Unsustainable Capitalism

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Al Gore takes aim at "unsustainable" capitalism - Yahoo! News

I was not aware that mutual funds (maybe ETF's too?) change their holdings every 7 months.

Fact check?

[bjl584]

It sounds good in theory, but I'm not sure it would work put into practice. Would the incentives given to hold a stock for a longer length of time outweigh the losses that one would incur if the stock is a dog and loses value over that same time period? How would such incentives be determined? If they are too generous, it could lessen risk in the market and in turn reward.

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Well, I admire Al Gore for trying to do something about it, although this may even be beyond the Great Lord Al Gore's capabilities after inventing the internet .

But seriously, Lord Gore is right. . .if an average mutual fund is changing it's holdings every 7 months than there is a problem.

We aren't investors.

We are traders by proxy.

I see a real problem with that.

If I want to trade, I'll trade.

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Well, I admire Al Gore for trying to do something about it,

Perhaps he could begin by not wasting so much fuel from his private jet, living in a multi-thousand square foot mansion while asking the rest of us to conserve, by sharing more of his vast fortune that was acquired by capitalism, and by not making up his own facts. Together, all of us reading this are leaving much less of a "footprint" on the earth than just he himself.

He's the epitome of a hypocrite. Whatever he is urging us to do will somehow find a way to benefit him financially, just like every other charade he promotes.

[disneysteve]

if an average mutual fund is changing it's holdings every 7 months than there is a problem.

We aren't investors.

We are traders by proxy.

Exactly, which is why the vast majority of actively managed funds underperform the market and index funds are the way to go.

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Hmmm.

Rants against Al Gore aside ( I neither like him nor hate him nor his message). . .how often do Index funds change holdings, DS?

One of my core investmetns is SPY.

I would assume the index does not change every 7 months.

Anyone know this info?

[bjl584]

Hmmm.

Rants against Al Gore aside ( I neither like him nor hate him nor his message). . .how often do Index funds change holdings, DS?

One of my core investmetns is SPY.

I would assume the index does not change every 7 months.

Anyone know this info?

The only answer that I can find is that the don't rollover "often." The term "often" is not defined in the article that I found however.

[disneysteve]

Hmmm.

Rants against Al Gore aside ( I neither like him nor hate him nor his message). . .how often do Index funds change holdings, DS?

One of my core investmetns is SPY.

I would assume the index does not change every 7 months.

Anyone know this info?

Index funds change holdings only when the index they track changes holdings which is typically rare. Last year, the S&P 500 index fund from Vanguard had a turnover rate of 4.3%. Compare that to the average managed mutual fund that has a turnover rate of 85%.

[Mr Nice Guy]

Index funds change holdings only when the index they track changes holdings which is typically rare. Last year, the S&P 500 index fund from Vanguard had a turnover rate of 4.3%. Compare that to the average managed mutual fund that has a turnover rate of 85%.

85% seems high. I just checked one of my funds and it's annual turnover is 6% (a large cap focused fund)

[disneysteve]

Hmmm. It seems to depend on where you look.

"William Harding, an analyst with Morningstar, says the average turnover ratio for managed domestic stock funds is 130 percent."

Turnover Ratios Weak Indicator Of Fund Quality
Here is a great article from 2009 with actual turnover rates from numerous real funds showing rates as high as 834%.

From ehow.com: "Actively managed funds often have higher turnover ratios (on average about 80-85%) than passively managed funds or index funds, which average around 5% turnover."

From Motley Fool: "Managed mutual funds have an average turnover rate of approximately 85%"

[Mr Nice Guy]

Wow just did some looking around and found the numbers about the same Steve.

Interesting. High turnover mutual funds in a taxable account would be worse than a Roth correct?

Definitely going to screen for turnover next time I go mutual fund shopping. I didn't screen for turnover when I found my latest large cap fund, but luckily it has very low turnover.

[kv968]

Hmmm. It seems to depend on where you look.

"William Harding, an analyst with Morningstar, says the average turnover ratio for managed domestic stock funds is 130 percent."

Turnover Ratios Weak Indicator Of Fund Quality
Here is a great article from 2009 with actual turnover rates from numerous real funds showing rates as high as 834%.

