Why many investment managers deliver poor results

Moisand Fitzgerald Tamayo, LLC Again Named an Elite Firm by the Financial Times:

Fee-only Financial AdvisorsWe are pleased to share that for the second straight year, the Financial Times has named Moisand Fitzgerald Tamayo, LLC as one of America’s top 300 independent Registered Investment Advisor firms. We take pride in the quality of our team and find it particularly gratifying to see credible outside parties recognize what we do. For more details, see Moisand Fitzgerald Tamayo, LLC Named One of America’s Elite Firms by the Financial Times, Again.

 

Most managers deliver poor results

Most investors who try to beat the market fail to do so. Being able to get into markets before a rise or out before a decline seems like a skill someone should have. Since much of the financial press is obsessed with where the market is going, it would be easy to think figuring out such movements were critical to success. Likewise, all the “what stocks to own now” story lines make many think that moving in and out of individual securities is the way to go.

That all makes for an interesting story and gives the market gurus plenty of airtime, but the overwhelming evidence tells us we don’t need gurus.

A recent look at the poor results of most money managers comes from Dimensional Fund Advisors[i]. Of the 2,587 mutual funds in existence on December 31, 2001 which invested in stocks of U.S. companies, more than half were shut down or merged with other funds during the next 15 years. When fund companies do this, the track record of the fund also disappears so rarely is a strong performer closed. Over that 15 years, a mere 17% of the original 2,587 funds beat a benchmark following the stocks in which the funds were invested.

Bonds are much more stable than stocks but that didn’t help fund managers much. Only 57% survived the 15-year period and 18% beat their benchmark.

Smart people competing with other smart people

How does this happen?  Money managers are well-educated, well-equipped, and well-paid specialists, which is part of the problem. They are competing with other well-educated, well-equipped, and well-paid specialists to buy and sell a finite set of securities. Managers are paid to move money around in an effort to beat their benchmarks. They must get paid, their operations must be funded and the more trading they do, the higher the costs.

The Dimensional study clearly shows that funds which have higher expenses (due to fees and trading costs)on average have a poorer track record than lower expense funds.

Narrow is the norm

A second reason for poor results is described in a recent study by academics from the University of Chicago and Oxford[ii]. Periodically the press will lament how the market is “narrow” i.e. only a few stocks are doing well so we should be fearful if those stocks start performing poorly.

…most of the time market indexes are driven by a few stellar performers. 

The Heaton study suggests this is not a newsworthy point as most of the time market indexes are driven by a few stellar performers. They looked at the performance of 26,000 stocks in the University of Chicago’s CRSP data base from 1926-2015 and found that “…58% of common stocks have under-performed the T-bill rate over their full lifetime. Moreover, the entire gain in the U.S. stock market since 1926 is attributable to only 4% of the stocks. The top 86 stocks have created a 50% lion-share of the total $32 trillion dollars achieved.”

Wow! That is narrow.

This happens because a stock can only lose 100% of its value but there is no cap on the upside. It makes sense that if you own the best of the best, you can do very well but the best is a tiny group. The practical lesson here is that the most reliable way to assure you own these superstars is to diversify as widely as possible and manage costs. This is one of the things we do for clients and what we expect of the funds we use.

Theory becomes reality

The results speak for themselves. Of the 16 Dimensional funds that existed over the 15 years ending December 31, 2016, the only one that did not finish in the top 25% of its category missed that top quartile by less than 1%[iii]. If the other fund families we favor ran similar studies, we would expect similar excellent results. Further, since most of these funds are also more tax efficient than the general fund population, we would expect them to rank even higher on an after-tax basis. A Morningstar study (Ptak, 2016) found a mere 4.1% of managers outperformed on an after-tax basis over 10 years. We want our clients to pay as little as possible in taxes, so tax efficiency matters.

We have been emphasizing the importance of diversification, patience, and discipline for a long time. These results reinforce all three of those points. Our research team looked at the year-to-year category averages[iv] from 2007-2016 of these same 16 funds. Even properly structured low-cost funds have rough stretches. All of the funds ended in the top 26% for the full ten-year span yet all experienced a bad year and most experienced several bad years. On average, each of the funds were below average in four out of the ten years.

There are a lot of things we can worry about but the quality of our clients’ holdings is not one of them.

  

News & Notes

KARLY 2Welcome, Karly: Our top priority is taking care of our clients so we are keen to add talented people to our team. Our Orlando office recently welcomed Karly Whitehead as a Financial Analyst Associate. Karly graduated with a Bachelor’s degree in Financial Planning from the University of Georgia, consistently recognized as one of the nation’s top programs. Karly was chosen by faculty as the Outstanding Senior of her graduating class. She assists the Financial Planning Department with its daily tasks such as custodian reconciliation reports, research, setting up client portals, and completing tax returns. She is currently pursuing her CFP designation.

IMG_4464Congratulations, Dan: Dan Moisand, CFP® was the recipient of a Jesse H. Neal award. The Jesse H. Neal awards are “…the most prestigious editorial honors in the field of specialized journalism. The Neal Awards were established in 1955 to recognize and reward editorial excellence in business media. Award-winning content reports on major industry issues of the time.” Dan was one of the writers for Financial Planning magazine’s coverage of the Department of Labor’s Fiduciary Rule.

Clients: Please remember to call us when anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.

Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC

[i] “Mutual Fund Landscape 2017 Report”, Dimensional Fund Advisors

[ii] “Why Indexing Works”, Heaton, Polson, & Witte, 2017

[iii] “Relative Performance of Equity Funds With More 15 Years of History”, DFA 2017

[iv] Data from Morningstar website

 

 Contact Us


Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.

If you have any questions or would like to discuss anything further, please give us a call or send us a note.

If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right.

For more frequent updates, follow us on FacebookLinkedIn, or Twitter.

 

Important Additional Information & Disclosures


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Moisand Fitzgerald Tamayo, LLC-“MFT”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MFT. 

Please remember that if you are a MFT client, it remains your responsibility to advise MFT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MFT is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Tax advice is given only to clients and only when agreed to by MFT. A copy of the MFT’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.

Please Note: MFT does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MFT’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please Note: Limitations:  While MFT does NOT pay for recognition, awards, or publicity, neither rankings and/or recognition by unaffiliated rating services, publications, or other organizations, nor the achievement of any designation or certification, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if MFT is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers. No ranking or recognition should be construed as a current or past endorsement of MFT by any of its clients.  ANY QUESTIONS: MFT’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including providing the criteria used for any reflected ranking.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your MFT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your MFT accounts; and, (3) a description of each comparative benchmark/index is available upon request.

 

WANT TO KNOW WHEN WE POST NEW MATERIAL?

As a Sanctuary From The Noise®, we only post information we believe timely and important to the long term financial success of our clients. Follow us to receive emails - no more than once a month - about new posts.

We keep your information private and make stopping our emails as easy as starting them.

Something went wrong. Please check your entries and try again.
Share This