[HN Gopher] Less Than 7 Percent of US Active Equity Funds Have B... ___________________________________________________________________ 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. ___________________________________________________________________ (page generated 2023-04-15 23:00 UTC)