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The views of a 45 year veteran

Charley Ellis, a 45 year veteran of investment in the markets, has been quoted as saying “the sad lesson for retail investors is that institutional investors underperform the market and that includes those professionals running managed funds.”

In his book, “Winning the Loser’s Game”, Charley Ellis explains that managed funds, on average, will underperform the market average by 2.85% per annum due to the costs of fees, transactions and mistakes. Yes, investment managers make mistakes too!! Hence the managed funds average returns are below par.

Furthermore, the research quoted appears to have used the S&P500 (which excludes dividends) as the market benchmark against which to measure managed funds returns. Considering that managed funds derive a sizeable chunk of their returns from dividends, this paints an even worse picture for the managed funds.

Whilst his findings are based on research in the USA, there is no evidence that it is any different in Australia. In fact, some simple scanning down the Morning Star managed funds data in the Saturday Financial Review over the last 10 years will confirm this.

One of Charley Ellis’s main reasons for this underperformance by the managed funds, or the market pro’s as he calls them, is that over the last 50 years the funds have gone from being 10% of market turnover to 90% of the turnover. “The institutions are the market. They cannot, as a group, outperform themselves. In trying to find a solution to outperform the market they have become the dominant variables. And their efforts to beat the market are no longer the most important part of the solution; they are the most important part of the problem.”

Fees are also a massive contributor to underperformance. It was recently reported by Jessica Irvine from the Herald Sun that “Australians pay about $17 billion a year in fees to the approximately 350 super funds in Australia, including government funds, industry funds and retail funds”.

Jessica goes onto add, “But that’s the end of it, right? Your super fund manages your money? Wrong. Most super funds do not actually invest your money directly, but outsource investment decisions to a panel of fund managers. These fund managers are big names such as AMP, Colonial First State, State Street, Challenger and Perpetual. They too, of course, expect a fee for their service”.

“So for most people, your employer chooses a default super fund, which in turn chooses an asset consultant, which in turn chooses a fund manager to manage your money. It’s a pretty long chain of command, along which fees are applied all the way, not to mention the potential conflicts of interest that arise because the big Australian banks own both the major super funds and the major fund managers.”

There is only one way around all this and that is to take charge of your own destiny, become educated and driven to manage your money yourself. Active investment is a 40+ year game for most people and the skills that you will gain from investing yourself will be of tremendous value for the rest of your life and stay with you for life.


  • David says:

    Hmmm – yes, it’s a ‘do-it-yourself’ thing in the markets, else fees and under-performance will chew into your investments. Thanks Gary for providing us with one of the few systems that actually work in the markets.

  • Keith Hills says:

    I used to have my money in a super fund and they were taking about 3% of the gross value in fees each year regardless of how they performed. What a great scam!!!
    With the market the way it is I can loose a bit of money here and there and still be way in front and I am learning good money skills for the good times when they return, which may be a long way off.
    I was talking to afriend yesterday about thier super fund and she was saying that in one of their portfolios the value had dropped by a third. Compared to that, I am doing heaps better.

  • Sow Behl says:

    No, there is a fundamental issue with Gary’s trading system. In that its a ‘trend following’ system. Real trending markets are officially dead and will not return for some time. Gone is that era. Fading markets is king!

    • Gary Stone says:

      Response to Comment by Sow Behl:

      “No, there is a fundamental issue with Gary’s trading system. In that its a ‘trend following’ system. Real trending markets are officially dead and will not return for some time. Gone is that era. Fading markets is king!”

      Firstly some questions: what is a “real” trending market compared to any other kind of trending market? Where does one go to declare a type of market “officially” dead? If trending markets are dead why would they ever return, let alone for “some time?”

      Beware the “new era.” There have probably been many “new eras” declared over the last 300 years!

      Fading markets is a legitimate strategy. There are many legitimate strategies that work in any market, that’s what makes a market. If only one strategy was “king” and no others worked there would be no market.

      May I suggest that you do some research on secular bull and bear markets, primary bull and bear markets and secondary bull and bear markets and may I also suggest that you look at more than just the last few years and look at the last 80 to 115 years on indices and last 60 years on stocks.

      “It’s hard to learn from history. It’s even harder to learn if you know no history.” Professor Geoffrey Blainey.

      Last thought, be careful that you are not fading any given market that starts trending up very stronlgly like many stocks have done on the ASX over the last few weeks. Or like Gold, Oil, Silver and Iron Ore have done, in both directions, over the last 2 or so years. It might be very costly. Certainly think twice (or more) about using a fading strategy during a secular bull market in equities.

      Best Regards

  • Sow Behl says:

    Also, Gary, you will probably never publish this comment but your SPA3 is over optimised. I’m sure you know in your heart this, but for the sake of selling your system you ignore it. There is no way that just because you have found optimal parameters that the system will continue to operate profitably from now on. Even with all your statistical data improvements doesn’t mean it will improve this. fundamentally markets are not trending, the system can NOT work long term.

    • Gary Stone says:

      Response to Comment by Sow Behl:

      “Also, Gary, you will probably never publish this comment but your SPA3 is over optimised. I’m sure you know in your heart this, …. There is no way that just because you have found optimal parameters……”

      At SWS we “wear our research and our equity curves out on our sleeves” for all to see.

      A very big assumption that “SPA3 is over optimised” when you have no idea what research has gone into it. This is what people do when a certain outcome does not fit into their current paradigm – they make assumptions. It’s one way, of many, that current beliefs defend themselves.

      Well, let me give you an idea what research has been done.

      Firstly, there are no “optimal parameters” in SPA3. SPA3 has an edge that will outperform the market with many parameter settings. It has an edge with parameter settings that range from 8 3 5 to 55 34 13 with all sorts of combinations thereof in between. Take your pick.

      You can use position sizes ranging from 0.2% Risk % per trade to 1.5% Risk per trade depending on the size of portfolio, how many open positions you wish to manage, how much drawdown you would prefer to limit your portfolio to etc etc.

      There is no one optimal parameter setting in SPA3. This is part of the definition of robust. The rest of the definition may be saved for another time….

      Through research we have provided 100’s of 1000’s of simulated equity curve outcomes to help customers decide their parameters and position size for their situation.

      About whether markets will never trend again and further to my comments above…..

      That is your opinion, nothing more nothing less, which you are entitled to hold. Ensure that you don’t get a closed mind as it could be dangerous to your equity curve at some stage.

      The XJO and XAO actually trended today between 10.30am and the close, up 0.7% in a nice neat up trend with higher highs and higher lows. I could quote 1000’s and 1000’s of examples around the world in 5 minute, hourly, daily, weekly and monthly timeframes where there are financial instruments trending in both directions. Always have been and always will be.

      Your challenge is to determine an edge using concepts that you are comfortable with, objectively demonstrate to yourself that you indeed have an edge, ensure that, within coo-ee, you use the right position sizing and then trade it.

      It won’t help your equity curve to criticise other approaches, unless it plays a role in giving you more confidence in your approach, but that doesn’t mean that your criticism is correct, it’s just an opinion. It just means that you don’t know what you don’t know.

      I wish you consistent and objective investing with your trading approach.

      Best Regards

  • William says:

    Sow, you say ‘real trending markets are officially dead’. Curious idea, since all markets & all instruments trend some of the time. Are you trying to say that all markets will remain flat from now on? Its like saying the sea will remain calm from now on, and there will never be any more tides or waves.

    I think you need to qualify your remarks, don’t you? Tell us exactly what you mean.

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