I read this article in WSJ sometime ago and since I trust their information, I am schocked. How can this be true? Are all these people unaware of the S&P index fund or any other index funds for that matter? Forget the return, investors to these funds, why are they paying all those expense ratios and front load charges and back end charges? Just to receive returns less than S&P??? I can understand some funds returning less than the index but 87% of all funds??? C’ommmon what am I missing here?
not everyone has a goal of beating the s&p.
To my knowledge, I thought it more along the lines of 2/3 mutual funds returning less than the S&P. Most hedge funds return less than the S&P500 as well. People buy mutual funds/hedge funds because the good funds have much less volatility and more liquidity than the S&P500.
depends on how far back you are looking to compare the funds to the index the farther back you go, the fewer funds stand the test of time in terms of average return against a composite index
- S&P has no fees 2) S&P has immediate reinvestment of dividends in total return index 3) S&P has complete investment with no redemptions and subscriptions forcing them to hold cash 4) S&P has no commissions 5) S&P has no slippage Now S&P index funds have most of those things (but low fees) and beat most actively managed funds too.
the book “A random walk on wall street” is essentially a four hundred page proproganda on why the SP500 index fund is so much more awesome than mutual funds…
Not a friend of Malkiel sternwolf?
sternwolf Wrote: ------------------------------------------------------- > To my knowledge, I thought it more along the lines > of 2/3 mutual funds returning less than the S&P. > Most hedge funds return less than the S&P500 as > well. > > People buy mutual funds/hedge funds because the > good funds have much less volatility and more > liquidity than the S&P500. I’ve heard the 87% number as well, but the actual number is relevant. The important number is the probability that you can ex ante select the outperformers. Also the notion that people buy mutual funds because of liquidity/volatility is laughable - the SPYs are some of the most liquid securities out there. Most index funds return within a few basis points of the index, unless you’re in your some stupid index fund with 40 bps fees. A Random Walk Down Wall Street should be a must read for anyone who wants to work in this industry. If all you took away from it was that it was “propaganda”, I suggest you re-read it. Hedge funds have a different mandate. People buy hedge funds to get high absolute return, low volatility and low correlation to other asset classes. And the world of hedge funds is now so diverse such as to make comparison to the S+P 500 irrelevant.
If the index funds gain more and more ground, what will happen to buyside research?
You will work your ass off for a CFA, after years of bloodsucking ratrace, become a fund manager and then hire many experts w/CFAs who also work their asses off, and all that work and rush and sweat and after many years, the result is less than a loser S&P return? In the name of what? Less volatility??? First time I heard this 87%, I thought it was a joke or misunderstanding. Now, I can not believe it is true. I need my prozac to sleep.
“If the index funds gain more and more ground, what will happen to buyside research?” Fewer jobs? Looks like the WS will soon be occupied by the quants because the only way to beat an index is to bet both ways and play with vol.
I wonder why you are shocked at the notion that the stock market is pretty efficient. There are all kinds of reasons for investing in individual stocks (taxes is the big one) instead of mutual funds, but there are fewer good reasons for investing in broad-based discretionary mutual funds than index funds. Buy-side research can have a large contribution helping people invest in individual stocks which collectively provides the “information” for index funds.
there is a reason why so many wealthy investors buy FOFs and the like. it is because they don’t want to see their portfolio drop by ~50% off the top like the S&P500 has done as recently as 2000-2002. would you rather have been in the sp500 or an international index the last five years? i get tired of hearing the religious arguments about the sp500. if you are going to dollar cost avg in —> invest for multiple decades —> dollar cost avg out then the sp500 is a fine index. but, that’s a vary academic argument that is used by all the windsocks on tv and print. as a practical matter, the s&p500 is not nearly so great a fit for most investors. granted, the closet indexers who charge 1.5% and more to underperform their benchmarks for risk and return just don’t have a place in the industry much longer.
How are they measuring “all funds.” If it is truly all registered funds, then one should consider that they don’t all have the S&P as their benchmark. If 87% of all funds that have the S&P500 as their benchmark underperform it, that is more eye-opening (though still not completely surprising). Lig’s post pointed that out; I’m surprised no one followed up on that part.
Yes and no. Why should we let an asset manager decide what the goal is? If we are investing in equities, the S&P 500 is a real-good approximation of the “market portfolio”. If a manager picks a benchmark like the Dow Jones Transports or something and beats that but underperforms the S&P, it means that he picked a stupid benchmark or you picked a stupid benchmark by investing with him. Of course, there may be good reason to pick a different benchmark than the S&P yourself (for example, I think long-term retirement money indexed to healthcare seems like a reasonable idea).
I think it’s simply a market segmentation issue. If you want other people’s money so you can charge fees on it, and you can’t tell what the customers’ policy statements are going to be, then you can capture more customers if you have one fund indexed to S&P, another fund indexed to Russel 3000 Value, another fund indexed to MSCI, etc… Of course, if your alphas are all correlated to each other across different benchmarks, that won’t help the clients diversify, but sssshhhh! dont’ tell them that!
Yeah. This is just a “shhh, don’t tell anyone this” type explanation.
you have to figure out how exactly they calculate that 87%. break it down and analyze it so you know what the population looks like before you start drawing conclusions. -what percentage of all mutual funds are FI funds? -does that include money markets as well? its perfectly understandable for a person to want to own some bonds, and IMO, a retail MF is prob the best way to go. -what percentage of those funds are index funds based on some other index? again, its perfectly reasonable to own an international index fund. and that index fund might return less than the S&P.
sternwolf Wrote: ------------------------------------------------------- > People buy mutual funds/hedge funds because the > good funds have much less volatility and more > liquidity than the S&P500. I’ll buy the lower vol assumption, but hedge funds having more liquidity than the S&P? Huh? Amaranth? All the funds that imposed their gates in August? Hedge funds are not more liquid than the S&P. Far from it.
What do you mean how they calculate the 87%? How many ways are there to measure a fund return? It is very simple, look at their prospectuses. I believe the 87% is true but I can not believe we live in a world of sheep herds.