Comments on: Competitive Advantage and Long-Term Fund Performance

By: Weekly Mashup - My Life ROI, Getting the Best Return On Life

Weekly Mashup - My Life ROI, Getting the Best Return On Life — Sun, 22 Feb 2009 15:12:31 +0000

[...] an easy to understand analogy between a tangible goods industry and mutual funds (in regards to competitive advantage). Ever wonder why fund managers have a hard time outperforming the market for longer periods of [...]

By: ObliviousInvestor

ObliviousInvestor — Wed, 18 Feb 2009 22:39:28 +0000

Hi Frank,

Thanks for the feedback. It’s great to get the viewpoint from somebody who’s actually been there before!

By: Frank

Frank — Wed, 18 Feb 2009 22:33:24 +0000

I used to manage mutual funds and I never found the disclosures of my competitors funds that useful, nor did I worry about them seeing mine. They’re really pretty stale, at least 90 days old, by the time you get them. You might find out that another guy did well the quarter before last because he owned Coke, but so what? The fact that Coke did well wasn’t a secret and you don’t know what he owns now.

I think your analogy of the concrete company isn’t far off. Your competitors can see the concrete you made, but that only tells them a little about how you made it. Similarly, unless you know how and why a portfolio manager decided to buy Coke, you can’t effectively replicate what he does.

By: ObliviousInvestor

ObliviousInvestor — Wed, 18 Feb 2009 21:16:13 +0000

Sure. My definition of “noise” is pretty inclusive. The way I see it, anything that you can neither impact nor predict is simply noise and is best ignored.

In other words, day-to-day, month-to-month, or even year-to-year market fluctuations are simply noise for most long term investors. Most of us would be better off ignoring them completely, and focusing instead on things that truly are predictable: Long-term market returns, for instance.

By: Canadian Money

Canadian Money — Wed, 18 Feb 2009 21:09:12 +0000

Can you define what you mean by “market noise”?

By: ObliviousInvestor

ObliviousInvestor — Wed, 18 Feb 2009 13:54:54 +0000

Hi DGI.

I imagine that you’re right, as far as individual investors go: Replicating somebody’s portfolio just because they’ve had good returns lately isn’t exactly a wise strategy.

I was really only intending to make a statement about the mutual fund industry. And no, I don’t suspect that mutual fund managers simply go and copy other managers’ portfolios every 6 months.

What I do strongly suspect is that they put some serious time & money into analyzing the portfolios of the people who are putting up the best numbers. And it’s probably difficult to keep your strategies a secret when you have to disclose so much on such a regular basis.

By: Charles in Vancouver

Charles in Vancouver — Wed, 18 Feb 2009 13:51:21 +0000

It could work the other way too, couldn’t it? Fund A makes a bet on (let’s say again) Coca-Cola 5 months before their portfolio disclosure, and bets against PepsiCo. At disclosure time, everyone decides Coca-Cola is a good bet too. So funds B-F also purchase some Coca-Cola, and sell or short-sell PepsiCo. Fund A has now benefited so much from their copycats (by driving market prices) that they can safely close their positions at a profit and pick a new bet.

By: Dividend Growth Investor

Dividend Growth Investor — Wed, 18 Feb 2009 13:18:17 +0000

Buffett’s Berkshire Hathaway comes to mind whenever I hear about mimicking other investor’s portfolio. The main problem with mimicking other people’s strategies is that they might have different risk tollerances than you.
For example I am a buy and hold dividend growth investor, who likes to dollar cost average into stocks that offer dividend income growth potential. If a company does cut its dividend however I sell, even at a loss. If someone is not comfortable selling at a loss, then they would have a hard time replicating my results.