This is an education issue that I have touched on before. When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
That sort of ignorance is disappointing, disheartening but also a learning opportunity. It is a reminder that people very often invest in things they do not quite understand. This applies to do-it-yourselfers in their 401Ks all the way through to "sophisticated" pools of capital buying some sort of mortgage debt that turned out to be toxic.
As for Bogle's assertion that ETF investors are getting killed, I find it is useless. I'll leave questioning of the data to Felix and just say that human behavior causes investors to lag mutual funds. This has been the case for ages (always?) and so if true of ETFs, is no different than any other sort of fund. People get killed in treasuries occasionally too. The price of any asset can go down a lot and the human response to that could compound that problem, ditto buying high.
I would think that if you asked indexers who have hung on all they way through this and rebalanced at whatever interval Bogle would think prudent many of them would say they have been killed in this market. Bogle has admitted in past TV appearances that it is the behavior, as opposed to the product, that causes the most problems for people yet he continues to rail against the products. One quote from him "...you’re talking about 18% of investor capital that’s been lost by all this trading.” So people may be bad traders, what does that have to do with ETFs? Bad traders have been around longer than Bogle has. If they get rid of all the ETFs today bad traders will have figured out how to lose money with other tools by the open tomorrow.
We had an unusual call into the fire department yesterday for a Public Assist. A stallion got his legs caught in the bottom of the fence because the mare in the next chute over had gone into heat and he was all worked up. The stallion went down, couldn't figure out how to get is legs untangled and was very distressed.The owner called 911 a second time saying how freaked out the horse was so on the second call I told dispatch to call animal control expecting there would be nothing that the other firefighter I would be able to do. But when we got there the owner had one rope around his back half and another around is neck. We jumped in there with him, each grabbed a rope and pulled. Pulling out and rolling him over was much easier than I would have expected but there we were in the chute with a (formerly?) distressed stallion so we jumped the hell out of there and all was well.
Fortunately the night before I had watched a few minutes of the movie Junior Bonner, a modern day cowboy movie starring Steve McQueen from 1972 that was filmed here in Prescott. The picture is my favorite scene from the movie (ahem) at the old train station that more recently was an AG Edwards office (free Lenny Dykstra coaster to anyone who can remember who bought that firm) but now is vacant.
26 comments:
When I first moved to Prescott, about 9 years ago, I found a copy of Junior Bonner at a local video rental store. It was a great introduction to the area. I was amazed at how little had changed in about 28 years. Have you seen the huge Junior Bonner mural that covers one wall of the historic Palace restaurant on Whiskey Row? I bring all my visitors there when they visit Prescott from "back East".
Wachovia. Who's Lenny Dykstra? Is this a good prize?
Wachovia, and up until last season a long suffering Phillies fan.
Hey cowboy :) I have several friends who are firemen. They always have good stories, but I think yours takes the cake. Well done!
You didn't ask, and I certainly have no right to complain, but I'd like to second yesterday's comments about the new blog page. It's harder to read, dark and a little bit depressing. Fortunately, your sunny disposition still shines through.
Thanks as always.
Man, Lenny Dykstra. There's an interesting story.
I waffled back and forth on this active mutual fund subject. The guy running the 1 active fund I own is supposed to be one of the best.
I understand it's a value fund. And I understand what it invests and how it invests. But, OTOH, the guy is supposed to be smarter than me.
It's an interesting contradiction that I keep thinking about off an on. I guess deep down we expect active mutual fund managers to all be technical guys who get out at the appropriate time.
He did beat the market in 2008. On the other hand, he lost 30%.
"Junior Bonner (1972), Sam Peckinpah's elegiac meditation on both the rodeo and the slow death of the American West. McQueen plays the title character, a down-on-his-luck aging rodeo star who's living from bullride to bullride."
Is there a message in there?...:-)
Oh, how about a red backround for
days to be out of the market and
green backround for days to jump in.
Thanks for all you do Roger...
My animal rescue story might be better. Although I wasn't personally involved, it seems a cow got itself into a deep concrete lined irrigation canal and couldn't get out. It was slowly drifting downstream and would eventually get to a gate where drowning was near certain. Some enterprising ranch hands managed to get a rope around the cow's neck just as a backhoe arrived on scene. Well...you get the picture. I heard once the rope was removed the cow trotted off as if nothing happened.
Ditto the readability of your new format. More difficult to read.
Active managers should be judged against the appropriate benchmark. I believe that sufficient evidence has been provided to show that in the long run, an index of any investment style beats active management 80% of the time. The almost impossible trick is to identify the 20% who do outperform early enough to make a difference.
Happy trails to all!
