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Jul 8, 2009 3:43 pm

We'll typically see a claim like, "90% of active funds lag their benchmarks."  A conclusion is then drawn that passive beats active.  I believe that is what you are doing.

I think that other conclusions can be drawn.  The first conclusion is that most funds suck.  Why would we compare against the entire universe of funds when most are not funds that we would ever consider.   It would be like saying, "Mario Mendoza (the Mendoza line) was a good hitting shortstop."  After all, he could hit a baseball better than 99% of the people who play baseball.  Why would we look at the entire population of baseball players instead of just the one's who have a track record of being good enough to play in the majors?   Let's compare index funds to funds with a long record of success.  When you get rid of the 80% of funds with the highest expenses, an entirely different picture emerges.  What we find is that the best long term performance has nothing to do with Active vs. Passive.  It has everything to do with high cost vs. low cost.   Passive isn't better because it is passive.  Passive tends to do better because it is low cost.  However, there is nothing indicating that passive beats low cost active investing.   In fact, use Vanguard as an example.  Their active funds seem to do just as well their passive funds.    "What percentage of active managers lag their true benchmark?"   I've never liked that question.  Whenever a manager beats a benchmark, the argument is, "Look how they didn't stay within the benchmark."  Since when is a manager supposed to stay within a benchmark that is determined by someone outside of the fund?   I don't have a horse in the active vs. passive debate.  I truly believe that it doesn't matter.  There are so many investing decisions that are more important.
Jul 8, 2009 4:11 pm
"Couldn't say it better myself.  If you TRULY could consistently "pick stocks" or "beat the market" (in ANY market or asset class), you most CERTAINLY wouldn't have a job, nor would you share your abilities with clients.    Alas, active managers DO have jobs.  They DO share their "work" with the world.  This should be enough to show you that they don't have that much confidence in their ability to beat the market over time - why should you?   And if that doesn't convince you that they KNOW of their own failures...check out what percentage of mutual fund managers actually OWN positions in the funds they run.  It's laughable!   Enough for now.  More later.  If you have specific questions, please fire away."   I like the comparison, but it's not valid.  Jim is the manager at XYZ fund.  The stated goal of the fund is to beat the S&P 500.   He makes 7 figures a year as the manager.  He has succeeded in this goal.  Over the last 10 years, an investor in his fund would have turned $1,000,000 into $1,000,001.  An investment in the S&P would be worth $846,000  He's done a great job and has been paid very well.    As a fund manager, he very much has his hands tied in terms of what he can or can't do.   It is his income from his job as a fund manager that allows him to invest his personal money the way that would like.  In fact, Jim is very conservative personally and all of his money has gone into EIAs.  He was confident in his ability to beat the market, but not confident that the market would give postive returns.    It doesn't make sense for managers to put money in their own fund unless the money in the fund is invested in the way that they would invest their own money.  That is rarely the case.  The fund's goal and the manager's goal is almost never going to be the same.  
Jul 8, 2009 4:15 pm


Ice, I was hoping you'd chime in here.  Wanted to see where people stood on this issue.  I've now started incorporating both passive and active management into my practice.  It depends on the investor.  Not completely sold on either style personally.   That's a shame.  Because this is no more a debate than whether or not Tylenol is better at relieving headaches than Gas-X.  When you get down to it, there is a clear-cut right & wrong answer.   If it were clear-cut there would not be a debate.  Just for the record I am not sold on either style but I am using more passive than active in light of what I have read am starting to believe.    What I did is go out and put together a portfolio that a index investor may use and what an advisor may use.  It is reasonable to say that people when constructing a portfolio will go out and pick the best performing funds in the most recent time period.  Yes, advisors are guilty of it also.    DIY will do that; I would hope an FA wouldn't.    Ummm...The mutual fund industry is counting on advisors doing it.  Why do you think they have wholesalers coming out and showing advisors what's working right now.  

Interesting to note is that the passive mgt strategy is outperforming the active in the 1yr, 3yr, and 5yr periods.  It is lagging the 10 yr. 3.82% to 5.15%. 

