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

Harvard’s Endowment Fund

The $33 billion Harvard portfolio is the largest endowment fund in the world. Harvard relies on its endowment fund to cover the costs of more than a third of the university’s operating budget (source: WSJ, June 23, 2014). Despite paying some of its money managers multi-million dollar salaries, Harvard’s endowment fund returns have lagged its peers (see table below).

 

5-Year Annualized Returns of Elite School Endowment Funds

[ending June 30, 2014]

 

Fall of Active Fund Managers

The WSJ writes Charles Ellis is “widely regarded as the dean of the investment-management industry” (source: WSJ, August 23, 2014). According to Ellis, age 76, author of 16 books and former chairperson of Yale’s investment committee, “With rare exceptions, active management is no longer able to earn its keep.”

 

Some Portfolios May Be Too Diversified

Is a U.S. stock/bond mix sufficient for most people to reach their retirement goals? Morningstar has addressed this question by creating seven portfolios, each more diversified than the previous one. Returns for the 20-year period ending June 2014 are shown in the table below. It turns out a simple 70/30 mix (S&P 500 + government bonds) is difficult to beat. Each of the seven portfolios was rebalanced at the end of each calendar year.

 

Portfolio Annualized Returns [all periods ending 6/30/2014]

 

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.

 

Frontier Funds

From the beginning of 2013 through the first five months of 2014, the MSCI Frontier Markets Index was up > 50% while the MSCI Emerging Markets Index was flat. Frontier countries such as Bulgaria, up 91%, Pakistan, up 88%, and Nigeria, up 47%, had strong returns over this 17-month period. Research now shows these markets may not be as unstable as suspected.

 

Alternative Mutual Funds: A Mixed Record

Since the 2008 stock market collapse, investors have been dumping money into alternative funds. The objective of these funds is decent returns, with limited risk; a pattern of returns not positively correlated to stocks. Alternative fund categories include: long/short equity, market neutral, managed futures, bear market, and multi-alternative (multiple strategies).

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Frontier Funds

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

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