Portfolio Management

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troll's picture
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I'm curious to hear from any FA's doing discetionary Portfolio Management. Meaning SMA's where YOU are the manager. Especially within the wirehouse.
What are your reasons for running money that way? Are you using technology to scale it? Do you run models, and how many models do you run, MF's individual stocks? What about the fixed income piece? What do you charge? How do you make your decisions, and most important how do you sell it, position it, whatever?
I used to focus on SMA's. Over time I've come to the conclusion, that by running the money myself, i can not only be more tactical, but the clients feel its about me, rather than me being a salesman , outsourcing the money. It does take a bit more time, but with the block trading technology that I have available to me at SB, it's still scalable. Plus i enjoy it.
I have to admit that there are still times when I feel maybe I should be doing more MONEY MANAGERS, but I keep going back to ME.
I run Portfolios of all stocks, all ETF's a mix, and MF's with an occassional ETF. Lately I am moving more toward the MF platfrom. I use a combination of firm research, outside research, and Dorsey Wright (which I am not an expert in, but know enough about to integrate it into my process).
 
Curious to hear others thoguhts. Both in regards to running money and marketing the product

troll's picture
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31 views, no replies?
Thought I'd get at least a couple.

skeedaddy2's picture
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3 Models: Preservation, Optimization, & Leverage (same positions only weightings are different).

Macro with momentum/RS overlay. Core (ETF) and satellite (stocks) strategy. 20 positions max.

Sectors: Energy, Materials, Technology, Emerging Markets,
Stocks: AAPL, OXY, GILD, V, GGB, PCLN
ETFs: DBC, ADRE, QQQQ, PXE

Equities:
2.00% first $500k, 25% (sequential) discount for each $500k thereafter

Bonds:
.50% flat

or

1% flat & Performance fee of 10-20% on accounts over $750K.

Householding:Yes
Blended billing: Yes

Back office: Morningstar Advisor Workstation
Reuters Bridge Channel
Front office/CRM: eMoney 360 Pro
Custodian: Fidelity

troll's picture
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Joined: 2004-11-29

Skee - re core satellite -
do you use ETF's as core for any particular asset class - like - are you doing Large Cap Equity with ETF's or for part of that asset class?
 
Any screening strategy?
Lately I've been charging 1.5% flat, up to a million, or 1% flat for accounts $1 million up, for my MF accounts, since I need to factor in expense ratios (we use no loads and load waived A shares, but rebate any 12b-1's back to the client on the A's, so about .7 average ER). If I am using individual equities I'll start at 2, go to 1.5 for $1 million, using breakpoints not flat.

Northfield's picture
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Prat- At ML I've gravitated from seperate account SMA to almost entirely discretionary portfolio management where I run the portfolio. Similar reasons that you stated; lack of conviction in the outside managers, feeling disconected from the investment process, etc. I've been very happy with the outcome. I feel much more engaged in the process, and clients feel (rightly) that they are getting something unique.
 

Process is similar to Skee's. Overall philosophy is macro w/momentum. Sell the losers quickly, and let the winners run. Core is etfs, but generally broad market etfs. Satellites are tactical etfs, closed end funds, and an occassinal stock. Conservative accounts are 80% core - 20% satellite; aggressive accounts are generally the reverse.
 
Intelectually this makes sense to me, and it has not been difficult to perform better than a blended benchmark net of fees.
 
Fees are 2% to $250k, 1.75% to 500K, 1.5% to $1 mill and 1% over. I average about 1.75% with an average account size of about $400k. I also run an income portfolio at about 80bp.
 
I wish I could charge a performance fee of 10-20% like skee, but, of course, in a wire that won't ever fly.

Captain's picture
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Skee -

We also custody with Fidelity.

Is there any other trading platform, other than AdvisorChannel Workstation, that you use to build and transmit orders to Fidelity?

Just curious to know - I don't have any issues with Fidelity's trading platform... just wondering if you are using something else...

Thanks,

C

troll's picture
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Can you guys talk a little more about macro/momentum?
I am assuming that means the tactical or sattelite piece is tops down, sector first, with consideration given to market and peer relative strength?
 
I am struggling with fees, I guess becasue I am using mutual funds, and if I charge 1.5% then add the ER, even after rebating the 12-b1 fee to the client, it ends up costing the client 2.25, which means I need to get 9% to get 6.75 net to the client.
Am I selling myself too cheap? Maybe I need to re-examine the viablity of usuing MF's. Maybe I should go back to ETF's and individual stocks.
Need to hone a process.

Anonymous's picture
Anonymous

Pratoman:  Not sure exactly what you have to work with @ SB, although I'm sure it's vastly superior to the platform I have to work with, but, you may want to look into using Vanguard (or even T. Rowe Price) for a lot of your asset classes. 
 
As a general rule (in my practice), I tend to use passive/low cost approaches in asset classes that are relatively efficient.  For instance, I truly don't believe that active management adds any value to U.S. Large cap (and even Midcap) funds (especially after expenses).  There are plenty of other domestic and international classes that I use passive/low cost approach for as well, not just U.S. Large Cap. 
 
Generally, I think there can still be some benefit to using active management in less efficient markets (say, BRIC markets, emerging, US & Int'l small cap, etc.) where consistent above average returns might be able to be exploited.
 
So, even if you did charge 1.5%, 60% in low cost/passive funds, 20% in fixed income/cash, and 20% in satellite investments (even if they were actively managed small cap mutual funds), you should be able to keep your "all in" expenses at 2% I would think. 
 
My firm has two cookie-cutter managed vanguard portfolios (using all funds, no ETFs) and the fee starts @ 1.5%, and the total expenses fall into the 1.9x% range.

troll's picture
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Ice - great stuff - thanks.
I use the SB technology to screen for 1st quintile Lipper MF;s, and for positive Alpha, and where possible, low beta. I am using funds for large cap growth and value for example, like Janus Advisor Forty, and Pioneer Cullen Large Cap Value. I need to re-look at the numbers vs the benchmark, but I think they both outperform for 1, 3 and 5 year. I am using them in combo with Vanguard, and I share large cap ETF's to lower the total ER on the portfolio. And in the case OF Janus Adv Forty, to get more diversification.
 
But you bring up some great ideas, that I'm going to consider.
 
This is a great thread, for me at least, extremely useful. Thanks for all the great ideas.

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I use that Janus Forty fund too.  It's done really well.  Also Touchstone Large Growth (TEQCX) on the C share managed by Louis Navallier has outperformed on the 1, 3, 5, and 10 year. 
 
Ice- I think there might be a fair amount of gains you're leaving on the table by going the passive route.

Anonymous's picture
Anonymous

snaggletooth wrote:I use that Janus Forty fund too.  It's done really well.  Also Touchstone Large Growth (TEQCX) on the C share managed by Louis Navallier has outperformed on the 1, 3, 5, and 10 year. 
 
