Mutual Funds

One way academic researchers measure investment risk is by looking at stock price volatility.

Table 9 lists the largest mutual funds in the U.S. as of December 2015, according to MarketWatch.com.

 

Table 9

20 Largest Mutual Funds as of December 2015

 

Vanguard 500 Index; Adm  (VFIAX)	Vanguard Total Stock; Inv  (VGTSX)
Vanguard TSM Index; Adm  (VTSAX)

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)

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]

 

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.”

 

A number of online brokers provide free online tools for portfolio construction and management. One service known for its simplicity is Motif Investments. Motif offers nine preset and commission-free portfolios; each portfolio is comprised of the same four ETFs from Vanguard and two ETFs from BlackRock (real estate and commodities).

 

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]

 

Financial advisors typically recommend a portfolio contain 6-12 months of cash savings to cover emergencies. Some mutual fund managers believe opportunity costs begin to outweigh possible benefits when investors hold > 10% of their portfolio in cash.

 

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 hedge—prices are adjusted twice a year to account for CPI increases.

 

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.