David Swensen the honcho at the Yale Endowment fund had an op ed in the NY Times over the weekend that was very critical of the mutual fund industry, specifically actively managed funds. It is not new that he believes individual investors are better off with broad index funds and certainly there is some segment of the investing population where that is the most suitable advice.
However I don't think simply dismissing all actively managed mutual funds is right either. Generally the traditional mutual fund wrapper is not my preferred vehicle. I generally prefer individual stocks and exchange traded funds but we have one traditional mutual fund that we have used as an across the board holding to seek out a specific effect. The fund in question has generally delivered that desired effect but of course no fund or stock or anything else can be perfect all of the time.
For someone building a portfolio that makes country and sector decisions even if not a lot of individual stock picks a traditional fund can work. For someone who wants Australia at the country level then I imagine the first thing they would look at is the iShares Australia ETF (EWA). There are several other ETFs, at least one closed end fund and at least one traditional mutual fund for Australia. If somehow the traditional fund in the space, it is actively managed, outperformed EWA at every turn then I think people would have to consider it, past-performance warnings notwithstanding. This could also be about a risk adjusted result too not just nominal performance.
Likewise with any other desired attribute for a portfolio. I tend to more interested in the realm of absolute return or alternative but whatever the case I would not totally dismiss some segment of the market.
However I don't think simply dismissing all actively managed mutual funds is right either. Generally the traditional mutual fund wrapper is not my preferred vehicle. I generally prefer individual stocks and exchange traded funds but we have one traditional mutual fund that we have used as an across the board holding to seek out a specific effect. The fund in question has generally delivered that desired effect but of course no fund or stock or anything else can be perfect all of the time.
For someone building a portfolio that makes country and sector decisions even if not a lot of individual stock picks a traditional fund can work. For someone who wants Australia at the country level then I imagine the first thing they would look at is the iShares Australia ETF (EWA). There are several other ETFs, at least one closed end fund and at least one traditional mutual fund for Australia. If somehow the traditional fund in the space, it is actively managed, outperformed EWA at every turn then I think people would have to consider it, past-performance warnings notwithstanding. This could also be about a risk adjusted result too not just nominal performance.
Likewise with any other desired attribute for a portfolio. I tend to more interested in the realm of absolute return or alternative but whatever the case I would not totally dismiss some segment of the market.
9 comments:
The thing is, if you decided that you liked a particular form of stock selection (picking countries?) you couldn't do that with mutual funds because their prospectus would never get that specific. The only way you know what the fund might do is to look at its past performance.
While I'm not AGAINST mutual funds, I would expect that a highly paid active manager would outperform me in some sort of market crisis. That turns out to mostly be not the case, of course.
I think that index funds are far superior to mutual funds and when you compare the two there is no need for mutual funds. There are decent funds, like DODGX, but they are very close to the indexes because of their size.
Smaller portfolios probably should be based on index funds and larger portfolios potentially could utilize individual stocks. But comparing indexes, mutual funds, and stocks, there is no use for the mutual fund when it cannot perform better, has no tax advantage, does not offer control/transparency, and is not the lowest cost.
Roger,
Have high frequency algorithmic traders (i.e. "machine trading") and 500 point market swings altered the way you hedge market risk? I'm beginning to think more and more the market is rigged and is a loser's game for the individual retail investor.
For bonds I think mutual funds are the way to go. Haven't been disapopinted by Gross, Gundlach, Fuss and Hasenstab as yet.
Haven't been disapopinted by Gross, Gundlach, Fuss and Hasenstab as yet.
PIMCO and Doubleline. Who are the last 2? I'm looking for another core bond fund.
I think Hussman does a good job on that front with Hussman Total Return which I own.
There are issues with owning funds. Example on the equity side. I've owned FAIRX for a long time, and been pleased, but he appears to maybe have gone off the rails with this ginormous bet on banks and financials. Probably should have sold right away when I saw the size of the bet many months ago, but I didn't.
I think on the equity side for whatever reason managers are more prone to just go crazy at some point.
I think an alternative to funds is owning "wealth-creation" companies like Berkshire, Fairfax, Leucadia where the corporation is essentially a capital allocation vehicle more then an operating company. Still have to have confidence in the chief allocator though.
Does anyone know how a retail investor can buy farmland? Apparently Grantham and Soros think this is a "sure thing".
THanks
Mike C--Search these names on Morningstar. Also read and ask on the Morningstar bond forum. Lots of experienced investors there.
I was referring to Dan Fuss (LSBDX) and Michael Hasenstab (TGBAX/TTRZX). LSBDX did take a beating in 2008 but has since nicely recovered. Wouldn't consider the above as core bond funds though. You may want to check the following in that category - DBLFX, PIMIX and PTTRX. DBLFX doesn't have much history but it should be similar to TGLMX - what Gundlach managed earlier. Gundlach/TCW trial is still underway, may want to factor that in.
Anon 11:34am: I know a banker in Southern IL that I can hook you up with!
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