Why Managed Funds are Bad for your Wealth


P

pmm101

We are bombarded with advertisements for managed fund (mutual fund)
investments. They implore us to entrust our hard earned cash to them
with the promise that their expert managers will reward us with above
average returns.

On the face of it managed funds do appear to offer benefits. They
allow the smaller investor to diversify (and thus reduce risk) to a
much greater degree than if they invested in individual stocks. A
managed fund can spread an investment across 30 or more stocks whereas
the small investor might be lmited to just 2 or 3 by direct
investment. And they should ensure that the stocks are being chosen by
intelligent individuals with access to the latest and best
information.

But all of this comes at a cost, ie the manager's commission.

And there's the rub. By the time the manager's fees are taken out the
average returns don't beat the the market average.

An example of this is reported by the U.K. Daily Mail (Oct 25, 2006) -
"Research from independent advisers Bestinvest shows that over the
past three years 73pc of actively managed funds investing in UK
companies to increase your capital have failed to beat the FTSE All
Share Index."

As a further example, Clive Briault of The United Kingdom Financial
Services Authority says: "Our research shows there is no evidence, on
average, over time, that actively managed funds outperform tracker
funds if you take into account the difference in charges between the
two." (The Mail on Sunday, Financial Mail, January 28, 2007)

Burton Malkiel's classic A Random Walk Down Wall Street describes
academic analysis that says the same.

Of course there are star performers, but these may be explained by
chance. Of all the gamblers playing the casino slots, some will (by
chance) emerge as winners. It doesn't mean they can repeat their
success. That's why funds carry the wealth warning that past
performance is no guarantee of future results!

Best way to achieve the benefits of diversification is through low-
cost tracker funds or Exchange-traded funds (ETFs).
 
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J

Jerry

There are lots of managed funds that beat the S&P on a current and
historical basis - easily justifies their small expense.

Jerry
 
P

PeterL

We are bombarded with advertisements for managed fund (mutual fund)
investments. They implore us to entrust our hard earned cash to them
with the promise that their expert managers will reward us with above
average returns.

On the face of it managed funds do appear to offer benefits. They
allow the smaller investor to diversify (and thus reduce risk) to a
much greater degree than if they invested in individual stocks. A
managed fund can spread an investment across 30 or more stocks whereas
the small investor might be lmited to just 2 or 3 by direct
investment. And they should ensure that the stocks are being chosen by
intelligent individuals with access to the latest and best
information.

But all of this comes at a cost, ie the manager's commission.

And there's the rub. By the time the manager's fees are taken out the
average returns don't beat the the market average.

An example of this is reported by the U.K. Daily Mail (Oct 25, 2006) -
"Research from independent advisers Bestinvest shows that over the
past three years 73pc of actively managed funds investing in UK
companies to increase your capital have failed to beat the FTSE All
Share Index."

So the trick is to pick the 27% that beat the FTSE.


As a further example, Clive Briault of The United Kingdom Financial
Services Authority says: "Our research shows there is no evidence, on
average, over time, that actively managed funds outperform tracker
funds if you take into account the difference in charges between the
two." (The Mail on Sunday, Financial Mail, January 28, 2007)

Burton Malkiel's classic A Random Walk Down Wall Street describes
academic analysis that says the same.

Of course there are star performers, but these may be explained by
chance. Of all the gamblers playing the casino slots, some will (by
chance) emerge as winners. It doesn't mean they can repeat their
success. That's why funds carry the wealth warning that past
performance is no guarantee of future results!

If they outperform through long periods (15 to 25 yrs) then it's not
chance.
 
D

Default User

Jerry said:
There are lots of managed funds that beat the S&P on a current and
historical basis - easily justifies their small expense.
Which ones? Also, do they beat their relevant index?



Brian
 
D

Default User

PeterL said:
On Jun 25, 3:55 pm, (e-mail address removed) wrote:


If they outperform through long periods (15 to 25 yrs) then it's not
chance.
Which ones did you have in mind?



Brian
 
F

FrediFizzx

Default User said:
Which ones? Also, do they beat their relevant index?
For starters you can look at AMAGX and JAOSX that have beat the S&P 500
long term. These are not index funds but they beat my benchmark
historically. It all depends on what you pick for your benchmark index.
If they beat that with total return then you are probably doing OK
expense-wise.

