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Indexes Beat Stock Pickers Even Over 15 Years (even small cap)


stahleyp
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I can't say I'm completely surprised (plenty of other data shows that the market is pretty efficient) but a new study shows how futile active management is over the long term.

 

"Over the 15 years ended in December 2016, 82% of all U.S. funds trailed their respective benchmarks, according to the latest S&P Indices Versus Active funds scorecard. "

 

"Among more than a dozen categories tracked, 95.4% of U.S. mid-cap funds, 93.2% of U.S. small-cap funds and 92.2% of U.S. large-cap funds trailed their respective benchmarks, according to the data"

 

https://www.wsj.com/articles/indexes-beat-stock-pickers-even-over-15-years-1492039859

 

Admittedly, I am surprised at how hard it is for small cap managers.

 

BF-AP817_PERFOR_16U_20170412183007.jpg

 

I've heard that about 20% of funds will outperform over the very long haul....I didn't realize it was only 8% or less. Ouch.

 

Though one can argue that the crazy amount of government intervention makes it a tough gig to beat the index.

 

Hope springs eternal - regardless of evidence.

 

 

 

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Those management fees, trading costs and taxes are a big hurdle to overcome. I'm not surprised. Especially since I guess this is about mutual funds, so they have constraints about things like position sizing and leverage so even if you can find a couple of good idea's it's hard to make them count.

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This doesn't surprise me.  I think it reflects the way the industry is structured, even more than managers' talent or the fees. Most money managers don't really have the incentives to outperform (they still get paid as long as they 'fail conventionally').

 

Investors are to blame too - very few bother to learn about how investing works, and check fund prices too often.  All this encourages benchmark-hugging.

 

Sadly, new financial regulations (in Europe anyway) are making it even more onerous for smaller firms to start up, blocking future young talent.

 

One good thing has been a new(-ish) wave of medium-sized, owner-managed mutual fund companies (usually star managers jumping ship to set up on their own) such as Fundsmith, Woodford and Lindsell Train who run relatively concentrated, off-benchmark, buy and hold portfolios.

 

And let's remember, some managers can do it.  People just need to do their homework to work out a checklist of where to look for them (e.g. they probably won't be at Fidelity).

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Yes some do it but it is super hard to know in advance which ones. For instance, I think it was Ruane (I can't find it so pulling things from memory) picked a list of around 10 investors/funds. I think over a decade 2 or 3 beat the market. That is crazy!

 

Let's look back 10 years ago. If I gave someone this list vs an index fund, most (I'd assume) would choose this list.

 

LLPFX - Longleaf Partners

OAKLX - Oakmark Select

SEQUX - Sequoia

TAVFX- Third Avenue Value

WPVLX - Weitz Value

FCNTX - Fidelity Contrafund

FLPSX  - Fidelity Low Priced Stock

FAIRX - Fairholme

LMVTX - Legg Mason Value Trust

TWEBX - Tweedy Brown Value

VPMAX - Vanguard Primecap

CGMFX - CMG Focus

MGRIX - Marsico Growth

DODGX - Dodge and Cox Stock

 

I have a mix of value and growth funds here. I believe all of these (with the exception of Third Avenue) is ran by the same person/team. Guess how many have out performed the S&P 500 over the past 10 years? 4 out of 14 (before taxes). FCNTX, FLPSX, OAKLX and VPMAX.  If you factor in taxes, you can take out FLPSX and basically OAKLX (though it did beat Vanguard 500 admiral by a couple basis points after tax...though the 2008 drawdown was probably not worth the pain for most). These are (or were) considered some of the best of the best 10 years ago. The only fund to beat the market by more than 2% annually here (before tax)? Primecap.

 

 

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Yes some do it but it is super hard to know in advance which ones. For instance, I think it was Ruane (I can't find it so pulling things from memory) picked a list of around 10 investors/funds. I think over a decade 2 or 3 beat the market. That is crazy!

 

Let's look back 10 years ago. If I gave someone this list vs an index fund, most (I'd assume) would choose this list.

