sidney

Bogle: Investors 'Getting Killed' in ETFs

Some investors do struggle to defy human instinct and buy when everyone panics and sell when everyone is euphoric. Taking that approach(and it is indeed very difficult to fight the crowd pressure emotionally). Within my Vanguard 403B(having only ~90 mutual funds to choose from) I was able to achieve(as of 5/31/09) a 1 YR 40% ,3 YR 21.6%, 5YR 22.8 % annual rates or return. By paddling against the crowd behavior I managed to outperform the entire universe of mutual fund managers on a 1 YR and 3 YR basis(14K, 12K) and all but 5 mutual fund managers on a 5 YR basis. This was using Vanguard funds but allocating them against the herd grain. If I picked the long term treasury fund to park my assets instead of the money market fund I could have done even better.
Bottom line is that the mutual fund managers are not going to reallocate to cash when things get overheated and buy when they get oversold. Neither individual investors as a group or professional money managers have much success in "market timing". Mutual fund managers simply don't do it. They are so concerned with following their benchmark that when they get to much cash coming in that they can't invest fast enough they close their funds instead of letting the cash position build up for the rainy day where they could go on a parade buying stocks when their cheap or using that extra cash to meet the redemption from shareholders so they don't have to add additional price pressure by liquidating even more of the stocks that are down in price. The fear of under performance drives mutual fund managers from the long term asset allocation decisions to protect capital. When the crowd panics, individuals sell stocks, ETFs, hedge funds, and mutual funds. Prices collapse. This is THE time to buy and when markets are down 50% its a John Templeton generational moment to step up and buy as much as you can and borrow as much as you can to buy more.
The only vehicle I know of that might allow a manager to reallocate to cash might be a Closed End Fund. By being protected from the flows of Investors the CEF manager can go to cash and back without fear of under performance. Paramount is retaining the NAV of the fund so their fees go up. Consider Russian CEF that Mobius managed, I remember him once saying the risks are too high I've gone mostly into Cash, by doing so he avoided a big crash and could readily buy up bargains after the crash. I doubt an open end manager could have done this. I tend to think an ETF couldn't have done this either.
THE CEF provides the manager room to flex. CEFs also provide valuable financial behavior data(premium/discount) about how investors are willing to pay for a basket of assets relative to their worth.