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Random number generation? A striking report from S&P tips off that not only did 84% of...

Random number generation? A striking report from S&P tips off that not only did 84% of actively managed funds fail to beat their benchmarks in 2011's tricky market, but less than 50% of portfolio managers outperformed even over a five year tracking period. Even the best of the lot struggle, with only 12.2% of the large-cap funds ranked in the top quartile five years ago managing to maintain a spot in the upper 25% five years later. "There's no evidence of persistence of performance beyond what would be randomly expected," says Buckingham Asset's Larry Swedroe.
Comments (31)
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    This is not news. The rough average is always around 85% failing to beat the market -- heck, maybe 2011 was a GOOD year for them!

     

    Simple retail investors (regular working Americans investing for retirement) should not invest in mutual funds, they should invest in low-cost index funds.

     

    Sophisticated individual traders should do their own thing.
    17 Mar 2012, 12:04 PM Reply Like
  • Ray Lopez
    , contributor
    Comments (1508) | Send Message
     
    I agree with the study and Mr. Bogel of Vanguard and Burton G. Malkiel are of course vindicated once again. But I also point out that in bear markets that coincide with recessions (that is, early stock market bear markets, like in 2008-09), actively managed funds outperform passive funds by a statistically significant figure. However, since such downturns are relatively brief, it does not pay to stick with actively managed funds for the long run.
    17 Mar 2012, 12:10 PM Reply Like
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    > But I also point out that in bear markets that coincide with
    > recessions (that is, early stock market bear markets, like in
    > 2008-09), actively managed funds outperform passive funds by
    > a statistically significant figure.

     

    Got a link for that?

     

    I'm not disputing it, it sounds reasonable, but I'd like to learn more about that trend for when the next crash happens. :)
    17 Mar 2012, 12:13 PM Reply Like
  • wyostocks
    , contributor
    Comments (7617) | Send Message
     
    ray and d_v

     

    I would dispute it. Mutuals saw a huge fall in value during all the past crashes. That is why most 401"s crashed as most are invested in mutuals.
    17 Mar 2012, 12:41 PM Reply Like
  • Ray Lopez
    , contributor
    Comments (1508) | Send Message
     
    The link is found in a book that favors passive investing (so it was particularly telling) and links to I believe Crestmont Research. That's where I first saw this stat, but have seen it repeated elsewhere. Also it's not a dramatic difference between the superior active investing to the inferior passive investing during hard times--but it is statistically significant (i.e., not due to chance).
    17 Mar 2012, 12:48 PM Reply Like
  • Ron Myers
    , contributor
    Comments (254) | Send Message
     
    Luckily for this industry most Americans have no choice other than this high-fee garbage when it comes to their 401k.
    17 Mar 2012, 12:12 PM Reply Like
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    I believe most 401k plans offer low-cost index funds. Mine is with Vanguard, which is probably among the best for such things, but I don't know of any major institutions that don't offer simple index funds for 401k's.
    17 Mar 2012, 12:23 PM Reply Like
  • The Geoffster
    , contributor
    Comments (4009) | Send Message
     
    Interestingly, more and more money managers invest their clients in index ETFs.
    17 Mar 2012, 12:38 PM Reply Like
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    Yep. Even adding their own fees on top, they can beat most of their peers, making lots of money with basically no work and no value added. A financial professional's dream.
    17 Mar 2012, 12:43 PM Reply Like
  • KISS_investor
    , contributor
    Comments (330) | Send Message
     
    indexed etf's and passive products are convenient ways to diversify your investment.

     

    If I want exposure to "x industry" i buy etf's with exposure to that industry..not perfect, but helpful to simplify my complicated life..

     

    paying somebody to actively manage MY money?? no thanks..

     

    i spent 25 years in corporate finance and was an investor relations exec for many years... i personally dealt with these arrogant goofballs.. Of course there are some great people that are good at stock picking and industry analysis...but don't pay them...read about what they are doing, look at the filings, and do your own work.

     

    ..that's how to make money..
    diversification, due diligence and dividends...
    17 Mar 2012, 12:49 PM Reply Like
  • Ted Bear
    , contributor
    Comments (573) | Send Message
     
    When was the last time you heard a fund manager talk about their absolute performance? NEVER.

     

    They always talk about how they 'beat' 37% of the funds in their group, all of which were typically lousy performers relative to the market, and especially in terms of actually generating positive returns through solid stock picking.

     

    Take a look at what is important to the funds, and how they reward thier 'professionals' What does a fund manager, or even a retail broker, get when he comes on board? A bonus for bringing assets.

     

    Funds make money from assets. Of course the really lousy funds lose assets from redemtions, but on balance performance is nearly irrelevant for the fund companies. It is ALL about how many fees they can generate on a larger and larger pool of assets.

     

    Funds are NOT in business to make the customer money. They are in business to make money for themselves. Same for brokers.

