest financial mind you know. Majority of people have low risk-tolerance and should be in Vanguard funds, with very minimal rebalancing, and enjoy life! I really don't like the classic "Financial Advisor" role because a person could read one intro book and could save SO MUCH in fees. I'm not a fan of fees for things people don't need.