Fred
 
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E

Ed

We are bombarded with advertisements for managed fund (mutual fund)
investments. They implore us to entrust our hard earned cash to them
with the promise that their expert managers will reward us with above
average returns.
I've never seen ads that make this promise.
On the face of it managed funds do appear to offer benefits. They
allow the smaller investor to diversify (and thus reduce risk) to a
much greater degree than if they invested in individual stocks. A
managed fund can spread an investment across 30 or more stocks whereas
the small investor might be lmited to just 2 or 3 by direct
investment. And they should ensure that the stocks are being chosen by
intelligent individuals with access to the latest and best
information.

But all of this comes at a cost, ie the manager's commission.
What commission?
And there's the rub. By the time the manager's fees are taken out the
average returns don't beat the the market average.
Lots of them do, loys of them don't.
An example of this is reported by the U.K. Daily Mail (Oct 25, 2006) -
"Research from independent advisers Bestinvest shows that over the
past three years 73pc of actively managed funds investing in UK
companies to increase your capital have failed to beat the FTSE All
Share Index."
27% did though.
Of course there are star performers, but these may be explained by
chance. Of all the gamblers playing the casino slots, some will (by
chance) emerge as winners. It doesn't mean they can repeat their
success. That's why funds carry the wealth warning that past
performance is no guarantee of future results!
Not again. Why don't you start up that really o;d and boring one about the
coin toss again. It's so worn out but refuses to die.
Best way (for some) to achieve the benefits of diversification is through
low-
cost tracker funds or Exchange-traded funds (ETFs).
One size doesn't fit all. The above statement has been altered to be more
accurate.
BTW, there are many ETF's that are not diversified.
 
E

Ed

This is a new twist by index worshipors. It was always the S&P500 but since
that index has made little or nothing for investors over the past 7 years
you are looking for new ways to refine your argument. Why don't you tell us,
get off your passive butt and do your own research.
 
N

Norman Wells

Lots of them do, loys of them don't.
No. Some of them (27%) do. Most of them (73%) don't.
27% did though.
Are you proud of that? Is that good?

ANY figure under 50% means that it is better on average, or over the
long term, for an investor to invest randomly in the shares that make up
the FTSE index by using a blindfold and pin technique, rather than
invest through a managed fund. The more the figure is lower than 50%,
the better it is to invest at random. And 27%, by any measure, is well,
well below 50%.

Frankly, it's a disgrace with figures like that for anyone in the 73%
incompetent majority to maintain that they are professional advisors or
investors.
Not again. Why don't you start up that really o;d and boring one about the
coin toss again. It's so worn out but refuses to die.
You may hope that it will go away, but that's solely because it's a
severe embarrassment, or it should be to anyone with normal humanity who
is not out solely to con others.

Just because you consider it to be old, boring, done to death, whatever,
doesn't mean it's a problem solved. It isn't.
 
T

Toom Tabard

Of course there are star performers, but these may be explained by
chance. Of all the gamblers playing the casino slots, some will (by
chance) emerge as winners. It doesn't mean they can repeat their
success. That's why funds carry the wealth warning that past
performance is no guarantee of future results!

Best way to achieve the benefits of diversification is through low-
cost tracker funds or Exchange-traded funds (ETFs).
Some may be explained by chance. Others which claim recent outstanding
performance seem, on analysis, to have achieved that by a sudden blip
or two in otherwise mediocre long term performance.
But there are funds which have been under managers who can
consistemtly turn in good performance over several years. What is
needed is for the investor to do his own research to locate them and
to actively manage their selection of funds and to be decisive in
identifying and ditching poor performers. Then you can get the full
advantages of a spread of investments giving a good return. Doing it
online with discount sites makes this easy and reduces charges.

Toom
 
E

Ed

Norman Wells said:
No. Some of them (27%) do. Most of them (73%) don't.

Are you proud of that? Is that good?
Why would I proud or not proud, that's a weird question.
ANY figure under 50% means that it is better on average, or over the long
term, for an investor to invest randomly in the shares that make up the
FTSE index by using a blindfold and pin technique, rather than invest
through a managed fund. The more the figure is lower than 50%, the better
it is to invest at random. And 27%, by any measure, is well, well below
50%.

