LATEST BLOG POST
June 2017
Jeff Troutner
Equius Partners

In today's Wall Street Journal (6/6/17, subscription required), Burton Malkiel discusses the dismal state of active management using the SPIVA data as support. He also address the question, "what if everyone indexed." Here are excerpts:

For years S&P has served as the de facto scorekeeper demonstrating the dismal record of “active” portfolio managers. During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&P 500 large-capital index. Nor were managers any better in the supposedly less efficient small-capitalization universe. Over 85% of small-cap managers underperformed the S&P Small-Cap Index.

When S&P measured performance over a longer period, the results got worse. More than 90% of active managers underperformed their benchmark indexes over a 15-year period. Equity mutual funds do beat the market sometimes, but seldom can they do it consistently, year over year. 

The same findings have been documented in international markets. Since 2001, 89% of actively managed international funds had inferior performance. Even in less efficient emerging markets, index funds outperformed 90% of active funds. Indexing has proved its merit in various bond markets as well.

...What would happen if everyone began investing in index funds? The possibility exists that they could grow to such a size that they would distort the prices of individual stocks. The paradox of index investing is that the stock market needs some active traders to make markets efficient and liquid.

But the substantial management fees that active managers charge give them an incentive to perform this function. They will continue to market their services with the claim that they have above-average insights that enable them to beat the market, even though they cannot all achieve above-average market returns. And even if the proportion of active managers shrinks to a tiny percentage of the total, there will still be more than enough of them to make prices reflect information.

April 2017
Jeff Troutner
Equius Partners

The latest SPIVA report shows, once again, that gurus who pick stocks and/or time markets are ripping off long-term investors. Only 8.5% of funds in the US large value fund category beat a relevant index. Only 6% of US small value funds met that objective.

This is consistent with Dimensional Fund Advisors' research, which uses CRSP data. Dimensional also reports that "Only 15% of US equity and fixed income funds that were around in 2000 beat an industry benchmark, 15 years later. Over the same time period, 82% of US equity and fixed income Dimensional funds outperformed their benchmarks."


April 2017
Jeff Troutner
Equius Partners

We're often asked by new clients (and too many investment advisors) why we use the asset class funds of Dimensional Fund Advisors almost exclusively to build and manage our clients' investment portfolios.

The simple answer is that they're the best mutual funds available for each of the core asset classes we include in portfolios. But let's dig a bit deeper

First, Dimensional pioneered "asset class investing" in the early 1990s based on groundbreaking research by Eugene Fama (University of Chicago) and Ken French (Dartmouth). Their suite of U.S. and foreign large cap and small cap "value" funds are designed to capture the risk/return premiums outlined in the Fama/French research in the most efficient and effective way while maintaining an acceptable amount of portfolio diversification. Since most of the funds we use were launched in 1993 and 1994, there is a proven track record of Dimensional's talent at managing highly structured asset class funds compared to their competitors (primarily Vanguard, which still uses an indexing methodology).

Second, Dimensional remains deeply committed to the academic research behind "factor investing" and has developed a world-class research department within the firm to challenge/enhance what they learn from the top academics. Most importantly, Dimensional has consistently turned the sound science of asset class investing into practical solutions that always consider taxes, transaction costs, and other fund expenses. Unlike most fund companies (and consistent with the Equius approach), decisions aren't made for marketing and business development reasons first. Instead, they consider whether a change benefits their clients first and then work to implement the change with the greatest positive impact.

Finally, Dimensional is focused. They do not deviate into areas of personal finance and investments they don't believe in (e.g., Vanguard's never-ending experiment with their clients' money in traditional actively-managed funds) or that distract them from being the best producers of asset class mutual funds. In my 30+ years in the investment business, I have never found a firm with more integrity and a commitment to "doing the right thing" than Dimensional.

None of this means that we agree with everything Dimensional does. They have, for example, a commodity fund that some of their larger advisors demanded. Since commodities have no expected return (they produce no earnings, pay no dividends, and yield no interest), we reject them as an asset class (consistent with Dimensional researchers, by the way) and do not include them in our clients' portfolios. We accept that this often places Equius at a competitive disadvantage with other advisors (since the mainstream media constantly touts commodities as good "alternative" investments). But we're confident avoiding commodity funds places our clients in a more favorable competitive advantage vis a vis their long-term portfolio returns.

April 2017
Jeff Troutner
Equius Partners

Our primary goal with the Equius blog is to link readers to interesting articles, research, videos, and other sources on modern investing techniques and principles. Occasionally posts will include perspectives from us that add to information we've presented in our newsletter, Asset Class, or our video content.

Naturally, we won't agree with everything presented by outside sources, but we believe it's important to be exposed to other voices and ideas that can help you make the best decisions around your financial wealth.

If you have any questions or comments about a blog post, please don't hesitate to call an Equius relationship manager.

Jeff

EXPLORE OUR KNOWLEDGE BASE
Created with Sketch. David Booth Chairman and Co-CEO, Dimensional Fund Advisors “This investment philosophy is about more than returns—it’s about a great client experience that can really help people relax.”