Portfolio Management
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[quote=newnew]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.
[/quote] I think I'll just stand with Warren Buffett in the belief that Modern Portfolio Theory does not work.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.
[quote=iceco1d]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.[/quote][quote=iceco1d]
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.[/quote] 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...[quote=iceco1d]
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.
[/quote] That's it? That's all you agree with? Man, I surely thought there were at least a couple other decent points." 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!)[quote=newnew]" 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!)[/quote] 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.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.
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"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”.
Class Expense Ratios 1.05 1.30 -3.64 6.83 3.18 7.25 -7.80 6.69 2.19 6.64 0.00 n/a GS Balanced Fund Retail B 1.80 2.05 -4.37 6.03 2.41 5.03 -8.03 6.72 2.02 4.84 0.00 n/a GS Balanced Fund Retail C 1.80 2.05 -4.34 6.04 2.41 2.94 -4.13 7.10 2.02 2.70 0.00 n/a S&P 500 with Income n/a n/a n/a -6.68 9.76 4.20 n/a -5.06 11.31 3.50 n/a n/a n/a *Lehman US Aggregate n/a n/a n/a 6.87 3.83 5.78 n/a 7.65 4.58 6.03 n/a n/a n/a GS Balanced Strategy Portfolio Retail A 1.25 1.40 -0.22 8.53 5.04 5.36 -5.77 7.81 4.11 4.56 0.00 n/a GS Balanced Strategy Portfolio Retail B 2.00 2.15 -0.98 7.73 4.25 4.58 -6.08 7.85 3.91 4.35 0.00 n/a GS Balanced Strategy Portfolio Retail C 2.00 2.15 -0.95 7.72 4.26 4.59 -2.12 8.22 3.92 4.36 0.00 n/a *S&P 500 w/income n/a n/a n/a -6.68 9.76 4.20 n/a -5.06 11.31 3.50 n/a n/a n/a 60% Leh Agg/20% MSCI EAFE/20% S&P 500 n/a n/a n/a 2.49 8.19 6.09 n/a 3.22 9.37 5.96 n/a n/a n/a GS Equity Growth Strategy Portfolio Retail A 1.35 1.78 -5.84 15.61 5.35 5.99 -12.63 15.53 3.67 4.73 0.00 n/a GS Equity Growth Strategy Portfolio Retail B 2.10 2.53 -6.58 14.74 4.55 5.20 -12.83 15.72 3.48 4.53 0.00 n/a GS Equity Growth Strategy Portfolio Retail C 2.10 2.53 -6.57 14.72 4.56 5.22 -9.16 15.98 3.49 4.54 0.00 n/a 50% MSCI EAFE/50% S&P 500 n/a n/a n/a -4.30 14.70 5.80 n/a -3.60 16.54 5.12 n/a n/a n/a *S&P 500 w/income n/a n/a n/a -6.68 9.76 4.20 n/a -5.06 11.31 3.50 n/a n/a n/a GS Growth Strategy Portfolio Retail A 1.35 1.70 -5.04 13.60 5.21 5.85 -11.48 13.33 3.73 4.71 0.00 n/a GS Growth Strategy Portfolio Retail B 2.10 2.45 -5.77 12.74 4.42 5.07 -11.68 13.48 3.54 4.51 0.00 n/a GS Growth Strategy Portfolio Retail C 2.10 2.45 -5.66 12.76 4.43 5.08 -8.00 13.76 3.54 4.51 0.00 n/a 20% Leh Agg/40% MSCI EAFE/40% S&P 500 n/a n/a n/a -2.01 12.54 6.00 n/a -1.30 14.15 5.50 n/a n/a n/a *S&P 500 w/income n/a n/a n/a -6.68 9.76 4.20 n/a -5.06 11.31 3.50 n/a n/a n/a GS Growth and Income Strategy Portfolio Retail A 1.34 1.64 -2.64 11.41 5.45 6.01 -8.81 10.99 4.21 5.01 0.00 n/a GS Growth and Income Strategy Portfolio Retail B 2.09 2.39 -3.37 10.55 4.66 5.22 -8.97 11.13 4.01 4.81 0.00 n/a GS Growth and Income Strategy Portfolio Retail C 2.09 2.39 -3.35 10.57 4.66 5.22 -5.21 11.41 4.01 4.80 0.00 n/a 40% Leh Agg/30% MSCI EAFE/30% S&P 500 n/a n/a n/a 0.25 8.58 5.44 n/a 0.97 9.61 5.12 n/a n/a n/a *S&P 500 w/income n/a n/a n/a -6.68 9.76 4.20 n/a -5.06 11.31 3.50
If all fund families benchmarked with these blended indices, they would be more accurate----- but sales would go way down!!!
SNAGS: here’s 2 points: my indexes CANNOT blowup
Indexes can and have blown up. For example the QsI 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.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”.
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.
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.Good point. Let me rephrase. I feel not even attempting to add returns beyond hand holding is lacking.
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!"