[Ron] As I understand it the returns on all mutual funds is after expenses are paid. So you would not subtract the expense's again when comparing it to a index.
[JC] Correct, the expenses are already included in the total returns, so you are basically duplicating them.
Thanks Ron and JC. You are both correct. Morningstar's "Total Return" includes annual expenses which I added back in double-counting them.
[Morningstar] Unless marked as load-adjusted total returns, Morningstar does not adjust total return for sales charges or for redemption fees. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets.
What this means is that my actual returns of BJBIX over EFA (EAFE) index and BMCFX over IWM (Russell 2000) from 2002-2007 were 3.47%/year higher and -0.41%/year (lower) versus the 2.28%/year higher and -1.99%/year (lower) per year differentials of active vs index stated above.
[oildog] I don't think your strategy makes a lot of sense. There's nothing special about the returns produced by an index fund. Your goal should be to produce satisfactory investment returns over a long time horizon, not to beat index fund by a few basis points per year. ... Strategies that attempt to produce consistent outperformance over a particular benchmark are almost never successful.
I agree on your point that the ultimate goal is to produce the best investment returns (given the risk you're willing to take) over a long time horizon as being the key goal. And the fundamental rebalancing mechanism I use to do that is similar to how any index fund investor does it by rebalancing periodically across asset classes to methodically buy low and sell high. And my goals are long-term so I'm OK with a slightly aggressive portfolio more weighted in equities and international and mid-/small-cap in particular compared to a more conservative portfolio with higher bonds and cash and large cap.
When is comes to using active funds to "boost" an asset class performance (as compared to the index in that asset class), the index in an asset class is the only yardstick I've got to compare to, I believe. I could focus only on maximizing overall portfolio return but if I simply maximize that, then I may be 100% oil and international small cap right now. I'm not comfortable with the risk with such an approach and I don't have time to manage the related timing aspects of that kind of approach.
The approach I've come to, which I think has worked well overall, is to measure active fund managers against their index and to invest in 1-2 funds per asset class where a manager has signs showing the ability to beat the index for long periods of time. I'm OK ending up under index performance for a year or two. But one thing I've noticed (and maybe this is just subjective perception) is that picking active fund managers who trounce the index one year and then way underperform the next and then maybe even the next and trounce the year after that...while such active fund managers may actually end up with highest return delta above the index, they tend to be almost impossible to identify and trigger against like the exit call problem I had with BMCFX. I've found that active funds that are more consistent and beat their index year after year (but not every single year grant you) are easier to spot and manage with exit triggers.
And that brings me back to the question I originally posited to this group. Does any active mutual fund investor out there have a good criteria they use to decide to sell an underperforming active mutual fund? I think I'm "OK" at it. But if I could improve that one thing, I think it could help me do even better with my overall portfolio.
Thanks for all of the feedback thus far.
-Andy
