Wednesday, September 09, 2009

Paul B. Farrell: Lazy Portfolios take on the best and win, again - MarketWatch

Have you heard of the Lazy Portfolios? They run a series of tests of what are essentially passive investment strategies vs active management.

Well given behavioral finance is so hot, they decided to take on that. The result? Lazy wins again!

Paul B. Farrell: Lazy Portfolios take on the best and win, again - MarketWatch:
"Does the 'Behavioral Edge ... earn superior returns?' No!
Representing behavioral finance:
"There are two mutual funds actually managed by the Fuller & Thaler team: The JPMorgan Undiscovered Managers Behavioral Growth Fund and the Undiscovered Managers Behavioral Value Fund.

Fuller & Thaler manage roughly $1 billion, mostly institutional money."

The article then presents (on page 2) a table showing results of the Lazy Porfolios vs The Behaviorally based Fuller-Thaler funds.

The results might just nudge some back to indexing:

"Every one of the eight Lazy Portfolios beat the Fuller-Thaler Growth Fund for all three time periods, some by as much as 11 percentage points. Moreover, not only are all of our Lazy Portfolios in positive territory on a 5-year basis (while the Growth Fund's in negative territory) we're beating Growth by as much as six percentage points long-term. Same applies when we pit Lazy Portfolios against the Fuller-Thaler Value Fund on the 3-year and 5-year results. "
Now looking at two funds is not exactly scientific and if this were an academic journal it would most likely be laughed at and the paper returned without even being reviewed, but it is not so we can look at the results, but be sure to take them with some salt.

The results do remind me of the old WSJ series (many years ago now) that interviewed Thaler and Eugene Fama. In the end, both admitted their investment strategy was essentially to index. For Thaler it was because such a strategy protects us from ourselves (especially with reweighting) and for Fama it was his believe (which is backed my much data) that active management not only does not beat passive investing, but generally loses to it (especially after costs are included).

1 comment:

The Mike said...

Sorry, Dr. Mahar, but someone needs to call BS on this article. Look at the ALLOCATIONS of these "Lazy Portfolios". The Second Grader Starter is 10% fixed income; Dr. Bernstein's No Brainer is 25% fixed income; all the others are 30% to 40% FIXED INCOME. How do you justify comparing these portfolios to two funds which are 100% stocks?!?!?!?
I'm not saying this to defend the Fuller & Thaler funds -- far from it -- but let's make it a FAIR comparison.