Evaluating Managed Funds

[DesertCat]

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Probably not many more increases, but everyone's figuring on at least one more. At that's 1 more than the EU plans. With the deficit increasing this year the Fed tightening of the money supply has managed to strengthen the dollar.


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I don't believe that fed interest rate increases directly impact the dollar much. I believe the fed has increased rates something like 13 times over the last few years. This year, the dollar went up, last year and previous years it went down. I think the clearer correlation is dollar inflows/outflows caused by the deficits and the tax repatriation bill. I think there is a much clearer correllation between Clintons balanced budgets and strong dollar, and Bush's deficits and weak dollar. The one exceptional year to the deficits argument is this year, the year of repatriation.

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FWIW, I just don't think rising/declining dollar is much of an issue for someone with there money in US markets.

It might be a reason to get into europe markets.

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I'm an active investor so I pretty much ignore the dollar. I don't feel I have the time or ability to invest internationally and am getting good returns in the U.S. market.

But if you are a passive investor, I think it makes sense to invest some of your portfolio internationally, say 20% or so just for broader exposure. An index fund is only useful if it gives you broad exposure to the market. Well there is more than a U.S. market, so why skip international exposure for your portfolio? That's the basic argument.

But the "world is coming to an end argument" is, as long as the U.S. runs large deficits, why not keep some of your money where investments don't lose purchasing power because of their currencies? Because of our deficits, if I was a passive investor I would definitely consider upping intl. exposure to 30-40% or more.

At least until we elect another Republican president like Clinton who'll balance the budget [img]/images/graemlins/grin.gif[/img]

[AceHigh]

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Probably not many more increases, but everyone's figuring on at least one more. At that's 1 more than the EU plans. With the deficit increasing this year the Fed tightening of the money supply has managed to strengthen the dollar.


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I don't believe that fed interest rate increases directly impact the dollar much....

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It definately does, because it makes American bond rates more attractive. The deficit does too. But France and Germany are starting to run deficits also. And it's likely the rates will be 4.5% vs. 2% for 2006, so that will keep US money relatively tight.

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FWIW, I just don't think rising/declining dollar is much of an issue for someone with there money in US markets.

It might be a reason to get into europe markets.

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I'm an active investor so I pretty much ignore the dollar. I don't feel I have the time or ability to invest internationally and am getting good returns in the U.S. market.

But if you are a passive investor, I think it makes sense to invest some of your portfolio internationally, say 20% or so just for broader exposure. An index fund is only useful if it gives you broad exposure to the market. Well there is more than a U.S. market, so why skip international exposure for your portfolio? That's the basic argument.

But the "world is coming to an end argument" is, as long as the U.S. runs large deficits, why not keep some of your money where investments don't lose purchasing power because of their currencies? Because of our deficits, if I was a passive investor I would definitely consider upping intl. exposure to 30-40% or more.

At least until we elect another Republican president like Clinton who'll balance the budget [img]/images/graemlins/grin.gif[/img]

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Not sure I buy the US investor putting money in Europe, at least I don't see it as protection for weak dollar when Ed is living in US and spending all his money in US dollars.

But I agree, us investors yearn for the days of the Republican/Conservative Clintons.

[jively]

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Why should Ed have to be concerned about a major drop in the US dollar [...]


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Well there is taking advantage of the "tailwind" foriegn equity values get from the declining dollar.
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Also, with the Fed increasing rates and the EU unlikely to do so[...]

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How much longer will the Fed increase rates? How much longer CAN the fed increase rates? Not much longer I think. [...]

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Probably not many more increases, but everyone's figuring on [...]

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Whoa, why all the need to make forecasts? The dollar may go up or may go down - who knows? Who cares! It's still a great idea for US investors to invest internationally.

From 1970 to 2004, the S&P 500 compounded at 11.3% per year, with a SD of 17.2%. The EAFE Index (Europe, Asia, Far East) in US dollars compounded at 11.1% per year, with a SD of 22.4%.

A portfolio of 70% S&P 500 and 30% EAFE index compounded at 11.5% per year, with a SD of 16.9%. So over this time, diversifying with international stocks increased your return and lowered your risk, without having to make any forecasts about the dollar moving up or down. The dollar has flung around a lot over the last 35 years.

I recommend globally diversifying (we use 30% international), and never changing your allocation because of forecasts.

