Evaluating Managed Funds

[wildwood]

Hi Ed,
I skimmed this thread without reading every word. Here are my thoughts: 1.) Consider having some exposure to commodities and/or natural resoures. They are in a multi-year strong uptrend. Historically this has not been good for general stock equities 2.) We are due for a multi-year bear market and it will be global. There will be very few places to hide. Some great buying opportunities will emerge, but much later in the decade. Bonds will again become known as certificates of confiscation just as they were in the 1970's. With a fiat currency and printing press, there will not be any defaults on Treasury bonds, but there may be a devaluation of the dollar and/or a serious inflation which transfers wealth from creditors to debtors. (government being the biggest debtor therefore the biggest winner) These senarios tend to always end badly and then the phoenix can rise from the ashes. Then it will be time to buy stocks and bonds again (when nobody wants them).

Every word in this post is my humble opinion. Not investment advice. Due your own due diligence. I don't come to twoplus two much anymore, but I read your books and enjoyed them so I offer what little I know in return.

[Carl_William]

Ed

Have you tried the Mutual Fund Impact Calculator. The Internet site ID is:


http://www.investored.ca/en/interact....htm#topOfForm

It is a pretty good tool. I had to mess around with it a few times to appreciate it. This programs assumes that a given sum of money is invested at the beginning of the year for so many years. It is a very accurate program. A somewhat similar program on the NASD Internet site has some flaws. I noticed that the FAIRX mutual fund that you are interested in had a great run over the last five to ten years. You cannot expect it to grow like that in the future -- it might, but don't count on it. Also the FAIRX funds has a 1.0% expense ratio and also charge an additional 2% when you take the money out of the fund. That amounts to 3% during the last year -- so if the fund averages 10% for 10 years; an initial $1000 investment would return $2,309.40 when cashed in. An index fund with no front or exit loads and an expense ratio of 0.2% at an average of 10% per year would be worth $2,544.65 after 10 years. The index fund expenses are about $50 compared to about $284 for the FAIRX fund -- this is about 5.5 times higher for the FAIRX fund. Also the index fund market return could be at least 1.0% lower than the FAIRX fund and still beat it. The point is; the FAIRX fund may be a great fund and always beat a specific index fund, but actively managed mutual funds on balance cannot consistently beat the index (indexes) -- they never have. A great actively managed fund could be compared to a great poker player, but if all of the competition poker players were also great players -- forget it. My advice is -- don't put all of your 401(k) retirement money in one fund.

I suggest you also look into the Vanguard Group funds -- their expenses are very low.

If you have over $100,000 to roll over; you might consider the Dimensional Funds.

http://www.dfaus.com/

Their returns are probably the best. The are not easy to use. You must go through a financial advisor and the expenses could approach 2% per year.


If you are interested in the efficient market approach, I suggest you read "The Four Pillers of Investing (lessons for building a winning portfolio)" by William J. Bernstein. William Bernstein is a brilliant man and he also has a Web Site.

[krishan]

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you need international small cap (VINEX and others) and commodities (PCRIX) because these are low to non correlated, different asset classes than what u have listed.

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Isn't VINEX closed to new accounts? Any other similiar index funds?

Krishan

[buffett]

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charge an additional 2% when you take the money out of the fund

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Dude. Chill out. Read the prospectus: "The [2%] redemption fee applies to the proceeds of Fund shares that are redeemed within 60 days of purchase."

The expense ratio is 100bps, compared to 20bps for an index fund. Bruce et al. give the index an 80bps headstart.

If you think their philosophy, temperament, and track record (longer than 5 years by the way...their co. also manages a lot of money besides FAIRX) are the real deal, 80bps is a small hurdle.

If you think that investing is like coin flipping and no one can beat the market long-term, go with the index fund.

[Carl_William]

thanks for the info concerning the 2%

[rockrock]

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is there still positive alpha after evaluating on the 3-factor model?

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The idea that Buffett and the rest of the SuperInvestors are crushing the markets solely because of their higher exposure to small caps and value stocks is kind of silly. You might get an extra 1-2% of annual outperformance that way, not 10-15%.


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1-2%?? What planet do you live on.

S&P vs small vs value

Small/value tilt pretty much paints the picture for anyone not otherwise altered by the SuperInvestor Frontal Lobotomy

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So in the future you predict small cap/value stocks to outperform the S&P by how many percentage points annually?

