[HN Gopher] Less Than 7 Percent of US Active Equity Funds Have B...
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Less Than 7 Percent of US Active Equity Funds Have Beat the Market
Past Decade
Author : belter
Score : 102 points
Date : 2023-04-15 20:32 UTC (2 hours ago)
(HTM) web link (www.ft.com)
(TXT) w3m dump (www.ft.com)
| ThorsBane wrote:
| This is going to change because too much money in indexes means
| not enough capital is chasing winners, and is instead enjoying
| the rising tide. That is okay and it is sustainable. But it still
| means that the upside for the ones who do chase winners and who
| succeed in placing correct bets on great companies will be more
| and more massive. Because the delta in capital from the index to
| the cream of the crop will be way larger in absolute terms as the
| indexes grow in size, and the winners will continue to prop up a
| huge rising tide of continued innovation.
|
| I'd be worried if nobody could beat the market. 7% to 15% beating
| the market seems reasonable to me. The market is an incredible
| abstraction and it works, and it's also still great and
| reassuring to know that there's still an echelon of actively
| managed funds that beat the market.
| cft wrote:
| That's a very good insight. The success of the index funds is
| nothing but an indicator of the inflation from the top, that
| has not trickled down to Main Street until recently. In a
| stable solid monetary regime, capital is forced to pick
| individual stocks, as opposed to riding the inflation wave.
| fredgrott wrote:
| I have an economic question. Several people in the hedge and
| equity industries have asked that hedge funds in general pay a 5%
| tax. If that were to happen how would that change the outcome as
| in such a situation one has to factor in making enough on
| investments to cover the 5% tax?
|
| Or in general what can be done to economically align hedge funds
| with making some basic 5% or more return?
| somethoughts wrote:
| I think its helpful to realize that the S&P 500 is not some
| static index of companies whose selection has been on auto-pilot
| but actually a fairly actively managed index whose selection
| algorithm is continuously being updated and refined. There is a
| not insignificant human judgement component of how to define the
| selection/weighting criteria.
|
| In some senses, behind the scenes its likely similar to the
| Twitter/FB/Netflix algorithm - at some point there is some
| editorial opinion being inserted via criteria and weighing of
| those criteria.
|
| "Some years ago Bill Miller, then a well-known Legg Mason
| portfolio manager with a stellar record of beating the market,
| noted that the S&P 500's track record of being very hard to beat
| suggested that active management can succeed and that the Index
| Committee were actually good active managers."
|
| https://www.indexologyblog.com/2014/08/07/inside-the-sp-500-...
| throw0101b wrote:
| > * There is a not insignificant human judgement component of
| how to define the selection/weighting criteria.*
|
| Not wrong, but the rules are relatively fixed and known ahead
| of time and somewhat deterministic compared to the decision-
| making process of most active funds.
|
| It should also be noted that the S&P 500 isn't the only index.
| The Russell 3000 and Wilshire 5000 try to cover "all" publicly
| trade companies in the US:
|
| * https://en.wikipedia.org/wiki/Russell_3000_Index
|
| * https://en.wikipedia.org/wiki/Wilshire_5000
|
| But "passive investing" does exist on a spectrum:
|
| > _The terms passive investing and index investing are often
| intertwined, but they are not exactly the same thing. Today's
| guest is Adriana Robertson, the Honourable Justice Frank
| Iacobucci Chair in Capital Markets Regulation and an associate
| professor of Law and Finance at the University of Toronto
| Faculty of Law and Rotman School of Management. Adriana is
| interested in index investing and, in this episode, we hear her
| views on whether or not index investing is passive. Hear facts
| from her paper on the S &P 500 Index fund specifically, and all
| of the reasons that it's not passive, as well as some of the
| issues that are potentially arising from the creation of so
| many indexes or so-called passive investments. A more recent
| paper by Adriana, published in_ The Journal of Finance,
| _surveyed a representative sample of U.S. individual investors
| about how well leading academic theories describe their
| financial beliefs and decisions, and Adriana shares the
| differences in something like value growth from an academic
| perspective versus a real-world perspective. Find out how
| investors can go about evaluating the performance of their
| portfolios and what they should be looking for when deciding
| which index fund to invest in, as well as why index funds
| aren't a meaningful category anyway, factors from Adriana's
| surveys that might influence investor's equity allocation, and
| the trend towards indexing and whether it will overtake active
| portfolios. Tune in today for all this and more!_
|
| * https://rationalreminder.ca/podcast/133
| ncr100 wrote:
| .. and it's "THE" S&P 500 ... popularity surely has an impact
| on whether an investor will simply choose to invest in a member
| of the '500.