 

LLPFX - Longleaf Partners

OAKLX - Oakmark Select

SEQUX - Sequoia

TAVFX- Third Avenue Value

WPVLX - Weitz Value

FCNTX - Fidelity Contrafund

FLPSX  - Fidelity Low Priced Stock

FAIRX - Fairholme

LMVTX - Legg Mason Value Trust

TWEBX - Tweedy Brown Value

VPMAX - Vanguard Primecap

CGMFX - CMG Focus

MGRIX - Marsico Growth

DODGX - Dodge and Cox Stock

 

I have a mix of value and growth funds here. I believe all of these (with the exception of Third Avenue) is ran by the same person/team. Guess how many have out performed the S&P 500 over the past 10 years? 4 out of 14 (before taxes). FCNTX, FLPSX, OAKLX and VPMAX.  If you factor in taxes, you can take out FLPSX and basically OAKLX (though it did beat Vanguard 500 admiral by a couple basis points after tax...though the 2008 drawdown was probably not worth the pain for most). These are (or were) considered some of the best of the best 10 years ago. The only fund to beat the market by more than 2% annually here (before tax)? Primecap.

 

Not a bad exercise. Honestly, if I had to invest into one (or more than one) of these ten years ago, I would probably have chosen SEQUX. Haha maybe I would have outperformed too if I sold it at VRX top. :P

 

Even though we are in the value investors board and I have invested in DODGX in the past, IMO value funds mostly suck and have sucked for a while now... 15-20 years... I am talking about TWEBX, TAVFX, DODGX. So I would not have picked them to outperform index. I don't know much - or did not know much 10 years ago - about the rest of these funds, so probably would not have selected them. I knew about OAKLX but around that time I think it was underperforming a lot and Bill Nygren was considered a wash out. Well. Surprise.  8)

 

And yeah, I would have not picked Fidelity funds. Like the guy above said... oh well.  8)

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I have this quote attributed to Bogle:

 

According to Bogle’s Common Sense on Mutual Funds, generally 85% of fund managers lag the S&P 500 over any extended period.  Additionally, only 0.5% of managers beat the indices by 3% or more.

 

I think mutual funds have a lot of problems structurally.  Long-only hedge funds should do better as a group I would imagine, except that the fees are stupid high, which probably offsets all the structural help. 

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Yes some do it but it is super hard to know in advance which ones. For instance, I think it was Ruane (I can't find it so pulling things from memory) picked a list of around 10 investors/funds. I think over a decade 2 or 3 beat the market. That is crazy!

 

Let's look back 10 years ago. If I gave someone this list vs an index fund, most (I'd assume) would choose this list.

 

LLPFX - Longleaf Partners

OAKLX - Oakmark Select

SEQUX - Sequoia

TAVFX- Third Avenue Value

WPVLX - Weitz Value

FCNTX - Fidelity Contrafund

FLPSX  - Fidelity Low Priced Stock

FAIRX - Fairholme

LMVTX - Legg Mason Value Trust

TWEBX - Tweedy Brown Value

VPMAX - Vanguard Primecap

CGMFX - CMG Focus

MGRIX - Marsico Growth

DODGX - Dodge and Cox Stock

 

I have a mix of value and growth funds here. I believe all of these (with the exception of Third Avenue) is ran by the same person/team. Guess how many have out performed the S&P 500 over the past 10 years? 4 out of 14 (before taxes). FCNTX, FLPSX, OAKLX and VPMAX.  If you factor in taxes, you can take out FLPSX and basically OAKLX (though it did beat Vanguard 500 admiral by a couple basis points after tax...though the 2008 drawdown was probably not worth the pain for most). These are (or were) considered some of the best of the best 10 years ago. The only fund to beat the market by more than 2% annually here (before tax)? Primecap.

 

Hmm. ..down the memory lane for me. Used to own most of these funds. These were the"who's who" of value. Most of them were featured in OID. Where I read about them. By 2009, I purged them all out. Wonder if OID went down with them?

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Also, I really think there is some end point measuring issues here.  All value funds I track look bad right now, with the exception of Turtle Creek and Arlington Value.  I expect most of the value hedge funds will start looking a little better in a few years. 

 

I do think mutual funds are just tough to do well in.

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Working from memory, I think DFA's growth vs. value stats had the 1990-1999 decade as the worst relative performance for value while the decade ending in 2015 was the third worst. Sandwiched in between was the early 2000's which saw a very dramatic reversal in favor of value. This doesn't offer much about active vs. passive, but does speak to the performance of some of the value funds on the list: 20-year numbers include the tail end of the 90's growth trumping value big time and 15-year numbers won't capture the full effect of the 2000-2002 halcyon days for value managers.

 

I also ditched a number of the value funds on that list in 2009--my exact words were "I don't need anyone's help in losing this much money."

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In the US and Canada the best money managers typically run hedge funds and not mutual funds since they are more lucrative and flexible...  Look at Allan Mecham performance over 15 years (especially pre-fees).  I'd think one would argue that he trounced the market...