From ehow.com: "Actively managed funds often have higher turnover ratios (on average about 80-85%) than passively managed funds or index funds, which average around 5% turnover."

From Motley Fool: "Managed mutual funds have an average turnover rate of approximately 85%"

Although there is no doubt that an index fund should have a considerably lower turnover rate than an actively managed fund, I don't think the "typical" fund would have an 85% turnover rate let alone a nearly 200% rate as the article states. I'm sure if you take all the funds available and find the "average" it may be 85% but that's taking into consideration outlier funds such as Steve pointed out with an 834% rate. There are probably many funds with a rate nearly as high which can skew an "average". However if they were to apply a weighted average that takes into consideration the amount of assets in those funds, that "average" would drop quite a bit.

Another anomaly would be if they're using bond funds in their calculations since they, just by their nature, usually have well over a 100% turnover rate. Heck, iShares Aggregate Barclay Bond ETF has an annual turnover rate of of 400%+. Add that into the mix and that could throw off anything.

Granted, turnover is higher in actively managed funds than indexes, and probably going higher, but don't be blinded by all the numbers you read. Remember, there are lies, damn lies and statistics Do your homework and take the turnover ratio of a fund into consideration, especially in a taxable account. However, also realize what the typical turnover of that asset type should be. Bond funds will have a high turnover rate and smaller caps would normally have a higher rate than large cap.

A turnover rate of 20% or 34% may seem obscenely high for index investors but those are the rates for IWM (a Russell 2000 ETF) and VSGAX (Vanguard Small-Cap Growth Index Fund) respectively. Just be aware of what the norms are.

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Well, it's an interesting discussion. I used to own Janus Overseas and as an actively managed fund, it used to out perform the index by like double.

But I wonder how often a "good fund manager" has to move assets around to outperform the index.

To me, if you are changing any more than 10-15% of your holdings per year to begin with, well then, I question your stock picking ability to begin with, you know?

I am not sure I am an entire fan of "passive investing" - for instance, if you had a lot of European exposure, you prospectus may tell you to be passive as Europe circles the drain right now.

Maybe we need to start classifying:

Index
Passive
Minimally Active
Maximally Active (trading)

I am not opposed to applying a little human judgment when flying the plane rather than just leaving your portfolio on autopilot.a

I am just not sure a pilot should fly by the seat of his pants either hoping it gets to it's destination.

[kv968]

But I wonder how often a "good fund manager" has to move assets around to outperform the index.

To me, if you are changing any more than 10-15% of your holdings per year to begin with, well then, I question your stock picking ability to begin with, you know?

I think even "good fund managers" have to move their assets around more nowadays. Not because so much of their "bad" picks but because instead investors themselves don't the have patience to give a manager's picks a chance. People used to let their investments in mutual funds ride a little bit to see if the picks come to fruition. Now it seems like if the fund doesn't outperform nearly everything else people pick up their money and move it to the "hot" fund that is currently performing well.

I'm not implying that you stick with a bad fund for years on end, but to judge a fund by it's quarterly or, in even in some cases, yearly performance might be shortchanging the manager. Therefore he/she has to do the best they can to at least appear to be in whatever is hot at the moment (i.e. window dressing). I mean God for bid someone looks at their fund's holdings and Apple isn't in there.

[kv968]

I am not sure I am an entire fan of "passive investing" - for instance, if you had a lot of European exposure, you prospectus may tell you to be passive as Europe circles the drain right now.

The one thing I do like about passive/index investing, besides the price, is the transparency. Sure I may hold the MSCI/EAFE index, which is 100% int'l equity, and no one's there to help me avoid some pain if it goes down, but at least I know what I own. With a managed fund, I'm not sure if the manager put more in bonds, moved from one country to another or really what's going on. With an index, if I feel there's trouble coming I myself can reduce my exposure and know by how much I'm doing it.

With that said, I have both managed and indexed funds in my portfolio but I've been indexing more lately while honing the allocation I want.

One other thing to remember with managed funds also is their mandate. Even though a manager may see a total collapse of a market coming, most funds are required to hold say no less than 80% in stocks. So even if they wanted to dodge the bullet, their hands are tied at times as to how much they actually can.