     

    What did Goldman call the customers? Muppets, schills, or something similiar? That is pretty much the attitude across the entire financial industry, protestations aside.
    17 Mar 2012, 01:49 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4845) | Send Message
     
    Ted

     

    Good comment and on the money no pun intended. This is why they call it the "asset gathering" business not the "asset growing" business. They don't care if it grows as long as they gather more assets they collect more and more fees.

     

    The risk and return of these fund managers is pathetic. They are heavily invested which means often stock exposure is 90% and they only bring back returns of single digits.

     

    There are better risk/return approaches than this garbage.
    17 Mar 2012, 01:53 PM Reply Like
  • Econdoc
    , contributor
    Comments (2944) | Send Message
     
    the next time you hear anyone tell you it is a "stockpicker's market" hide your wallet

     

    this is old news but it never fails to surprise people...amazing

     

    save your money
    use it to buy a spread of index funds or ETF's
    add to them on a regular basis
    rebalance infrequently
    resist the urge to trade - do not trade
    ignore "news" - ignore all "news"
    don't listen to "experts" - all of them - even the SA venerables (sorry SA)

     

    do these things - and tyou will be just fine - do the opposite and you won't.

     

    E
    17 Mar 2012, 01:56 PM Reply Like
  • deercreekvols
    , contributor
    Comments (5142) | Send Message
     
    All the more reason to manage your own investments.
    17 Mar 2012, 03:20 PM Reply Like
  • Econdoc
    , contributor
    Comments (2944) | Send Message
     
    wrong conclusion

     

    for most people - a fee based manager - who is not a salesman (very crucial) or paid on commission by a product company is a great asset.

     

    most people do not make money on their investments - not because they are not smart - not because they don't know what to do - it is a lack of will and too much emotion

     

    99% of people who manage thein own investments are prone to panic or get overly exuberant, to over trade, to go with their gut - they make money they are smart when they lose money it is bad luck.

     

    read these boards - the last 3 years have been a once in a lifetime chance to buy and hold equities - how many did it? even today it is still the smart play - and yet stocks are hatred and the moment a bad number comes out - the panic comes back.

     

    a good adviser can get you through this by acting as a circuit breaker. the other thing is they shuld only rec. index products to you. if you can find such an person. hold onto them.

     

    E
    17 Mar 2012, 03:35 PM Reply Like
  • Modernist
    , contributor
    Comments (2110) | Send Message
     
    The few people emotionally intelligent enough to accept passivity and apply it consistently, are probably the 1% capable of beating the market. ironic
    17 Mar 2012, 07:37 PM Reply Like
  • Teutonic Knight
    , contributor
    Comments (2000) | Send Message
     
    Econdoc,

     

    Re: "...read these boards - the last 3 years have been a once in a lifetime chance to buy and hold equities - how many did it? even today it is still the smart play - and yet stocks are hatred and the moment a bad number comes out - the panic comes back. "

     

    Non-Concur. These remarks are hindsight. Hindsight has no value. Everybody sees it. It's like, hey, if I know what the exam questions were, I would have scored better!

     

    In the weeks and months before the Lehman Collapse, a British Billionaire who domiciled in exclusive enclave in the Bahamas invested $300M in Lehman common shares. You know what happened next. He is a 1%. I'm sure he fired his advisers afterwards.
    17 Mar 2012, 07:58 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4845) | Send Message
     
    econ

     

    I hear you but if people would have put their money in a mattress rather than put it in the S&P 500 for the last 12 years they would be ahead of the game. And on an after-tax risk based return the mattress probably was a better investment. And fund managers always compare against the S&P 500 and then close quickly any funds that are not keeping up.

     

    Not recommending the mattress but you get my point.
    17 Mar 2012, 11:21 PM Reply Like
  • easyfix
    , contributor
    Comments (37) | Send Message
     
    @EconDoc...You are absolutely right. It takes conviction and a very steady temperament.

     

    two stories from the past...
    John Templeton (Templeton Fund) bought shares of every public European company at the outset of World War II in 1939 that were trading for less than $1.00 per share including many that were in bankruptcy AND EVEN used borrowed money to buy as much as he could. Guess what happened?

     

    In 1963, a small-time businessman named Tino De Angelis owned a company, Allied Crude Vegetable Oil. De Angelis would borrow money from a bank via a line of credit, buy shiploads of vegetable oil, store the oil in tanks on shore, sell the oil and then pay back the line of credit. The oil in the tanks was inspected regularly and was pledged as collateral for the line of credit.

     

    Eventually, De Angelis figured out a way to outsmart the bankers who came by to check on the collateral. Instead of filling his ships with vegetable oil, he filled them with water and then pumped in a thin layer of oil on top. When the bankers sampled the load, they never reached below the oil floating on the top of the water. They thought the whole tank was filled with oil, as promised.

     

    De Angelis used this "phantom oil" as collateral for more and more loans, borrowing more than $150 million (over $1 billion in today's dollars) against tanks of water. By the time the bankers finally caught on, the $150 million was gone.

