"Will Trice" <wtrice[at]notmonitored.com> wrote
snip for brevity
- quote -

Read the paragraph at the top of Table 4. It's way more
complicated than BWS wrote.

- quote -

That's open to interpretation of my remarks alongside the
paper's findings.

Elle wrote:
- quote -

It is true that he uses different definitions, but the main points of
the paper are obviously based on the one that Bread quoted. The other
types of abnormal returns are calculated to support the first and to
further explore the data and eliminate possible biases. According to
the author, the various calculations are all consistent.

- quote -

It's clear to me. His quoted figures (0.76% and 0.5%) come directly
from Table 4, which calculates abnormal return according to Bread's
quote. This table certainly does not compare small caps to large caps
as you implied earlier.

-Will

william dot trice at ngc dot com

<BreadWithSpam[at]fractious.net> wrote
- quote -

Actually, it's not what you say either. I am counting three
or more "definitions" of "abnormal return" in Schultz's
Results and Tables section.

What is meant in the abstract is unclear. What he means in
his first use of the phrase in the Intro section (and other
sections) is unclear. There is a conventional definition of
"abnormal return." He's not necessarily using it.

On a practical level, I would say that the paper loans some
impetus for asking the question (among others): "Do indexed
small cap funds beat actively managed small cap funds?" Many
chatter about this, and ISTM for some of the reasons the
author of Beliav's paper puts forth. I think the evidence is
good that, for large caps, indexed tends to beat actively
managed over the long haul. Not so much for small caps, from
my reading at present anyway.

It's something I'd put the likes of joetaxpayer on, and he'd
have a comprehensive answer in a week or less. ;-)

BreadWithSpam[at]fractious.net wrote:

- quote -

I think you're right if the intent is to invest in equities via mutual
funds. However, I think the author was trying to study the rewards
allotted to the individual investor that invests in individual
securities as opposed to mutual funds, and then using actively managed
funds as a proxy for the portfolios of smart (in the investing sense)
investors.

Your point about the author's construction of indices for comparison is
well taken, I particularly found it odd that he used momentum as one
axis of his "style boxes". Not necessarily incorrect, but odd.

-Will

william dot trice at ngc dot com

"Will Trice" <wtrice[at]notmonitored.com> wrote
- quote -

This is not worth discussing if we do not agree what the
conclusions are in the first place. Post what you think they
are, and we can examine the paper further. Or not. :-)

Elle wrote:
- quote -

Wow, coal in the stocking again this year, eh? I really wasn't trying
to poke you in the eye, but I think I managed to anyway. I was actually
just trying to see if you would amplify your thoughts. Consider:

'The key word is "common-sense," Beliav.'

In an effort to find out what you were getting at, I wrote:

- quote -

I'm sure you had a context in mind and I was trying to get you to
amplify on that context without twisting the exchange.

-Will

william dot trice at ngc dot com

"Will Trice" <wtrice[at]notmonitored.com> wrote
snip, with all due respect Will, I think you twisted
somewhat the previous exchange. Untangling within the
constraints of this moderated newsgroup is a chore. I also
feel an invitation to split hairs has been made, and I am
not going to irritate the still poorly compensated
moderators more here, or try not to. Focus your questions so
that they actually state your substantive position and the
relevance to financial planning, and I might respond. (Not
that you should be waiting on the edge of your seat for my
puny response. :-) ) Consider:

- quote -

What do you think the conclusion is? What Beliavsky claimed
the conclusion to be and what I think it is are different
things.

"Elle" <honda.lioness[at]nospam.earthlink.net> writes:

- quote -

Actually, it isn't. His definition of "abnormal returns"
requires that he compares individual stocks against a
bunch of very similar ones - the abnormal return of a
large-cap value stock is specifically as compared to a
"characteristic portfolio" of very similar large cap
value stocks, not the market as a whole and certainly
not small caps.

I still don't buy his conclusion for other reasons
related to this methodology, but it's not exactly
the problem you are pointing at.

Or, rather, I don't buy that his conclusion is
what Beliavsky suggested it was, nor that these
results have much in the way of immediate practical
application to folks building porfolios. In fact,
the author himself says:

The primary contribution of this paper is the use of
abnormal returns of mutual fund holdings as a measure
of the efficiency of a market segment.

Note (1) "mutual fund holdings" - not actual mutual fund returns,
and (2) it's about effiency of market segments, not
about actual fund performance or outperformance, nor
about any particular funds at all -- all the "abnormal returns"
are aggregated across large collections of funds.



--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Will Trice <wtrice[at]notmonitored.com> writes:

- quote -

My bad - I missed "per month".

I'm still not sure I buy it. I glanced over the paper
(here's a link to it:
http://www.cob.ohio-state.edu/fin/di...e_20071026.pdf
)
and I while his methodology of finding "abnormal returns"
is somewhat better than simply comparing everything to
the S&P 500 (as folks still do so often!) but, and as I
said, this is only at a glance, it looks fishy to me.
He talks about "abnormal returns" like this:

exceed the returns of stocks with similar characteristics

but then later on, he sometimes points to such "similar"
stocks like this:

divided into one of 125 characteristic portfolios based on size,
book-to-market value, and momentum

Which is to say he effectively compares each stock to one
of these 125 pseudo-indices, rather than comparing a whole
portfolio to the portfolio's most similar, say, morningstar-style
box. In theory good. In practice, he ends up with some of
those pseudo-indices having as few as 10 stocks. Not much
of a benchmark, if you ask me, especially since nobody
actually invests in any funds based on those 125 pseudo-indices.
(he calls them "characteristic portfolios").

I'd be curious what happens if he were to make it much broader
slices of the market - more along the lines by which both
fund evaluations and portfolio managers actually work - again,
more like the morningstar boxes or, say, the DFA funds.

