Mutual funds that consistently beat the market. Not one of 2,132
nytimes.com
nytimes.com
But it seems like the criteria used is a bit weird:
> The team selected the 25 percent of the funds with the best performance over the 12 months through June 2018. Then the analysts asked how many of those funds remained in the top quarter for the four succeeding 12-month periods through June 2022.
That's different than not beating the market.
> And over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks.
So some firms do beat the market.
> Some actively managed funds did better than the overall market over the last 15 or 20 years. Though they were unable to do so consistently year after year, they had good stretches, and those periods were strong enough to make them outperform over the entire span. Such funds may well be worth owning.
> “Those that have managed to do that are impressive,” Mr. Edwards said. “But which funds will be able to do it over the next 20 years?” Unfortunately, we don’t know.
If you owned that fund for 20 years you'd beat the benchmark. If you missed a few crucial moments - you wouldn't. It's really easy to get into the fund after a good year and leave after a bad year. The risk required for those big gains also sometimes results in big losses.
Other times funds cheat, like Renaissance. They certainly had lots of quantitative innovations, but a huge part of their advantage was not paying their taxes. They settled with the IRS for 7 billion dollars.
For the record, I don't think literally all funds doing well is noise, but the evidence seems to consistently bear out that most of the time it is.
And that 7B is past taxes, interest, and penalties. They returned 66% annualized before fees and 39% after fees over a 30 year span, 1988 to 2018. Renaissance also has grown to over $130B.
It also was not tied to many of their funds - it was only from (if I recall) a single fund. The others are not under IRS investigation (AFAIK)
So the 7B is no where near enough of a cheat to allow this kind of return. You can view the 7B as evidence that the fun returned incredible returns to investors, so much so, that missed taxes on the profits were 7B.
ETA:
> Levin in 2014 had presented the findings of a year-long probe into basket options, calling for tougher action from the authorities. The report said the largest user of the options, Renaissance Technologies Corp, saved an estimated $6.8 billion in taxes.
https://www.reuters.com/business/finance/renaissance-executi...
http://web.archive.org/web/20211226110616/https://www.reuter...
I kinda doubt that this could be accurately assessed by Levin (since the entire point was to add smoke and mirrors to thr ese transactions), but I'll concede that the best available evidence (at least after casual searching) suggests it was about $7B (in 2014).
I don't really doubt that there was something to Renaissance's magic, but going by your numbers, nearly half of that magic was tax fraud. If your competitors are paying multiples more than you in taxes, because they're paying short term capital gains and you only pay long term - yeah, having the highest returns seems pretty feasible. I'd also note that "one fund" was their main fund, not like a little side project or something.
Lastly I'd like to point out this linear, it's not like they would have returned 39% in a universe where they paid that $7B as that went instead of as a lump sum at the end. They basically were drawing on a line of credit from the taxpayer. They had additional liquidity and so they made additional money. You can't separate their tax fraud from their returns and say that their returns were just so good that they had a huge tax bill. No, they committed tax fraud, in order to get those returns.
The exact amount is what the IRS figures out before damages are applied.
>I kinda doubt that this could be accurately assessed by Levin
Once someone starts to believe things that suit them without evidence they generally stop listening to actual evidence. This is exactly that pattern: an investigate, and likely the IRS also, did do an investigation likely of hundreds to thousands of man hours, reached the above conclusion, and you, an internet poster googling for a few minutes, disbelieves them?
Financial News London, a pretty solid source on such things states "Current and former executives of hedge fund Renaissance Technologies will personally pay as much as $7bn in back taxes, interest and penalties to settle a long-running dispute with the Internal Revenue Service, the firm said, a tax settlement that may be the largest in history." [1] I think I'll trust their (and similar financial research places) on the characterization of the payment, especially since the standard for back payment has always been back taxes + penalties + interest. The IRS doesn't just play around, especially when something this high profile is at stake.
>nearly half of that magic was tax fraud.
What? Provide your napkin math. I just presented numbers that show this "half" to be far out of reality.
If you're a programmer, simply set up a simple model (I just did that) and compute expected with or without paying that 7B over the past 30 years. The returns are vastly more than "half". Did you just claim half from any numerical checking, or just guessed it?