Ice- I think there might be a fair amount of gains you're leaving on the table by going the passive route.
 
Respectfully, in the asset classes I go the passive/cost route (i.e. the large, high volume, semi-stong/strong efficient markets), not a chance. 
 
If you really believe Joe Smith from [insert actively managed fund] is going to consistently beat the market in U.S. LC Growth (or an asset class of similar efficiency), you are quite mistaken.  If Joe Smith could consistently pick stocks that would outperform the market, he'd be doing it from his living room making a few hundred million a year, instead of working 80 hours a week for a 6 figure income at some fund company.  There are just too many analysts, too many institutions, working too many angles, to consistently outperform in those markets...spending 1.25% a year within the fund (or more) to try and do so is futile.  Even Warren Buffet admits the inability of Berkshire to continue to post gains like it has historically - partially because of the assets required to make a dent on their balance sheet, but also because markets are increasingly efficient, and the opportunities are just not as prevalant as they were in his prime years. 
 
Now, in hindsight, can you find plenty of funds and fund combos that will outperform the low cost fund portfolio I referenced?  Of course.  There is literally an infinite number of portfolios you could assemble, surely you will find plenty that beat the benchmark over certainly periods.  I can promise you, that can be 100% attributed to 1 of 2 things: style drift or luck.  Comparing a notorious drifting fund family like American to a disciplined family like Vanguard isn't a reasonable comparison, I'm talking pure, disciplined investing.
 
You charge 1.xx% to actively manage a portfolio, I charge .2% to put together a similar portfolio, targeted at the same asset class, diversify away non-systematic risk, and sit tight, over the long term I'm going to beat you by 1.xx% - .2% all day (give or take a small correction). 
 
Now, in the smaller, less fluid asset classes, I completely agree: Active management can be a huge benefit.  Go back to the one I listed earlier, say the BRIC markets.  ABC Fund Family with headquarters in bumblefawk USA isn't going to have access to the same research that a truly global firm like Goldman (who coined the term "BRIC" - which I'm sure everyone already knew) would in a country like Brazil.  Superior information can be used to exploit these (relatively) inefficient markets and extract excess returns.  It's not that superior information can't be used for the same purposes in the larger, more efficient markets, it's that superior information can't easily and consistently be obtained in those markets (because everyone else has it too, which makes it not-superior anymore).
 
How about muni bond funds?  Ex: Oppenheimer buying entire unrated issues (which they obviously "rate" internally) in exchange for higher yields/coupons or bigger discounts, etc.  You and I can't do that.  I don't know if it justifies the management fee, but there is another case where active management could yield better returns. 
 
I'm not anti active management, and I'm not an index fund Nazi.  I think both have their places.  I'm relatively...appauled about the extraordinary faith some FAs put into active managers, and the relentless analysis of past performance and lipper rankings.  Yikes.  Not meant to offend or criticize anyone - but Jonesers aren't the only FAs that need clarity on a variety of issues. 
 
[end rant]

snaggletooth's picture
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I must be missing something.  I agree most managers will underperform.  It also depends on the time frame you are looking at.  But looking at the Google Finance interactive chart, from the beginning of March 2001 to now, the S&P has done about 13%.  Navallier has done 45%. 
 
Since the inception of the Janus fund in October 2002, the S&P was up 74%, Janus is up 140%, and Navallier is up 110%.
 
I don't call that luck or style drift.  That is good management. 

Anonymous's picture
Anonymous

Snags,
 
You picked out a period of time that is rather short, and serves your particular example.  For one, I only looked up The Janus Fund, and I use neither fund you listed, so perhaps you can bring me up to speed if I'm missing something.
 
1.  I'm not seeing the Janus Fund inception date as 2002...I'm showing it as 1970.  Enlighten me here?  Anyway...
 
2.  If you go back to almost any other longer period of time vs the S&P, the Janus Fund gets completely spanked (not many would argue that 5 1/2 years is "long term").    By the way, it manages to get spanked with an almost identical beta.  The longer period you go, the worse it gets spanked.  Add up 30 years worth of wasteful trading and you get a difference that looks a lot like what I mentioned above (1.xx - .2 etc.).
 
3.  Perhaps "style drift" was a poor choice of words.  Perhaps the fund stays on task for the most part...the correct terminology was probably "inappropriate benchmarking."  I'm seeing various equity holdings (small & mid caps) in the fund that are not part of the S&P 500.  I'm also pretty sure that junk bonds are also not part of the S&P 500, which the fund also holds.  You can't hold small stocks, international stocks, emerging markets stocks, and high yield bonds, and compare the returns apples for apples to a static benchmark. 
 
That would be like making one football team from kids from only 1 town, and another football team from the choice of kids from the entire state, and then comparing their performance in absolute terms.  If you are going to hold riskier assets that are not included in the S&P 500 (and hence, higher expected returns), you need a different benchmark. 
 
Even with that being the case, the S&P still beats the Janus Fund over just about any long term period in history.  Lower returns with more volatility...doesn't sound like good management to me.
 
Even so, what any fund manager did in the past is completely irrelevant to what they will do in the future.  Zero.  Zilch relevance.  You could look at other things, such as what the fund holds in cash to handle redemptions, or how active of a trader they are (by the way, for an actively managed fund, the Janus fund is a relatively cheap fund IMO)...but it almost all boils down to cost in those markets. 
 
I think there is too much emphasis on "the S&P 500" and the "the Dow" etc.  I think it's important to keep in perspective that most indicies are just "a bunch of companies that share some common trait(s)," or are organized in some particular fashion.  There is nothing special about "the S&P 500" - you could make the "Snaggletooth 500" and be just as effective. 
 
It's interesting to point out, that even the S&P 500 is not "passive," but had to be "actively" put together at some point in time.  It just so happens that mirroring it doesn't incur many transaction costs, and the strategy is easy to copycat (as are most indicies - consider the Russell indicies - when they are reconstructed this year, that information will be made public, and any "index funds" that mirror them, can do so free of any research of their own - Russell is still actively constructing it, other companies are using it). 
 
They are all/were all active strategies, designed and implemented by a team of human beings, driven by logic, and implemented.  They just happen to be cheap to maintain. 
 

newnew's picture
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ice is right. snaggle not making good sense.
 
there is not an active manager in the world that will say they can beat the APPROPRIATE index over time by more than a point or two.
 
Show me a domestic stock fund that consistently "beats the S and P" and I will show you a fund that includes more than domestic stock (usual choices to add are cash and intl stocks, maybe some bonds or hi yld). it is the extra asset classes that add the "alpha", not stock picking! IT IS ALL MARKETING! Easy to sell all that "beat the market" crap.
 
I belive in the Efficient Market Theory and stick to funds/ETFs with avg exp of 20 bps.
 