Frankly, it's a disgrace with figures like that for anyone in the 73%
incompetent majority to maintain that they are professional advisors or
investors.
But how many funds is 27%? And the piece said "actively managed funds that
invest in UK companies". What about relative risk? Is it always 73% that
underperform or just for the time period used in the research? Did 73% of
small cap value funds underperform the FTSE All Share Index? Same question
for managed funds in the mid and large cap areas, all 3 styles. Do balanced
funds count?

You may hope that it will go away, but that's solely because it's a severe
embarrassment, or it should be to anyone with normal humanity who is not
out solely to con others.

Just because you consider it to be old, boring, done to death, whatever,
doesn't mean it's a problem solved. It isn't.
Norman, you are completely ignoring risk, sectors, investing styles, etc.
This is the disgrace.
You also are in agreement with research for a fixed and unstated period of
time, also a disgrace.

I'm not sure how the do things in the UK or what the fees are. I can tell
you that over long periods of time most managed funds beat the S&P500 in the
larger fund houses. I can't speak to the smaller ones because I haven't
looked. But if you look at Fidelity, T. Rowe Price, Vanguard, Royce,
American, DFA, etc., you will see for yourself.

If a fund company offered managed funds with a long history of
underperformance at equal risk would you consider those funds? I wouldn't
and if you remove those from the list the 27% will become a much larger
number.

You will get no argument from me that there are plenty of terrible funds out
there. Not to buy funds without doing minimal research would be, well, a
disgrace.

If you are happy with the FTSE All Share Index tracking funds you just go
ahead and stay with them, you could do a lot worse.
 
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J

Jerry

Some that are general market oriented are FSLSX, FLVCX,FEQIX, FVDFX. Their
expenses are not much more than an index fund. Their above index
performance will dwarf this additional expense. What I do is monitor funds
on a last 3 months basis and weight those that are currently performing
best. My feeling is that if one gets good current gains, the long term will
take care of itself.

Jerry
 
N

Norman Wells

Ed <friday@fishinthe.net> said:
Why would I proud or not proud, that's a weird question.
Well, you were given the figures, and you then tried to equate them as
you will see from the top line reproduced above. It implies you have a
personal interest and are trying to cover up the real data. What is the
reason for doing that if not pride or a desire to con people?
But how many funds is 27%?
I don't know, but the absolute number doesn't matter.
And the piece said "actively managed funds that
invest in UK companies". What about relative risk?
Why bother with relative risk when you know the absolute risk? If I
invest in a fund, it will always be without knowledge of future
performance as it says in the ads. It's not a good start to know that
73% of funds underperform random investment.
Is it always 73% that
underperform or just for the time period used in the research?
When Richard Branson started Virgin Money with index tracking funds
several years ago now, I recall he came up with remarkably similar
figures. So, I think there is strong evidence to suggest that this
figure is relatively constant over time.
Did 73% of
small cap value funds underperform the FTSE All Share Index? Same question
for managed funds in the mid and large cap areas, all 3 styles. Do balanced
funds count?
Once you start to sub-divide a whole, you will always find bits that do
better than others, and bits that do worse. I've no idea what the
figures were in every little bit you choose to divide the whole into,
nor, unless you come up with a convincing argument that some sectors
really do buck the 73% incompetent trend in a statistically significant
manner, do I think it's relevant.
Norman, you are completely ignoring risk, sectors, investing styles, etc.
This is the disgrace.
You also are in agreement with research for a fixed and unstated period of
time, also a disgrace.
The newspaper article said it was over a 3 year period, and it's over 10
years now since Richard Branson's remarkable similar assessment. I
think it's fair to say therefore that it's a long term problem.

If you sub-divide the whole by talking about risk, sectors and investing
styles (whatever they are!), you may well find a crumb of comfort
somewhere. But the overarching picture is inescapably negative and
should be acutely embarrassing. It shows that most fund managers are
incapable of doing anything better than sticking a pin in a list of
shares, but nevertheless think it quite acceptable to cream off a
healthy annual management fee for doing so.
I'm not sure how the do things in the UK or what the fees are. I can tell
you that over long periods of time most managed funds beat the S&P500 in the
larger fund houses.
Well, in the UK, most don't after charges have been taken into account.
That's exactly what the 73% figure is telling you!
If a fund company offered managed funds with a long history of
underperformance at equal risk would you consider those funds? I wouldn't
and if you remove those from the list the 27% will become a much larger
number.
And if you take out the 'lucky' star performers because it's obviously
not sensible to invest in something that depends on luck, the 73% will
become a much larger number. Statistics cut both ways.

