Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, December 14, 2015. You can also find the re-balance calendar for 2015 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Active Stock Fund Performance Consistency

Recently, Valeant Pharmaceuticals (VRX) made some big news: because of its controversial business model, the stock took a big beating, losing more than 60% in the short span of two months. One of the biggest shareholders, hedge fund Pershing Square managed by Bill Ackerman, was greatly affected. His high profile defense of the stock has created a sensation among main stream media. However, the story does not stop here. 

Value investors should know Sequoia Fund (SEQUX). It was the fund recommended by Warren Buffett in 1970s when he closed his investment partnership and instead went t0 manage Berkshire Hathaway. It turned out that Sequoia has Valeant as its biggest holding — around 30% of the fund’s portfolio. Needless to say, the fund’s performance was hit hard.

As it stands right now, Valeant’s controversy has not completely settled. Whether this is a good investment or not remains to be seen. However, what’s more interesting is that this event involves with Sequoia fund, one of the solid funds that has the best long term record. This leads us to investigate in more details on how a group of famous investment funds have done. 

In 2006, Barron’s magazine published a list of top 20 best equity funds. Its criterion to select the funds is simple: it used the best 15 year performance. Among them, there were many well known funds. Taking a closer look at these funds, one can find most of them have not done well recently. 

Long term performance falters

The following table shows the performance of these funds, along with Sequoia, Longleaf Partners (LLPFX), Small Cap Index Fund (NAESX) and Vanguard S&P 500 fund: 

Fund Performance Comparison (as of 11/23/2015):

Fund Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
FPPTX (FPA Capital) -13.7% -16.5% 2.8% 4.3% 4.7% 0.19
FLPSX (Fidelity Low-Priced Stocks) 1.5% 2.2% 15.5% 12.7% 8.7% 0.42
CVGRX (Calamos Growth A) 5.7% 5.4% 15.9% 10.9% 6.3% 0.23
HRTVX (Heartland Value) -10.4% -7.7% 9.2% 6.9% 5.2% 0.2
ACRNX (Columbia Acorn Z) 2.0% 2.3% 12.3% 10.3% 7.5% 0.28
ICSCX (ICM Small Companies) 0.7% 3.3% 14.8% 11.2% 7.5% 0.26
HCAYX (Hartford Capital Appreciation Y) 3.5% 3.2% 19.3% 11.2% 7.2% 0.29
DFSCX (DFA US Micro Cap I) -0.7% 2.3% 17.0% 13.1% 7.2% 0.25
MASPX (BlackRock Value Opportunities Instl) -3.9% -2.3% 15.2% 11.8% 6.2% 0.21
MUHLX (Muhlenkamp) -3.3% -3.9% 11.1% 7.5% 1.1% 0.01
KAUFX (Federated Kaufmann R) 6.6% 7.9% 20.0% 11.8% 7.6% 0.32
HWSIX (Hotchkis and Wiley Small Cap Value I) -5.4% -1.5% 18.2% 13.9% 6.7% 0.23
JSIVX (Perkins Small Cap Value L) 1.0% 2.6% 14.0% 9.5% 8.3% 0.28
NBGNX (Neuberger Berman Genesis Inv) 4.1% 4.2% 13.6% 12.0% 8.2% 0.35
USCIX (Laudus Rosenberg U.S. Small Cap Sel) 15.2% -17.6% -7.6% 2.2% 0.01
WGROX (Wasatch Core Growth) 5.7% 7.8% 15.4% 14.3% 6.9% 0.27
MPGFX (Mairs & Power Growth Inv) -0.6% 0.5% 14.7% 13.7% 7.9% 0.35
TAVFX (Third Avenue Value Instl) -2.8% -3.9% 9.1% 4.8% 3.1% 0.11
SKSEX (Skyline Special Equities) -1.9% 0.8% 18.9% 14.5% 8.5% 0.31
LMVTX (Legg Mason Cap Mgmt Value C) -3.5% -4.3% 16.2% 11.2% 1.0% 0.01
SEQUX (Sequoia) -11.8% -9.9% 9.7% 11.6% 6.9% 0.35
LLPFX (Longleaf Partners) -17.3% -20.3% 5.3% 6.6% 3.4% 0.12
DODGX (Dodge & Cox Stock)  -1.7%  -1.4% 17.1% 13.4% 6.2% 0.24 
VFINX (Vanguard 500 Index Investor) 3.3% 3.8% 16.9% 14.0% 7.4% 0.32
NAESX (Vanguard Small Cap Index Inv) -0.9% 0.6% 15.9% 12.7% 8.2% 0.29
VIMSX (Vanguard Mid Cap Index Inv)  0.6% 1.7%  17.3% 13.2% 8.2% 0.32

Detailed year by year performance >>

Among them, Laudus Resenberg fund (USCIX) has ceased to exist.  Within the large cap stock funds, only MPGFX (Mairs & Power Growth Inv) managed to out perform its large cap index fund VFINX in the last 10 years (since 11/23/2015). In the small cap category, there are two funds that beat NAESX (Vanguard Small Cap Index Inv)SKSEX (Skyline Special Equities) and JSIVX (Perkins Small Cap Value L) in the last 10 years. One tied: NBGNX (Neuberger Berman Genesis Inv). In the mid cap category, only FLPSX (Fidelity Low-Priced Stocks) surpassed VIMSX. 