In the WSJ on sat, article said that in the last 3 years, only 1% of 2300 active funds "beat the S & P" IF YOU COUNT TAXATION. Pitiful. But it's easy to sell.

troll's picture
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newnew wrote:ice is right. snaggle not making good sense.
 
there is not an active manager in the world that will say they can beat the APPROPRIATE index over time by more than a point or two. (Only a point or two?  That adds quite a bit over time)
 
Show me a domestic stock fund that consistently "beats the S and P" and I will show you a fund that includes more than domestic stock (usual choices to add are cash and intl stocks, maybe some bonds or hi yld). it is the extra asset classes that add the "alpha", not stock picking! IT IS ALL MARKETING! Easy to sell all that "beat the market" crap.
 
I belive in the Efficient Market Theory and stick to funds/ETFs (plus what % commission or fee?   Is your allocation static or tactical?  Point is, where do you add alpha, or do you believe that alpha is not achievable?  Indexing by definition eliminates alpha.  To benchmark, you would simply use the indexes matching the ETFs in the same proportion and after fund costs and broker cost you are subtracting alpha.) with avg exp of 20 bps.
 
In the WSJ on sat, article said that in the last 3 years, only 1% of 2300 (what about the other 9000 actively managed equity funds, how many of them beat the S&P?)active funds "beat the S & P" IF YOU COUNT TAXATION. Pitiful. But it's easy to sell.

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So how are you setting up those accounts?  Are you wrapping the Vanguard and other index funds?

Anonymous's picture
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Primo

1.  Although I appreciate newnew's compliments, I do not agree with his statement regarding "beating the index by more than a point or two over time."  The truth is, if you did a scientific study (and many have) and looked at active manager performance verses a truly accurate benchmark, they are less than 1% likely to beat the "passive" benchmark over a 7+ year period of time (some studies say 5, some say 10, I believe in 7). 
 
Please also note, my arguement does NOT include tax consideration.  I'm arguing for straight performance minus transaction costs & management fees.  For tax management in mutual funds, I actually do prefer actively tax-managed funds vs index funds. 
 
2.  You are correct...a point or two is HUGE over time.  Which is why (again, in the markets I mentioned previously) I do not allow active managers to waste money on trying to achieve "above average returns" and do 1.xx% less than the benchmark over time (which, if you do some research - and I don't mean in the Janus brochure - you'll see that nearly all active managers underperform their true benchmarks by roughly their management fee + expenses over extended periods of time). 
 
3.  Although alpha certainly has its place in our industry - touting one fund managers ability to constantly achieve it certainly isn't it.  I absolutely "believe" in alpha, since it quite obviously exists, and NO markets are perfectly efficient.  It simply isn't reasonable to think that a human being can consistently achieve it in todays highly fluid, efficient markets (again, back to the markets I originally mentioned) on a consistent basis at a level that will offset the fees and expenses incurred by implementing the active strategy. 
 
I reiterate, there are markets I do believe active management can be a benefit (and "achieve alpha" consistently, for now), just not most of the markets that represent the core of many investors portfolios. 
 
4.  I do charge a fee for my services.  My clients are paying me for advice and planning primarily.  I do not claim to be a portfolio manager, or a good stock picker.  My clients understand that. 
 
By the way, in regards to "beating the benchmark" by an active manager.  I prefer highly disciplined funds, etfs, etc.  If I choose increase a clients exposure to junk bonds, or emerging markets, I will do it on my own, I do not want the American Funds(or any other fund) making that decision for me. 
 
5.  I find that many supporters of active management really like to ignore the fact that benchmarks are the fruits of "active management" - just a LOW COST form of active management.  Active managers are quick to call S&P 500 returns "average" or attack my strategy as "guaranteeing my clients below average returns after my fee" - the insinuation that the S&P 500 is the "average" return is completely arbitrary.  By the way, there are plenty of other indicies to mirror, in every market out there - there is no need to think when you see the year end numbers for the S&P that "iceco1d's clients all got S&P minus 1.5%" because that's just not true. 
 
6.  Plenty of actively managed funds beat the S&P.  And like I've mentioned repeatedly, go check and see how many of those funds should TRULY be benchmarked to the S&P? 
 
Go do the research if you really care, but get it from an indepedent source, not the glossy crap you get from fund companies and BDs.  The guys doing the research have absolutely no reason to lie.  Pick any fund you want, compare returns to the [real] appropriate benchmark, over a 7+ year period of time.  You may not like the answers you get. 
 
The more you dig, the more you'll realize how incorrectly "we" as an industry misuse and position the terminology (alpha, benchmark, S&P, MPT, historical returns, lipper ranking, and on and on and on). 
 
Snags
 
I like to use Vanguard usually for indexing (and yes, I charge a fee for it).  I am also trying to integrate T. Rowe Price into the low cost mix as well. 
 
For the actively managed pieces of portfolios I primarily use Oppenheimer, Goldman, and Russell (some bond funds, tax managed funds, emerging markets, BRIC, etc.).
 
Keep in mind, I am only talking funds right now - no ETFs, no stocks, no bonds, etc.
 
I would say, generally 60-75% of my (fund) portfolios are index and/or very low cost funds, and the remainder is active. 
 
Fee starts at 1.5% and can go as low as .6% (but generally not lower than 1.0%). 

Dark Knight's picture
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Please all of you investment wizards out there listen to Ice.  He knows what he is talking about.
 
 

newnew's picture
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ice- I DO NOT believe that active managers can win by a point or two. I said that THEY would never say that they do MORE than that--I was referring to Snags outrageous comment that one fund beating an index by ALOT (more than one or two points) was the result of "good management". Ridiculous. We are in agreement.-----------                                            If some of you want to insist on active management, fine, but you are ignoring decades of academic studies and the 1990 Nobel prize in Econ--all of which say, basically, "its the asset class, stupid". The rest is for show "I am DOING SOMETHING for my clients (picking winners)"

troll's picture
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Who is picking the allocation?  Is it you or your firm? 

snaggletooth's picture
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iceco1d wrote:
 
 
Snags
 
I like to use Vanguard usually for indexing (and yes, I charge a fee for it).  I am also trying to integrate T. Rowe Price into the low cost mix as well. 
 
For the actively managed pieces of portfolios I primarily use Oppenheimer, Goldman, and Russell (some bond funds, tax managed funds, emerging markets, BRIC, etc.).
 
Keep in mind, I am only talking funds right now - no ETFs, no stocks, no bonds, etc.
 
I would say, generally 60-75% of my (fund) portfolios are index and/or very low cost funds, and the remainder is active. 
 
Fee starts at 1.5% and can go as low as .6% (but generally not lower than 1.0%). 
 
This is what I was looking for.  So at 1%, is it safe to say to your clients that you can pretty much guarantee that they will always underperform the benchmark by at least 1.2% including fees and expenses?
 
It's kind of like in baseball.  If I sit on the bench, I can guarantee I won't strike out.  But I can also guarantee I'll never get a base hit...just some splinters in my ass (fees).