>Lastly I'd like to point out this linear, it's not like they would have returned 39% in a universe where they paid that $7
The naive compound growth is T=P(1+r)^n, which is exactly linear. Double the principal P, double the outcome. Taxes aren't paid on value, only on profit, and if you check the math (it's pretty easy), taking X % each year or at the end of profits is exactly the same number.
The practical reason profits are taxes yearly to to provide smoother income for govt and to get some of the profit before things tank and there is none left.
In real investment, this actually becomes sublinear, as the more invested in a market, the lower percent returns, since the ability to grow is an S-curve (as is all things), not an exponential. Buffet, for example, has talked exteneively about this.
This sublinear fact is also why Renaissance famously kicked out lots of early external investors - the funds under management were not able to grow since there was too much for the opportunities they chased.
So I do agree it's not linear - it's sublinear.
[1] https://www.fnlondon.com/articles/hedge-fund-renaissance-tec...
I just don't really care about your criticism after that, I'm not interested in having a discussion on these terms, and there's little to be learned from addressing the least charitable interpretation of what I was saying anyway.
>Presumably they failed to pay much more than that.
I read that as you believe these numbers are wrong, despite so many places stating this was what I first wrote: back taxes, interest, and penalties.
Is it not also rude for you to write this, effectively writing my earlier (and documented everywhere, including your links) what the number represented is wrong? Since you appeared to have a belief against the reasonable things I posted, I read that as you not wanting to believe the evidence. So I posted more evidence.
>I just don't really care about your criticism after that,
Yeah, that part is pure math. Calling it "half" against all reasonable calculation (which I explained how to do) is certainly not "little to be learned". I asked where you got the "half" claim - I cannot for the life of me get that as an estimate.
But now I see why you believe things despite evidence :)
I say, "well, I have a certain notion." I then go out and look for evidence I might be wrong: I do find this evidence. So I add, "my earlier notion is contradicted by evidence. Being skeptical of that evidence, I would like to gather more, but I don't have the time presently. Being an empiricist, I accept the best available evidence, at least provisionally."
You then go on a rant about how I'm a stupid idiot who ignores evidence. In my mind this is coming from nowhere, it's a reaction to a comment where I specifically sought out evidence I might be wrong and accepted it. My reaction is, "wow, this guy is being a jerk, I don't really want to engage with them anymore."
You then proceed to say, "doesn't the fact that you don't want to engage with people who are acting like jerks prove you're a stupid idiot who ignores evidence?"
As for your specific criticisms, they're founded in misreading what I had to say, and since I imagine the reward for discussing them further will be more rude remarks, the only thing I'm really interested in discussing anymore is why I'm heading for the door. Anything else would just seem to be handing you ammunition to use against me. I would be happy to explain myself further and to admit where I was incorrect if this was a good faith discussion, but it isn't. Note that doesn't mean I haven't privately changed my mind about things.
Hope that's useful feedback for you. Take care.
You write about Renaissance: "a huge part of their advantage was not paying their taxes"
Me: the 7B is past taxes, interest, and penalties. They grew 66% annualized to over 130B. So the $7B is not big enough to make it a "huge part of their advantage".
You: The 7B is not taxes. Presumably they failed to pay much more than that. I don't know how much, I doubt it would be possible to calculate.
Did you look? I didn't just pull the phrase from my butt - it's in many articles, and is standard IRS practice. Yet, without looking to update your view, you state it's not taxes. At this point I realize you don't care to learn or look or read. So I cited a clean place to read the phrase.
And then you move your "huge advantage" to "nearly half that magic was tax fraud." Missing 7B on taxes allows 66% growth to 130B in 30 years? I asked for napkin math - because I have done decades of modeling of this type of stuff, professionally and as an amatuer , and I don't see any way this happens.
Maybe you're used to just making quantitative claims without evidence and not getting pushback for stuff that simply doesn't line up. I am much more interested in people who will back up quantitative claims with evidence, and am willing to call people out on claims pulled from thin air as if they were fact.
