It was a particularly hot summer weekend day in St. Louis, too hot to be outside. So I decided to use the time going through the collection of articles I keep for future use. I save these articles, to be resurrected at a later date, in an effort to hold forecasting pundits and active managers responsible for their predictions or performance.
Among this stable of articles was one about Morningstar's 2012 fund manager of the year awards. Since all backward-looking crystal balls are perfectly clear, I thought it would be worthwhile to check in on how these superstar investors performed in 2013—the year after being selected.
The table below shows the winning funds in 2012 and their Morningstar percentile ranking based on 2013 performance.
Read the rest of the article on ETF.com.
I have long been skeptical of how fair bond fund prices are — or more accurately said, the potential ability for knowledgeable investors to “game” bond fund prices — in fixed income asset classes where liquidity isn’t great. Two asset classes that immediately come to mind are municipal bonds and high-yield corporate bonds. I finally got around to testing this proposition using daily returns data for a handful of different bond funds in these two asset classes. The findings confirm my suspicion.
If bond fund prices (or, equivalently, net asset values) were fair on a day-to-day basis, you should generally see that a prior day’s return for a fund tells you nothing about what today’s return will be. In other words, past returns shouldn’t predict future returns. The good news is that this is a testable proposition.
I pulled daily returns data for five different large bond funds from two different fund families. The first three funds have the majority of their portfolios invested in less liquid securities like municipal bonds and high-yield corporate bonds. The last two tend to own fixed income securities with better trading liquidity.
Read the rest of the article on Multifactor World.
In Mebane Faber’s new book, “Global Value,” he states: “It is ironic that the largest and most famous index, the S&P 500, is really an active fund in drag. It has momentum rules (market cap weighting), fundamental rules (four quarters of earnings, liquidity requirements) and a subjective overlay (committee input). Does that sound passive to you?”
While we could debate extensively whether or not the S&P 500 Index is actively managed, I agree that it is. For me to consider the S&P 500 passive, it would have to comprise the top 500 stocks by market capitalization or, failing that, use rules-based screens with no reliance on the subjective judgments of committee members.
With that said, the real question is, Why does it matter if the S&P 500 is actively or passively managed? One reason the distinction might be important is because of an argument often raised by supporters of active management. They contend that the S&P 500 is not a fair benchmark because it’s really an actively managed index. Let’s examine if that claim has any validity.
Read the rest of the article on ETF.com.