Columbia Management is one of the largest investment management firms in the world. With close to 7 full decades of industry experience and expertise and over 100 individual investment strategies, Columbia has become a staple within the fund industry. In September, 2009, Ameriprise Financial, Inc. agreed to acquire Columbia Management $1 billion. In January 2015, Ameriprise's unveiled its new global brand which combined Columbia with its U.K-based affiliate Threadneedle Investments and renamed the entity Columbia Threadneedle Investments. The combined company has offices across North America, Europe, Asia and the Middle East, with 450 investment professionals. As of year-end 2015, their total assets under management reached $472 Billion. In early 2015, Ameriprise agreed to settle a 401(k) excessive fees claim for $27.5 million, which involved some Columbia funds.
Given the depth of their experience, the size of their asset base, and the numerous investment strategies that have gained traction, you would imagine that an investor's decision to partner with Columbia and leverage that expertise would be without question. Why would so many investors give their money to Columbia if they weren't good at what they did?
Well, we have taken the initiative to dispel the common perception that the active fund industry is delivering on the value proposition they profess. Using randomness to justify short-term outperformance, the industry has lured investors into buying into the notion that they can be a part of an exclusive group that can outperform the overall market.
Unfortunately, once we take a deeper dive into historical performance through the use of statistics, we find that the vast majority of the largest investment management firms in the world are no match for the overall market. Intricate presentations about different firms' approaches to outsmarting everyone else become nothing more than pure salesmanship. You can find similar analyses that we have done in the past for fund companies such as:
Our analysis begins with an examination of the costs associated with the strategies. We are only looking at strategies that have at least 3 full years of performance history, which brings our total sample size to 99 funds. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.
The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to incurred by passively managed funds.
The table below details the hard costs as well as the turnover ratio for all 99 active funds offered by Columbia Management. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).
On average, an investor who utilized an equity strategy from Columbia experienced a 1.17% expense ratio, a 0.16% 12b-1 fee, and a 5.61% max front-end load for equity funds with a load. Similarly, an investor who utilized a bond strategy from Columbia experienced a 0.73% expense ratio, a 0.12% 12b-1 fee, and an average 3.58% max front-end load for bond funds with a load. These fees can have a substantial impact on an investor's overall accumulated wealth if it is not backed by superior performance.
The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Columbia's strategies. It is important to mention that these performance figures do NOT include the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc. We compared each of the 99 strategies since inception and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found:
- 46% (46 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
- 54% (53 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
- 2% (2 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes
In general, we conclude that the Columbia family of funds has no expectation of producing above-average returns for their investors. The majority (54%) of their funds didn't beat their benchmark from inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes. As a fiduciary, we need to be sure beyond any shadow of a doubt that a strategy we recommend is going to best serve our clients.
But what about the 2 funds that had a statistically significant alpha at the 95% confidence level? They are skilled, right? We would just like to remind readers that based on a sample of 99 individual funds, we would expect 3 (1 in 40) to have a statistically significant alpha just by chance alone. Therefore, it is hard to decipher whether or not Columbia has displayed some skill or this is just example of random outcomes from a large sample size. To give a similar analogy, if we filled Yankee Stadium (54,251 max capacity) and gave everyone a coin to flip, just by random chance a handful of individuals might get 10 heads in a row. Are they skilled coin flippers? Of course not!
Now some readers may believe that we are not properly analyzing performance since we do not take into account risk (Beta). We understand your concern. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from Columbia who have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for Beta. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.
As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green shaded area). This is what we would expect in a well functioning capital market.
So what is the bottom line? In general, Columbia has not demonstrated that their process of hiring the best analysts and managers and implementing their investment strategies is superior to anyone else. To say they apply a unique process to just 2 of their investment strategies seems very unlikely. The majority of funds offered by Columbia have failed to outperform their benchmark since inception. Of those that did by a statistically significant amount, it is similar to what we would expect by random chance alone. In a global context, because we see a very similar trend across many major fund management complexes, general intuition would indicate that Columbia falls victim to a similar fate based on market efficiency, cost, and competition.
As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds.
Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.
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About the Authors
Tom Allen
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc. Â
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.