Stock Picker Graveyard

DoubleLine Equities Growth Fund: Another One Bites the Dust

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Stock Picker Graveyard

We have written extensively about the “stock pickers graveyard,” which is the final resting place for those funds that ended up on the wrong side of Lady Luck. Jeffrey Gundlach, former fund manager and founder of DoubleLine Capital, recently announced that they were closing the barely 3-year old Equities Growth Fund (DBEGX). As reported by Reuters, “the $5.9 million DoubleLine Equities Growth Fund will stop operating after failing to gain much traction with investors and posting poor returns.” According to Morningstar, the fund has started off 2016 very poorly, placing it in the bottom 6% of performers compared to its Large Cap Growth peers. Unfortunately it too will find its final resting place in the stock pickers graveyard.

The significance of this story isn’t so much that a particular fund failed. This is common in any type of competitive market. Some businesses fail while others succeed. The more important aspect of this particular story has to deal with its implications on the active investment community as a whole.

Anyone who has been involved in investing for some time is more than aware of the on-going, and sometimes contentious, debate about active versus passive investing. Each side has laid out their arguments and we believe that facts most closely support the passive approach. But the active investment community is not going to lay down their sword so easily. Year-after-year, we are constantly looking at performance figures in attempts to answer the question of whether or not “alpha” is real or a figment of our imagination – or more accurately, a robust marketing strategy. Any edge that the active investment community can gain in further perpetuating their own self-interest will be vigorously marketed and unfortunately fed to the many investors who need sound investment advice.

Most comparisons of active versus passive investing involve looking at the entire active fund industry and comparing their performance to their respective benchmarks. For example, let’s say we started a comparison at the beginning of this year and we will compare results 5-years from now. In order to do this we would look at the entire US mutual fund landscape at the beginning of this year and at the end of 5-years. Unfortunately, unless you account for funds like the DoubleLine Equities Growth Fund, your results will become the victim of survivorship bias.

A comparison that does not account for survivorship bias will overestimate the success of active funds versus passive funds since it does not capture all of the funds that have failed to survive. Once their performance is included in any comparison, results are not as favorable. According to the Center for Research in Security Prices (CRSP) at the University of Chicago, if only data from surviving funds is considered, the growth of a dollar for the surviving funds appears to be 19% better since 1962. CRSP has the only complete database of both live and dead mutual funds.

It should be expected that certain funds are going to come and go. This is a natural result of competition. But there are other implications that need to be considered, especially when we are making comparisons between the performances of active investors versus passive investors.

Like any good eulogy, although the fund is no longer with us, we will remember its performance (or lack thereof).