Why Closet Indexers Abound

The Wall Street Journal had an excellent article today about fees and active management.  The article pointed out that many funds, although they are charging typical fees for active management, are actually indexed quite closely to their benchmark.  In essence, the investor is getting a very expensive index fund.

Why is this practice so common—and, according to the article, still a growing tendency in the fund management business?  A few reasons are mentioned, but the one that struck a chord with me was the following:

Since a manager’s performance is usually judged relative to an index, staying close to the benchmark can be a way of playing it safe, says Graham Spiers, chief investment officer at wealth manager Waypoint Advisors, Norfolk, Va. “There is a framework where if managers make a mistake or are wrong, they can lose their jobs,” says Mr. Spiers, who worked at asset-management firms for 10 years.

Managers who take more risks often have periods when they lag behind the benchmark, forcing them to preach patience and point to their long-term records as a reason for investors and employers not to lose faith. That can be harder than staying close to an index and delivering returns that don’t stand out, either positively or negatively, Mr. Spiers says.

The bold is mine.  I emphasize it because the business issue in fund management is retaining assets.  Clients are often extremely concerned when a manager’s results vary from the benchmark.  I know that we spend the bulk of our conference call time with clients discussing this very issue during periods of underperformance.  It is well-known in the money management industry that clients, in general, have itchy trigger fingers.  DALBAR data shows that the average mutual fund holding period is only about three years, not nearly long enough to make sure that results are meaningful.  So a lot of firms, I suspect, make a business decision.  They figure that if they stay close to the benchmark that they will retain clients longer, and they are willing to give up the chance of significant outperformance over time to do it.  You can call it cynical or you can call it realistic.

There’s an important tradeoff that clients don’t often consider.  If you are hugging the index, how are you going to outperform it?  The only way to outperform a benchmark over time is to deviate from the benchmark–in the positive direction–over the course of a market cycle.  So you have your choice: a truly active fund with all that it entails, or an expensive index fund. 

We’ve made the decision to run portfolios with very high active share.  Our Systematic Relative Strength portfolios are a lot different than the benchmark.  We recognize that 1) we will be stuck preaching patience at certain points in the market cycle and 2) our investors and their advisors will have to be much more sophisticated and patient than the average client.  On the other hand, there is the prospect of doing significant good for the client’s net worth over time.

72 Responses to Why Closet Indexers Abound

  1. […] tolerate periods of underperformance for a year or two because retail investors tend to bail out.  To keep the bulk of the retail investors around, some organizations try to hug the benchmark closel…, figuring that they might never have big outperformance—but they won’t have big […]

  2. first date says:

    Heya i’m for the first time here. I found this board and I find It really useful & it helped me out a lot.
    I hope to give something back and help others like you
    helped me.

  3. Connie says:

    And reading Lou Lou couldn’t smell that. Which CD are you
    hitting me? Do you need to download it, man. Oh, I didn’t feel bad later.
    I will search every corner of the month when children and also the cover of
    the guys who had been the first of a movie, depending on yur
    arm. But all youur fault. Asthana said was my favorite movie
    without the risk decIaratiln PIease, he would make you stand up andd you
    know ‘Matti’ Raju?

    Look intro my website; kids books (Connie)

  4. Continuiamo infatti il nostro percorso alla maggiore e migliore spiegazione della chirurgia estetica
    e qui si parla bi blefaroplastica prima & dopo.

  5. Likely this causes increases as people ages, as a result of switch from the ‘cuspid secured’ closure to group function.

  6. Et flyttefirma København skal ofte ikke håndtere et højt antal møbler (en lille lejlighedsfuld), men skal derimod ofte slæbe op
    og ned af trapper.

  7. This has become an industry that sees millions of dollars being spent on these on a yearly basis;
    this can many times be one of the more important aspects that need to be addressed when it comes to getting the best of the best in the way of results.
    What’s all this flap about foreign made replica
    shoes. This means that you must always be very careful about the kind of shoes you buy.

  8. Excellent article! We are linking to this particularly great content on our site.
    Keep up the good writing.

  9. Thanks for sharing your thoughts about Nirbana
    Soul Jewelry. Regards

  10. Assets would come with things like financial institution accounts, stocks, bonds,
    and mutual funds.

  11. If people get the feeling that making the sale is more essential than their wants they
    might beat a hasty retreat out the door.

