Comments on: Closet Index Funds: What They Are and Why to Avoid Them

By: Mike

Mike — Wed, 05 Aug 2009 11:47:33 +0000

Damilola: I’m not familiar with the second index you mentioned. The Lipper Balanced Funds Index could be a useful comparison.

Alternatively, you could determine how highly the fund’s performance is correlated to a blended portfolio of, say, the S&P 500 and the Barclays Capital Aggregate Bond Index.

By: Damilola

Damilola — Wed, 05 Aug 2009 04:31:03 +0000

I was trying to do this with active fund that I own (RPBAX) a balanced fund under T Rowe Price. What would be the benchmark for that? I see that the prospectus compares it to the Lipper Balanced Funds Index and Merrill Lynch Capital Market Index as well.
Or am I going in the wrong direction?

By: Mike

Mike — Fri, 24 Jul 2009 11:22:41 +0000

That’s the whole point though: We don’t know what the next 9 years will look like. We have to choose what to do with our money without that knowledge.

By: pkora94

pkora94 — Fri, 24 Jul 2009 09:00:38 +0000

If the next 9 years turn out to be exactly the same as the previous then i am willing to take that bet otherwise i think i will take a bet on something else.

By: Mike

Mike — Wed, 22 Jul 2009 17:46:51 +0000

pkora94, yes, that fund outperformed by roughly 1% per year over the last 10 years. Would you bet on that happening again?

By: pkora94

pkora94 — Wed, 22 Jul 2009 08:45:18 +0000

Is it just my maths but the actively mannaged fund seems to have beaten the passive fund by 15% over that period of time.

By: Mike

Mike — Tue, 21 Jul 2009 16:06:36 +0000

TFB: You raise a good point there. Thanks for bringing that up.

By: vilkri

vilkri — Tue, 21 Jul 2009 15:44:11 +0000

Most of the actively managed funds have such a high correlation. Economists would call this an agency problem. Fund managers really don’t have much incentive to stick out by deviating too much from the benchmark index. The reward for excelling is not big enough. On the other hand the punishment for underperforming significantly is very bad – the fund manager gets fired and has to live with a poor performance record, which will make it difficult to get a job again.

By: TFB

TFB — Tue, 21 Jul 2009 05:42:16 +0000

When you don’t have access to a real index fund, say in a 401k plan, using a closet index fund is not bad because you know it will stay close to the index. It is least likely to do crazy things.

By: Rob Bennett

Rob Bennett — Mon, 20 Jul 2009 18:36:21 +0000

This blog entry explains (in my eyes) why most active funds are not worth investing in. I believe that those on the look-out for really good funds might be able to find a few. But the phenomenon described here shows that marketing considerations are often dominant when funds are constructed. They’re using the index to get good performance and then packaging it as a non-index fund to justify higher fees!

A big plus of indexing is that it is so simple that the average person can understand what is going on and thus can better protect himself or herself from the marketing mumbo-jumbo.

Rob