My experience is similar to Stephen Drone's with the one fund I own. Most funds' charters are to be fully invested, so even a few % cash is considered defensive. That obviously won't provide much cushion in markets like last year's.
I think Roger is right-- asset allocation is not the responsibility of fund managers. If you need or want more cash, then you've got to sell something (or not buy as much in the first place.)
Retired in P the mural was painted by Dave Newman. Do you notice that in the movie during the parade scene they show where Murphy's is but instead it is O'Neil's Economy Store.
5:57 if you really don't know LD was a very good baseball player and a not so good figure in the financial markets of late. The coaster is a joke from when Adam Warner talked about the Dunkin Donuts near him giving away LD coasters.
6:12, cowboy for a day anyway
SD your guy is supposed to be smarter than you? many of them are very smart, no question but that doesn't mean having the occasional missfire.
RE the new blog layout, it is a work in progress. I am working with a new ad network and am letting them figure the best way to go with the layout but it is a process.
Roger -- ditch the black background and white font. Looks nice but hard to read.
The problem I have with managed funds in my IRA account is that the brokerage company has introduced a $50 fee (in addition to trading fees) for redemptions within 6 months. So, if I think the market may tank, say in small caps, I will be penalized additionally to change my portfolio allocation.
Roger,
Love your blog but please revert to your original visual format. The new white on black is almost impossible for these mature eyes to read.
Thanks.
mkt
@7:54 guys like Bogle and Buffet would probably applaud disincentives to trading since it costs the average investor so much wealth. Sure it is annoying, but if you don't think a trade will deliver $50 in value one could argue that it should be left unexecuted.
Regarding active management and the top 20%: does anyone have an experience "cloning" 13Fs ala AlphaClone or manually? This concept is basically the opposite of the actively managed mutual fund where you pay the manager with the tacit expectation that you will get outperformance - but then don't get it usually! In contrast the hedge fund managers aren't promising you anything, and don't care if you exist, but you actually get outperformance historically speaking.
From your average 401k funding employee's perspective when we pay a mutual fund's management fee we are paying an expert to manage our money. Incorrect as that may be, thats the way it comes across to your average person.
I've been with 4 different companies and 4 different 401k plans. They are all the same.
Your 401k education is pretty much...
"Welcome to the company. Your 401k is managed by investment company x.
You are automatically enrolled at Y% in Z fund. Please login to website W to make any changes.
You want to invest in a 401k because of company matching and for tax purposes.
The end."
I've never really got the feeling that mutual fund managers nor their companies cared. They have a captive audience due to their agreement with the employee's company and they take it for granted. If mutual funds and by extension 401ks want to keep getting an influx of money they have to be more open and communicative.
Roger: Why did you superimpose your head on someone else's body in that picture?
Just curious.
um for a little humor.
Redesign looks OK to me. Nothing fancy, but maybe that's just as well. In my somewhat limited graphic-design experience, people sometimes tend to dislike the new design at first glimpse because they were so comfortable with the old. But a thoughtful redesign can be an improvement and viewers will settle in with it just fine.
Besides, if this puts a few more coins in our host's pocket, 'nuf said.
As for mutual funds staying true to their charters, etc. Well yes. But golly, you'd have thought some of them might have been a bit more on their toes about selling the companies (e.g. financials) that were train wrecks in the making. Isn't that why the fund managers get paid the big bucks? Whatever happened to anticipating problems? Oh, wait, whocouldhavenoode (or however they spell it.)
BillM
I am not sure I can agree with you that a fund manager should always be "all in". I think the assumption that the average retail investor has made an asset allocation with the purchase of a actively managed fund is borderline laughable. I think the average retail mutual fund investor has virtually no idea what they are doing - and knows it - that is why they purchase an actively managed mutual fund (they think they are getting help. I, and others, think they are getting hosed.)
I think you have to operate in the world you live in -not the one you think should be - I think fund managers have a duty to do more than rearange the deck chairs when the ship is sinking.
That is just my opinion, I could be wrong.
anon 12:08 your comment about the average investor whether true or not would seem to be a completely different discussion.
"I think fund managers have a duty to do more than rearange the deck chairs when the ship is sinking."
I'd like that, of course, but then that would need to be detailed in the prospectus.
"we buy value stocks, except when the 50 day MA and the 200 day MA cross"
Certainly an interesting idea.... but I'm also not sure that anyone would read enough of the prospectus to know which funds did this and which don't.
Hmm. I swear "sign out" after leaving a comment was at the top this morning, but now it's not.
its a work in progress:>>
hah. I'm not complaining.
Nicer/cleaner format. Good Job Roger.
bwjr
Roger,
The "work in progress" on the blog's format is much better!
tks
j
Wachovia is the answer, and i am assuming that these are used coasters because "Nails" never was known to leave one unused.
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