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Passive investors who invest in the Total Market by definition earn returns equal to the Total Market Return.
Active investors (including investors in actively managed funds) attempt to beat the market. For every one that beats the market there is another than underperforms to the market. By definition, their sum is the total market. Unlike fictional Lake Wobegon, all active managers cannot be above average. Once you subtract out the fees charged by active managers, the sum of all active investors underperform to the market. This again is definitional: subtracting fees from the market return yields less than the market return.
So the real question is this: are the actively managed funds that do better than the market the result of skill or the result of luck?
Cornell’s findings are consistent with the previous research. The great majority (about 92%) of the cross-sectional variation in fund performance is due to random noise. This result demonstrates that “most of the annual variation in performance is due to luck, not skill.” Cornell concluded: “The analysis also provides further support for the view that annual rankings of fund performance provide almost no information regarding management skill.”
Fama & French found few active managers (about 2%) were able to outperform their three-factor (beta, size and value)-model benchmark than would be expected by random chance.
Stated differently, the very-best-performing traditional active managers have delivered returns in excess of the Fama-French three-factor model. However, their returns have not been high enough to conclude they have enough skill to cover their costs, or that their good returns were due to skill rather than luck.
Fama and French concluded: “For (active) fund investors the ... results are disheartening.” They did concede their results appear better when looking at gross returns (the returns without the expense ratio included).
Their study showed a declining ability to generate alpha. The authors found:
Since 1989, the percentage of managers who evidenced enough skill to basically match their costs (showed no net alpha) has ranged from about 70% to as high as about 90%, and by 2011, was at about 82%. The percentage of unskilled managers has ranged from about 10% to about 20%, and by 2011, was at about 16%. The percentage of skilled managers, those showing net alphas (demonstrating enough skill to more than cover their costs), began the period at about 10%, rose to as high as about 20% in 1993, and by 2011 had fallen to just 1.6%, virtually matching the results of Fama & French.
At the end of the day, there is little evidence of nonzero true alpha (skill -- or lack thereof -- of active mutual fund managers).
But there does appear to be some at the two extreme tails -- superior and inferior. Just not much.
the data is actually much simpler than they all thought to compile. just looking at the track records of the various mega funds over various time frames it showed that odds were in the 70% area that merely picking a mega fund at random would beat indexing .
following investor money is very different than just following every fund without some criteria . some funds are always losers , some are small with crushing internal xpenses , others are extremely risky and move top to bottom . so once you eliminate and select where the money is going things change very quickly to indexing being the likely laggard .
which fideliy funds beat the s&p 500 in 2017 ? not all are mega cap funds .
in large caps we had :
growth company
blue chip growth
growth discovery
contra
focused stock
large cap growth stock
trend
large cap growth enhanced
magellan
independance
stock selector all cap
capital appreciation
fidelity fund .
Last edited by mathjak107; 04-01-2018 at 10:27 AM..
If Beta is the expected performance of a fund or portfolio or index, how can a index fund be expected to achieve Alpha which is performance above the Beta for the fund. A index fund should have a Beta of 1.0 correlating to the index it is tracking. Wouldn't any attempt at Alpha have to involve a fund which has the possibility of exceeding its Beta. Doesn't that by definition suggest that active funds are needed to achieve Alpha?
Beta is not the accuracy of the fund to the index, it's the volatility of the fund to the index it is tracking. R-squared is the value/measure you're thinking of. As the OP had opined, he noticed his active fund was doing better than his passive funds. The point is in a stable bull market passive will perform as good or better (once fees are considered especially) than active. In "active" bull markets where the market is frothy, active management will be the only way to gain alpha or appreciable gains within a managed structure.
R-squared is a measure of the percentage of an asset or fund's performance as a result of a benchmark. It is reported as a number between 0 and 100. A hypothetical mutual fund with an R-squared of 0 has no correlation to its benchmark at all. A mutual fund with an R-squared of 100 matches the performance of its benchmark precisely.
Beta is a measure of a fund or asset's sensitivity to the correlated moves of a benchmark. A mutual fund with a beta of 1.0 is exactly as sensitive, or volatile, as its benchmark. A fund with a beta of 0.80 is 20% less sensitive or volatile, and a fund with a beta of 1.20 is 20% more sensitive or volatile.
Alpha is a third measure, which measures asset managers' ability to capture profit when a benchmark is also profiting. Alpha is reported as a number less than, equal to, or greater than 1.0. The higher a manager's alpha, the greater his or her ability to profit from moves in the underlying benchmark. Some top-performing hedge fund managers have achieved short-term alphas as high as 5 or more using the Standard & Poor's 500 Index as a benchmark.
Most of my portfolio consists of passive index funds that are doing poorly, either negative YTD or close to it... of course they are just tracking the broader indices... but I have one active fund in my 401k FCNTX which is really shining, relatively speaking of course...
FCNTX has a YTD return of +3.06% with an expense ratio of .74%. Even factoring that in it has performance over twice as good as the S&P500.
I do notice that they are shuffling things around a lot because I have quite a bit of capital gains and the dividend payout is not great but this is in my tax exempt so I don't care too much. The turnover rate is listed as 29%, holy crap! But whatever it is they are doing seems to be beating the market which is clearly impressive in this challenging market.
Any fans of active funds here?
Lol...when its PROVEN active doesn't beat passive in the long run...why even question it. Everybody IS A pro IN A BULL MARKET. When the pain comes you want to be in a nice index rather than trying to hope the funds you choose work. That said its cool to play with some money and let it ride in a sector or a stock. Also be glad you are around even. That is ahead of the game as of right now.
If you really want to go full bore passive, then do what I did for quite a few years: be invested in a diversified mix, set your contributions for auto investing every couple of weeks, then be (or become) disinterested in the whole investing thing and completely ignore the market or any news about the market. I guarantee it doesn't get more passive than that and still have a working brain stem.
I did really well when I traveled in an RV for 2 years. I often did not have internet or phone coverage and paid little attention to the markets. I made no changes in allocations or funds. Since then I have made several changes and typically get the timing wrong.
that is not the statement you made . you stated it was a proven fact the passive beats active . that is not true. the answer is it depends on the pool of active funds being compared to .
Quote:
Originally Posted by jp03
..when its PROVEN active doesn't beat passive in the long run...why even question it..
that is not the statement you made . you stated it was a proven fact the passive beats active . that is not true. the answer is it depends on the pool of active funds being compared to .
Of course there are exceptions but as a RULE especially in a bull market..passive has been winning. Now...in a Bear market that would probably be less true.
in a Bear market that would probably be less true.
Why? I would expect a bear market to be more chaotic / less predictable than a bull market.
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