Bonds

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Largest Mutual Funds

Superior Active Fund Management

Arnott (1993) and Odelbo (1995)

Arnott (1993) reviewed characteristics of equity funds with superior returns, finding 17 actively-managed large cap funds outperforming their benchmark in 37 out of 49 rolling 5-year periods ending 1993. A paper by Odelbo (1995) found great stock fund managers did not exclusively follow one investment style while looking for undervalued stocks. The author also found there was no statistical evidence of their superior performance.

 

Chevalier and Ellison (1999)

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Efficient Markets

Efficient Markets

A cornerstone of indexing advocates is based on securities markets being efficient. Barron’s defines the efficient markets theory: “…market prices reflect the knowledge and expectations of all investors. Those who adhere to this theory consider it futile to seek undervalued stocks or to forecast market movements.

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Indexing

Duration

A fund’s duration can sometimes be a misleading measurement of interest rate risk if the bond fund has a meaningful weighting in convertibles, foreign stocks and bonds or derivatives. Haslem (2003) believes duration is a more accurate measurement when there are small interest rate changes. Duration tends to better reflect interest rate risk of portfolios of high quality bonds.

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Unpopular Funds

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Indexing

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Dividend-Paying Stocks

TIPS

As of June 2014, the TIPS marketplace was valued at just under $1 trillion, representing ~ 8% of the Treasury debt market. TIPS represent the only marketable U.S. debt instrument with an inflation hedgeprices are adjusted twice a year to account for CPI increases.

 

Municipal Bond Pricing Website

Individuals own ~ 72% of all U.S. municipal debt; individual ownership exceeds any other financial asset class except for U.S. stocks (source: WSJ, June 2014). The website Electronic Municipal Market Access (EMMA), allows investors to compare trade histories of bonds with similar characteristics.

 

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Frontier Funds

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TIPS

S&P Small Cap 600 vs. Russell 2000

There is no standard definition of a small cap stock. The methodology used deciding what stocks are included in a small cap index can result in significant return differences. As of the middle of 2014, The S&P SmallCap outperformed the Russell 2000 for 12 of the last 19 years. The Russell 2000 has been tracking small caps for 30+ years; the S&P SmallCap 600 has been around for 19+ years.

S&P SmallCap 600 vs. Russell 2000

Fees

According to a May 2014 WSJ article, after 30 years, a $200,000 mutual fund investment (8% gross annualized return) grows to $1.4 million after paying the typical mutual fund annual fee of 1.25%. This was the average expense ratio for mutual funds for 2013 (source: Morningstar). The same investment grew to $2.0 million if annualized returns were the same but a 0.04% annual expense ratio (source: ETF.com).

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Leasing vs. Buying a Car

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