So sure - go model a world where missing 6B in taxes over 30 annual growth returns of 66% results in half the returns to 130B. If the difference were taxes, the govt could do it too tax free (since they make laws), and in 20 years after putting in 10B (which is trivial for govt), they'd have 252 trillion.
But they cannot, because the returns Renaissance got are not from tax issues.
So, if you are going to make quantitative claims, don't state them as true unless you can provide decent numerical evidence.
Hope that's useful feedback. Take care.
Edit: out of curiosity I looked at your comment history - I see many threads where you complain people misread you. It seems common you write something, someone calls you on it, and you attack them and say they're not reading your words properly, simply when they call you on wht you wrote. Hope that's useful.
It's true that I often express myself poorly and have a bad habit of escalating arguments when people say snipey things (and the two reinforce each other as the snipes are often based on misinterpretations); this is something I feel I've made a lot of improvement on, for instance, compare this thread [1] to this more recent thread [2] (both of which are on the same hot-button topic). I feel I've gotten much better at having a discussion with people who may try to get a rise out of me, and staying on topic without escalating the disrespect (like I mentioned, I wasn't interested in remaining on topic here, as I've learned that when people mock you the discussion is over, and anything you say on the topic will only invite more mocking). In the earlier thread I think I was being a jerk, but I feel pretty good about how the second thread went. Perhaps when you were reading my comment history, you came across this thread [3], where I, like you, was frustrated that someone expressed an opinion on something I cared about that I felt wasn't an informed view. Perhaps you'll find it interesting that I simply asked them a question to illustrate my criticism, and then didn't remark on them personally or tell them they were what was wrong with the Internet.
There's a rich irony that you want to cut me down for being a close-minded Internet poster who rejects evidence, when this is an impression you formed of me off the basis of one comment, which you misread as being my rejecting evidence I in fact accepted, where you were bothered I didn't factcheck something I literally factchecked in that comment, and that you tried to use my getting pissed off by your rudeness as evidence you were correct (which is truly peak Internet posting). When you went to "test" this hypothesis with my comment history, it appears to me that you looked for evidence that you were correct instead of evidence that you were wrong. There are for instance, just as many comments where I admit I'm wrong about something as when I say someone has misread me; they would have been pretty easy to find. You didn't mention any threads where I didn't get into a petty dispute of who misread who, and something tells me you didn't actually spend the 1 or 2 hours necessary to read my entire comment history and critique whether something "happens regularly" or whether it's something that I'm getting better at. I'm pretty sure you made the all too easy mistake when talking to someone online of seeing them as a static entity, doomed to repeat it's mistakes and never to change their mind, rather than as a dynamic, living, and learning human being. So after finding a couple of comments that seemed to confirm your bias, you were satisfied.
Perhaps if you see an Internet poster who doesn't always update his priors properly in me, it's because it takes one to know one. (Being steeped in maxbond lore now, I'm sure you'll have already read the thread [4] where I explain why I don't read & cite other people's comment histories, so I'll leave testing this hypothesis this as an exercise to you.)
Regardless of whether I'm used to getting pushback on quantitative claims, I am very familiar with and weary of this type of nonsense (which as you no doubt read, I sometimes engage in myself [5], and won't pretend otherwise; it's something I'm willing to acknowledge and work on). I'd really like you to desist from doing that in the future. It's tiresome and rude. Perhaps you're used to being able to yell at people until they back down, and you aren't used to someone calling you out for being a jerk. I understand that without such feedback, it can be hard to see a problem let alone address it. So again, I hope this feedback helps, and take care.
[1] https://news.ycombinator.com/item?id=32927784
[2] https://news.ycombinator.com/item?id=33849719
[3] https://news.ycombinator.com/item?id=33755083
Source: https://www.investopedia.com/articles/investing/030916/buffe...
Here's a trivial recipe: Gamble 20% of the money on a single roulette spin. Then invest everything in the overall market. (Yeah, technically you want the closest stock equivalent.)
The challenge is to consistently beat the market. To prove you didn't just get lucky on a handful of bets. For that, the criteria isn't weird at all. They're checking if a series of bets on a fund would have mostly or all been successful.
A better example would be to create the S&P 499. Take the S&P 500 and remove one company you think most likely to underperform. Theoretically you’d outperform the S&P 500.