By suggesting that you should only invest in funds that have performed
well in the past, you seem to be advising against UK national
advertising guidelines which make financial ads say that past
performance should not be seen as an indication of future performance.
That's there for a very good reason, and that reason is that it's true.
You will get no argument from me that there are plenty of terrible funds out
there. Not to buy funds without doing minimal research would be, well, a
disgrace.
Is it not a disgrace that they are still sold?
 
R

Ronald Raygun

Norman said:
I don't know, but the absolute number doesn't matter.
Neither does the relative number, much. Is it not more relevant to
go by what the funds are worth than how many there are?

For example, what if the underperforming 73% are all small outfits
managing millions, and the good 27% are big ones managing billions?
 
E

Ed

Norman Wells said:
Well, you were given the figures, and you then tried to equate them as you
will see from the top line reproduced above. It implies you have a
personal interest and are trying to cover up the real data. What is the
reason for doing that if not pride or a desire to con people?
First, I wasn't given 'the' numbers, I was given a set of numbers for an
unknown but specific date range. Second, my only personal interest is as an
individual investor.Third, I suggested you look at the managed funds vs.
index funds at some of your more popular fund sellers. If you did, I
couldn't con you. Your analysis of my reply indicates that in particular
sould avoids deciding what others imply, you suck at it.
I don't know, but the absolute number doesn't matter.
Sure it does, it could be 20 funds or 2,000 funds.
Why bother with relative risk when you know the absolute risk? If I
invest in a fund, it will always be without knowledge of future
performance as it says in the ads. It's not a good start to know that 73%
of funds underperform random investment.
So, because you can't see into the future you're telling me that there is no
way to manage risk. That's interesting.
When Richard Branson started Virgin Money with index tracking funds
several years ago now, I recall he came up with remarkably similar
figures. So, I think there is strong evidence to suggest that this figure
is relatively constant over time.
So you don't have any idea, also interesting.
Once you start to sub-divide a whole, you will always find bits that do
better than others, and bits that do worse. I've no idea what the figures
were in every little bit you choose to divide the whole into, nor, unless
you come up with a convincing argument that some sectors really do buck
the 73% incompetent trend in a statistically significant manner, do I
think it's relevant.
It is not important what you believe is relevant. You have already shown
that you are willing to accept the research in questing as unwaivering fact
forever and for always. That is a simple minded approach and you are an
ideal candidate for index tracking funds.
The newspaper article said it was over a 3 year period, and it's over 10
years now since Richard Branson's remarkable similar assessment. I think
it's fair to say therefore that it's a long term problem.
So what are the 10 year numbers?
If you sub-divide the whole by talking about risk, sectors and investing
styles (whatever they are!), you may well find a crumb of comfort
somewhere. But the overarching picture is inescapably negative and should
be acutely embarrassing. It shows that most fund managers are incapable
of doing anything better than sticking a pin in a list of shares, but
nevertheless think it quite acceptable to cream off a healthy annual
management fee for doing so.
That will always be the case, no surprise there. But 'most fund managers'
would never get my consideration.
Well, in the UK, most don't after charges have been taken into account.
That's exactly what the 73% figure is telling you!
We get that same silly argument here.
And if you take out the 'lucky' star performers because it's obviously not
sensible to invest in something that depends on luck, the 73% will become
a much larger number. Statistics cut both ways.
But obviously, the 73% is not a constant. I'm sure there are periods where
managed funds do quite a bit better.
By suggesting that you should only invest in funds that have performed
well in the past, you seem to be advising against UK national advertising
guidelines which make financial ads say that past performance should not
be seen as an indication of future performance. That's there for a very
good reason, and that reason is that it's true.
The same thing applies to index funds.
Is it not a disgrace that they are still sold?
Of course not. Don't you have a free market system? Isn't it buyer beware?
You have restaurants in the UK don't you? People frequent them even though
food in UK restaurants is world famous for being awful, excluding McDonald's
of course.
 