-Tom

[jively]

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Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?

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This line would also argue that no one can beat a sportsbook over the longterm. After all, someone is always taking the other side of your bet.

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Interesting point. However, the buyers and sellers of stock do think it is going up or going down, so the current price is a pretty good indication of the stock's value. With sports betting, the point spread is determined by the bookmaker, not as an estimate of how much the favorite will win by, but only designed to equalize the bets so they break even no matter who wins. If too many people are buying one side they move the point spread to equalize it. Sports betting may be more inefficient than the stock market.

-Tom

[AceHigh]

"I recommend globally diversifying (we use 30% international), and never changing your allocation because of forecasts."

OK, that makes more sense.

But I don't think it's so much diversifying, surely the worlds largest economy is big enough for us small frys, or a dollar hedge (we are going to be spending dollars anyway).

[jively]

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there is no one that can pick stocks and beat the benchmark over a long period of time

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Oh, please.*

* I'm not saying it's easy, I'm just saying that all tautologies are false [img]/images/graemlins/wink.gif[/img] and there's a lot of data that contradict you/Fama/French/Malkiel/Samuelson/.....

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Ok, maybe the stock market is less than 100% efficient, and it is possible for a few active managers to outperform their benchmark over a long period of time. However, by the time you have enough years of data to see they are truly skilled and not just lucky, they'll be retired. And if you are trying to find those managers before they have all of the necessary data, you could be wrong and underperorm the benchmark.

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Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads....

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Have you read The Superinvestors speech?


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I just looked it up. I'll look at it in more detail later. However, it looks like Graham and Dodd are into deep value, right? Great. I like deep value as well. The Fama/French research from 1992- shows that deep value outperforms the market over long periods of time, and I recommend a deep value tilt. When looking at the past performance W. Buffett mentions, is there still positive alpha after evaluating on the 3-factor model?

The average compound annual return from 1927 to 2004 is:

10.4% S&P 500 Index
11.4% US Large Cap Value Stocks

-Tom

P.S. Didn't W. Buffett say that most investors would be better off in index funds during a shareholder letter in the 90s?

[derosnec]

You can't predict with any certainty whether a fund will do good in the future (endless academic studies showing that funds can't beat the S&P 500).

Just use CAPM for investing decisions (sounds like that is best for your level of knowledge). Or, if CAPM is too advanced for you, just buy shares of an index fund.

[adios]

I'll interject something here, evaluating the risk to acheive the expected albeit uncertain returns must be evaluated as well. Sounds like a trite statement but I assure you it is not. For example if I take the "equivalent" risk of leveraging SPY by 2-1 in my portfolio but only "expect" investment returns 1.5x what I would expect with SPY by investing in my portfolio, I've taken on more risk than I need to. Hope I explained what I'm driving at. Anyway in evaluating any money managers record IMO one has to evaluate the risk that was undertaken to achieve the returns.

[derosnec]

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I'll interject something here, evaluating the risk to acheive the expected albeit uncertain returns must be evaluated as well. Sounds like a trite statement but I assure you it is not. For example if I take the "equivalent" risk of leveraging SPY by 2-1 in my portfolio but only "expect" investment returns 1.5x what I would expect with SPY by investing in my portfolio, I've taken on more risk than I need to. Hope I explained what I'm driving at. Anyway in evaluating any money managers record IMO one has to evaluate the risk that was undertaken to achieve the returns.

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Exactly. This is a complex decision (efficient frontier stuff, etc) for which he is not going to be able to make a profitable decision without the requisite background in finance (unless he gets lucky). He might consider lottery tickets instead, which are going for a buck a pop.

[DesertCat]

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P.S. Didn't W. Buffett say that most investors would be better off in index funds during a shareholder letter in the 90s?

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Yes, Warren Buffett is well aware of the poor performance of most fund managers, and that is why he's advised the average investor to choose index funds. But the point of his "Superinvestors of Graham & Doddsville" is that while the market is frequently efficient, it's consistantly beatable by a smart investor. His example investors didn't squeak by the indexes either, most of them crushed the indexes and did so taking substantially less (real) risk.

Of course I'm not sure how Buffett beat the market since he believes the CAPM is pure BS, and that Beta has nothing to do with risk. He's just an old fuddy duddy so out of touch with these smart academic types that he's content with a 50 year record averaging north of 25% a year....