     

    The loss hit one bank in particular very hard, American Express (AXP) which lost half its value due to the "salad oil scandal."

     

    Guess who purchased AMEX shares in 1964 and went big into Amex? and still holds those shares today...
    18 Mar 2012, 01:17 AM Reply Like
  • joe kelly
    , contributor
    Comments (1725) | Send Message
     
    And while GE was going from $29 to $6 a share my broker kept telling me it was no problem.
    Your's and Deer Creek's comment both have merit Econodoc. Personally, I like ontrol.
    18 Mar 2012, 05:16 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9923) | Send Message
     
    JK,
    And someday GE may just get back to $29/share but that may well be a long long time before it happens. And someday INTC may just get back to $60/share as it was in 2000 as well. And on and on.

     

    Meanwhile investors who purchased at those types of levels have done nothing but endure losses for a decade now. Albeit with some dividend compensation in the interim.

     

    It virtually never pays to buy at high or higher prices for any type of LT investor. So that is always the question ... are prices cheap enough to represent real low and safe LT investment values? Probably not by many many comparative and historical investment metrics. But then again for those that can trade the markets, if one can sell higher and does sell higher, then any time will work out.
    18 Mar 2012, 05:21 PM Reply Like
  • DaLatin
    , contributor
    Comments (1522) | Send Message
     
    Watch GE carefully ! The Fed is currently sniffing to see if GE Capital can do the right thing and pay poppa back. If they can start paying out GE's dividend can an should double an 29 is close by despite a flat or sideways market going forward !
    18 Mar 2012, 05:25 PM Reply Like
  • Teutonic Knight
    , contributor
    Comments (2000) | Send Message
     
    The U.S. Brokerage financial services is an annual $400B cottage industry.

     

    Think like this: The armies of its employed and their dependents are but a constant overhead sucking money from the so-called 'investments' on a daily basis - - - the millions of hot showers every morning, their commute to work, etc., not to mention their kids private schools tuition, room and board.

     

    Remember, GDP is now growing at 2%, and Debt is growing at 7%.

     

    Unless we as a nation create more wealth than we consume and borrow, we are at risk.
    17 Mar 2012, 04:43 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4845) | Send Message
     
    Tuet

     

    Great point but if you invest in corporations with earnings coming from outside the US you might be able to survive the mess in better shape.
    17 Mar 2012, 11:23 PM Reply Like
  • DaLatin
    , contributor
    Comments (1522) | Send Message
     
    Multinational corporations are truly the " new banks" !!!
    Solvent an debt free. Not like banks ! Especially EU banks ! And EU banks are responsible for 75% of business transactions worldwide.
    There the only safe bet if we get a major currency event for the mass public ! If THAT happens even gold will be subject to what if. Then silver an multinationals will rule the day.
    18 Mar 2012, 04:31 AM Reply Like
  • davidbdc
    , contributor
    Comments (3141) | Send Message
     
    Own your money. Don't give it over to others for them to be responsible.

     

    Buy solid companies that you might know something about and that return money to shareholders through dividends and you'll be fine.

     

    The way to build wealth isn't to give the first 1 or 2 percent gain every year to some clown. Its by saving and investing directly for yourself.
    17 Mar 2012, 04:49 PM Reply Like
  • azblackbird
    , contributor
    Comments (358) | Send Message
     
    Ditto... I run my own 401K. I'm the manager, admin, trustee, and custodian. Nobody but me controls the "checkbook". If I'm going to lose my retirement money in the market, then it's all my fault. I have nobody else to blame. I just shake my head in disbelief on how ignorant the masses are when it comes to controlling their own finances/investments. I shake my head even more knowing there are plenty of scam artists out there who call themselves portfolio managers, financial planners, or investment counselors, and who have no qualms whatsoever legally stealing somebody else's money for their own gains.
    17 Mar 2012, 08:48 PM Reply Like
  • Chris Lau
    , contributor
    Comments (1576) | Send Message
     
    Yet funds continue to thrive (albeit net outflow increases), analysts still make market calls, and experts fail to contribute alpha.
    17 Mar 2012, 05:27 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4058) | Send Message
     
    Its called seeking alpha, not delivering alpha.
    17 Mar 2012, 11:28 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4058) | Send Message
     
    Index funds are also not better as investment - as trading vehicles ok. No Index fund beats AAPL. None whatsoever. There are companies growing at a rate of 20-25% annually. Investing in the stock of those will blow index fun to pieces as investment.
    17 Mar 2012, 09:01 PM Reply Like
  • DaLatin
    , contributor
    Comments (1522) | Send Message
     
    WOW, this is news ?! I recall many of my posts since Oct 2011. When Bloomberg reports 78% of brokerage accounts were down in 2011.. Why do we need this SA flash. Even hedgies were licking deep wounds in 2011 an facing major redemptions.That forced the S&P an NASDAQ to give up even the little pop an close flat for 2011.

     

    dahhhh
    18 Mar 2012, 04:26 AM Reply Like
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