8/27/2014 6:45 PM ET|
Can these funds keep beating the market?
Index investing has soared in popularity, with good reason. But some actively managed mutual funds have beaten the S&P 500 for over a decade.
Passive investing is all the rage now that retail investors are giving up on trying to beat The Street. But the move away from trading and actively managed funds doesn't mean all funds are trailing the market.
In fact, several are still beating the S&P 500 ($INX) on a long-term time horizon, and some financial advisors are urging their customers to develop a more active investment strategy.
2013 was a great year for passive investors in the stock market. While the Hedge Fund Equity Hedge Index saw 11.14 percent gains in 2013, the S&P 500 returned more than 30 percent to investors, urging many to crow that active management is dead and indexing is king.
More crucially, the massive underperformance of active investors has led a number of people to pull money from active money managers, both in hedge funds and in the retail mutual fund world. At the same time, low-cost, passive-managed ETFs have seen capital inflows reach all-time high levels.
This doesn't mean that all mutual funds are losers, especially considering a longer-term time horizon. For instance, the Gabelli Asset Fund Class AAA (GABAX) has returned 10.42 percent annualized over the past decade, compared to 8.4 percent for the S&P 500.
Even the biggest proponent of passive investing is beating the market with an active fund: Vanguard, whose founder John Bogle is famous for beginning the passive investing revolution, offers a mutual fund that has beaten the S&P 500 over the past decade. Vanguard's Admiral Shares (VTSAX) is up 8.6 percent annualized over the last 10 years, and its alpha has grown considerably since the middle of 2010.
Can the strong performance continue?
Although some mutual funds have beaten the overall S&P 500, many are skeptical that the strong performance will continue.
"A lot of times it's just luck -- if there are 10,000 or so mutual funds, there will be some that do better," said Craig Birk of Personal Capital. "We think that there probably are a small number of managers who have skill and can add value, but we don't think there's any way for the average investor to identify who those people may be."
Birk believes that active management has more been a game of luck than skill, and these mutual funds may see their luck run out soon.
"I don't think it's getting easier or harder to beat the market -- fees and trading costs are very slowly coming down which may make it a little bit easier," Brik said. "About 60 percent of active funds are lagging the S&P every year. So we don't see anything that's making it easier or harder."
Many financial experts who disagree with Birk point to the very long track records of some funds that are more likely the result of skill than random chance. Certified Financial Planner Geoffrey Kanner says that greater access to data, global markets and asset classes can make a diversified portfolio outperform if it's managed well.
"If we're looking at the SPDR S&P 500 ETF (SPY) index fund, clearly there are times when it does great and there are times when foreign investments will be great. With this, the average investor can buy 500 great companies in the U.S," Kanner says. "But when you take a look at the revenue -- 40 percent of revenue comes from overseas. We're in a global market now. Same is true for the bond market. To understand this more complicated market, you need a sophisticated plan and understanding of the market."
Not all indexes are made alike
Some ETF companies are trying to appeal to passive investors with smarter indexes that are designed for passive investment while beating the market. For instance, WisdomTree has courted retail investors with a variety of indices designed to offer exposure to various assets, and they have seen tremendous inflows into these so-called "smart beta" ETFs.
"In 2013, we saw one-third of inflows ($60 billion of $180 billion) flow into alternatively weighted ETFs -- smart beta ETFs," says Luciano Siracusano, chief investment strategist at WisdomTree. "I think that's a good signal, because that says investors are understanding there's a third choice between actively managed mutual funds and traditional low-fee index ETFs."
Both the traditional low-fee indexes and the newer indexes designed by firms like WisdomTree are attracting a greater share of retail capital. Some advisors think this approach is often driven by a hunt for returns, but many investors fail to assess the risk associated with a long-only portfolio of index funds.
"When I compare a portfolio or an individual fund to the S&P 500, I will use Sharpe ratios, alpha, beta, etc. That's the only way to know if we are being compensated for taking that extra risk," Kanner says. "By the same token, if a fund has underperformed, that may be perfectly acceptable if we realize we have 30 percent or 50 percent less risk than the market. Many retail investors don't understand this."
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I hate when people who write article have major factual errors. It strips any credibility from the whole article.
VTSAX is the Vanguard Total Stock Market INDEX. It is not an active fund as stated in the article. It is a broad market index. The S&P 500 is only the top 500 stocks. It is not "the market". VTSAX includes around 5000 stocks and tracks the Wilshire 5000 index. It is more diversified than the S&P and you can't compare the two.
And that was when the unemployment rate was 9.9%, compared with the current 6.2%.
"They're more negative than they were five years ago," said Rutgers public policy professor Carl Van Horn. The slow pace of improvement during most of the recovery, now in its sixth year, has eroded confidence and slowed a return to the pay levels that many enjoyed before the economy suffered its worst collapse since the 1930s. About 42% of those surveyed say they have less pay and savings than before the recession began in late 2007. Just 7% say they're significantly better off."
First, it's the Rigged Recession, not a Great one.
Notably, the University of Michigan's Consumer Confidence Index reported a rise AGAIN just a few days ago, citing more people are getting okay with their circumstances. I suggest that no one is okay being hungry, broke, frustrated and scared... and such an "index" only exists for market pumping purposes now. That would indeed be the theme of the Rigged Recession-- manipulation and control until it's time to cut some heads off.
There are no personal accounts of what leads some people to the brink, but the motivation has to be a lot like it is now to force someone's living head into a yoke, send a blade down on it and make it dead. Markets are rising everyday, but there is no sign of economy arising from it all across the globe. I'm inclined to agree with Rutgers and to dismiss UofMI as foolishness.
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