Outstanding Financial Pornography

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Koogie
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Re: Outstanding Financial Pornography

Post by Koogie » 24 Aug 2016 11:29

This is making the rounds today. Might also have gone in the "Clippings" thread but I guess it depends on what you make of their argument or possibly brokers in general. (and no... it is not from "that" Bernstein... :wink: )

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"The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.
In a note titled "The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism," a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry."
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Re: Outstanding Financial Pornography

Post by ghariton » 24 Aug 2016 12:37

Koogie wrote:Might also have gone in the "Clippings" thread but I guess it depends on what you make of their argument or possibly brokers in general.
I think it should have gone into the Humour thread.

These guys have obviously never picked up a macroeconomics textbook. Not that I have any great confidence in modern macroeconomics. But it does show, and has done ever since Keynes, that the existence of a single interest rate / return on capital is enough for the economy to function properly, thank you very much. If some projects are expected to earn more, investors will pour more money in, until the rate of return falls to "the" interest rate. If some projects are expected to earn less, investors will refrain, until the expected return rises sufficiently. Adjustments for risk can work in the same fashion.

At the end of the day, return on capital is determined by the productivity of capital, not by the noise surface ripples induced by active managers.

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Re: Outstanding Financial Pornography

Post by DanH » 13 Sep 2016 09:05

I have never been impressed with this columnist. I hesitate to post this (I've been tempted many times in the past) because the columnist seems very well intentioned (not all do). But I used more than a few digits counting the inaccuracies.

http://www.bnn.ca/personal-investor-nev ... d-1.565338

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Re: Outstanding Financial Pornography

Post by 2 yen » 13 Sep 2016 10:48

DanH wrote:I have never been impressed with this columnist. I hesitate to post this (I've been tempted many times in the past) because the columnist seems very well intentioned (not all do). But I used more than a few digits counting the inaccuracies.

http://www.bnn.ca/personal-investor-nev ... d-1.565338
Hi Dan. Would you mind listing some of the inaccuracies? It would be helpful. I wondered if part of the problem with the article is that the totality of loads and annual fees (and there quite large differences) is not discussed in depth at all.

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Re: Outstanding Financial Pornography

Post by DanH » 13 Sep 2016 14:11

Let's be clear that I'm not trying to defend fund MERs or the industry. But I also don't care for blatant errors and sensationalism on this touchy subject (touchy for investors and the industry...not for me so much except when people make things up or confuse details to make a point).

The video starts out referring to "loads" as "yet another fee" that people might pay. Technically accurate but most of the time the load isn't extra because it's all embedded in the MER. But this is admittedly a bit nitpicky.

They refer to CRM2 as requiring advisors to illustrate the fees investors pay in dollars and percentages. Not all fees paid are shown - only those that are paid to dealer or firm. And only dollars will be shown. You have to go to Fund Facts or another resource to find the % fee and only on a product by product basis. See this sample fee/cost report to illustrate.

They refer generically to "mutual fund loads" as typically being 4% to 8%. There is nothing "typical" about this range. Front end loads are almost always zero. When they are charged, it's more like 2% max. Back end loads - if you sell within 6-7 years of investing - start at about 6% the first year and scale down to zero after 6-7 years. Since investors can do no-cost same-family switches; and because investors have tended to hold their funds for about 6 years on average in Canada, back end loads are not in the 4%-8% range on average. Not at all typical.

Then they cut to a screen showing a breakdown of the 6,200 funds with more than $25 in assets: 4,000 are no-load; 200 are front end load; 1,000 back-end load; and 1,000 optional (which means front or back). Let's rewrite this a bit as: 4,000 no loads + 2,200 load funds. This looks dead wrong to me since most products in Canada - if you measure by pure numbers - are load funds. No loads might would be true no-load funds (e.g., PH&N, Steadyhand, Mawer, etc) + bank funds + D series funds of load companies (which aren't that common yet). No way those are 2/3rds of the universe. Then again, bank funds pay some of the highest trailer commissions around so also not clear how "no load" is defined. If a source for this data was cited I'd be able to guess this. But the lack of a source for this breakdown adds to my suspicion.