Lastly, the author himself points out the following:

Empirical evidence generally supports the hypotheses that mutual
funds underperform after expenses. In the classic early study of
mutual funds performance, Jensen (1969) examines the returns after
expenses of 115 mutual funds over the 1955-1964 period. Despite a
survivorship bias in his data, he estimates that on average, mutual
funds underperformed by about 1.1% per year. This conclusion held
even after adding back all expenses except brokerage
commissions. In a comprehensive study of the returns to 1,892
diversified equity funds over 1962-2003, Carhart (1997) finds that
on average, the funds slightly underperformed the market. After
adjustment for characteristics of fund holdings though,
underperformance was more striking. Funds tended to overweight
small firms, and firms with low book-to-market ratios in their
portfolios. After adjusting for these factors, funds on average
underperformed by just under 2% per year.

Upshot of all of this -- for the most part, indices still
makes sense for most people.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

BreadWithSpam[at]fractious.net wrote:

- quote -

Did you mean to say "if the expenses are less that 76bp pre month"? I
think that's fairly easy to find, no?

-Will

william dot trice at ngc dot com

Elle wrote:
- quote -

Why do you feel this last sentence is true?

- quote -

Other than expenses, which B explained, what relevant assumptions do you
feel are being ignored?

- quote -

Do you feel that the conclusions of this paper violate common sense? At
least one other poster disagrees with you but, of course, that proves
nothing.

-Will

william dot trice at ngc dot com

beliavsky[at]aol.com writes:

[From the paper:]
- quote -

[From Beliavsky:]
- quote -

If the conclusion you copied in above is correct, actively
managed makes sense only for small growth if the expenses
(both management *and* trading *and* tax-drag) exceed 76bp.
Good luck finding that!

That said, there is more to all this than just long-term
returns - there are also issues of tax efficiency and
volatility, for example.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

beliavsky[at]aol.com wrote:


- quote -

This matches both my intuition and experience. All my active funds, except one,
are small to mid cap. Partly, the question seems to be one of value added by
the fund manager. The large cap stuff is analyzed to death. It really is a
pretty efficient marketplace -- everybody knows everything.

This is much less true in the smaller cap markets. There may be zero to two
analysts covering a stock, so the manager has opportunity to find something that
is not known to the whole world.

-- Doug

<beliavsky[at]aol.com> wrote
- quote -

The author's statement about the 0.76% abnormal return of
small caps blah blah is a mere restatement of the fact that
small caps have historically returned (well, from 1980-2006)
much more than large caps. Does this justify a higher
expense ratio for small cap funds vs. large caps, in
general? I guess, if one insists on comparing apples (small
cap funds) to oranges (large cap funds). Does it mean
actively managed small cap funds trump passive managed
small cap funds? No. And that's the choice people need to
make, since all properly diversified investors with a long
time horizon are going to hold both small caps and large
caps.

- quote -

I suspect by "simply strategy" you mean a snippet from a
paper sound bited to the point where most of the paper's
assumptions are ignored. Without the assumptions, the
underlying point of the paper is meaningless. Its
implementation becomes an exercise in gambling.

- quote -

And on average, do these managers beat the indices, with
expenses taken into account?

Didn't we have a bunch of these "money managers" recently
re-assemble and re-package high risk mortgages into packages
they claimed (magically) were lower risk?

Warren Buffett, in his typical common-sense manner, cut
through the obfuscation and noted that securitizing
uneconomic mortgages didn't make any sense: "I don't see any
way that pooling a bunch of mortgages, changing the
ownership, is going to change the viability of the mortgage
instrument itself -- whether people can make the payments."

The key word is "common-sense," Beliav.

On Jan 22, 12:17*pm, "Elle" <honda.lion...[at]nospam.earthlink.netwrote:
- quote -

Yes, but 12*0.76% = 9.12%, much higher than the typical expense ratio
of a small cap mutual fund.

- quote -

As usual, we disagree. In general, finance professors are not in the
business of developing investment strategies for individual investors
but in understanding the financial markets. I think it may be possible
for some individuals to use those insights to boost their performance,
but it may require refining a simple strategy presented in a paper. I
can say from first-hand experience that quantitative money managers do
pay attention to the research published in places like the Journal of
Finance.

<beliavsky[at]aol.com> wrote
- quote -

This is not what the conclusions say. Are you even aware
that the paper treats only mutual fund performance before
expenses? From the author's draft (free on the web): "I
examine returns on fund holdings rather than returns on the
funds because I am interested in how well mutual funds do on
their investments - not how much of their returns are passed
on to their investors."

This work has no application to real investors. It is the
usual grist of the academia mill, where few gems emerge.

Rational Cross-Sectional Differences in Market Efficiency: Evidence
from Mutual Fund Returns
by PAUL H. SCHULTZ
University of Notre Dame - Department of Finance & Business Economics
November 14, 2007
Abstract:
There should be enough inefficiency in the market to allow returns to
security analysis to adequately compensate the marginal investor for
his efforts. Cross-sectional differences in the costs of analysis
imply cross-sectional differences in market efficiency. Small growth
stocks are especially costly to analyze and trade. Hence we would
expect that the returns before expenses that smart investors earn
analyzing these stock to be especially high. Over 1980 - 2006, the
small growth stocks held by active mutual funds earn average abnormal
returns of 0.76% per month. Large value stocks held by funds earn
monthly abnormal returns of only 0.05%.

Keywords: market efficiency, mutual funds, growth stocks, small
stocks
JEL Classifications: G12, G14, G20

If the conclusions of the paper above are correct (I have not had time
to read it yet), actively managed mutual make more sense for small cap
growth stocks than for large cap value stocks. I have seen similar
research for small cap vs. large cap stocks, ignoring the value/growth
dimension.