An Active Manager Strikes Out

Larry Swedroe of BAM had an interesting encounter with an actively managed fund family Third Avenue that not only insisted that their firm’s results were good – they insisted they were competitive against evidence-based investing. On top of that, one of their executives decided to denigrate the pioneering work of Dr. Eugene Fama, an economic Nobel Laureate prize winner.  Click here for more on Eugene Fama. Mr. Swedroe fairly and objectively analyzes Third Avenue’s claims one by one and it becomes clear that Third Avenue’s claims are absurd. All you need to know is evidence-based investing ranks in the top 5% to 40%  in every time period. Some active investors beat their benchmark index, but you don’t know which one until after the fact. And they rarely repeat from one time period to the next. See Larry Swedroe’s full article, An Active Manager Strikes Out here....

Roller coaster, or double twisting roller coaster?

If you’re investing, assuming the returns will be similar – would you prefer a roller coaster ride (which is a certainty) or a double twisting roller coaster (even higher volatility than necessary)? I think most people would agree they would prefer less volatility. If you are an active fund manager – meaning that you are attempting to achieve returns by selecting individual securities and when to buy and sell them – the you add 2 more sources of volatility. One level is due to having an “unstable technique” – the nature of “active management” is that there is not a process but rather constant change. The second level of extra volatility is due to  the low level of diversification.  By its premise – targeting specific company stocks – active management has less diversification and therefore is more volatile. Extensive scientific and statistical analyses have proven that asset class is the dominating factor in returns not individual securities. Let me repeat that – it’s the asset class exposure that dominates returns not the individual securities. That’s because stocks in an asset class tend to move like a herd.  A good example is when I compare my firm’s model portfolios to my clients employer’s 401(k) plans. Once my clients allocate their assets as we direct – and they have similar asset class exposure = the returns in their 401(k) are similar over the same time periods – the same ballpark with our more highly diversified institutional funds winning the contest. So the better way to achieve returns is by owning asset classes with deep diversification within each asset class. You lose nothing in returns but...

The Fallacy & Frustration of 401(k) Fund Selection

For you 401(k) plan sponsors out there – it’s important for you to know the history behind the difficulties of monitoring and choosing funds in your company’s 401(k) plan – and how you might make your 401(k) better. First it’s important to know that actively managed funds annual performance rankings constantly move around at random. (How they perform relative to each other.) What is an actively managed fund? Fund managers attempt to achieve the best returns they can by actively buying and selling securities inside the fund. It is a very difficult task because emotions and news cycles dramatically move individual securities up and down no matter how well priced they look on paper. What appears to be a great company could be devastated by bad news or someone simply saying that it is overpriced. (The alternative approach is evidence-based investing  in which mutual fund managers buy nearly every security available in the asset class of the fund. They may enhance returns by providing more exposure to value and small company securities which are proven statistically to perform a little better.) When you rank the annual performance of actively managed funds in a category – from year to year their rankings bounce around like crazy from a high ranking to low, to medium, to low again. They move randomly up and down in the rankings. That’s because the active managers struggle to find a winning approach and it is very challenging. Sometimes they get lucky, often they are not. The movement of the market is bad enough- and in that environment they are also constantly changing their strategy. They also have low levels of diversification (concentration)...