Swedroe: Don’t Play The Loser’s Game

April 10, 2015

Recently, a blog post by Chris Marx, a senior portfolio manager for equities at New York-based AllianceBernstein (AB), came to my attention. In it, Marx commented on a March 9, 2015 article in The Wall Street Journal that highlighted the reality that today's investors should have lower expectations for future returns because valuations are now much higher than historical averages.


Currently, the majority of financial economists are forecasting real returns to the U.S. total stock market and/or the S&P 500 of about 4 percent, well below their historical real return of about 7 percent.


Marx sums up his recommended solution to the problem of lower expected returns as follows: "By choosing a[n active] portfolio manager with high conviction and a disciplined investing process, we believe investors can significantly increase the odds of meeting their financial goals—even in a market with muted return expectations."


Unfortunately for Marx, there's an overwhelming body of academic evidence showing that investors significantly decrease the odds of achieving their financial goals by choosing active strategies rather than passive. That's why Charles Ellis called active management the loser's game.


He meant that while it's possible to win the game of active management, the odds of doing so are so poor that the surest way to win is to choose not to play. That's why, whenever I come across articles like the one authored by Marx, my response is to go to my trusty videotape and review the performance of the firm, in this case, AB.


A Respected Firm
AB provides investment management and research services worldwide to institutional, high net worth and retail investors. As of Dec. 31, 2014, the firm had approximately $474 billion in assets under management, of which $237 billion were institutional. According to Morningstar, AB's mutual funds have about $63 billion in assets under management, excluding money market accounts.


AB's website boasts: "We're an asset-management and research firm with a unique combination of expertise, innovative solutions and global reach. We attract the industry's best talent—people with the relentless drive and ingenuity to spark innovative ideas. We're truly global. We've built an extensive and integrated global footprint over four decades, giving us the broadest possible perspective."


Sure sounds impressive. What matters, though, is whether the firm's asserted expertise and penchant for innovative solutions actually managed to generate superior performance relative to passive strategies.


To see if that is the case, and if Marx is right in his claim that active management gives investors the best possible chance of achieving their financial goals, we'll compare the returns of AB's actively managed domestic and international equity mutual funds to the returns of similar, but passively managed, funds from Dimensional Fund Advisors (DFA), which has comparable funds in the same asset classes.


In the interest of full disclosure, my firm, Buckingham, has been recommending DFA funds in constructing client portfolios for 20 years.



For our comparison, we'll only examine the funds with a 15-year track record. The table below uses data from Morningstar to show the 15-year returns through March 20, 2015, for each of the funds for which data was available.


15-Year Returns 


Fund Annualized Return (%)
15-Years Ending
March 20, 2015
U.S. Large    
AB Core Opportunities A (ADGAX) 8.1 1.20
AB Growth B (AGBBX) 1.2 2.14
AB Concentrated Growth Advisor (WPSGX) 5.1 1.06
AB Large Cap Growth A (APGAX) 2.3 1.25
Average AB Fund  4.2 1.41
DFA U.S. Large Company (DFUSX) 4.4 0.08
U.S. Large Value    
AB Equity Income A (AUIAX) 7.2 1.04
AB Growth and Income A (CABDX) 6.0 0.98
Average AB Fund 6.6 1.01
DFA U.S. Large Value (DFLVX) 9.2 0.27
U.S. Small    
AB Small Cap Growth A (QUASX) 5.9 1.27
DFA US Small Cap I (DFSTX) 8.9 0.37
International Large    
Bernstein International Portfolio (SIMTX) 2.7 1.15
AB International Growth A (AWPAX) 3.1 1.37
Average AB Fund 2.9 1.26
DFA International Large Company (DFALX) 3.3 0.28
Emerging Markets    
Bernstein Emerging Markets (SNEMX) 9.0 1.44
DFA Emerging Markets II (DFETX) 7.8 0.34



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