Don't invest in mutual funds

November 30th, 2009

Mutual fund charts of the day

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Posted by: Felix Salmon

Tags: investing

Fama and French have a very long blog entry (over 5,000 words) about the latest version of their paper on mutual fund returns. As you might expect from research sponsored by an index-fund company, it shows that active mutual-fund managers fail to outperform the market. But at least it does so with pretty charts.

Here’s what happens when you compare actual before-fees returns from mutual-fund managers (the blue line) with what you’d expect if no managers had any skill at all, and the returns were simply distributed by chance (the red line).

On the left hand side of the chart, you see actual fund managers significantly underperforming what you’d expect by luck alone. On the right hand side, however, it seems that if you’re skilled at manager selection, there is a glimmer of hope that you might find a little bit of alpha. Not a lot, but something statistically significant.

Unfortunately, all that alpha — and then some — gets eaten away by fees. Here’s the chart for after-fees returns:

The red line, remember, is the distribution of returns you’d expect if all mutual-fund managers had an alpha of zero. The blue line is actual returns. Fama and French conclude:

For the vast majority of actively managed funds, true α is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs.

Which comes as no surprise, but it’s still good to see some relatively solid empirics here. Anybody wanting to make an intellectually-credible case in favor of investing in actively-managed mutual funds is going to have to attack this paper head-on.

via blogs.reuters.com

... succinctly summarizing one solid piece of advice I have gotten at literally every level of economics education -- high school, college and b-school.

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This seems perfectly reasonable to me

November 30, 2009, 1:44 pm — Updated: 1:44 pm -->

Chicken Little cometh

Readers of classic science fiction may remember the “character” of Chicken Little in Pohl and Kornbluth’s The Space Merchants — a giant hunk of vat-grown meat from which slices were periodically removed to feed the masses.

Via Crooked Timber, it’s here:

SCIENTISTS have grown meat in the laboratory for the first time. Experts in Holland used cells from a live pig to replicate growth in a petri dish.

The advent of so-called “in-vitro” or cultured meat could reduce the billions of tons of greenhouse gases emitted each year by farm animals — if people are willing to eat it.

So far the scientists have not tasted it, but they believe the breakthrough could lead to sausages and other processed products being made from laboratory meat in as little as five years’ time.

Yum.

via krugman.blogs.nytimes.com

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The world still exists

A Blast at Last at Huge Particle Collider

Fabrice Coffrini/Agence France-Presse — Getty Images

Scientists at CERN, the European Center for Nuclear Research, during the restart of the Large Hadron Collider near Geneva.

via nytimes.com

Or our alien simulators paused the simulation, spent 18 months offline writing code to fix the "Hadron collider bug," spliced the code into the universal physics model, and reverted to the saved simulation from November 23rd, 2009.

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Friday afternoon wonderment

via bldgblog.blogspot.com

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Naughty Bernanke

Let me remind readers that, according to the Federal Reserve, the Federal Reserve's chief policy mission is:

[C]onducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

Emphasis mine. Clearly something here is badly amiss. The Fed has given up on easing further despite the fact that unemployment is approaching its highest level in 80 years, and despite the fact that prices are not stable but are declining.

via economist.com

Every Fed challenge team in the country better be arguing for more monetary easing. We're still looking at zero/negative inflation (deflation), and rising unemployment, and it's clear that fiscal policy won't step in (because people think the Treasury department should be run like a family budget, or something). Therefore, more aggressive monetary policy, please.

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Nonsensical

“A lot of it is sentiment-driven and there the dollar is getting a vote of no confidence,” Mr. Dolan said. “The massive borrowing by the U.S. government is undermining confidence in the longer-term outlook for the dollar.”

Investors appeared to be directing their focus to riskier equities and turning away from the currency markets. The dollar is considered a low-yield investment, given the historically low interest rates in the United States. Last week, the Federal Reserve gave no indication that it planned to raise interest rates anytime soon, leaving investors to reroute their funds toward the stock market, oil and gold.

via nytimes.com

These two paragraphs don't make much sense to me. A vote of no confidence in the government would result in long-term interest rates on US bonds to shoot up to compensate investors for inflation. That isn't happening. In fact, as the next paragraph states, interest rates are historically low.

I'm no expert on currency markets, but it doesn't make sense to me that a wise bet against the dollar in currency markets (driving the dollar lower) wouldn't also be a wise bet in bond markets (selling Treasury bonds and driving long-term interest rates up). It sounds to me like people don't have much faith in American economic growth over the next 10 years, which explains both trends, and could actually be remedied by additional deficits (stimulus spending). See Brad DeLong for more: http://delong.typepad.com/sdj/2009/11/a-joyless-recovery.html.>

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Distressing

Politico reported that you told colleagues, “There is now a pro-life majority in the House.” Is that true?

I don’t remember saying that, but it’s not inconsistent with what the votes say. That’s been the situation.

via voices.washingtonpost.com

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ZOMFG WTF!!!!! 9.5% THIRD QUARTER PRODUCTIVITY GROWTH NUMBER!!!! - J. Bradford DeLong's Grasping Reality with All Eight Tentacles

ZOMFG WTF!!!!! 9.5% THIRD QUARTER PRODUCTIVITY GROWTH NUMBER!!!!

I WAS EXPECTING A 6% PRODUCTIVITY GROWTH QUARTER, BUT THIS IS RIDICULOUS!!!

Productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent...

Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.

For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions--that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.

I don't think that I can mock Michel Kalecki any more, ever again.

via delong.typepad.com

How long can this productivity growth continue? At some point, businesses will run out of ways to squeeze more production out of their current workers ... But will they be able to meet demand with productivity growth alone?

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Election day

Results start rolling in after 9pm EST.

 

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Check yourself before you wreck yourself, Democrats

A Year After Obama’s Election, How Do You Feel?

By The New York Times

One year ago, we asked NYTimes.com readers for a single word to describe their mood about the presidential election. The response was overwhelming (73,400 words) and varied widely, with “hopeful” and “anxious” as the top choices.

Now, a year after the election of Barack Obama, we want to know: Has your mood changed? Are you energized, hopeful, disappointed, ambivalent or outraged? As Jeff Zeleny wrote Tuesday, Mr. Obama has now seen his pledge to transform the country give way to some of the hardened realities of office. While it will be years before it is possible to gauge the success of his governing agenda, his record for some of the issues on which he campaigned is beginning to come into focus.

What one word best describes how you feel a year after President Obama’s election? Let us know.

via thecaucus.blogs.nytimes.com

Watching Democrats' single words to describe their mood after Obama's election scroll across the page (like "betrayed"), all I could think of was: "We were thiiiis close to a McCain administration that would have driven us right into a second depression."

Progressive anger that Obama isn't living up to their (lofty) expectations is understandable, but misplaced. This administration is so much better than the alternative that we should still be thanking each and every one of our lucky stars that he was able to get elected.

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