The host asks the guest if there is any relationship between a fund having a load and its MER. The columnist/guest says NO; that a load is a one-time fee and your fund either says "load or no load or front end load or back end load".

So pretty much every part of this video has an error - some bigger than others. I didn't count one or two other things that I would quibble with...figured the above list was enough...certainly enough to qualify for a permanent seat in this thread :wink:

There is a good message underneath all of this - which is to not be afraid to negotiate and ask about different ways to pay for advice. For me, this message gets drowned out by the confused message.

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Re: Outstanding Financial Pornography

Post by 2 yen » 14 Sep 2016 11:07

DanH wrote:Let's be clear that I'm not trying to defend fund MERs or the industry. But I also don't care for blatant errors and sensationalism on this touchy subject (touchy for investors and the industry...not for me so much except when people make things up or confuse details to make a point).

The video starts out referring to "loads" as "yet another fee" that people might pay. Technically accurate but most of the time the load isn't extra because it's all embedded in the MER. But this is admittedly a bit nitpicky.

They refer to CRM2 as requiring advisors to illustrate the fees investors pay in dollars and percentages. Not all fees paid are shown - only those that are paid to dealer or firm. And only dollars will be shown. You have to go to Fund Facts or another resource to find the % fee and only on a product by product basis. See this sample fee/cost report to illustrate.

They refer generically to "mutual fund loads" as typically being 4% to 8%. There is nothing "typical" about this range. Front end loads are almost always zero. When they are charged, it's more like 2% max. Back end loads - if you sell within 6-7 years of investing - start at about 6% the first year and scale down to zero after 6-7 years. Since investors can do no-cost same-family switches; and because investors have tended to hold their funds for about 6 years on average in Canada, back end loads are not in the 4%-8% range on average. Not at all typical.

Then they cut to a screen showing a breakdown of the 6,200 funds with more than $25 in assets: 4,000 are no-load; 200 are front end load; 1,000 back-end load; and 1,000 optional (which means front or back). Let's rewrite this a bit as: 4,000 no loads + 2,200 load funds. This looks dead wrong to me since most products in Canada - if you measure by pure numbers - are load funds. No loads might would be true no-load funds (e.g., PH&N, Steadyhand, Mawer, etc) + bank funds + D series funds of load companies (which aren't that common yet). No way those are 2/3rds of the universe. Then again, bank funds pay some of the highest trailer commissions around so also not clear how "no load" is defined. If a source for this data was cited I'd be able to guess this. But the lack of a source for this breakdown adds to my suspicion.

The host asks the guest if there is any relationship between a fund having a load and its MER. The columnist/guest says NO; that a load is a one-time fee and your fund either says "load or no load or front end load or back end load".

So pretty much every part of this video has an error - some bigger than others. I didn't count one or two other things that I would quibble with...figured the above list was enough...certainly enough to qualify for a permanent seat in this thread :wink:

There is a good message underneath all of this - which is to not be afraid to negotiate and ask about different ways to pay for advice. For me, this message gets drowned out by the confused message.
Thanks Dan for the detailed reply. I'm trying to get my head around some of this stuff. For example, the seeming contradiction between those who advocate mutual funds vs. those who advocate low cost ETF's. The ETF thing, I think I get, but have had a total allergy to mutual funds for decades and am trying to see the merits in some of them.

Take care!

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Re: Outstanding Financial Pornography

Post by AltaRed » 14 Sep 2016 11:22

2 yen wrote:The ETF thing, I think I get, but have had a total allergy to mutual funds for decades and am trying to see the merits in some of them.
A lot of it has to do with MER and of course, the fund manager. Mawer has proven its ability to compete with ETFs and it's Balanced fund in particular is suited to people who do not want to DIY asset allocation and diversification. It has a low(er) MER because it does not pay a trailer. It is a reasonable solution as an alternate to a fee only planner and one that I have suggested to my ex when I no longer advise her on her portfolio for one reason or another.

