Mutual Fund Replication – Death of Closet Indexers?

Mutual Fund Replication – Death of Closet Indexers? by Wesley R. Gray, Ph.D., Alpha Architect

Want to identify how to replicate an expensive, tax-inefficient mutual fund with ETFs?

Interactive Brokers has a pretty cool tool that does exactly that!

Check out their “Mutual Fund Replicator.”

Michael Mauboussin: Here’s what active managers can do

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More

In the example below, the IB system examines the Janus Perkins Small Cap Value Fund, highlighting that it can be synthetically replicated with a portfolio consisting of 58% SCHB and 42% PSCF.

We went ahead and tried the system out on a random large cap value fund: The Fidelity Value Discovery Fund (FVDVX).

FVDVX is a 900mm large cap value fund with 92 holdings spread across mega-cap holdings ($10B and higher).

The fees aren’t ridiculous (80bps), but the fund can be replicated with a high degree of precision by simply investing 91% in Vanguard’s Value ETF and 9% in the iShares Residential Real Estate ETF.

Closet Indexers

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