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No, Id say it's more like you are trying to hit a home run every time while Ice is trying to take what the pitcher gives him.  No he won't hit as many homers as you but overall he'll be a more valuable asset to the team.

Anonymous's picture
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NewNew
 
My mistake, we do agree (I thought we agreed on most points anyway). 
 
Primo
 

 

Completely depends on the client and situation.  In a perfect firm, unequivocably me.  My firms shortcomings are a whole other debate.
 
Snags
 
That's not a good analogy at all.  I can't really say much more if you don't directly address my points. 
 
Sitting on the bench would be sitting in cash under the mattress.  A better sports analogy would be the New England Patriots - a team of no superstars.  They have very few stars (I know everyone knows them now, and they have always had Brady (who was a nobody) and picked up Randy Moss last year).  EVERYONE plays their position well and does their job.  They aren't trading 20 players in the off season.  They don't put up with cry baby superstars.  They are a disciplined, well oiled, high performance sports team.  How about that, a team of mere "averages" that (almost) couldn't be stopped all season by teams with $20MM higher payrolls.  Now THERE'S an analogy for you.
 
I don't care what my benchmark is, whether it's the S&P, the Russell 1000, or the EAFE, or some blend of those three and 10 more, yes I can guarantee my clients with all surety they will underperform it by my fee + maybe another 50 bps in fund/etf/cef/trading expenses, etc.  I can also guarantee you that yours will underperform their true benchmark by your fee, and your fund/etf/etc. expenses, over the long term - which will be more underperformancce than mine.
 
A benchmark is man made.  Funds that mimic "benchmarks" are borne of the active strategy & process that created that benchmark.  I think you aren't seeing the real reason I choose to use index funds for these asset classes.  The "research" is done by the model of the index, which is why the funds can be had at such a low cost.  Low cost is the key here, not the index itself. 
 
I can't really say much more about this subject.  This thought process is exactly why we are subject to such criticism and regulation as an industry. 
 
It's so much easier to sell "my fund manager is terrific A+++++ and beat the S&P 4 of the last 5 years!" (which may be true, except they don't tell you that 60% of the assets in the fund aren't even in the S&P 500), than it is to sell the reality of their futility and glutony of fees and costs. 
 
No Vanguard wholesaler has ever taken me to lunch either...
 
Edit & Follow Up
 
I think I've addressed plenty of questions thus far, so I think I'd like to ask a few:
 
1.  What exactly is it, about the active fund managers at Janus, or Goldman, or American, etc. that enables them to beat their peers consistently?  What do they know that allllll the other fund managers, analysts, do it yourselfers, hedge funds, etc. don't know?  What gives them the exceptional ability to sit down and look at the universe of U.S. Large Cap stocks and pick the winners & weed out the losers?
 
Remember I'm talking about efficient asset classes (ex: U.S. LCV).  I already made my case for active management in various other classes.
 
2.  What is the motivation for these guys, with this awesome, and consistent ability to outpick the market, to go to work everyday at Putnam, Franklin, Federated, etc.?  Why on earth, if they really believed in their ability to consistently identify winners & losers would they report to work everyday?  They should be at home shorting losers, buying winners on margin, and making billions (literally).
 
3.  Why exactly does underperforming a benchmark by 1.5% seem so awful?  Please don't use the S&P or the Dow for this answer - they are completely overused and overemphasized.  If I had a fixed mortgage right now for 3.75%, should I be upset that it lags the fed funds or discount window rate by a couple points?
 
That should be good for now I suppose.

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iceco1d wrote:
 
No Vanguard wholesaler has ever taken me to lunch either...
 
Hmmm...I had a great Kobe beef burger today for lunch from a wholesaler...It was delicious!
 
You and I could sit here all day long til we're both in a LTC facility and we'll do nothing more than bang our heads against the wall...

Anonymous's picture
Anonymous

Haha, I know.  But we could also have a few beers and catch a game after the debate too (perhaps, from the LTC facility in the recreation room though!). 
 
PS - I can use the same exact argument/logic for active management in less efficient/fluid/voluminous markets.  It would probably be easier to back into why not to use active management in certain markets, if I argued why you should use it in others.  But I passed that  bridge 3,000 words ago, and I'm too tired now, lol.

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Again, in Modern Port Theory an Efficient Frontier exists. You, Mr Prospect, need to be on it. What part of the curve you possess is based on your risk tolerance. (this info is out there, I do not make it up!). My job is to keep you on it, without regard to emotion, but with regard to tax efficiency.

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newnew wrote:Again, in Modern Port Theory an Efficient Frontier exists. You, Mr Prospect, need to be on it. What part of the curve you possess is based on your risk tolerance. (this info is out there, I do not make it up!). My job is to keep you on it, without regard to emotion, but with regard to tax efficiency.

 
I think I'll just stand with Warren Buffett in the belief that Modern Portfolio Theory does not work.

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Alpha is not achievable without deviation from the benchmark.  Even a fund like VFINX does not have an alpha of 0, it has a negative alpha due the the 20 bps or whatever they charge.  As far as active managment gauranteeing underperformance, VFINX performance ranks in the 43rd percentile on a 10 year basis in it's Morningstar category (Large Cap Core TR).  That is over half of the category that outperforms the S&P in what Morningstar deems the appropriate category.  The other point you have forgotten is that alpha takes cost into consideration.  Too much cost lowers return which will lead to negative alpha if you let it.  Speaking of the efficient frontier,  I assume you are not properly using alternative asset classes due to the discussion on the importance of low cost.  Add managed futures to a stock/bond portfolio.  The efficient frontier changes completely.  Before you say I will just use a commodity ETF to add alternative asset classes, ETFs cannot mimic managed futures like they can the S&P for example.  The costs in managed futures are outrageous, however they will lower volatility and increase returns over time.  Alpha not only depends on deviation but also non-correlating assets.  ETFs cannot truly achieve alpha.  Asset allocation can achieve alpha, but needs to adapt on a constant basis to be effective.  This is why I use active money managers.   The portfolio that I use as my base allocation has had positive years net 1.5% for over a decade, better than 10% annualized returns, beta of about 60 (S&P) and an alpha above 5 for ten year time frame.  This could not be achieved with ETFs and cost is not an issue as the value provided is well worth the cost.  It can be done if you work hard enough at it.

Anonymous's picture
Anonymous

Snags

 
MPT doesn't work to a tee because the prerequisites for it don't exist in the real world (namely, rational market participants).  If you do a search for "MPT" and my name, and read the longest post you get back in the search, you'll see the other novel I posted about it. 
 
That being said, you can't talk MPT with the materials supplied by the industry, they aren't accurate.  I'm right with you on that statement, although i'm sure for completely oppostie reasons.
 