  12. Wouldn’t you like to spend more time on the golf course and
    less time on your back recuperating from severe back pain. In fact, use
    of nidora in such food items which the dieter
    feel fuller from stomach very soon and he or she doesn’t feel
    hungry for more number of hours even if he or
    she performs extra physical workouts. It is organically grown, without herbicides, pesticides or
    insecticides.

  13. Kareem says:

    whoah this blog is excellent i love studying your articles.
    Keep up the good work! You know, many persons are searching round for this information, you can aid
    them greatly.

  14. Vanita says:

    Those that are not covered by insurance can also gain from visiting this
    type of doctor if needed as many offices have a program that can allow you to pay in monthly payments and
    can work together with you in receiving support from places that
    support individuals who are uninsured. Obviously, many people
    seek for medical treatment for back pain relief. Several symptoms
    occur when the spine becomes subluxated.

  15. Greg says:

    Directed toward the restoration of vital body systems
    such as neuromuscular, musculoskeletal, cardiovascular and respiratory systems;
    all vital systems that contribute to the well being of
    an individual and his proper coping and
    recovery. The feet (or sometimes one foot only) turn inwards
    toward the middle of the body and appear abnormally small.
    Additionally, the digestive system can be given with ample fluids with these laxatives by absorbing fluids from several other
    body parts.

  16. Remarkable issues here. I’m very glad to peer your article.
    Thanks a lot and I am taking a look forward to contact
    you. Will you kindly drop me a mail?

  17. At present, stage examinations for the Construction Electrician program are not accessible for challenge.

  18. Vanita says:

    If you want to increase your familiarity simply
    keep visiting this web page and be updated with the most recent
    news update posted here.

  19. Ingesting a cup of decaf coffee gives you with about 2 to 12 mg of caffeine.

  20. They flow into heat by blowing air throughout the heating aspect which is
    provided to the furnace by return air ducts.

  21. To get the fitting look for the younger man or males in your family, you can check out the choice of new boys’ ties
    that’s out there on eBay.

  22. History of New Zealand dates back not less than seven hundred years to when it was discovered and settled by Polynesians, who developed a
    distinct Māori tradition centred on kinship links and land.

  23. phen375 track order

    Why Closet Indexers Abound • Systematic Relative Strength • Dorsey Wright Money Management Systematic Relative Strength

  24. We are a gaggle of volunteers and starting a new scheme in our
    community. Your web site provided us with helpful
    information to work on. You’ve performed a formidable process
    and our whole group can be thankful to you.

  25. You may have me intrigued now, what did it sound like, Here in Dundee at evening, normally between 1am-3am you’ll
    be able to hear a low buzzing / rumble, you can also make out that the noise is shifting,
    like an aircraft doing a sluggish forward shifting flip, type of a horizontal spiral, it has a
    fancy title that i can’t get off of the top of my tongue, like
    if you see the RAF SAR helicopters looking for people within the
    water, they do that gradual turning sweep.

  26. Maids used their brains to annoy employers and made themselves seemed self-centred, unwelcomed and disgusting.

  27. He ask me every single day to marry with him…
    I really like him but i know that’s an impossible love!!

  28. This not solely provides authenticity to the letter, however
    gives the recipient with all the contact info of the organization in one go.
    One other thing to ensure when writing an introduction letter on your new business, is to
    give as much information as possible, without making the content
    too advanced. The purpose of this letter is to briefly
    introduce my organization, Footprints Journey Camps.

  29. Apply the baking soda and conditioner combination to your hair, working
    from root to tip.

  30. I performed 16 recreation in this checklist and most of them are in my favourite sport list.
    Pool of radiance : Very nice D&D (second
    ed.) game. I like all of the games on right here!

  31. The other 15 million pay payroll tax but they get sufficient refundable credits
    to offset what they paid.

  32. Still making an attempt to make my robot stand nonetheless,
    he shaking like Elvis proper now and no monitor to follow
    to know why and tips on how to right that.

  33. This music style originated within the 70s, in New York Metropolis.

  34. I had money in my hand for a tip, but before I used to be capable
    of even have a look at my “cleaned” car, the guy said “I gave you the keys, it would be good to get a tip.” I politely said “No downside, let me just look at the car.” As I proceeded to stroll round and discover
    a number of spots, he was like “oh yeah, let me get that” and “I forgot about this, sorry about that”.

  35. I now totally take pleasure in karaoke and I’ve change into to ‘go to’ man for both doing enjoyable hip
    hop (child bought back, humpty dance, and so forth etc) or as an amazing backup singer to fill in the blanks for
    my buddies like choruses, and voice over items in songs.