In the short term, I think you’re right. However, 20 years is a really long time. You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains.
So take the same odds except you pick stocks in a way that you believe you'll beat the market. Nobody knows the actual odds upfront. And there's plenty of money going to funds that don't pan out.
> You’re not going to make a bet at year 18 and somehow magically make back 15 years of gains.
That depends on how much your portfolio stands out. If you're .1% worse than the market for 15 years and then you make a bet that gains you 2.5%, you just beat the market.
And look, I agree that indexed investing is likely the best strategy for most people. However, some people do beat the market consistently over the long term. TFA states that plainly, although it tries to downplay it. Additionally, this specific "research" is released by S&P Dow Jones Indices. What is the S&P 500 and Dow Jones if not a hand-picked selection of stocks? So this article isn't really saying it's impossible to beat the market. The article is saying that it's impossible to beat S&P Dow Jones Indices at picking stocks, which means the article is just a marketing piece. I'll also add that the S&P 500 plays with a stacked deck. By the nature of its size, companies included in the index trade at a substantial premium to similar companies outside of the index.
It's just an example that doesn't even use stocks. I think it's obvious enough that nobody can prove expected value for actual stocks.
> However, some people do beat the market consistently over the long term. TFA states that plainly, although it tries to downplay it.
By what definition of "consistently"? I see no such statement in the article.
Being up after X years is not consistently beating the market. That's beating the market once. You have to look at multiple time periods to talk about consistency.
> Additionally, this specific "research" is released by S&P Dow Jones Indices. What is the S&P 500 and Dow Jones if not a hand-picked selection of stocks? So this article isn't really saying it's impossible to beat the market. The article is saying that it's impossible to beat S&P Dow Jones Indices at picking stocks, which means the article is just a marketing piece.
It's not "just" a marketing piece if it's right. And they're using those baselines because it's the closest thing to "the market" we have available.
And it's obviously not impossible to beat the market. But if nobody can do it reliably, then nobody should get your money to try.
SCHD beats SPY total returns over the past few years, for example. Its an ETF, but could just as well be a passive mutual fund. Many CEFs do as well.
Not sure the conclusion drawn here is accurate
When people say "the market", they are referring to the S&P 500. If a rules based strategy beats the S&P500, then it is outperforming the market. If it's offered as a mutual fund, then that fund is beating the market too
Would it change your mind if I told you the Fictional 500, the index my ETF tracks, had returned 30% over that same period? Would you maybe have some questions about how I managed my ETF?
If that passive index outperforms the S&P500, then my actively managed ETF also outperformed the market.
Looking at the 500 largest(ish) companies in general is an arbitrary rules based strategy anyway. There's nothing inherent in the number 500 that dictates it will outperform vs other rules based strategies.
You can compare Fictionaland funds to the S&P 500 and this can be a useful exercise. But you can’t determine if your Fictionaland fund is “good” unless you compare to a representative index — this is one with overlap of securities, but with likely different weights from the underlying index. And you’re going to have peer funds by other companies with slightly different methodologies, you’ll all compare to the same index, and your relative performance amongst competitors will mostly determine if you’re doing good.
Edit: I missed the management/performance question. If you run an ETF you are going to report holdings frequently, typically every day. If you run a mutual fund it’ll be less often, like every 60-90 days. So over time, you’ll be able to understand a bit about the trading methodology.
> The team selected the 25 percent of the funds with the best performance over the 12 months through June 2018. Then the analysts asked how many of those funds remained in the top quarter for the four succeeding 12-month periods through June 2022.
> The answer was none.
So it's more that being a top-performing fund in one year doesn't predict you'll be a top-performing fund in the next. 2k is a pretty significant sample size (though it's functionally less since many are tracking the same benchmarks & so should be highly correlated), large enough that we should anticipate dumb luck.
Or are you responding to the blurb before the paywall?
> No actively managed stock or bond funds outperformed the market convincingly and regularly over the last five years. Index funds have generally been better.
So index funds have generally done better than managed funds in a consistent way. It might be more interesting to know which managed funds (if any) did better than an index fund, but I'm guessing the real purpose of the article is to suggest you may as well just buy the index funds.