Author Archive: indexfundfan

Selecting superior mutual fund performance

A recent paper in the FPA Journal studies “The difficulty of selecting superior mutual fund performance“. The study attempts to quantify the relative performance of actively managed large- and mid-cap funds during a 20 years period (11 10-year rolling perfiods). The conclusions are similar to what studies have already shown:

  • During the study period, most actively managed large- and mid-cap mutual funds underperformed their respective passive strategies. While every period under review had mutual funds that outperformed the passive strategy, few funds did so consistently.
  • Furthermore, predicting in advance which mutual funds would outperform was difficult, if not impossible, and the cost of selecting the “wrong” manager was high. These factors combined demonstrate the difficulty for financial planners to select superior performance.

The two tables below show the under-performance of the actively managed large- and mid-cap funds in the study.



Value averaging

The topic of value averaging came up again (49263) on the Diehards forum. From Marshall’s Spring 2000 paper “A STATISTICAL COMPARISON OF VALUE AVERAGING VS. DOLLAR COST AVERAGING AND RANDOM INVESTMENT TECHNIQUES“:

According to Edleson [3], the idea behind VA is simple. The investor sets a predetermined worth of the portfolio in each future time period, as a function of the size of the initial investment, the size of periodic investments and the yield expected. The investor then buys or sells sufficient “shares” or units of the investment such that the predetermined portfolio worth is achieved at each revaluation point.

Here’s the conclusion of the paper:

Results strongly suggest, believe it or not, that value averaging does actually provide a performance advantage over dollar-cost averaging and random investment techniques, without incurring additional risk.

Portfolio return for March 2006

March 2006 had been another reasonably good month for my 70%/30% (equity/fixed income) portfolio. The return was 2.07%, bringing my year-to-date portfolio return to 6.76%.

The two closest Vanguard funds that match my portfolio are the LifeStrategy Moderate Growth fund, target 60% equity/40% fixed income, and the LifeStrategy Growth fund, target 80% equity/20% fixed income.

The first fund returned 0.95% in March and 3.63% year-to-date, and the second fund returned 1.61% in March and 5.05% year-to-date. A spliced version (50:50) that matches my 70%/30% allocation portfolio would have returned 1.28% in March and 4.34% year-to-date.