I read an interview with the decision maker of actively managed materials sector fund.The chart compares that fund (in light brown) versus iShares Global Materials (MXI), which I own for some clients, since the inception of MXI.
There are a couple of things here worth noting. For most of the time the ETF outperformed the active manager but what this chart does not really capture is that over the last 12 months the actively managed fund has cleaned the clock of MXI. MXI is flat in the last year, the active fund is up 25% or so.
What I think this reveals is an evolution of the theme. Success in the last 12 months has required more of a sniper approach than a shotgun approach (footnote Richard Kang on that saying). As a cycle ebbs and flows there are periods where going narrower matters more than at other times.
You would either need to pick a stock or very narrow product or realize that even the correct broad sector pick might not always be a homerun. I would note that an overweight to MXI, flat over 12 months, would have added relative outperformance versus the S&P 500 even if buying Potash (POT) would would have been better.
While this post is a touch nuance-y, it is important for anyone willing to invest at the sector level to realize that at times narrow will matter, there will be times when narrow will hurt and that with the path you choose there will be times where your portfolio is better off for what you prefer and other times where your portfolio will be worse off for what you prefer.
This is the sort of thing to think about ahead of time because making a change midstream (especially going from broad to very narrow) is likely to result in performance chasing and performance chasing is often done after the move has occurred or done at a time of emotion where a big move has come, someone on TV projects that recent past as continuing forever, more people buy in and then comes the big airpocket.
4 comments:
you should save this post for the Hall of Fame archives - there is great stuff here people should read again and again
I'm a great believer in indexing but, I sold off the alst index fund I had in Fall, 2007. I decided that indexing is a bull market strategy.
Roger -- Your nuancey subtlety has left me more confused than enlightened, not necessarily a bad thing. I see how anyone investing in a theme would be well-advised to consider alternative ways of achieving that goal (index, active fund, individual stocks or some mix of the 3) and you continue to do us a service by sharing your thought process. But I'm not clear how one can form an investible thesis as to when an active fund might outperform an similarly-styled index? My intuition is that if active funds rarely outperform net fees over longer periods, what special talent would I need to identify the ones like to outperform in the short term? Recent performance, research and a hunch? And if we're in the shotgun-to-sniper phase, isn't that generally a sign that a theme is long in the tooth?
rick, not really about how to pick active or passive but more about at times one will work better.I would add that going narrow could be achieved by buying a stock.
anyone not in tune with how to do this simply need to realize it occurs and that their sector index fund may not always a great way to capture a sector.
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