Some would argue that GE is like owning a mutual fund as well given all the companies under the same umbrella (in different sectors as well).

One of the hurdles that mutual funds have is the restrictions on how much a position can represent of their overall holdings, and how much of a particular company they can own. BRK doesn’t have these limitations since it is not a mutual fund.

I think you are being modest – I’m pretty sure a guy like you CAN beat the index with your individual positions! I look forward to your post.

As for me, if I own XIU then I’m adding individual bank positions on top of that when their yields starting heading to uncharted territory on dips (I’m thinking long and hard about CIBC right now though as if ever there was a cut in dividends from a bank – it might be them – they always seem to get their hands the dirtiest in any banking-wide fiasco! ).

Also, if I’m adding individual positions, it’s because I’m prepared to own the stock as a long term position, BUT my entry will be on a deep value basis and I’m happy to exit if I get a double digit return in less than 2 weeks. If the stock doesn’t move or if it goes down further – I’m happy to hold.

So while I don’t look for quick gains – I’m happy to take advantage. Most years this means I don’t have much activity – but this year: tonnes and it has done me well – no doubt partly due to luck, but when you are buying a top company whose dividends are higher than a high interest savings account – it’s usually not long before there’s a move in stock price to exploit that – and that means the stock has a higher likelihood of going up as opposed to down. Of course there is a LOT more risk to undertaking such a strategy – but I’m happy to take this risk with a small portion of my portfolio – certainly not all though.

For example, RBC Canadian Equity charges 2.42% while O’Shaughnessy Canadian only 1.51%.

The first step is to eliminate closet index funds. This is just a starting base…

Secondly, even if about half the active funds under perform the index/closet index combo, it’s still possible to compete well against other mutual fund investors. As we know, unsophisticed retail mutual fund investors are notorious performance chasers, and not very analytical. My own co-worker literally said that he bought his RRSP mutual funds based on last year’s performance. (I kept my mouth shut.)

Not many relish a steller 10+year performance, know what R-Squared is or understand the funds’ investment philosophies. I’m not saying we can beat them this year or next, but over the long-term, odds are in our favour if we do our homework.

I’ll explain why I plan to keep some individual positions in a post but I’ll say that I have no illusions that I’ll do better than the index and I’m okay with that.

FJ: I don’t know what the odds are after you filter out the closet index funds but it’s still less than even. Let’s do a thought experiment:

1. Index funds and all closet index funds taken together track the index before expenses.
2. Among the assets in the rest of the funds, half the money does better than average, half less before expenses.
3. After expenses, less than half of the non-closet index funds did better than average.

http://financialjungle.com/2007/05/27/investing/the-dirty-secret-behind-closet-index-funds/

There’s a free site that returns the R-Square value of a mutual fund. Anything > 90% is considered a closet index fund. Enjoy!

http://www.fundlibrary.com

It’s possible to improve the odds of picking winning funds through the process of elimination:

1) You know closet index funds are almost guranteed to trail the index.
2) You can shiftly identify closet index funds by examining their top holdings to ensure they don’t mimick the index.

One of my favourite active funds is RBC O’Shaughnessy Canadian Equity.

Further reading:
http://www.som.yale.edu/Faculty/petajisto/active72.pdf

I guess I know what I’m writing about on Wed.

Tim

What about Warren Buffett’s Berkshire Hathaway stock? Is that not actually a managed fund? Would his performance not indicate that active management can outperform an index over long periods of time?

Don’t get me wrong, I fly the flag of the virtues of low-fee indexed products as much as any of you – and I hardly use mutual funds at all. So I belong on your side of the overall argument.

As for a study that shows you that anyone can consistently pick a winning fund – it will probably never happen, and most Canadians (especially) will continue to be hosed by the financial services for decades to come through mutual fund over-pricing and under-performance.

It is POSSIBLE to pick a winning fund? Yes. And for those who know about the argument between active and passive, but still choose to pick active in some cases (or for part of their portfolios) – I believe they do it for the same reason an indexer would choose to add individual stocks to their mostly indexed portfolio – because there is the chance that they can do better.

If I do recall correctly, and you DO purchase individual positions, would you agree? If not, I would be curious as to the rationale…

There is a very high probability that you will come out ahead in ~15 years…when it actually matters!