Primo
 
Your post just made two things clear to me:
 
1.  You didn't read everything that I wrote carefully, because on certain issues we are in agreement.
 
2.  You proved many of my points for me. 
 
a) I don't care what Morningstar deems as an "appropriate category" - go through the funds and tell me they all fit in that category, exactly, 100% of the time.  Again, you are missing the point.
 
b)  I never said I didn't use alternative asset classes.  In fact, I said REPEATEDLY that I do NOT use a low cost approach for those asset classes! 
 
PS - I'm not an ETF fanboy anyway.
 
c)  Alpha was created as a correction parameter for the capital asset pricing model, not a marketing term.  It's basically the link between a perfect world and the real world.  The closer the real world gets to perfect, the less and less alpha will be posssible.  Large, fluid markets, are getting ever closer to "perfectly efficient."  This is the basis of my entire effing argument.  The closer to perfect efficiency you get, the less alpha there is to exploit.  There isn't enough alpha left in plenty of large, U.S. & European markets to warrant a 1.00% management fee + transaction costs.  There is enough inefficiency in markets like microcaps, BRICs, etc. to warranty 1.00% management fee + costs to extract alpha.  I really don't see why this isn't making sense. 
 
Keep in mind, this alpha/performance issue of active or passive management in an asset class is completely separate from other active management issues such as:  tax management, managed futures, ability to obtain higher yielding bonds, blah blah blah.
 
I love adament use of "Efficient Frontier" and "Alpha" and "MPT" to argue points on this board...generally by people that never built an efficient frontier, much less truly understand it.  It's pretty clear that your use of Alpha is similarly misguided, nearly throughout your entire post.
 
BTW, I mean misguided in absolute terms - I'd have you manage my money before most people in this business if you had to use individual securities.  Your points are wrong...but way "less wrong" than most.  It may not seem like a compliment, but it is.
 
It's equally intriquing to hear people sit and wonder why MPT has failed them in the real world.
 
d) Based on what you told us already, why in gods name are you even calculating beta relative to the S&P 500, much less comparing your returns vs. the S&P 500? 
 
You are comparing what your portfolio did, that was NOT restricted to the securities in the S &P 500 TO the returns and volatility of the S&P 500 - one of my biggest complaints in the 4 novels I've posted so far!
 
Same reason I said not to assume my clients all get S&P minus 1.5%.  I get exposure to markets where low-cost isn't the most effective...but I know enough to identify the markets where it is right, and I'm capable of explaining to my clients why.

troll's picture
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Joined: 2004-11-29

iceco1d wrote:Snags

 
MPT doesn't work to a tee because the prerequisites for it don't exist in the real world (namely, rational market participants).  If you do a search for "MPT" and my name, and read the longest post you get back in the search, you'll see the other novel I posted about it. 
 
That being said, you can't talk MPT with the materials supplied by the industry, they aren't accurate.  I'm right with you on that statement, although i'm sure for completely oppostie reasons.
 
Primo
 
Your post just made two things clear to me:
 
1.  You didn't read everything that I wrote carefully, because on certain issues we are in agreement.  I did read your post and yes we do agree on some points.
 
2.  You proved many of my points for me. 
 
a) I don't care what Morningstar deems as an "appropriate category" who determines what the appropriate category is then?- go through the funds and tell me they all fit in that category, exactly, 100% of the time.  Again, you are missing the point.
 
b)  I never said I didn't use alternative asset classes.I used the word "properly".  In fact, I said REPEATEDLY that I do NOT use a low cost approach for those asset classes! 
 
PS - I'm not an ETF fanboy anyway.
 
c)  Alpha was created as a correction parameter, not a marketing term. I do not use alpha as a marketing term.  Next time I bring up alpha to a client will be the first.  Alpha is not a correction parameter, it is a risk/reward calculation.  You are using alpha incorrectly.  I love adament use of "Efficient Frontier" and "Alpha" and "MPT" to argue points on this board...generally by people that never built an efficient frontier, much less truly understand it. The efficient frontier is the point where changing the asset allocation will either increase volatility measured by standard deviation or reduce returns.  Pretty sure I understand it.  My point is that the effecient frontier changes over time, it is not static.  It's pretty clear that your use of Alpha is similarly misguided, nearly throughout your entire post.
 
BTW, I mean misguided in absolute terms - I'd have you manage my money before most people in this business if you had to use individual securities.  Your points are wrong...contrary does not mean wrong, just different. but way "less wrong" than most.  It may not seem like a compliment, but it is.  Thank you.
 
It's equally intriquing to hear people sit and wonder why MPT has failed them in the real world.
 
d) Based on what you told us already, why in gods name are you even calculating beta relative to the S&P 500, much less comparing your returns vs. the S&P 500?  Because you have to measure against something.  Between the 3 indexes people hear the most about, the S&P most closely resembles a diversified portfolio.  I do realize it is not a perfect comparison, but nothing ever will be.  BTW, R2 on my portfolio is 77 against the S&P.  A little short of the accepted 85 to benchmark, but close enough since it would be almost impossible to truly benchmark it.  If R2 was 50, I would agree with you.
 
You are comparing what your portfolio did, that was NOT restricted to the securities in the S &P 500 TO the returns and volatility of the S&P 500 - one of my biggest complaints in the 4 novels I've posted so far!
 
Same reason I said not to assume my clients all get S&P minus 1.5%.  I get exposure to markets where low-cost isn't the most effective...but I know enough to identify the markets where it is right, and I'm capable of explaining to my clients why.

Anonymous's picture
Anonymous

I'm not going to switch to different colors and re-quote you...not because I'm being an ass, but because it's too much of a pain at this point.  A couple points, nevertheless...
-By "appropriate" I mean this:  If you are using securities in your portfolio that aren't inccluded in the S&P 500, it's not fair to compare your portfolio to one that either a) mirrors the S&P 500 or b) only contains select securities in the S&P 500. 
 
If I told you to assemble a team of the best college football players, and then I make a college team, but sprinkle in a few NFL Pro-Bowlers (riskier assets than included in the index) for good measure...would you be happy if I compared your team to mine and/or made them play each other?  Would you consider that a fair comparison?  A true measure of how well you constructed your team per the rules?
 
-Sorry I missed the word "properly" in your original post.  I don't recall what it's specifically regarding, so I won't really say much else about it.
 
-I'm not going to argue about who is using alpha incorrectly.  Based on my Master's thesis though, I'm pretty sure it aint me.  Like I said, I don't think your points are completely wrong.  Our discussion of alpha fits into that allegation.
 
-You do have to measure against something.  You aren't talking to "most people" on this forum...which is why I asked for other indicies to be included.  I'm pretty sure every listed equity is part of an index somewhere.  Blend away, and see what you get. 
 
PS - I'd still like someone to address my freaking questions....for once.

snaggletooth's picture
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iceco1d wrote:
 
 
I think I've addressed plenty of questions thus far, so I think I'd like to ask a few:
 
1.  What exactly is it, about the active fund managers at Janus, or Goldman, or American, etc. that enables them to beat their peers consistently?  What do they know that allllll the other fund managers, analysts, do it yourselfers, hedge funds, etc. don't know?  What gives them the exceptional ability to sit down and look at the universe of U.S. Large Cap stocks and pick the winners & weed out the losers?
 