This is bass-ackwards from what it should be.  Do the research (didn't I recommend that a year ago?), when you understand why I say this is bass-ackwards, you truly understand the passive vs active issue.   It may be bass-ackwars but it is what it is.  I'm quite dense you may need to enlighten me some more.    I don't think that it's too far off to say that the funds used in the active portfolio might be found in many portfolio's.  Baron Growth, Hartford Midcap, Contrafund, PIMCO funds, Am Funds EuroPac, Legg Mason Value, those are all funds that have a pretty good reputation and have for a while.    Really?  I missed the memo here where people admit how GREAT Hartford, Fidelity, American, and Legg Mason funds are!  In fact, they all get ragged on pretty hard on this board.  PIMCO, of course, is excluded from that comment (well, fixed income, anyway).   I didn't say the fund companies were great.  You can select specific funds from many companies that perform well.  When I started using Bill Miller 5 years ago he had beaten the S&P for like what, 15 years in a row, he's in the sh*tter now but I doubt people were blasting him then.  This board is much of the time a bitch session.  They blast these funds when clients are losing money and the performance sucks.  Advisors are as guilty as their clients in looking for the next best fund.  Plus the Jonesies get paid when they move from American to Hartford.   I reiterate - you just picked the best performing funds of the PAST, and put together a portfolio.  That is EXACTLY what we tell our dipship DIY prospects that they SHOULDNT be doing on eTrade!  ("Mr. Prospect, that's past performance.  You needed to own that fund last year, to get that return...there is nothing saying that fund will be able to repeat that performance over the next X years.").     Seriously.  Think about how you assembled that portfolio.  Wow.   I know that.  That was my intention.    I bet the majority of advisors sell on past performance.  Not just the last year or two but over the last 10 years.  Show me how to pick the best performing funds of the FUTURE and I'm all over it.         Basically what I see is depending on how those managers perform over the next 5 years will determine if in 5 years everyone will be touting passive management because of the outperfomance over the lagging 10 years.    The media touts passive management because it puts them in a favorable light (i.e. "against the guys in the $5,000 suits on Wall St."), that's why whenever a columnist, or media outlet, does a piece on this subject, they butcher it and their argument looks f*cking stupid.   No argument there.   The everyday investor touts Vanguard and Fido, because that's what they are told by the media.   People are sheep, they will follow.   The academic world touts ETFs & index funds because the argument is correct.  The research is out there validating every point I've made, excluding baseball.    It's amazing to me, that when the sh*t hit the fan last year, many of you/us couldn't stand waiting for Nouriel Roubini's next insight - hell, probably some of you got a subscription to RGE Monitor!    But yet, you completely glance over the fact, that even this guy admits openly that his ENTIRE retirement nest egg, is in (equity) index funds.   [/quote] [/quote]   Ice, you make great points and very valid arguments.  I have no doubt that you have a much better grasp on Efficient Markets than I do.  You've studied it for years.  I am new to the game and trying to pick it up.  I have yet to find it or understand the definitive research that shows it to be clear-cut.  I am learning to be a self-taught Efficient Markets advisor, you no doubt had PHDs instructing and advising you.  It may take me some more time. 
Jul 8, 2009 4:24 pm

Wow, I missed a few posts from when I started my response to you Ice.  Damn clients!  Anyway, I’m on board because in my own research when I factor in all the costs I see little to no real benefit of using active management.  Of course once I tack on my 1% for managing the account it gets closer. 

Jul 8, 2009 4:37 pm


Jul 8, 2009 5:00 pm

[quote=Fast Eddie] [quote=B24]

To me, the bottom line is, regardless of which approach you use, is that you have to execute well.  Any knucklehead can buy an index fund, but it doesn't mean it will turn out well (what if someone bought the SPY in 2000 and held for 10 years?).  However, rotating correctly, the correct basket of index funds did alright the past 10 years.  Conversely, you can compare First Eagle Global to Legg Mason Value, and see that FEG crushed Bill Miller's entry.  So I find it stupid when writers pick arbitrary (or not so arbitrary) funds and indexes to use, as it does not necessarily reflect actual investors results.

However, for the complete novice, just picking a well diversified complement of indexes is probably the least likely to screw you up, so long as you stick to it.   One other thing - each of the "Lazy" portfolios above includes a healthy dose of bonds and other asset classes (during the worst 10-year period for equities).  And his actively managed funds are all equity.  So right there it is an incomplete comparison.  If he had compared them from 1995-1999, I bet the result was the exact opposite.  So as someone else mentioned, timing matters.[/quote]

Index annuities have done better than ANY of those strategies.
[/quote] Fast Eddie:

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No. that is not the case.

If you had invested $100,000.00 on 01/02/1997 in the S&P Depository Receipts (SPY) and reinvested dividends and capital gains, even with a 1.00% annual fee  your account value would be $209,350.00 on 12/31/2007.

If I had made the same $100,000.00 investment in the Master Dax 5 from allianzlife  you would have $171,460.00

Jul 8, 2009 5:18 pm

Jack, is there a reason why 2008 isn’t included?

Jul 8, 2009 6:16 pm

The Master Dex 5 has a 10 year surrender charge.

<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

Jul 8, 2009 6:22 pm


If you wanted to do a true portfolio comparison of active vs. passive go back 5, 10, 15 or whatever the time frame was for the comparison, and then choose the best performing funds at that time. That would more closely model the way most DIYers do their investing. When you retroactively look back at what the best performing funds are in hindsight that gives you an unfair advantage - I think this is what ice was trying to say.