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In the US and Canada the best money managers typically run hedge funds and not mutual funds since they are more lucrative and flexible...

 

That's the marketing pitch anyway, right? ;)

 

I can't argue with Mecham's performance. He's one of the few people I'd gladly give a large percentage of my money to him to manage...but my large percentage doesn't meet the minimum (and his fund is closed now). He's fees are reasonable and eats his own cooking and seems to have a ton of integrity. But who knew 15 or even 10 years ago that his performance would have been what it is?

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Yeah, starting like 100 basis points in the hole, when you're talking about an asset class that does maybe 10% nominal is a huge disadvantage.  Even if you add in 200 or 400 basis point a factor exposure, paying an additional .25% is kind of huge relative to that expected additional return and its not like there's a high water mark or anything if the factor no longer works or goes through a 20 year cycle... 

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Working from memory, I think DFA's growth vs. value stats had the 1990-1999 decade as the worst relative performance for value while the decade ending in 2015 was the third worst. Sandwiched in between was the early 2000's which saw a very dramatic reversal in favor of value. This doesn't offer much about active vs. passive, but does speak to the performance of some of the value funds on the list: 20-year numbers include the tail end of the 90's growth trumping value big time and 15-year numbers won't capture the full effect of the 2000-2002 halcyon days for value managers.

 

I also ditched a number of the value funds on that list in 2009--my exact words were "I don't need anyone's help in losing this much money."

 

+1. Yep, I can do that myself, losing money.

 

I had a slightly different thought as well given that I was holding positions on my own that was also an anchor position in these funds. I asked myself, "Why am I paying them to hold something I've already conviction in". Additionally, I watched curiously as they were forced to sell their conviction ideas, ostensibly to deal with redemptions. I clearly had an edge where I did not have to deal with that. Just had to deal with steep paper declines, bought more while they were selling etc. No institutional imperative etc.. I learned a lot during that time, mostly about myself by watching others' behavior.

 

In hindsight, being an individual investor during and after the crisis years was a once-in-my-lifetime opportunity to build great wealth over the long term. "Great wealth" is relative but so far, it appears that way for me.  Not that I'm looking for the next big crisis, but as Buffett often says, everyone will likely get this opportunity once or so during a lifetime, being ready to back up the truck is key.

 

 

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Not that I'm looking for the next big crisis, but as Buffett often says, everyone will likely get this opportunity once or so during a lifetime, being ready to back up the truck is key.

 

Without changing the subject too much, I sometimes wonder if moving forward, stock market declines will continue to be large, more like 2008-2009, as recessions roll through.

 

Retail investors have so much equity in 401ks and IRAs that they can liquidate easily online to bonds, cash, etc. I think the supply/demand will be exaggerated because of how many people could have a finger on the sell button. Then all the forced selling comes through, creating even more panic and retail liquidations. It is sort of depressing how unprepared most 401k investors are from a psychological standpoint - one big downside of losing the traditional pension plan system - protecting employees from themselves.

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Not that I'm looking for the next big crisis, but as Buffett often says, everyone will likely get this opportunity once or so during a lifetime, being ready to back up the truck is key.

 

Without changing the subject too much, I sometimes wonder if moving forward, stock market declines will continue to be large, more like 2008-2009, as recessions roll through.

 

Retail investors have so much equity in 401ks and IRAs that they can liquidate easily online to bonds, cash, etc. I think the supply/demand will be exaggerated because of how many people could have a finger on the sell button. Then all the forced selling comes through, creating even more panic and retail liquidations. It is sort of depressing how unprepared most 401k investors are from a psychological standpoint - one big downside of losing the traditional pension plan system - protecting employees from themselves.

 

True to an extent, especially the guaranteed benefit programs but the bigger issue for retail investors, 90 plus percentage of them, is the long term mediocrity that comes with the underperforming funds in their 401k. What we're glossing over is by how much worse the 90% of funds did versus the index. Before fees that is. And many, many Americans work in companies that do not / cannot negotiate fees with the plan administrators.

 

It's somewhat disingenuous to blame the retail investors, the loud message they need to hear is index investing is the better option for them and to your point, to leave it alone during turmoil. Something that the plan fiduciaries don't do. Just read the inserts / flyers that go  with pay stubs. They all read the same " Keep saving / giving more of your money to us and in smaller print, don't expect anything in return". The lack of fiduciary responsibility with peoples' life savings is criminal.

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