Tue 5 Dec 2006
International stocks were one of the main investment options that many argued you need a top notch manager to effectively invest in. Au contrair! MarketWatch reported in September on a July Standard & Poor study comparing the 5 year returns on International Index managed funds and index funds and this report bears repeating here. Nearly 60-65% of Index Funds outpaced their Managed equivalents. Now the odds are better that you can find an actively managed international fund that outperforms the benchmark than you can find an actively managed US fund that does, but the odds are still not in your favor. An interesting Journal of Financial Planning article from 2002 had found that Small Cap and International Funds outperformed the benchmark index, but this is not reflected in the more recent S&P report.
Disclaimer: I’m biased towards Index Funds. I do own several managed funds through my 401K and I have purchased only the Columbia Acorn fund of my own free will back in Jan 2002 (it has been a pleasure to own). However, I’m of the opinion that the only thing each of us can actively control about the funds and indexes we invest in is their load and expense ratios. Managers and investment strategies can shift, and even when they don’t, no one has a hot hand indefinitely and knowing when their selection skills have definitively soured is difficult (especially when you’re accustomed to trusting in the skills of this manager and following them through normal draw-downs).
December 5th, 2006 at 2:18 pm
Amusingly, take a look at the performance of the Acorn fund versus the mid-cap growth ETF IWP… Either the ratio of ACRNX:IWP or the side-by-side charts. It’s pretty tough to argue that one is consistently out-performing the other…
When I consider a mutual fund, I like to compare it to its ETF couterpart like this to see if it consistently under-performs or consistently beats the index.
December 5th, 2006 at 2:49 pm
You have accidentally reported an ironic issue – I originally purchased ACRNX as a Small-cap fund…I just checked on Morningstar and they classify it now as a Mid-cap fund, but just barely. This is EXACTLY the problem I have with mutual funds–they have a tendency, over time and with changing management, to drift from their original focus. Grrrrr….
Time to revisit this fund and see if I need to trade this in for an ETF. I’m certainly not getting what I originally paid for!!
December 5th, 2006 at 3:19 pm
> However, I?m of the opinion that the only thing each of us can actively control about the funds and indexes we invest in is their load and expense ratios.
There are at least three things I’d add to that list:
* We choose when to buy — you can attempt to time certain sectors or asset classes.
* We choose when to sell — you can decide if/when to take profits, re-balance, or whatever…
* We choose whether to invest in a tax-deferred account or taxable account.
The first two definitely have an impact on the manager — they either have more funds to invest, or redemptions to meet and cash to raise. The third really just applies to the amount of turnover that you’re able to tolerate…
We face similar constraints when investing in individual stocks. You can control when you buy/sell, and at what price… but you can’t really expect to change how the executives manage the business. That’s one reason that price is so important — you can pick the right company at the wrong price and lose money.
Just adding my US$0.02, which seems to be worth less and less every day… 😉
December 6th, 2006 at 6:05 pm
Two things…
First, how does Acorn Funds classify the ACRNX fund? Maybe Morningstar is wrong, or maybe Acorn has been holding good small cap stocks so long that they’re all now mid-cap sized?
[Answer… small and mid-cap focused.]
Second, compare the performance of your fund against IWM (Russell 2000 ETF): ACRNX:IWM, and side-by-side.
Still looks like there isn’t a clear winner to me… in ratio terms, there’s a range of 12% of under/over performance to the ETF, but it hasn’t been consistent over or under performance.