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Ferri, The Power of Passive Investing

He cites several studies and some of his own tests that demonstrate the futility of seeking alpha. Among the findings, a single actively managed fund has a 42% chance of beating a comparable index fund over the course of a single year, a success rate that drops to 12% over 25 years. The statistics get much worse as you add more active funds. If you own ten funds, you have a 27% chance of beating an all index fund portfolio over one year and a mere 1% chance over 25 years.

Ferri’s own work analyzed the returns of actively managed funds within a generic asset class over five years. He found that a portfolio of five randomly selected active funds had only a 16% chance of beating an index fund, that only 5% of them won by 0.5% or more, and that 63% of them lost by 0.5% or more. When the portfolio was expanded to ten active funds, the numbers were much worse. Only 8% were winning portfolios, 1% of them won by 0.5% or more, and 70% lost by 0.5% or more. Ferri then massaged his model to see whether the numbers could be significantly improved; they couldn’t. As he summarized the results, “Active fund investors have strong headwinds against them. The probability of selecting a winning fund is low; the average payout for those winning funds does not compensate them enough for the shortfall from being wrong; the addition of several active funds in a portfolio reduces the probability of success; and the longer that portfolio is held, the odds drop even more. That’s a lot of headwind!” (p. 92) (more…)

IMF Seeking Boost In Lending Cap By $250 Billion To $1 Trillion

In the latest sign yet that things in the world are roughly 25% worse than expected (give or take), the FT reports that the IMF will seek an imminent rise in its lending cap from $750 billion to $1 trillion to build safety nets that could prevent financial crises. “Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,” Dominique Strauss-Kahn, the IMF managing director told the Financial Times. “Just because the financing role decreases, doesn’t mean we don’t need to have huge firepower … a $1,000bn fund is a correct forecast.” At this point it is glaringly obvious that without the explicit support of the various central banks and of such fake international but really US organizations as the IMF, the already prevalent liquidity crisis would simply destroy the world. The troubling theme is that instead of taking away incremental worries, we have now gotten to the point where one bailout, like a butterfly in China, merely requires 10 more down the road. Alas, instead of a virtuous Keynesian dynamic, this is anything but.

Some more on the IMF’s feeble attempt at justifying the need for its exploding funding requirements, as well as its own attempt to validate that all is well:

 
 

South Korea, as this year’s president of the Group of 20 leading economies, is helping craft the plan. Seoul hopes to convince the G20 countries to back the increased IMF funding at a summit in South Korea in November. The G20 meeting in London in 2009 tripled IMF resources from $250bn. A US official said Washington was sympathetic to improved safety nets but needed more details on the Korean-IMF plan.

South Korean economists forged the plan because of their own bitter experience of their currency and stock market plunging in 2008. In spite of robust economic fundamentals, Seoul needed to be rescued from a dangerous liquidity shortfall by swaps from the US, Japan and China. (more…)