Reading Roundup

Christine Benz from Morningstar Tweeted out an observation about "so many people," presumably advisors and other intermediaries, making investing more difficult than it needs to be. She even included the words complexity and simplicity into the Tweet which are words we use here all the time in a similar context. 

She's right of course that investing can be very simple and the simplest strategy can get the job done but no style of investing in flawless, no style of investing is drawback free. Whatever form of investing someone wants to do, it is important to understand the drawbacks to avoid getting blindsided when those drawbacks hit. Dividend investing provides a great example doing phenomenally well in 2022 and lagging badly in 2023. Market cap weighted indexing did very poorly in 2022 and was lights out in 2023. Nothing, any of us could possibly do will be best in all market environments but it doesn't have to be. 

Benz in a followup implied that advisors and intermediaries sell complexity as being necessary so they can justify their fees. Yes, anyone with a job in any industry is doing so to get paid. The customer then decides whether the cost worth the service or product provided. I am not discounting bad actors of which there are plenty.

Speaking of complexity, Bloomberg reported that Bridgewater's "flagship" Pure Alpha II hedge fund was down 7.6% in 2023. Going into November it was up 7.5% for the year, apparently got caught wrong footed in the bond market and swung to that loss. There was a table of Bridgewater's other funds and they all appeared to be higher. Bridgewater funds do very well the vast majority of the time. Whatever it is that Pure Alpha II does, like any other strategy or approach, cannot always be the best or work they way investors would hope for which in no way invalidates the strategy. Simple indexing did poorly in 2022, slightly less simple dividend investing lagged in 2023 and presumably very complex Pure Alpha II lagged by a lot in 2023. That goes with the territory. 

Speaking of valid but maybe with some drawbacks Barron's had an article titled The Right Balanced Fund Can Carry Your Portfolio. Where To Find It. The article though was more like a list of some pretty big balanced funds from well known fund providers. For the record, balanced funds (the context was some mix of equities and fixed income) are valid, they can get the job done and simply buying one and calling it a day would be simple and would probably work over the long term. I regularly use the Vanguard Balanced Index Fund (VBAIX) for blog posts to benchmark some of the portfolio ideas we concoct. The reason I am not a fan of them for portfolios, there are two big ones actually, is fixed income with duration has become very volatile but the volatility is now very unpredictable after 40 years of being a one way trade. Additionally the correlation went up when investors needed the correlation the most. You could use my own words against that last point that no strategy can always be best but the visibility for something bad happening at some point with bonds was very high, we blogged about it constantly. For my money bonds with duration do not offer the diversification benefits they used to which for me, rules out balanced funds for client accounts or my own accounts. At least balanced fund in the typical application of the strategy. 

Barron's noted that 2023 was yet another year where active managers lagged. There were a couple of snippets about how difficult it is for active managers to collectively outperform the indexes. SPIVA issues reports every year noting exactly that. It can even be rarer that it appears on first glance. Barron's regularly profiles or interviews mutual fund managers and they will note some measure of long term outperformance, 5 years or 10 years or whatever. But with some of these funds you'll see one year of wild, essentially unrepeatable outperformance that skews the average annualized return. Imagine some fund lagging the index by just 100 basis points for four out of five years but in one year it was up 50% while the index was up 8%. A great, great year like that for an actively managed fund is not rare at all even if repeating would be rare but that kind of year will skew the returns for a very long time.

Active management does not have to mean trying to beat the market every year even though that is what most actively managed funds are trying to do. Hanging your shingle to say "I'm going to beat the market every year" is a tough way to make a living. I'm an active manager trying to smooth out the ride for clients. By definition that would mean not worrying about trying to outperform every year. If things are going well, I would outperform in a year like 2022 and lag in a year like 2023. The objective in smoothing out the ride is to do all I can to help clients not panic when something like 2022 happens and ensure that their income needs are not disrupted. "Sorry, I don't think you should take your $3500 monthly distribution for a while" is not a conversation I ever want to have as opposed to "maybe hold off on buying that boat" if it means unexpectedly selling stock after a large decline.  

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.