| rthomas6 wrote:
| Yeah but the Russell 3000 tends to slightly beat the S&P 500,
| and it comprises 98% of the market.
| maest wrote:
| That's just the size premium.
| anonu wrote:
| Yes there's an index committee comprised of humans. But the
| index methodology is public and when there are tie break
| decisions needed, they're fairly predictable.
|
| Another thing to think about is that most of the outperformance
| of the index is driven by the largest companies. But not
| because they were added when they were their current size. But
| because of the buy and hold approach of getting them in when
| they're still on the small end of the large caps. There was a
| good recent paper on this concept, showcasing that most of the
| big index returns are attributable to only a few stocks.
| Similar to how most of global market returns are mostly just
| US.
| herostratus101 wrote:
| I think you mean that the committee comprises humans.
| 88913527 wrote:
| Is the algorithm "select * from companies order by market_cap
| desc limit 500"? At the risk of oversimplifying, there should
| be quite little to debate, and when some hair-splitting
| occurs, I trust a committee of reasonable humans will make a
| reasonable choice.
| anonu wrote:
| You have to adjust for free float market cap. Companies
| need to be US incorporated. You have to be aware of share
| classes. For example both GOOG share classes are in the
| S&P.
|
| When it comes to tiebreak decisions, there may be 5 or so
| potential adds when there is 1 delete. There may be a focus
| on evening out sector exposures, preferencing underweight
| sector adds. (Just my guess)
| mandevil wrote:
| The algorithm is a little more complicated than that, as
| various judgements have been added in, but always with
| specific rules. When there was a trend of tech companies
| going public with dual classes of shares leaving founders
| in control forever (e.g. Zuck with Facebook) they announced
| that any company which went public after date X with dual
| classes to prevent the economic owners from exercising
| control would not be allowed onto the index. Similarly,
| there are rules about profitability that, IIRC, were added
| after the first dotcom bubble to try and keep extreme
| bubbles from mucking up the index (I think it's that you
| need to have two consecutive quarters of profitability, but
| I don't remember the details).
|
| Also, the market cap of company 450 and company 550 are
| close enough that recent market performance can flop ]back
| and forth fairly regularly, which the S&P has further rules
| to try and limit, though again I don't remember the
| details. Again, they try to be fairly rules based, but do
| exercise some discretion in creating the rules.
| somethoughts wrote:
| Definitely agree the algorithm is likely pretty well
| documented but as noted in the blog it is adapted in
| realtime.
|
| Here's the current breakdown:
|
| Apple 7.08%, Microsoft 6.20%, Amazon.com 2.62%, NVIDIA 1.87%,
| Alphabet 1.84% Berkshire 1.65% Alphabet 1.61% Tesla 1.44%
|
| which if it was an active manager would be highly
| opinionated.
| DesiLurker wrote:
| unrelated basic question: Berkshire itself is a
| conglomerate that owns oprtions of S&P companies like Apple
| etc. So is this not double dipping?
| singhrac wrote:
| Really? That's essentially just the market cap weights,
| which is the most default thing you could do.
|
| There's a slight deviation because it's float-adjusted and
| I'm assuming their marks are at some frequency, but those
| numbers aren't mysteries.
| pavlov wrote:
| I think the point is that the divergence in market cap is
| so large that it's become equivalent to a highly
| opinionated active manager. Any fund that's allocating
| over 13% to just two companies seems a bit risky, but
| that's what you're getting with Apple and Microsoft here.
| sokoloff wrote:
| I don't think it's as opinionated nor active as you're
| making it out to be.
|
| Investing proportionally more in a huge company than you
| do in the 500th largest eligible company seems much more
| passive than active to me.
|
| If two S&P companies were to merge and everything else
| remained the same, I'd think that having the combined
| amount invested in the combined company to be more
| sensible than cutting your investment proportion in half
| merely by a merger.
