Category Archives: Mutual Funds

Understanding How Fund Performance Comparisons Overstate Returns

May 13, 2014

Every investor has, I hope, read the standard disclaimer on mutual fund and ETF performance documents that ‘past performance does not predict future performance,’ or other text to that effect. Still, when you read a fund company’s statement that ‘x% of our funds have out-performed their category average’ or that ‘x% of our funds are rated 4- and 5-star by Morningstar,’ this seems meaningful. Similarly, if you read that the average small value fund has returns ‘y’% per year over the last 10 years, this also seems significant. There is a major factor that is missing in many of these types of comparisons of fund performance, however, that tend to make active funds look better than they really are (as compared to low-cost index funds) as well as making a mutual fund family’s managers look more skillful than they might actually be.

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Economic Inequality

Income inequality is increasingly acknowledged as a key economic issue for the world.  The topic is a major theme at Davos this year.  Economic inequality is also an increasingly common topic in U.S. politics.

A new study has found that economic mobility does not appear to have changed appreciably over the past thirty years, even as the wealth gap has grown enormously.   The authors analyzed the probability that a child born into the poorest 20% of households would move into the top 20% of households as an adult.  The numbers have not changed in three decades.

On the other hand, there is clearly a substantial accumulation of wealth at the top of the socioeconomic scale.  The richest 1% of Americans now own 25% of all of the wealth in the U.S.  The share of national income accruing to the richest 1% has doubled since 1980.  In contrast, median household income has shown no gains, adjusted for inflation, since the late 1980’s and has dropped substantially from its previous peak in the late 1990’s.

Why is this happening?

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More Unconventional Failure

Guest post by Richard (Rick) A. Ferri, CFA, founder of Portfolio Solutions.

Unconventional success from an investment strategy leads to failure for most investors. The excess gains earned by the early adopters of a new investment idea quickly dissipate as growing crowds become increasingly unsophisticated and push down returns. It doesn’t take long before the average return from the strategy falls well below a simple portfolio of index funds. Continue reading

Explaining the Value Premium

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Value has persistently outperformed over the long-term.  Why is that?

In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity.  Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other.  For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul. Continue reading

Review of The Affluent Investor by Phil DeMuth

I have known Phil DeMuth for a number of years and I admire his common sense and views on many topics.  Phil authored the recently-published book The Affluent Investor that fills a need in the crowded shelves of investment books.  As a financial advisor to high-net-worth families, Phil brings valuable perspective to investors who have built substantial portfolios and seek to protect and grow their wealth effectively. Continue reading

Target Date Strategies Over The Last Five Years

The intent of target date strategies is to provide investors with fully-diversified portfolios that evolve appropriately as investors age.  Target date funds have enjoyed enormous growth over recent years, not least because the Pension Protection Act of 2006 allows employers to direct retirement plan participants into these funds as the default investment option.  Consultancy Casey Quirk projects that target date funds will hold almost half of all assets in 401(k) plans by 2020.

Target Date Folios are an alternative to traditional target date funds, launched on the Folio Investing platform in December of 2007.  These portfolios now have more than five years of performance history.  Prior to the design of the Folios, a detailed analysis of target date funds suggested that they could be considerably improved.  The Folios were designed to provide investors with an enhanced target date solution.  In this article, I will discuss the design and performance of the Folios and target date mutual funds over this tumultuous period.  The risk and return characteristics of these funds and Folios provides insight into the effectiveness of different approaches to portfolio design and diversification.  Continue reading

Perpetually Out of Step

There is increasing evidence of big flows of money into equities and leaving bonds.  This is being seen at all levels in the market, including among institutional investors such as pension plans.  The Wall Street Journal just published an article discussing this shift called Are Mom and Pop Heading for Wall Street?   Mutual fund flows suggest that investors are finally returning to equities, after selling in droves over the past several years.  This article summarizes the issue:

From April 2009 through now, mutual-fund investors sold a quarter trillion dollars in stock funds, according to recent data from the Investment Company Institute.

Ironically, that selloff coincided with a period of stellar performance in stocks—when the Dow Jones Industrial Average jumped more than 60%. Continue reading