Comments on: Why are Actively-Managed Funds Popular?

By: Joe

Joe — Fri, 09 Jun 2006 16:45:03 +0000

I think his argument was that money managers pick stocks that have less downside risk than actually being able to time the market. In fact, mutual funds dont’ really play the timing game – they claim to invest in “only the best” stocks. It may be worth comparing the downside volatility of an index fund with a active mutual fund.

By: Free Money Finance

Free Money Finance — Fri, 09 Jun 2006 10:31:33 +0000

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By: silverm

silverm — Fri, 09 Jun 2006 06:39:20 +0000

Hi Canadian Capitalist, I was wondering why all those Actively Managed funds vs Index funds talks tend to end just short of closet index funds?

A quote from John Bogle of Vanguard:
“Indexing has also forced managers of mutual funds holding portfolios of large-capitalization stocks to minimize their risk of materially departing from the stock market’s return, the better to stabilize cash flows from investors— essentially, therefore, setting marketing strategy. Of the 100 largest equity funds, fully three-quarters have market correlations of 0.90 or above, including one-fourth at 0.97 to 0.99. (We call these funds “closet index funds.”)”

If we accept that 75% of actively managed funds as simply closet index funds, can we put any faith in all those studies of actively managed fund under performance?

There have been may exceptional managers in the past and present like Peter Lynch, Irvin Michael, John Neff, Ralph Wanger, Sir John Templeton, Peter Cundill, Francis Chou, Tom Standly, Jim O’Shaughnessy and Eric Sprott? I’m just curious why have the debate at such a high level? i.e. average of these can’t beat the average of that. My view is that we have a nice group of managers to choose from, but unfortunately closet index funds and other less able managers are dragging the average down for the industry and contaminating the studies. The active vs index debate is over generalizing (IMHO), therefore the conclusion doesn’t help me in my real life investing.

By: Canadian Capitalist

Canadian Capitalist — Fri, 09 Jun 2006 03:40:08 +0000

Joe: I disagree with your prof. because there is no evidence that managers as a group are able to time the markets successfully. In any case, in a bear market a manager is forced to sell and raise cash to meet the flood of redemptions.

By: Joe

Joe — Thu, 08 Jun 2006 14:51:13 +0000

I took an investments course and my prof said that actively managed funds are popular because they have less downside risk. In other words, you money will not bounce around as much, triggering panic selling for a lot of people.

By: Anonymous

Anonymous — Wed, 07 Jun 2006 18:18:12 +0000

Why are Actively-Managed Funds Popular?…

Canadian Capitalist’s guess is that the vast majority of the investing public just buys a fund in the hottest sector sporting blockbuster recent performance numbers. He also discusses some academic studies regarding fund fees….

By: Kanwal

Kanwal — Wed, 07 Jun 2006 17:39:46 +0000

We live in a world of instant gratification. No one
wants to take the time (or has the time) to sit down
and look into investing properly.

Hopefully your blog will help people become more
aware.

By: FMF

FMF — Wed, 07 Jun 2006 13:57:21 +0000

“My guess is that the vast majority of the investing public just buys a fund in the hottest sector sporting blockbuster recent performance numbers. They don’t pay attention to the costs but are sold on the recent performance numbers. The thinking goes something like: “Wow. This fund returned 89% last year. I got to get in on that!””

I agree with you 100% — strange though it is!

Why people don’t just take 15 minutes and figure out a better (and easier) way to invest (like in index funds) is a mystery to me.