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, October 24, 2016. You can also find the re-balance calendar for 2016 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.
Stock Investing: Actively Managed Funds vs. Index Funds
In previous newsletter August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds, we advocate a mixed ETF and mutual fund investment portfolio that uses low cost index ETFs for stock (equity) assets and uses actively managed total return bond funds for fixed income (bond) asset. It drew some questions from several readers. In this newsletter and a follow up one, we will discuss the rationale behind choosing index funds or active funds for stocks and bonds.
For stock asset classes including US stocks, international stocks, emerging market stocks and REITs, in principle, we prefer using low cost index funds (ETFs or mutual funds).
Active stock funds rarely outperform index funds consistently
Though it’s been a popular and hotly debated topic on the value of active stock funds, the very first common sense and experience tell us that there have been way too many great stock funds that suffered from sudden downward performance. SEQUX (Sequoia) is one of the recent examples. The following table shows some of recent ‘disgraceful’ funds:
Fund Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
---|---|---|---|---|---|---|
SEQUX (Sequoia) | -10.8% | -26.3% | -0.8% | 8.1% | 5.9% | 0.29 |
LMVTX (Legg Mason Cap Mgmt Value C) | 4.1% | 6.1% | 7.1% | 12.9% | 1.7% | 0.05 |
FAIRX (Fairholme) | -1.0% | -12.2% | -3.7% | 6.9% | 4.7% | 0.18 |
LLPFX (Longleaf Partners) | 15.3% | 11.6% | 2.4% | 8.6% | 3.8% | 0.14 |
TAVFX (Third Avenue Value Instl) | 5.8% | 4.9% | 1.7% | 7.3% | 2.1% | 0.07 |
DODGX (Dodge & Cox Stock) | 7.4% | 6.8% | 8.1% | 14.9% | 5.5% | 0.22 |
VFINX (Vanguard 500 Index Investor) | 5.8% | 9.0% | 10.0% | 14.1% | 7.1% | 0.31 |
See detailed year by year comparison >>
The first two funds are well reported. Fairholme’s Bruce Berkowitz was named as the manager of the year by Morningstar. He was a rising value investing star before 2008. The next three funds are all managed by well known value investors and have been recognized for a long period of time. Not only these funds underperformed Vanguard S&P 500 (VFINX), they underperformed by a big margin: as high as 5.4% difference!
We also took a task to look at the performance of the domestic (US) stock funds whose managers won at least once the covet Morningstar’s manager of the year award. The following table shows the funds whose managers won the award before year 2000.
Fund Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
---|---|---|---|---|---|---|
FKACX (Franklin Growth Opportunities C) | -1.7% | -3.4% | 7.2% | 10.8% | 7.7% | 0.3 |
VIGRX (Vanguard Growth Index Inv) | 4.7% | 6.4% | 10.7% | 14.0% | 8.6% | 0.39 |
FMAGX (Fidelity Magellan) | 1.6% | 4.3% | 10.0% | 13.5% | 5.6% | 0.22 |
TAVFX (Third Avenue Value Instl) | 5.8% | 4.9% | 1.7% | 7.3% | 2.1% | 0.07 |
PRNHX (T. Rowe Price New Horizons) | 7.6% | 5.8% | 9.4% | 16.7% | 11.4% | 0.47 |
FPPTX (FPA Capital) | 8.4% | -0.1% | -2.1% | 3.7% | 5.0% | 0.21 |
SKSEX (Skyline Special Equities) | 4.3% | -0.7% | 5.3% | 15.3% | 7.4% | 0.27 |
NAESX (Vanguard Small Cap Index Inv) | 9.0% | 5.7% | 7.3% | 13.6% | 8.0% | 0.3 |
NYVTX (Davis NY Venture A) | 4.3% | 5.7% | 7.7% | 12.2% | 5.3% | 0.21 |
GABAX (Gabelli Asset AAA) | 6.5% | 4.9% | 4.7% | 10.8% | 7.2% | 0.32 |
YACKX (Yacktman Svc) | 6.8% | 10.8% | 5.7% | 10.7% | 9.6% | 0.5 |
CFIMX (Clipper) | 6.2% | 9.6% | 10.0% | 13.3% | 5.2% | 0.21 |
VFINX (Vanguard 500 Index Investor) | 5.8% | 9.0% | 10.0% | 14.1% | 7.1% | 0.31 |
*: NOT annualized
**YTD: Year to Date
See detailed year by year comparison >>
Notice that some funds have different styles and should be compared with their respective benchmarks (highlighted). For example, PRNHX (T. Rowe Price New Horizons) is a small cap stock fund and it should be compared with Vanguard Small Cap Index (NAESX).
These funds are the who’s who in mutual fund industry in the last 20 to 30 years, long enough for a generation of investors to have patience in them. However, the majority of them have vanquished or underperformed significantly.
Again, this table shows it’s hard to maintain consistent outperformance.
Larry Swedroe has written a series of articles on the persistence of outperformance of actively managed stock funds by looking at many well known funds’ performance. Interested readers can read his latest one Are the Returns of Jeremy Siegel’s “Superstar” Funds Likely to Persist?.
Risk (stock) funds are heavily influenced by sectors and styles
The other problem with active stock funds is so called ‘disappearing alpha’: their performance is mostly influenced by their so called factor weights instead of individual stock picking ability. In academic study, Fama and French’s 4 factor model is the most famous. Basically, it states that the performance of a stock fund can be mostly explained (or decided) by the following factors:
- Beta or market exposure: how much correlated with a broadbase market index (such as S&P 500)
- Size: large capitalization or mid cap or small cap of a stock
- Value: how expensive a stock is (value stocks vs. growth stocks)
- Momentum: the recent price performance
Unfortunately, just like other popular stock funds, this fund has lagged seriously since then:
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
---|---|---|---|---|---|---|
CGMFX (CGM Focus) | -7.8% | -12.1% | 1.3% | 5.1% | 2.4% | 0.05 |
VFINX (Vanguard 500 Index Investor) | 7.7% | 13.7% | 12.0% | 14.6% | 7.4% | 0.33 |
Conclusions
Though it’s not totally impossible, it’s a very tough task to pick a long term active stock fund winner. Furthermore, based on the above discussion, even if one wants to actively pick a near or intermediate term winner, it might be better off to work on a list of style or sector index funds and rotate among them, instead of picking from actively managed stock funds. For style/sector fund rotation, interested readers are referred to July 27, 2015: Performance Dispersion Among Momentum Based Portfolios. This is MyPlanIQ’s guiding principle when constructing an investment plan.
Market Overview
As we have warned many times, stocks and bonds retreated meaningfully in the last two weeks. Investors seem to adopt a wait and see attitude. Near term, markets are very much hinged on this Wednesday’s Federal Reserve decision on interest rate. However, in the current high valuation and weak fundamental environment, market loss can be triggered by many other factors. We will just have to react accordingly by following our chosen strategies. Again, this is not a time to be aggressive.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future.
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.
Latest Articles
- September 12, 2016: Newsletter Update
- September 5, 2016: Overvalued Markets And Long Term Timing Strategies
- August 22, 2016: Inflation Protected Securities TIPS For Current Overvalued Markets
- August 15, 2016: Risk On: Emerging Market Stocks And Small Cap Stocks
- August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds
- August 1, 2016: Adding Value To Your Own Investments
- July 25, 2016: Tactical Asset Allocation Funds Review
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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