A good fund manager can also often beat the small cap indices if one is inclined to slice and dice beyond broad market ETFs, and that is simply because small caps are notoriously volatile (win big or lose big) and a good manager can better smell out the winners.

I still have a legacy Franklin Templeton Bissett Canadian equity fund, Class F, that outperforms the TSX on at least a 5, 10, 15, 20+ year rolling average basis. I bought it via E*Trade before they were shut down by the mutual fund industry from offering Class F funds at the discount broker model. I wish I had a whole bunch more of that fund that I bought in circa 1998.

Bottom line: It is often the MER that kills performance returns.
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Re: Outstanding Financial Pornography

Post by pmj » 14 Sep 2016 13:00

2 yen wrote: For example, the seeming contradiction between those who advocate mutual funds vs. those who advocate low cost ETF's. The ETF thing, I think I get, but have had a total allergy to mutual funds for decades and am trying to see the merits in some of them.
There are some MFs that have outperformed the TSX - eg TD's Dividend Growth fund, TDB972 - see various earlier posts: search.php?keywords=TDB972
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Re: Outstanding Financial Pornography

Post by 2 yen » 14 Sep 2016 19:11

pmj wrote:
2 yen wrote: For example, the seeming contradiction between those who advocate mutual funds vs. those who advocate low cost ETF's. The ETF thing, I think I get, but have had a total allergy to mutual funds for decades and am trying to see the merits in some of them.
There are some MFs that have outperformed the TSX - eg TD's Dividend Growth fund, TDB972 - see various earlier posts: search.php?keywords=TDB972
Thanks!

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Re: Outstanding Financial Pornography

Post by twa2w » 14 Sep 2016 19:28

The problem with saying a mutual fund beat the market is quantifying that. Is that over some arbitary end period. Is it over 1, 2, 3, 5, 10 years. Is it on an average of rolling periods.
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Re: Outstanding Financial Pornography

Post by AltaRed » 14 Sep 2016 19:31

Agreed. Context (assumptions) is critical. Otherwise it is just data. I'd at least look at 3, 5, 10 and 15 year rolling averages. Even then, one has to then look under the hood to see if the lead manager changed, or the fund family changed ownership, etc, etc, etc.
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Re: Outstanding Financial Pornography

Post by pmj » 15 Sep 2016 00:49

Easy enough to do. Go to Google Finance, plot MF vs TSX over whatever period you want, then juggle with the start and end points of the x-axis scroll bar. Remember that the TSX index at Google doesn't include dividends, check out the MF divs (if any) - so maybe add 2% per year to the TSX #s to make a fair comparison.
Unfortunately Google doesn't appear to have the afore-mentioned Franklin fund - I was hoping to compare it.
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Re: Outstanding Financial Pornography

Post by kombat » 15 Sep 2016 07:37

pmj wrote:There are some MFs that have outperformed the TSX
I'm much more interested in the MFs that will outperform the TSX. Can you post a list of those?

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Re: Outstanding Financial Pornography

Post by pmj » 15 Sep 2016 08:05

kombat wrote:
pmj wrote:There are some MFs that have outperformed the TSX
I'm much more interested in the MFs that will outperform the TSX. Can you post a list of those?
Will you offer up a list of ETFs that are gonna out-perform?