|
| Or if a company you'd invested in doubled in value, I'd
| rather hold the constant number of shares rather than
| sell half of them to bring my exposure to the winner
| down. Selling half feels more active and opinionated than
| simply holding.
| [deleted]
| scotty79 wrote:
| > Index Committee were actually good active managers.
|
| It's as if researchers complained that placebo is too
| therapeutic.
| ransom1538 wrote:
| Agreed. I have ruined so many dinner conversations over this.
| You can't beat the SP500, it is the only free lunch. It is
| truly depressing when you think about it - you just feed the
| machine. The American millionare class is a group of 401k
| holders. [Oh. and they made 54.96% in the last 5 years]
| geysersam wrote:
| > The American millionare class is a group of 401k holders.
|
| What do you mean by this? That pension saving make up the
| bulk of wealth in the US? Because from what I can gather
| that's not correct.
| AnimalMuppet wrote:
| I think he's saying that 401ks have made a bunch of regular
| people into millionaires, because of the performance of the
| S&P 500.
| ransom1538 wrote:
| Your best odds of being an american millionare is pushing
| all you can into a 401k which purchases sp500. Most
| american millionares are not business ninjas. They are
| teachers and firemen pushing into their 401k, they also
| don't make much money. "Only 31% averaged $100,000 a year
| over the course of their career."
|
| What happens is the ridiculous return of the sp500.
|
| Sorry, about this link in advance:
| https://www.ramseysolutions.com/retirement/the-national-
| stud...
| sokoloff wrote:
| Being in the millionaire class in the US isn't that rare[1]
| and very often is achieved by real estate and retirement
| savings.
|
| [1]-It's about 9% of American adults.
| abdullahkhalids wrote:
| > It's about 9% of American adults.
|
| How is this counted wrt spouses?
| user_named wrote:
| Yes, easily. Buy an emerging market etf. Will outperform
| SP500 over the next decade.
| xapata wrote:
| Over the next decade, but not the next year? Are you so
| confident in this that you've leveraged and bought options
| to maximize returns?
| anonu wrote:
| The issue is that some active funds do beat the market... And
| they do consistently. But the buyin is high and the fees are
| above industry averages. So people look for lower cost active
| returns and fail.
| belter wrote:
| But normally they do it with closed money pools. In the
| meanwhile they normally have other money pools that offer to
| their customers...but the algorithms never seem to work as well
| for those money pools...
| huhtenberg wrote:
| E.g.
| https://en.wikipedia.org/wiki/Renaissance_Technologies#Medal...
|
| > _From 1994 through mid-2014, it averaged a 71.8% annual
| return, before fees._
| belter wrote:
| But not for everybody...
|
| "Renaissance suffers $11b exodus with meager quant returns -
| https://economictimes.indiatimes.com/markets/stocks/news/set.
| ..
| sitkack wrote:
| Way too much meddling by the SEC has caused structural
| inefficiency in the liquidity and the distribution of capital.
| dehrmann wrote:
| Could you elaborate? On first read, I read the Fed, but the SEC
| causing this is interesting.
| jrochkind1 wrote:
| If you had invested in a fund that just tracked S&P 500, what
| would have been your, over, say, the last ten years, what would
| have been your returns? I can't figure out if this info is in the
| article.
|
| _Are_ there low-fee funds that just track the S &P 500? That
| would seem to be the way to go for long-term investing? What such
| funds can I find? (taking into account as other comments in this
| thread point out that, yes, the S&P is actually actively managed
| itself, sort of).
| belter wrote:
| https://www.fool.com/investing/how-to-invest/index-funds/ave...
|
| "...If you had invested $10,000 in the S&P 500 index in 1992
| and held on with dividends reinvested, you'd now have more than
| $170,000. The market volatility in 2022 could cause this return
| to decline somewhat. However, the index has proven to be a
| winner over the long term..."
| huhtenberg wrote:
| But if you would've invested in SPY in 2000, your return
| would've been 0% until 2013 or thereabouts.
|
| I.e. the entry point matters a lot.
| M3L0NM4N wrote:
| I mean, most people don't just invest all their savings in
| the stock market at once. Continually investing over time,
| or DCA, is super important.