Also, there are asset classes such as small caps, international, managed futures, emerging markets that are less efficient by nature and if you do the same comparison, a majority of active managers (or at least a better percentage than large-cap) will beat their passive counterparts. So it’s important to look at the efficiency question when making the active vs. passive decision.  This, by the way, was insight ice had on other threads that I thought was applicable here.

One thing I have been looking more into is enhanced indexes, ie passively managed investing that takes an index and then screens for forward looking fundamental criteria and  seeks to eliminate the “losers” from the index. This is available in some etf and UIT strategies. The thought behind this is to remove human error and some of the high costs while also generating alpha. Anybody have success/experience with this?

Jul 8, 2009 6:46 pm

Has anyone seen this - article in Kiplinger referred to it:

I thought the part which tells you how much fund managers had invested was particularly useful if you want to unsell what’s in someone’s portfolio. Actually, most of the criteria could be used to unsell, if appropriate. Wouldn’t use it to choose a fund though.

Jul 8, 2009 7:03 pm

One of the thigns we are missing is the active style of management we aer looking at.  It is my opinion that true “style box” managers do not do well against benchmarks.  However, you take “world allocation” funds (as Morningstar would call them), AKA “Go Anywhere Funds”, adn they do a much better job in many cases at achieving investment objectives, versus beating arbitrary indexes.  Point being, I am not enamoured by a Large Cap Domestic Growth Fund that beat it’s index last eyar, but lost 38% (I am just grabbing numbers).  You could use funds like First Eagle Global, Mutual Discovery, Blackrock Global Allocation, IVY Asset Strategy, or Capital Income Builder (yes, it blew last year), and pair it with something like PIMCO Total Return, and achieve some real goals.  Yes, this is a VERY simple portfolio, but none of these funds are one-hit wonders.  These are classics that are trying to achieve total return, not beat some arbitrary index.  In fact, it is almost impossible to stack it up against a portfolio of indexes, as the allocations change, and some of them use some ecclectic asset classes that aren’t picked up by Morningstar, or distort the overall mix (commodities, gold, long/short, etc.).  But in this case, you REALLY have to trust the managers, because they can go anywhere (some more than others).

  So, my point is that there are two ways to skin the cat (actually three) - indexing, active style-box approach, and active "core/satellite/absolute return" approach.   Oh, then there's Index Annuities.
Jul 8, 2009 7:11 pm

There is only one way to guarantee a client that they will have more money.

Jul 8, 2009 7:21 pm

B24 - I followed you until the absolute return part. It’s news to me if these global allocation funds (which do have the advantage of flexibility) are considered true “absolute return” funds. Capital Income Builder, for example, is long-only that I’m aware of. They may employ some absolute return like strategies (such as global rotation) but as far as I know, they don’t have the ability to go all cash or bonds like an absolute return strategy might call for.

Jul 8, 2009 8:07 pm

Howie, you are correct.  CIB is the least flexible of all of them.  I use that for a more “traditional” balanced approach.  And you are correct, they are not strict “absolute return” funds.  My point really was that there are several great funds out there that are not trying to beat arbitrary indexes, but rather staying positive through all market cycles (though CIB’s objective is actually rising income with secondary growth). 

  However, some of them do have wide latitude, like IVY Asset Strategy and Mutual Discovery.  But you do need to know the in's and out's of each manager, as each fund's apporach is VERY different.  For example, First Eagle is primarily equity driven with heavy doses of gold (and gold mining stocks).  IVY goes all over the place (long/short/currencies, etc.), CIB is a more traditional global balanced fund, Mutual Discovery is DEEP global value and is often heavy cash (lots of smokes and beer stock), Blackrock is the most traditional after CIB.
Jul 8, 2009 8:14 pm


The Master Dex 5 has a 10 year surrender charge.

<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

[/quote]   Surely you could run an illustration from 1/1/1998 to 12/31/2008, yes?  But then that would blow up your hypothesis.    Quite a quandry there, Jack.
Jul 8, 2009 10:14 pm

Asset allocation is 1000 times more important than active v. passive.  In fact, show me a good asset allocator and I would put my money with him with monster expenses as opposed to a low cost, poorly allocated portfolio.

Jul 8, 2009 11:25 pm

Asset allocation is the man-made global warming of the investment world.

Jul 8, 2009 11:30 pm

[quote=Moraen]Asset allocation is the man-made global warming of the investment world.[/quote]

I couldn’t agree more.

Jul 9, 2009 12:04 am

Asset allocation is the man-made global warming of the investment world.

  I'm not sure I agree, but a great quote is a great quote!
Jul 9, 2009 12:10 am

Asset allocation is the man-made global warming of the investment world.

  If you truly believe this, you are not doing it correctly.  That is ok though, most advisors don't.  Cap Inc B, BFA, and Inc FofA is not an asset allocation.