Remember I'm talking about efficient asset classes (ex: U.S. LCV).  I already made my case for active management in various other classes.
 
2.  What is the motivation for these guys, with this awesome, and consistent ability to outpick the market, to go to work everyday at Putnam, Franklin, Federated, etc.?  Why on earth, if they really believed in their ability to consistently identify winners & losers would they report to work everyday?  They should be at home shorting losers, buying winners on margin, and making billions (literally).
 
3.  Why exactly does underperforming a benchmark by 1.5% seem so awful?  Please don't use the S&P or the Dow for this answer - they are completely overused and overemphasized.  If I had a fixed mortgage right now for 3.75%, should I be upset that it lags the fed funds or discount window rate by a couple points?
 
That should be good for now I suppose.
 
Per your request:
 
1.  It's not that the fund manager's "know" anything more, it's that they aren't over-diversifying.  I remember reading some study that showed a value portfolio could be fully diversified with like 12 stocks and a growth portfolio could be diversified with 20.  Not sure on the exact numbers, you get the point.  If a manager feels like a certain company is undervalued compared to its intrinsic value, then it is worth the risk to invest.  Managers outperform because of concentrated positions.  They won't always be right, and some have been more right than others.  The managers I follow, which are actual people, not companies, have been right far more often than wrong. 
 
2.  Many of the best managers have their own firm which is contracted out by a fund company.  There are more underperforming managers than managers who outperform, so it's not like all these guys are something special.  It takes a certain passion.  Look at Bill Gross.  The guy is a billionaire.  He plays poker with Bill Gates.  He doesn't have to trade for Pimco, but he's there from dawn til dusk.  Oddly enough, I saw a graph going back 21 years of his Total Return fund compared to the S&P and the bond fund did 7.4% while the S&P did 7.5%.  Sure as shit that bond fund beats most other bond funds out there.
 
3.  I don't understand wanting to underperform by 1.5% in any situation.  The indexer isn't even allowing for the chance to outperform.  While the chance for an actively managed fund to blow up exists, it isn't common, and I believe worth the risk to at least try for higher returns.  Look at 10 year periods where the S&P was literally flat...1972-1982 or somewhere around there (I think it was Oct to Nov).  Sure the S&P has a yield, but I would think a solid manager can take advantage of certain positive runs and outperform.
 
Sorry if this doesn't come out right, I'm watching more TV than typing...

Anonymous's picture
Anonymous

I'm just going to address the point I agree with:  You are spot on that many asset classes can [almost] be fully diversified (in terms of non-systemic risk) with 12 - 20 securities.

snaggletooth's picture
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iceco1d wrote:
I'm just going to address the point I agree with:  You are spot on that many asset classes can [almost] be fully diversified (in terms of non-systemic risk) with 12 - 20 securities.
 
That's it?  That's all you agree with?  Man, I surely thought there were at least a couple other decent points.

Anonymous's picture
Anonymous

Don't worry Snags, I'll give you more props later, I didn't have time to read thoroughly this time!  Better shoot Greebacks a PM and have him tune into this thread so we can bring him up to speed. 
I'm probably out for the weekend now - have a good one everyone!

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" I don't understand wanting to underperform by 1.5% in any situation.  The indexer isn't even allowing for the chance to outperform.  While the chance for an actively managed fund to blow up exists, it isn't common, and I believe worth the risk to at least try for higher..."
 
SNAGS: here's 2 points: my indexes CANNOT blowup, and you just said your funds could ("risk is worth it"). Also, it is not about underperforming, of course. i get paid a fee to make sure that my clients own the right asset classes and own them in proper balance. Without me, THEY WOULD NOT. therefore, the comprison is this: how much better off are they with me, net the fee? I think plenty better off, because without me they would be in cds,  or only one or two asset classes, or in tax-inefficient funds, or whatever. Bottom line: net taxes, net fees, net advice, I am worth it; they do not "underperform" by the equivalent of my fee.
 
PS Goldman Sachs mutual funds are at least honest about their relative poor performance. They publish "blended indexes" (Ice referred to these indexes just now) with their quarterly fund report to advisors, and it ain't pretty. I wish American Fds could be so honest (ANCFX beat the S & P! Totally inappropriate comparison!)

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newnew wrote:" I don't understand wanting to underperform by 1.5% in any situation.  The indexer isn't even allowing for the chance to outperform.  While the chance for an actively managed fund to blow up exists, it isn't common, and I believe worth the risk to at least try for higher..."
 
SNAGS: here's 2 points: my indexes CANNOT blowup, and you just said your funds could ("risk is worth it"). Also, it is not about underperforming, of course. i get paid a fee to make sure that my clients own the right asset classes and own them in proper balance. Without me, THEY WOULD NOT. therefore, the comprison is this: how much better off are they with me, net the fee? I think plenty better off, because without me they would be in cds,  or only one or two asset classes, or in tax-inefficient funds, or whatever. Bottom line: net taxes, net fees, net advice, I am worth it; they do not "underperform" by the equivalent of my fee.
 
PS Goldman Sachs mutual funds are at least honest about their relative poor performance. They publish "blended indexes" (Ice referred to these indexes just now) with their quarterly fund report to advisors, and it ain't pretty. I wish American Fds could be so honest (ANCFX beat the S & P! Totally inappropriate comparison!)
 
What about a situation like 2000-2003 when the S&P was at its worst point down -46%?  I think many of the "better" active managers would have beaten that handily. 

troll's picture
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Or how about the Q's down 80%?  That sure looks like a blow up to me.

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I've been doing Private Portfolio Management since 1985. It's the bulk of my business. I currently have 42MM under management. I originally started in the Legg Mason MIP program and currently practice in the WS PIM program. I run four basic models. Long Term Growth, Moderate Growth, Income and Growth, and Social Responsibility. Minimum account size is $50M. Fees are 2.1% for all accounts under $100M. Accounts over $100M  range from 1.85% to 1.25% depending on model.I use 3 bullet points in my sales presentations. 1 - Clients have the ability to actually talk to the manager. this isn't possible with MF or SMA accounts. We can take into consideration personal needs, and tax efficiency.  2- Overall Cost is lower than with any actively managed MF or wrap fee account. 3- Quarterly reports with a benchmark and periodic meetings with me.I use some ETF's in the program. Primarily IShare foreign shares, and more recently to a minor extent commodity and currency shares.

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Primo: QQQs down 80% is not a manager blowup! It is what you get _% of the time for a Standard dev of __(fill in blank for your index of choice). Totally irrelevant to discussion.
 
