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Subject:  Re: Portfolio Management Fee? Date:  3/16/2006  2:27 PM
Author:  Hawkwin Number:  50540 of 88804

<<When you see a list of funds that has above average return, you have to watch out for survivorship bias. I would assume that several times a year you review the available funds and drop the ones that are underperforming.

If you look at the list that was actually on your list ten years ago(including the ones that are no longer on current list), what percentage of those stocks beat their index by enough to cover ten years of the 1.15% fees?>>

I won't argue that such a bias can and will occur -- as it does with any managed fund. The only way to avoid such bias is by selecting index funds.

Each strategy has to have outperformed their representative benchmark for 1, 3, and 5 year performance, net of fees, to be recommended. It also has to have lower standard deviation. The benchmark will be a blend of indexes that matches the allocation of the recommended holdings.

I know with this particular wrap account, on average, about 3-4 of the funds, out of 100+, are replaced each year. Half are typically due to the funds being closed, half due to them being removed for no longer meeting the standards of the product. Additionally, survivorship bias is less relevant in a type of account where you are quarterly reallocated based on what the product determines is the best fund(s) for you. For example, many of the recommended allocations in the large cap sector in previous years had a heavier weighting in value. Now, the accounts have been reducing their recommended allocation of LCV and increasing their LCG. The client can take that recommendation or they can keep their existing allocation.

The funds I have seen removed recently (last year or so) due to not meeting the criteria of the account:

Torray (LCV) TORYX
Sentinel (HYT) SEHYX

There have been a larger than normal amount of funds closed over the last year -- and they have been or are in the process of being replaced for new investors:

JPMorgan Mid Cap Value FLMVX
H&W Mid Value HWMAX
American Beacon (SCV) AVFIX
Columbia Small Cap (SCV) SMCEX
Preferred Intl Equity Index PFIFX

Existing holders of the above funds are welcome to keep them as long as they continue to fit the criteria of the program. In the case of any of the funds being A shares instead of I or R, the difference of the operating cost is refunded to the client (no one pays a sales charge to buy it). If the client ever wants out, they have the ability to roll the funds over, in-kind, as well.

As far was what was on it 10 years ago, I cannot say as I was not employed by this company at that time. I do know that very few (as I mentioned above) have been removed in the three years since I have been here. One other thing I did not expand on is that for a new fund to be added, it has to have satisfied the criteria for (IIRC) at least 10 years (it could be five though, I don't recall specifically at this moment).


I would say most people that visit this site are likely fine doing their own due diligence, but they are atypical investors. Most people don't have the time, the interest, or the discipline to invest correctly and for those that have sufficient assests, this style of investing may be beneficial for them. You asked me to compare what the return would look like, net of fees, compared to an index. The problem is, the vast majority of investors will not hold that index (or any fund for that matter)long enough to get the return from it.

I read an article last year that stated the average holding period for a fund is something like 15 months. o.0 *blink*
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