| Quarrel wrote:
| DCA works, but isn't super important.
|
| If you win a lump sum, studies show that the best time to
| put it in the market is all of it right now, not trying
| to time the market or DCAing it into the market. Of
| course, you could get unlucky, so that you're initially
| in the 2000->2013 style window, but you can't know that
| at the time.
|
| Of course, most of us do / should invest smaller amounts
| over time, just because that is what our earning profile
| is like.
| jrochkind1 wrote:
| OK thanks! now to figure out how to calculate that as an
| annual rate of return (APY?) Sounds like this was through
| 2021, already a bit old?
|
| If I plug this into a random calculator on the web without
| knowing what I'm doing, $10K to $170K over 20 years looks
| like... around 15.25%? That does seem quite high, can that be
| right?
| belter wrote:
| Like Warren Buffet said...nothing like just buying the
| index and enjoying it...
|
| https://www.investopedia.com/ask/answers/042415/what-
| average...
|
| "The average annualized return since adopting 500 stocks
| into the index in 1957 through Dec. 31, 2022, is 10.15%."
|
| "Over the past 20 years (2002 to 2022), the average
| annualized return on the S&P 500 is 8.19%."
| jrochkind1 wrote:
| Thanks, that seems more realistic than the 15% I
| incorrectly came up with. 10% is what I had in my head as
| a very good but possible managed fund return -- and only
| 8% over the past 20 years instead of an unrealistic 70.
| This seems like a more realistic expectation.
|
| So a conclusion might be: if you've been getting less
| than 8% (after fees) over ~10 years in any managed
| fund... you might want to reconsider your investments,
| seems like. But if you've been getting 8-10% or more,
| you're pretty good. Does that make sense?
| belter wrote:
| I hope you realize these are extraordinary returns. Show
| me an active manager that can demonstrate consistent 8%
| returns over the last 20 years, and I will be at their
| door next Monday 08.00 AM.
| ForHackernews wrote:
| > Are there low-fee funds that just track the S&P 500?
|
| ...yes. Sorry, I don't mean to sound like a jerk, but is this
| really a question? There are dozens of them:
| https://www.thebalancemoney.com/the-cheapest-sandp-500-index...
|
| I'm continually astounded by techies who have so much money and
| so little idea what to do with it. It's not like this stuff is
| even hard, not compared to keeping up the latest JS nonsense:
| https://www.bogleheads.org/wiki/Main_Page#mp-gs-h2
| jrochkind1 wrote:
| Thanks!
|
| You may be over-estimating how much money I have as a techie,
| I work in non-profit/academic sector. My retirement funds are
| relatively paltry compared to what you may assume about
| techies with so much money (but perhaps still more than US
| median for my age; googling says median US retirement savings
| across all working-age households is $95,776), and mostly in
| managed 401k/403b where I have previously just chosen
| "lifecycle funds". -\\_(tsu)_/-
|
| People make a lot of assumptions about how much wealth random
| HN commenters or the HN audience in general have, and
| sometimes I start feeling like I'm really poor compared to
| all you techie multi-millionaires... but when I actually pay
| attention to comments, I realize, nope, a lot of HN is more
| like me (although probably often ashamed to say so).
| dehrmann wrote:
| If by "lifecycle funds" you mean target date funds, setting
| your allocation to 100% for your retirement year is the
| most reasonable strategy you can do.
| havermeyer wrote:
| FYI you may be better off using an index fund and then
| rebalancing into bonds or other fixed income options
| closer to retirement. See this article, for example.
| https://www.cnbc.com/2018/07/13/one-of-the-biggest-
| retiremen...
| miohtama wrote:
| Regardless if it fits to FT's thesis or not, note that the S&P
| recent gains can be attributed to 7 tech companies
|
| https://www.forbes.com/sites/dereksaul/2023/04/10/these-7-te...
|
| Everything else is still down and recession likely glooming. And
| when the recession hits the massive gainers are likely getting
| same-size correction.
| antibasilisk wrote:
| >recession likely glooming
|
| Just to be clear, we're in a recession and have been for a
| while now, despite government administrators attempts to change
| the definition.