It is frequently stated here that ETFs are better than MFs cos their MERs are lower. That is a logical statement, and it's usually true. But it's also a generalization - and thus it's not always true. I was surprised to discover that the fund that I use primarily to mop-up dividends has in fact out-performed - as described in detail in my linked posts. The post in this thread to which I replied raised the same ETF vs MF Q - and ISTM that sharing relevant information reflects the purpose of this forum.
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Re: Outstanding Financial Pornography

Post by DanH » 15 Sep 2016 09:10

pmj wrote:
kombat wrote:
pmj wrote:There are some MFs that have outperformed the TSX
I'm much more interested in the MFs that will outperform the TSX. Can you post a list of those?
Will you offer up a list of ETFs that are gonna out-perform?
This is a fair point. About 18 months ago I looked at the ETF universe with a goal of classifying the products in a way that hadn't yet been done. There were 463 ETFs listed on the TSX (including multiple series of units - eg, 'common' and 'advisor' series count as 2). In my assessment, only 49 ETFs (11% of the universe) were broad market index funds. That leaves more than 400 ETFs from which to choose that in one way or another represent active management. In other words, I saw 90% of ETFs as either directly employing strategies/exposures that I view as "active" (e.g., low vol; factor models; etc) - or being the types of ETFs whereby the investor is making an active decision (e.g., energy ETF; BRIC ETF).

The universe hasn't changed all that much. And I think this underscores pmj's question: which ETFs are you actually buying that are going to outperform those active funds - and are you 'behaving' well with these products that will facilitate this improved performance. I address this issue in this April 2010 Globe article. I think this is the first time I've posted one of my own articles in this particular thread but it fits with the current direction of the thread.

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Re: Outstanding Financial Pornography

Post by Peculiar_Investor » 15 Sep 2016 09:27

pmj wrote:Will you offer up a list of ETFs that are gonna out-perform?

It is frequently stated here that ETFs are better than MFs cos their MERs are lower. That is a logical statement, and it's usually true.
Frequent FWF'ers are likely aware that when members here post recommendations of an ETF based portfolio, for the most part they are referring to broad-based ETFs, not the slice-and-dice versions that are essentially "active" as DanH states. There are index mutual funds that also can be used in this manner, such as the TD e-Series of funds, although their costs tend to be slightly higher comparable ETFs.

The objective is to accept market returns, not out-perform, and to manage the one element that can be predetermined, the cost of ownership. I'm sure longinvest will soon be along to expand on the theory behind this thesis, but basically it boils down to outperformance cannot be known in advance, only in hindsight, and that the average across all investors in the market return.
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Re: Outstanding Financial Pornography

Post by scomac » 24 Nov 2016 09:21

Here we go again...

Stock-picking professionals are beating the indexers
Most finance professors will tell you that active management isn’t worth it. The market is just too efficient - efforts to beat it cost time and money but produce little in the way of extra risk-adjusted returns. Better to ride the average with an index fund or ETF than waste time trying to out-think the crowd.

For individual investors -- folks picking stocks at home with their own money -- the academics are giving very good advice. When retail investors trade, they tend to lose money each time - on average, they’re making bad decisions, and paying trading costs for the privilege of doing so. Only a very small percentage of normal people - perhaps 2 per cent to 5 per cent - have the skill to consistently beat the market average, after adjusting for risk.

Professionals, however, are a different matter. A large number of studies has documented that the typical mutual fund manager really does have the skills to beat the market on average. Now, via finance professors Lubos Pastor, Robert Stambaugh and Lucian Taylor, there is more evidence that professional money managers are very different from their amateur counterparts.
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Re: Outstanding Financial Pornography

Post by deaddog » 24 Nov 2016 10:35

scomac wrote:Here we go again...

Stock-picking professionals are beating the indexers
Only a very small percentage of normal people - perhaps 2 per cent to 5 per cent - have the skill to consistently beat the market average, after adjusting for risk.
What does that mean? How do you adjust an investors performance for risk? I would think that you either beat the market average or you didn't.

Does this mean that if you manage to beat the market you are taking too much risk?
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Re: Outstanding Financial Pornography

Post by scomac » 24 Nov 2016 10:55

deaddog wrote:
scomac wrote:Here we go again...

Stock-picking professionals are beating the indexers
Only a very small percentage of normal people - perhaps 2 per cent to 5 per cent - have the skill to consistently beat the market average, after adjusting for risk.
What does that mean? How do you adjust an investors performance for risk? I would think that you either beat the market average or you didn't.

