MFG

2.31%

$9.31 magellan financial group limited

Valuation still looks convincing, page-24

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JeanLDD

76 Posts.

26/11/22

23:44

Post #: 65007790

Originally posted by convexity: ↑
What is shocking, is how catastrophically wrong you are.

"I could not care less about an active manager with a standard deviation of 10% versus 20% for the corresponding index fund that it's trying to outperform. "

For long term wealth creation, which is what you are trying to achieve, the standard deviation of returns is often far more important than the returns themselves.

Take this for a hypothetical example:
Year 1 2 3 4 5 6 7 8 9 10 Average
1 Index 15% 8% 12% 13% -25% 3% 25% 16% -30% 14% 5.10%
2 Fund 12% 5% 10% 10% -18% 7% 18% 14% -20% 8% 4.60%
3 Relative -3% -3% -2% -3% 7% 4% -7% -2% 10% -6% -0.500%

In this example:
The fund underperforms in 7 out of the 10 years or 70% of the time (similar to your active vs passive return comparison).
The average return of the fund over the 10 years is 0.5% lower than the index, so the fund underperforms there as well.
But because the standard deviation of the funds returns is also lower, the compounding return of the fund is higher, and the fund outperforms the index as a result.

In finance, it is not the average return that matters, it is the compounding return.

Starting with $100 and compounding the above returns results in this:
Year 0 1 2 3 4 5 6 7 8 9 10
1 Index $100.00 $115.00 $124.20 $139.10 $157.19 $117.89 $121.43 $151.78 $176.07 $123.25 $140.50
2 Fund $100.00 $112.00 $117.60 $129.36 $142.30 $116.68 $124.85 $147.32 $167.95 $134.36 $145.11

The fund's compounding return is 3.8% versus the index at 3.5%.
Expand
Ah yes, the standard deviation is the most important variable in all of portfolio management.

THAT'S WHY IN A SHORT DOWN CYCLE MFG UNDERPERFORMED BY 17%, KILLED A DECADE OF OUTPERFORMANCE IN ONE YEAR WHILE FOCUSING ONLY ON BETA AND SCREAMING ABOUT TOTAL RETURN, AND EVEN ALMOST DESTROYED THEIR ENTIRE COMPANY FROM IT.

Thank GOD they had a single variable that has nothing to do with returns and is constantly changing day to day in check though!

The only people stupid enough to use standard deviation as a meaningful variable are too stupid or ill-equipped financially to have even a basic understanding of how it works or what MPT is for that matter.

Brain rot from active managers trying to scam morons into paying them a fee for underperformance.

Last edited by JeanLDD: 26/11/22

MFG Price at posting: $10.07 Sentiment: Sell Disclosure: Not Held

2 Upvote

0 Great analysis

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Last $9.31		Change 0.210(2.31%)		Mkt cap ! $1.682B

Open	High	Low	Value	Volume
$9.31	$9.41	$9.23	$4.492M	481.9K

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No.	Vol.	Price($)
2	1861	$9.30

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Price($)	Vol.	No.
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No.	Vol.	Price($)
1	5000	9.260
1	2053	9.200
1	109	9.180
2	1269	9.150
1	12	9.130

Price($)	Vol.	No.
9.390	800	1
9.400	500	1
9.420	1000	1
9.490	250	1
9.500	2476	3

Last trade - 16.10pm 09/08/2024 (20 minute delay)

MFG (ASX) Chart

Valuation still looks convincing, page-24

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	Year	1	2	3	4	5	6	7	8	9	10	Average
1	Index	15%	8%	12%	13%	-25%	3%	25%	16%	-30%	14%	5.10%
2	Fund	12%	5%	10%	10%	-18%	7%	18%	14%	-20%	8%	4.60%
3	Relative	-3%	-3%	-2%	-3%	7%	4%	-7%	-2%	10%	-6%	-0.500%

	Year	0	1	2	3	4	5	6	7	8	9	10
1	Index	$100.00	$115.00	$124.20	$139.10	$157.19	$117.89	$121.43	$151.78	$176.07	$123.25	$140.50
2	Fund	$100.00	$112.00	$117.60	$129.36	$142.30	$116.68	$124.85	$147.32	$167.95	$134.36	$145.11

Valuation still looks convincing, page-24

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