| reducesuffering wrote:
| Last two quarters of GDP growth were 3.2% and 2.6% positive.
|
| By what possible criteria are you using to assert we're
| _currently_ in a recession?
| ForHackernews wrote:
| There's a Democrat in the White House, haven't you heard?
| Terrible for the economy. What other criteria do we need?
| throw0101b wrote:
| > _Regardless if it fits to FT's thesis or not, note that the S
| &P recent gains can be attributed to 7 tech companies_
|
| Exxon Mobil (XON) was the #3 company in 2001, but not even in
| the top twenty in 2021:
|
| * https://www.bespokepremium.com/think-big-
| blog/largest-25-sto...
|
| <5% of companies have driven most of the returns of equities:
|
| This is important because most stocks suck:
|
| > _We study long-run shareholder outcomes for over 64,000
| global common stocks during the January 1990 to December 2020
| period. We document that the majority, 55.2% of U.S. stocks and
| 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury
| bills in terms of compound returns over the full sample.
| Focusing on aggregate shareholder outcomes, we find that the
| top-performing 2.4% of firms account for all of the $US 75.7
| trillion in net global stock market wealth creation from 1990
| to December 2020. Outside the US, 1.41% of firms account for
| the $US 30.7 trillion in net wealth creation._
|
| * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
|
| > _Four out of every seven common stocks that have appeared in
| the CRSP database since 1926 have lifetime buy-and-hold returns
| less than one-month Treasuries. When stated in terms of
| lifetime dollar wealth creation, the best-performing four
| percent of listed companies explain the net gain for the entire
| U.S. stock market since 1926, as other stocks collectively
| matched Treasury bills. These results highlight the important
| role of positive skewness in the distribution of individual
| stock returns, attributable both to skewness in monthly returns
| and to the effects of compounding. The results help to explain
| why poorly-diversified active strategies most often
| underperform market averages._
|
| * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
|
| The trick is known which company(ies) will be that 5% and when:
| some do well for a time and then fade away: you would have to
| know when to jump in and out of them.
|
| Also, the S&P 500 being concentrated is not new and has been
| the case for 40+ years:
|
| * https://awealthofcommonsense.com/2020/02/5-companies-make-
| up...
|
| It's just the companies have changed.
| Zetice wrote:
| The point is that there's no way to know _which_ "7" companies
| will carry the bulk of the growth, so you grab some
| representation of "all" of them.
|
| So yeah, what you're saying is exactly how it's meant to go.
|
| Also, "recession is looming" is easy to say at literally any
| time in history. Eventually, you'll be right. The trick is to
| know precisely when it will take place.
| miohtama wrote:
| Also it's always sad to see Meta (Facebook) to success
|
| - They are making $40/year avg. off a user by selling users
| data
|
| - They announced massive stock buybacks
|
| Not sure if this is the best capital allocation for society -
| would love to see less parasitic platforms to success.
| nordsieck wrote:
| > They announced massive stock buybacks
|
| Not really sure why people complain so much about stock
| buybacks. They're tax advantaged dividends.
| biohax2015 wrote:
| Because they indicate that a company cannot do anything
| more creative with their capital than use it to inflate
| their stock price.
| nordsieck wrote:
| > Because they indicate that a company cannot do anything
| more creative with their capital than use it to inflate
| their stock price.
|
| OK.
|
| So they are returning that money to their shareholders.
| Which is kind of the point of a company.
|
| Does that mean the company is no longer a growth stock?
| Probably. But not being a growth stock isn't exactly a
| crime against humanity.
| MrMan wrote:
| [dead]
| 082349872349872 wrote:
| how apropos: it's the 50th anniversary of _A Random Walk Down
| Wall Street_ (1973)
| aynyc wrote:
| It's hard to beat index fund because everyone is buying and
| holding. 401K is now total like $7-8 trillion dollars. Soon, baby
| boomers will start the withdrawal wave, I don't know if index
| funds will be as hard to beat then. I hope so because my
| retirement is riding on 401K.
| toomuchtodo wrote:
| https://longnow.org/ideas/warren-buffett-wins-million-dollar...
|
| https://longbets.org/362/
| dehrmann wrote:
| What's neglected about this is arguably the most successful
| active asset manager bet _against_ active asset management.
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