D

David

Some may be explained by chance. Others which claim recent outstanding
performance seem, on analysis, to have achieved that by a sudden blip
or two in otherwise mediocre long term performance.
But there are funds which have been under managers who can
consistemtly turn in good performance over several years. What is
needed is for the investor to do his own research to locate them and
to actively manage their selection of funds and to be decisive in
identifying and ditching poor performers. Then you can get the full
advantages of a spread of investments giving a good return. Doing it
online with discount sites makes this easy and reduces charges.

Toom
Countless studies have shown that index funds beat about 70 to 75% of
managed funds each year. This means that each year about 30% of
managed funds beat index funds and if there are 10,000 funds this
means about 3,000 funds. However, this is with hindsight and there is
no way to tell in advance which managed funds will be in the 30% or
3,000 that beat the index funds and which will be in the 70% or 7,000
that do worse than index funds.

Researchers have looked at star managers and at previous performance
and these are not good indicators. Last year's star fund or star
manager has no better than a 50% chance of beating the index before
costs. The reason so many managed funds fail to beat the index is
their higher fees and charges. The idea that fund managers have some
stock picking ability that will more than compensate for the higher
costs is disproved by the results.

The thing to watch out for in fund family results is survivorship
bias, and the longer the timescale the larger is this effect. Fund
managers like fidelity are always starting up new funds. Those that do
well are supported and advertised heavily. Those that do badly are
closed, amalgamated or renamed, but done away with in some way because
otherwise they make the fund company look bad. A table of 10-year
results will just give the survivors and most of them that have lasted
that long will have done well. The losers won't be there and the fund
company won't want to talk about them. The only way of judging the
managed funds fairly is to take ALL the funds that were in existence
10 years ago and look at their subsequent performance. Only academics
do this. Fund companies are in business to make money from loads and
expense fees and will put the best spin on what they have short of
actually lying.
 
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P

PeterL

Which ones did you have in mind?

I don't have any in mind. I am just responding to the article's
contention that if a fund beats the average it's by chance.
 
J

Jerry

I don't know about your percentage of funds and their performance.
Hopefully that does not equate to the percentage of fund investors i.e.
smart money would go to the 30% of outperformers. Investing and picking
good performing funds is not rocket science. One can be pretty much
guaranteed of outperforming the S&P with managed funds if one is willing to
monitor and adjust accordingly over a 30 day periods.

Jerry
 
N

Norman Wells

Ronald said:
Neither does the relative number, much. Is it not more relevant to
go by what the funds are worth than how many there are?

For example, what if the underperforming 73% are all small outfits
managing millions, and the good 27% are big ones managing billions?
I see no reason at present to make any such assumption, so I don't.

Is there any?
 
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N

Norman Wells

Ed <friday@fishinthe.net> said:
So, because you can't see into the future you're telling me that there is no
way to manage risk. That's interesting.
Knowing that 73% of managed funds underperform random investment, and
that you can't know in advance which funds comprise the other 27%, the
best way of an individual investor managing risk is clearly not to go
with a managed fund.
So you don't have any idea, also interesting.
No. I have the idea, which I will hold until disproved, that the
percentage of underperforming funds is of the order of 73%. There is
evidence to that effect. However, if you care to disprove it, I will
listen.
It is not important what you believe is relevant. You have already shown
that you are willing to accept the research in questing as unwaivering fact
forever and for always. That is a simple minded approach and you are an
ideal candidate for index tracking funds.
As apparently are 73% of investors. If it's wrong, prove it wrong, with
some evidence.
So what are the 10 year numbers?
73% ish.
That will always be the case, no surprise there. But 'most fund managers'
would never get my consideration.
So you can always pick fund managers who will give you gains over random
investment in the coming year, can you?

How can you do that given that the fund managers themselves are all
trying to do it but 73% apparently fail?

Just what is the secret of your infallibility? And why aren't you
fantastically rich as a result?
But obviously, the 73% is not a constant. I'm sure there are periods where
managed funds do quite a bit better.
When then?
The same thing applies to index funds.
Indeed it is, but at least an index fund will follow the index. 73% of
managed funds will fall below it.
 

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