Snags: You would have to know BEFORE the bear market which are the "good" managers. Good luck. And I do mean luck. I will quote Ice: "what any fund manager did in the past is completely irrelevant to what they will do in the future.  Zero.  Zilch relevance"

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Another point for Snags et al: this idea that fees cause a port to automatically underperform by the amount of the fees is also incorrect for this reason: I get paid to keep clients from emotional trades. Paid to make sure we do nothing, in some cases. Or paid to make sure we do the opposite of what "feels good". Fees give me incentive to pay attention OFTEN to the OLD money, not just the new. When a family member wants to know who to see for planning (I am too close to them they might feel) I never recommend commision models, even if it might seem "cheaper".

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Fund Name

ShareClass

Expense Ratios

YTD
Cum

-->

Month End Average Annual Total Return (NAV) (%) 05/31/2008

Quarter End Standardized Total Return (%) 03/31/2008

DividendDistnPer Share

Std.30-DayYield

Expense
Ratios

-->

Current

BeforeWaiver

1Yr

5Yrs

10Yrs

SinceInception

1Yr

5Yrs

10Yrs

SinceInception

GS Balanced Fund

Retail A
18.69

-2.24
-->
1.05

1.30

-3.64

6.83

3.18

7.25

-7.80

6.69

2.19

6.64

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Balanced Fund

Retail B
18.53

-2.60
-->
1.80

2.05

-4.37

6.03

2.41

5.03

-8.03

6.72

2.02

4.84

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Balanced Fund

Retail C
18.49

-2.54
-->
1.80

2.05

-4.34

6.04

2.41

2.94

-4.13

7.10

2.02

2.70

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

S&P 500 with Income

n/a

n/a
-3.80-->

n/a

-6.68

9.76

4.20

n/a

-5.06

11.31

3.50

n/a

n/a

n/a
n/a-->

*Lehman US Aggregate

n/a

n/a
1.21-->

n/a

6.87

3.83

5.78

n/a

7.65

4.58

6.03

n/a

n/a

n/a
n/a-->

GS Balanced Strategy Portfolio

Retail A
11.01

-0.02
-->
1.25

1.40

-0.22

8.53

5.04

5.36

-5.77

7.81

4.11

4.56

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Balanced Strategy Portfolio

Retail B
10.99

-0.38
-->
2.00

2.15

-0.98

7.73

4.25

4.58

-6.08

7.85

3.91

4.35

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Balanced Strategy Portfolio

Retail C
10.99

-0.39
-->
2.00

2.15

-0.95

7.72

4.26

4.59

-2.12

8.22

3.92

4.36

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

*S&P 500 w/income

n/a

n/a
-3.80-->

n/a

-6.68

9.76

4.20

n/a

-5.06

11.31

3.50

n/a

n/a

n/a
n/a-->

60% Leh Agg/20% MSCI EAFE/20% S&P 500

n/a

n/a
-0.42-->

n/a

2.49

8.19

6.09

n/a

3.22

9.37

5.96

n/a

n/a

n/a
n/a-->

GS Equity Growth Strategy Portfolio

Retail A
15.25

-2.43
-->
1.35

1.78

-5.84

15.61

5.35

5.99

-12.63

15.53

3.67

4.73

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Equity Growth Strategy Portfolio

Retail B
14.69

-2.72
-->
2.10

2.53

-6.58

14.74

4.55

5.20

-12.83

15.72

3.48

4.53

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Equity Growth Strategy Portfolio

Retail C
14.62

-2.73
-->
2.10

2.53

-6.57

14.72

4.56

5.22

-9.16

15.98

3.49

4.54

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

50% MSCI EAFE/50% S&P 500

n/a

n/a
-3.18-->

n/a

-4.30

14.70

5.80

n/a

-3.60

16.54

5.12

n/a

n/a

n/a
n/a-->

*S&P 500 w/income

n/a

n/a
-3.80-->

n/a

-6.68

9.76

4.20

n/a

-5.06

11.31

3.50

n/a

n/a

n/a
n/a-->

GS Growth Strategy Portfolio

Retail A
14.03

-2.23
-->
1.35

1.70

-5.04

13.60

5.21

5.85

-11.48

13.33

3.73

4.71

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Growth Strategy Portfolio

Retail B
13.98

-2.51
-->
2.10

2.45

-5.77

12.74

4.42

5.07

-11.68

13.48

3.54

4.51

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Growth Strategy Portfolio

Retail C
13.87

-2.46
-->
2.10

2.45

-5.66

12.76

4.43

5.08

-8.00

13.76

3.54

4.51

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

20% Leh Agg/40% MSCI EAFE/40% S&P 500

n/a

n/a
-2.22-->

n/a

-2.01

12.54

6.00

n/a

-1.30

14.15

5.50

n/a

n/a

n/a
n/a-->

*S&P 500 w/income

n/a

n/a
-3.80-->

n/a

-6.68

9.76

4.20

n/a

-5.06

11.31

3.50

n/a

n/a

n/a
n/a-->

GS Growth and Income Strategy Portfolio

Retail A
12.61

-1.59
-->
1.34

1.64

-2.64

11.41

5.45

6.01

-8.81

10.99

4.21

5.01

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Growth and Income Strategy Portfolio

Retail B
12.56

-1.94
-->
2.09

2.39

-3.37

10.55

4.66

5.22

-8.97

11.13

4.01

4.81

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

GS Growth and Income Strategy Portfolio

Retail C
12.53

-1.87
-->
2.09

2.39

-3.35

10.57

4.66

5.22

-5.21

11.41

4.01

4.80

0.00

n/a
Utils.format(perfs.perfs[j].expenseRatio, new Float(100))-->

40% Leh Agg/30% MSCI EAFE/30% S&P 500

n/a

n/a
-1.30-->

n/a

0.25

8.58

5.44

n/a

0.97

9.61

5.12

n/a

n/a

n/a
n/a-->

*S&P 500 w/income

n/a

n/a
-3.80-->

n/a

-6.68

9.76

4.20

n/a

-5.06

11.31

3.50

newnew's picture
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If all fund families benchmarked with these blended indices, they would be more accurate----- but sales would go way down!!!

troll's picture
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Joined: 2004-11-29

SNAGS: here's 2 points: my indexes CANNOT blowup

 
 
Indexes can and have blown up.  For example the Qs

troll's picture
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Joined: 2004-11-29

newnew wrote:Another point for Snags et al: this idea that fees cause a port to automatically underperform by the amount of the fees is also incorrect for this reason: I get paid to keep clients from emotional trades. Paid to make sure we do nothing, in some cases. Or paid to make sure we do the opposite of what "feels good". Fees give me incentive to pay attention OFTEN to the OLD money, not just the new. When a family member wants to know who to see for planning (I am too close to them they might feel) I never recommend commision models, even if it might seem "cheaper".
 