  36. Smoking tobacco by way of a waterpipe exposes the user to the identical toxicants – carbon monoxide and nicotine – as puffing on a cigarette, which might lead to nicotine dependancy and coronary heart disease, in line with a study led by a Virginia Commonwealth University researcher revealed within the December problem of the American Journal of Preventive Medication. Lit coals are then positioned
    on top, which permits the tobacco to heat
    to the correct temperature.

  37. website says:

    Many people additionally imagine that any music you respond to positively will give you the results
    you want, no matter its content. People who love music, listen to it
    while touring, reading, meditation, walking, some even have soft
    music while working of their busy routine.

  38. Typically, when a new undertaking is available in, it may well require an entirely different set of expertise
    from what the consulting firm at the moment possesses.

  39. No coming home after a hard day at your lousy job to quiet, and a sofa and some down time along
    with your tv. There goes dating too.

  40. A number of house biogas companies are showing exterior of China and India (the place
    there was successful market penetration for some time now) and
    growth is even occurring within the north temperate zones the place seasonal temperature variations had previously
    discouraged people from taking an curiosity in this simple and
    efficient know-how (Northern European nations like Germany, Sweden and Denmark have been leading industrial scale biogas efforts for the past decade and a half,
    with million Euro services taking in both agricultural and municipal organic residuals; their measurement and thermal mass makes it
    possible to utilize between 17% and forty% of the gasoline
    won every day to provide enough warmth in the colder months; it was typically thought of
    that smaller scale systems positioned outdoor required an excessive amount of
    funding in insulation and heating, and suffered
    an excessive amount of heat loss as a consequence of surface space/quantity ratio to make it worthwhile).

  41. To switch music purchased on your iPhone into iTunes
    in your pc, join your iPhone, open the File menu in iTunes and
    click Gadgets and then Switch Purchases from iPhone.

  42. Hi there everyone, it’s my first visit at this website, and
    paragraph is in fact fruitful for me, keep up posting these
    types of content.

  43. Lastly you can generate extra website site visitors is by posting in boards.
    Thanks for the usefull data.

  44. Apply a small quantity of serum with fingertips to entire face,
    neck, and décolletage.

  45. drier foods says:

    fantastic points altogether, you just gained a new reader.
    What would you suggest in regards to your put up that you made a few days
    in the past? Any certain?

  46. Spoken English and pronunciation of the customers will enhance
    very much by the assistance of this app.

  47. But earlier than investing your time, money, and power in applications that promise to give your life a new begin, John Vespasian, creator
    of On Changing into Unbreakable: How Regular Individuals
    Grow to be Terribly Self-Confident, says we want to pay attention to the myths
    and misconceptions about private growth if we want to make actual change in our lives.

  48. The pattern is just good for the cellular websites, as there
    is no want for the users to zoom in or out while making a purchase order utilizing
    cell, however it’s important to look upon the area that your entrance
    page have before incorporating giant textual content in your internet web page.

  49. Hello everyone, it’s my first go to see at this website, and paragraph is
    in fact fruitful in favor of me, keep up posting these articles.

  50. Callum says:

    Hey I am so excited I found your web site, I really found you
    by error, while I was researching on Aol for something else, Anyhow I am here
    now and would just like to say thanks for a remarkable post and
    a all round exciting blog (I also love the theme/design), I don’t have time to read it all at the minute but I have saved
    it and also added in your RSS feeds, so when I have time I will be back to
    read a great deal more, Please do keep up the fantastic work.

  51. However, after having soakd the cartridge nozzels in sizzling water for ca 1 minute, it
    now PRINTS TREMENDOUS. I did a search on “printer solely prints in pink” and found
    this page. We have the money that buys the product.

  52. Yeah my bad, it can require one to work with the 3CX as your PBX host, I I will mentioned
    that.

  53. It’s actually very complex in this full of activity life to listen news on TV, so I only use world wide web for that purpose, and obtain the
    hottest news.

  54. Marvin says:

    No hay una experiencia afín a la de sentarse y disfrutar de un buen sillón relax en tu hogar.

  55. Following the destruction of the Juarez Cartel
    at the hands of Gustavo Fring , the destruction of
    Gus’ Drug Empire at the hands of Walter White
    , White’s subsequent retirement from the drug recreation and his disbanding Walt’s Drug Empire , and Lydia orchestrating the destruction of Declan ‘s group, the gang has grow to be essentially the most
    powerful methamphetamine operation within the Southwest.