In the following table, we look at a subset of funds in this group for the past 15 year’ performance: 

Fund Performance Comparison (as of 11/23/2015, since 11/23/2000):

Fund Name 15Yr AR 15Yr Sharpe
FLPSX (Fidelity Low-Priced Stocks) 11.6% 0.62
MUHLX (Muhlenkamp) 5.1% 0.2
JSIVX (Perkins Small Cap Value L) 9.9% 0.39
NBGNX (Neuberger Berman Genesis Inv) 10.4% 0.48
MPGFX (Mairs & Power Growth Inv) 8.4% 0.38
TAVFX (Third Avenue Value Instl) 6.2% 0.27
SKSEX (Skyline Special Equities) 10.8% 0.43
LMVTX (Legg Mason Cap Mgmt Value C) 2.8% 0.04
SEQUX (Sequoia) 7.7% 0.42
LLPFX (Longleaf Partners) 4.5% 0.16
DODGX (Dodge & Cox Stock) 10.4% 0.35
VFINX (Vanguard 500 Index Investor) 4.9% 0.12
NAESX (Vanguard Small Cap Index Inv) 8.7% 0.32
VIMSX (Vanguard Mid Cap Index Inv) 7.9% 0.31

Detailed year by year performance >>

The picture becomes much better: even the laggard MUHLX (Muhlenkamp) now managed to beat the S&P 500. However, LMVTX (Legg Mason Cap Mgmt Value C) and LLPFX (Longleaf Partners) still under performed. We know the story of Legg Mason fund that went through a debacle because of the then manager Bill Miller’s ill investments. 

The above tables reveal the three important points:

  • There is no guarantee that a long term solid fund can continue its performance. 
  • 10 year is still not long enough in terms of long term investments. 
  • Small cap stocks can have a long term performance edge. However, readers shouldn’t been fooled by the big performance difference in the 15 year time frame. In fact, if we look at the 20 year time frame (since 11/23/1995), small cap stocks (NAESX) has only performed better by 1.1% than large cap stocks (VFINX): 9.5% vs. 8.4%. Still a good enough margin but certainly not as big as the 3.8% difference in the 15 years. 

Active vs. passive stock fund debate

What we can learn further from the above data is that in the active vs. passive (index) stock fund debate, a common assertion that active funds rarely out perform index funds is valid. However, one needs to look into this debate deeper. 

First of all, a index such as S&P 500 is still an investment strategy. Its decision of including/excluding stocks in the index is based on some strict rules that an S&P committee decides. We would further venture to say that it is a very mechanical or program based strategy. In fact, even for an all stock market index such as Wilshire total stock market index, they are pretty much based on simpler rules. 

Active funds are usually meant for those that heavily depend on subjective views of investment managers instead of some simple rules. However, even within active funds, it is important to understand that there are a subset of funds that adhere to a set of detailed investment criteria. Two examples of these funds are DODGX (Dodge & Cox Stock) and SEQUX (Sequoia). Managers of these funds are usually more open to their investment criteria and are more steadfast to stick to their investment thesis. 

Unfortunately, the majority of active funds not only try to secret guard their investment thesis (or lack of), they are also more subject themselves to prevalent investment fads. Not only these funds charge high fees (which diminish an already lousy return even further), they are susceptible to manager(s) change. 

In reality, it is detrimental and unrealistic for investors to have to wait for such a long time to find out whether their investments work or not. Just imagine after 15 years, you finally decided to give up a fund that has done enough damage to your financial health. How much time will you have to recover from it?

In a word, investing in active funds is an extremely long shot in an extremely long term. No wonder Graham and Buffett suggest that for average investors, one should stick to index funds. 

We might also add that if one really wants to get a benefit out of actively managed funds, there should be a well thought out mechanical plan to buy and sell these funds.  

Market Overview

Markets are again stalled at a critical level, unable to breach the important previous high. At the moment, the biggest concern in risk assets is the divergence between high flying stocks and majority of average stocks. For example, year to date, S&P 500 (SPY) returns 3.3% while its equal weighted version (RSP) returns -0.4%. Similarly, small cap stocks returns only -0.5% year to date. Another big divergence is the high yield bond weakness: HYG (iShares iBoxx $ High Yield Corporate Bd) returned -3.3%. Apparently, investors are more risk averse at this moment:


For more detailed asset trend scores, please refer to 360° Market Overview

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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