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My point was that small/value tilt in portfolio can explain a lot more than the 1-2% cited.

[rockrock]

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you need international small cap (VINEX and others) and commodities (PCRIX) because these are low to non correlated, different asset classes than what u have listed.

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Isn't VINEX closed to new accounts? Any other similiar index funds?

Krishan

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PISRX is what I own. No index for this asset class but DFA has some funds that are index like that you might have access to through a financial planner.

There are several other small cap international funds around from T Rowe and others.

[rockrock]

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Your IJR vs. SPY chart goes back all of 5 years. How about looking up the CAGR of the Russell 2000 vs. the S&P 500 for something more like 20 or 50 or more years and then getting back to us with your results?

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Maybe you could because I couldn't find said chart. I know you've read Fama and French. How do you reconcile them and other academics with all your SuperInvestor babble?


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FAIRX hasn't outperformed Mid Cap value Index, period.

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Right. So far. And you're free to extrapolate that out into eternity, and I'm free to believe that FAIRX will eventually win.

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My point was that everyone is blithering on and on about FAIRX, and it hasn't even outperformed the mid-cap value index (according to Morningstar). It has a big chunk in Big B and Baby B. For that we pay 1%. The reality distortion field emanating from this fund has old-school Soviet Bloc Ministers of Propoganda green with envy.


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It's bonus time on Wall Street and they are driving the market up in order to secure year end windfalls in their paychecks.

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Oh, my. You think their bonii are based on the stock market? I'll give you one more guess, and here's a hint: it starts with the letters M&A.

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Are you talking about Mergers and Acquisitions??

To blame the 4th quarter rally on anything other than Wall Street bonus hunting is pollyanna.

The sell-off has already started. Get real. Hundred's of millions in bonuses to be paid and the market has been flat. The Santa Clause rally is about bonuses and denying it is to deny water is wet.

The only buying and selling I want to do is annual rebalancing and tax harvesting. Otherwise I'll take my asset allocation with indexing across multiple asset classes with small/value tilt. Give me a side of PCRIX and International Small Cap and I'll never thirst nor hunger again.

SuperInvestors indeed.

[rockrock]

interesting snippet on bonuses from bill cara (http://www.billcara.com/archives/200...aders_hav.html)

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December 11, 2005
Why traders have to focus on prices, Sun., Dec. 11, 2005, 1:59 PM
In 2H99, as the Great Bear Market was organizing, I pointed out in my market letter at the time that in a couple hours one day the personal wealth of Bill Gates grew by more than the annual GDP of Portugal. Now Portugal, as many of you know, is an enormous country.

Well, General Motors is an enormous company – 320,000 employees, 860,000 shareholders. And in just four days this week, Intel dropped in market cap more than one General Motors, which you missed because Wall Street had you looking in the wrong direction.

Wall Street profit bonuses to staff will aggregate $24 billion this year. They say it’s because they have done such a wonderful job for you. Actually, the Dow 30 Industrials Average is lower today than its close Dec-31-04 (10,783). The average mutual fund and the average hedge fund has done squat for 2005 as the year comes to a close.

But they take their $24 billion in bonuses this year-end because Humungous Bank & Broker earned it – one client at a time. So when the market is flat, and they make enough to pay themselves $24 billion in bonuses, who lost, do you think?

I think the answer is obvious --- one client at a time.

And when the market in INTC took a $14 billion hit in four days this week, who do you think earned it? I’ll tell you; it was the people who were running to CNBC to dazzle you with their stories.

And you were too busy to see what was going on right under your nose.


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[Ed Miller]

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is there still positive alpha after evaluating on the 3-factor model?

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The idea that Buffett and the rest of the SuperInvestors are crushing the markets solely because of their higher exposure to small caps and value stocks is kind of silly. You might get an extra 1-2% of annual outperformance that way, not 10-15%.


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1-2%?? What planet do you live on.

S&P vs small vs value

Small/value tilt pretty much paints the picture for anyone not otherwise altered by the SuperInvestor Frontal Lobotomy

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So in the future you predict small cap/value stocks to outperform the S&P by how many percentage points annually?

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My point was that small/value tilt in portfolio can explain a lot more than the 1-2% cited.

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My question was by how many percentage points.