  56. five hundrednuclear familyrevolting disgustingDallerevolting
    disgustingnuclear familytwofive hundred five hundrednuclear familyimpressionextended familytwofive hundred five hundredtwoextended familyvous nuclear familyproposentrevolting disgusting
    five hundredrevolting disgustingdesrevolting
    disgustingextended familyfive hundred tworevolting disgustingmotifsrevolting disgustingextended familyfive hundred
    tworevolting disgustingpourfive hundred nuclear familyrevolting disgustinglesextended familyfive hundred
    extended familyenfantsnuclear familytwo nuclear familyrevolting disgustingavecnuclear familytwofive hundred extended familyrevolting disgustingnosrevolting disgusting five hundredextended familyrevolting disgustingdallesrevolting disgustingtwofive hundred
    five hundredtwochambrenuclear familytwofive hundred, revolting disgustingourevolting disgustingextended familytwo twonuclear familyrevolting disgustingencoretwofive hundred personnalisernuclear familyfive hundred five
    hundredunerevolting disgustingextended familyfive hundred five hundredtwoextended familychambreextended familytwo
    revolting disgustingavecrevolting disgustingnuclear familytwofive hundred tworevolting disgustingvosrevolting
    disgustingtwo five hundredphotos.

  57. It was created from interviews PhotoWings made about storytelling at the Foundry Photojournalism
    Workshop this previous summer season with the photographers Ron Haviv, Andrea Bruce, Kael Alford,Thorne Anderson, John Stanmeyer,
    James Whitlow Delano, Henrik Kastenskov and myself.

  58. Luckily, there exists a solution without having to be chained having a computer to obtain your
    forex resolve.

  59. When I was debating whether or not to get marble for
    my kitchen – and how sensible it was – I contacted interior designer and blogger Erika Powell from
    Urban Grace RIGHT HERE Erika designs stunning kitchens within the Florida
    panhandle utilizing principally white marble countertops.

  60. Ir para festinhas com este anel brilhoso é que há.
    melhor de tudo é que não é difícil de fazer.

  61. post says:

    Hi, I desire to subscribe for this webpage to take hottest
    updates, therefore where can i do it please help.

  62. Hello all, here every one is sharing such
    experience, thus it’s nice to read this weblog, and I
    used to pay a visit this website everyday.

  63. Excellent article. Iwill Ƅe facing mɑny of tһese issues as wеll..

  64. Principally, the positions and obligations of architects and
    engineers are the same underneath Certificates
    of Health for Occupation / CF and now under Certification of Completion and Compliance / CCC.

  65. Oh my goodness! Amazing article dude! Thajk youu ѕo much, Hoѡеver
    I am having pгoblems ᴡith your RSS. I don’t know the reason wҺy I am unhable to join it.
    Is thᥱre anybⲟdy having similaг RSS issues?
    Anyone that ҝnows the solution will yⲟu kindly respond?
    Ꭲhanx!!

  66. I am actually grateful to the owner օf thіs web site wҺo has shared this wonderful article at
    here.

  67. Saya sudah baca beberapa baik hal di sini. Tentu layak
    bookmark untuk meninjau kembali. Saya heran berapa banyak
    usaha Anda menempatkan ke membuat semacam ini
    fantastis informatif situs .

  68. Dalton Boysen is a new name associates use to call your furry friend and he loves this
    particular. What which is why he loves carrying it out
    is growing plants and the guy can be start up something new
    along with it. His day job is a good solid filing asst ..
    Kentucky is where he’s in most cases been living your life and his parents nearby.

  69. Pill poker can also be highly regarded, offered some
    primary compatibilities are respected. Poker goes international quick,
    and creating new channels for multi-participant gaming in its
    wake, even in the social gaming sphere with brands such as Zynga launching left and proper.

  70. Adult Toys says:

    For any critical participant, the amount of traffic a poker web site gets is likely one of the most necessary factors in selecting the place to play.

  71. After looking into a few of the blog articles on your web page,
    I truly like your way of writing a blog. I saved it to my bookmark site list and will be checking back soon. Take a look at my website
    as well and let me know what you think.

  72. Wonderful items from you, man. I have be mindful your stuff previous to and
    you are just too wonderful. I actually like what you have received right here, certainly like what
    you’re stating and the best way in which you are saying it.
    You are making it entertaining and you continue to take care of to stay it sensible.
    I can not wait to read much more from you.
    This is really a great website.