I would agree with this post IF keeping clients from emotional decisions was our only job.  It is a big part (if not the biggest part) of our job, however I feel not even attempting to add value beyond hand holding (not an insult) is lacking.

newnew's picture
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what is "adding value"? this is our point of contention, with all due respect. Active management is your definition? I never said that preventing emotional trades was the only job-- see posts from preceding pages.

troll's picture
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Joined: 2004-11-29

Good point.  Let me rephrase.  I feel not even attempting to add returns beyond hand holding is lacking.

snaggletooth's picture
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Joined: 2007-07-13

Primo wrote:Good point.  Let me rephrase.  I feel not even attempting to add returns beyond hand holding is lacking.
 
This is exactly what I agree with.

Anonymous's picture
Anonymous

Ok, I can't sit on the side lines anymore, even though I'm trying.  Here it goes (hopefully) ONE more time.
 
The fee, is the fee for advice.  It is irrelevant otherwise.  You charge it, I charge it, lets assume we both charge the same.  Now HERE is the point:
 
How do the markets work?  Prices, returns, volatility, are ALL determined by the participants of the market.  You.  Me.  Bill Gates.  Whoever.  Price/volatility is simply the aggregate result of US. 
 
So lets take a look at "us" -  Most of "us" in the market are fairly rational (not completely, but fairly).  We are equipped with plenty of technology.  The flow of information around the globe is instantaneous.  We all have accountants.  Analysts.  Economists.  Report, after report, after report.  By "we" here of course, I'm talking about everyone that participates in the market.  Now, if we are all determining the price/volatility of a particular stock, and we all have the same information, where are YOUR active managers getting THEIR advantage?  Please tell me.  What is THEIR VALUE PROPOSITION?
 
What you (Snags, Primo) are telling me, is if you take ALL of the U.S. Large Cap Growth stocks ONLYI, and put them in a list, your active managers have the ability to go through those companies on the list, and by using the same research available to the rest of the whole planet, are able to separate the WINNERS from the LOSERS on a CONSISTENT basis?
 
Now, granted, there are some minor inefficiencies in the market, but in the US LCV class, you are telling me that these guys can sit down, with that same info that I have, Goldman has, Merrill has, EDJ has, and MILLIONS of other people have...and in fact, THOUSANDS of other highly educated, well funded people, teams, and firms, are analyzing all day everyday...and your active managers are able to say:
 
 "fuck you Merrill.  fuck you Goldman.  you guys have driven prices significantly out of equilibrium, and I...yes ME, Mr. Active manager, am going to exploit your mistake for my clients/fund/etc.  Not only am I going to exploit this pricing inefficiency, but I am going to charge 1.00% to do it, and it will STILL be worth it for investors in my fund.  But wait, there's more!  Now because I am this good at stock picking, I am going to do this all year long.  So there are also going to be some relatively hefty transaction costs involved for me to be able to exploit this inefficiency exploiting, stock picking strategy.  That's right, I'm also going to use the equivilant of about 30 bps per year to make these trades.  But that's OK!  Morgan Stanley, Merrill, Goldman, and almost all of the other mutual & hedge fund managers in the world fucked up these prices sooo badly, that there is easily enough "alpha" for me to exploit, cover my 1.3% in extra expenses, and STILL be worth it for you!"
 
Seriously guys.  That's the point.  To beat the market, you have to be smarter than the market.  Not just once in a while, but MOST of the time.  And you have to be SO RIGHT (in other words, the "market" has to be drastically WRONG in the first place) that you overcome the extra management fees and transaction costs in the process!
 
And meanwhile, you sit here and say with overwhelming conviction, that even though NEARLY ALL - not half.  not 2/3.  Over 99%! - of all active fund managers fail to even MATCH their true benchmark, let alone exceed it over time. 
 
But somehow, you find MORE honor and valor in saying you are TRYING to beat the market and failing miserably, than just matching (minus 20 bps, or less) the market!  What's even worse, is I can almost guarantee 99 in 100 brokers make these claims based on what they were told in their SALES TRAINING, or by a WHOLESALER, and NOT by actually doing the work, and doing the research!  Why is it like pulling freaking teeth to get you guys to LOOK at other side of the coin, scientifically?!?!??!  LOOK AT THE RESEARCH!  My god, how would you feel if your doctor ignored all current medical research, and just followed along with whatever their Pfizer rep told them because it was so much easier to explain to patients!  Holy crap!
 
And what's worse, is you want to sit here and tell me, that by taking a low cost approach to assembling an equity portfolio of growth and value, large, mid, small, and micro caps, in U.S., European, Asian, Emerging markets, I am somehow doing a disservice to my clients by charging them 1.5% for that construction, plus laying out a path to retirement, helping them with a budget, manage their credit, and create a retirement income plan?  You are off your rockers. 
 
Your right.  I'm an idiot for believing that Mr. Smith from American Funds can't outpick Goldman, Merrill, SB, WS, AGE, EDG, UBS and 10,000 other analysts on a regular basis. 
 
You know what's so sad?  I'd bet most finance scholars choose that path because they have visions of being "big time stock brokers" and "top notch stock pickers" someday.  They want to run money.  After they spend a few years actually studying the reality of our industry, they come out of academia with the exact opposite of what they envisioned - myself included.
 
You guys that are on the opposing side of this discussion, I got interested in this profession probably 10 years ago, for the exact reasons you guys are talking about.  I wanted to be one of those hot shot active managers.  You know, I had the same impression most of the public has about us, and the market.  Even though it would be cool if active management was generally the best way to go, it just isn't so.  I hope some day you guys take an honest look at the other side of coin; I make my statements with hard looks, and a lot of time and energy spent looking at both sides.
 
Edit
 
1.  Now, it will really fry your noodle, that passive managers actually NEED active managers.  Without active managers, and all that research and information flowing around, markets would be less efficient!  Remember what I said before?  S&P 500 index funds are borne of active management (the management behind the assembly of the S&P 500).  That's the key...let the active managers duke it out, and just ride the wave to shore for free.  So actually, I hope active management keeps rockin' on!
 
Correction
 
I mentioned some classes (micro caps, emerging small & micro caps, BRICs, and a few others) that I WOULD use active management in (due to a reasonable amount of inefficiency still present in those markets), just to clarify, that was a mistake - Passive in Large and Mid Cap, developed markets (US, Europe, Asia).

troll's picture
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Joined: 2004-11-29

wow   

newnew's picture
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Joined: 2007-02-23

total agreement with Ice. Snags and Primo are saying the things many brokers say to get sales. It's easy; "look at what these managers have done-they beat the market! Make the check out to Edw......".
 
Another way to say it, which I also disagree with, but which is implied but your posts, is "we don't really believe in the markets, they are so inefficient that even I can spot IN ADVANCE which manager will do MUCH BETTER-- so much better that it is easily worth not only the fund cost and the funds undisclosed trading costs, but also a 3.50% upfront load-- it's worth it even though it is totally in MY best interest to make that claim!"

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