Does this mean that if you manage to beat the market you are taking too much risk?
You'll have to ask the author, or more likely the professors that mined the data. I suspect that they found data to support their thesis and then the author spun it to make an entirely different point.
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Re: Outstanding Financial Pornography

Post by Descartes » 24 Nov 2016 11:08

scomac wrote:You'll have to ask the author, or more likely the professors that mined the data. I suspect that they found data to support their thesis and then the author spun it to make an entirely different point.
Indeed. Here is the actual research by Pastor:
http://faculty.chicagobooth.edu/lubos.pastor/research/

Here is, I believe, the actual paper from Pastor et al referenced in the article. Click the download or pdf button:
https://papers.ssrn.com/sol3/papers.cfm ... id=2524397
What is appalling is the dumbing-down and twisting of information that happens in articles like this.
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Re: Outstanding Financial Pornography

Post by hboy43 » 24 Nov 2016 12:42

scomac wrote:Here we go again...
Only a very small percentage of normal people - perhaps 2 per cent to 5 per cent - have the skill to consistently beat the market average, after adjusting for risk.
I have never come across quantitatively what is a risk adjusted return, mind you I have not gone looking for it either. Or is it just a qualitative thing for people with lower returns to explain it away.

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Re: Outstanding Financial Pornography

Post by scomac » 24 Nov 2016 14:48

Descartes wrote:Here is the actual research by Pastor:
http://faculty.chicagobooth.edu/lubos.pastor/research/

Here is, I believe, the actual paper from Pastor et al referenced in the article. Click the download or pdf button:
https://papers.ssrn.com/sol3/papers.cfm ... id=2524397
What is appalling is the dumbing-down and twisting of information that happens in articles like this.
Thanks for doing the actual digging, Descartes. Appalling is probably a polite term for what the author has attempted to do here, even though by the end he has wriggled his way to admitting that no matter what he thinks the research shows it isn't worth the pursuit. Unfortunately the target audience are just as likely to take something entirely different away from the article -- that there is worthhope in pursuing alpha through active management (in spite of fees.)
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Re: Outstanding Financial Pornography

Post by scomac » 24 Nov 2016 14:59

hboy43 wrote:
scomac wrote:Here we go again...
Only a very small percentage of normal people - perhaps 2 per cent to 5 per cent - have the skill to consistently beat the market average, after adjusting for risk.
I have never come across quantitatively what is a risk adjusted return, mind you I have not gone looking for it either. Or is it just a qualitative thing for people with lower returns to explain it away.
This may help. The article suggests using the Sharpe ratio as a means of determining risk adjusted return for a single security. From there you could derive a portfolios risk-adjusted return.
sharpesratio.gif
sharpesratio.gif (1.03 KiB) Viewed 861 times
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Re: Outstanding Financial Pornography

Post by Descartes » 24 Nov 2016 15:53

This is a good paper too from the same authors re: diminishing returns of funds as they grow bigger.

https://papers.ssrn.com/sol3/papers.cfm ... id=2318788

..perhaps this is the wrong thread for such papers but it is in reference to the original article in the globe.
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Re: Outstanding Financial Pornography

Post by hboy43 » 24 Nov 2016 23:56

scomac wrote: This may help. The article suggests using the Sharpe ratio as a means of determining risk adjusted return for a single security. From there you could derive a portfolios risk-adjusted return.
Thank you Scott for the links. I read a bit and don't see the whole idea as useful in the long run in terms of having the biggest pile of money after a lifetime of saving and investing, if one can be rational. Surely actual average returns of say 10% PA that are highly volatile and lead to a risk adjusted number of say 8, is a bigger pile in 20 or 30 years than an actual average return of 9 that risk adjusts to 8.

I guess it all comes down to "rational". Most are not, so it seems to me this is a tool to keep folks in the game in the short term at the cost of the long term to a avoid a situation like 2008 where an individual quits the market and hides in GICs for the rest of their lives.

Is my assessment fair here or have I completely missed the point?

Hboy43

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