Scorecard of Active Strategies

Comment on “Active Management Stinks, But It Doesn’t Have To,” by Daniel Crosby, in the October 2016 AAII Journal.

This seems to be something of a mixed bag. Regardless of whether efficient market theory is correct in detail, passive investing based on it has proven superior to active management. Just as Newtonian mechanics is only a close approximation, it works in almost all practical situations as demonstrated by the SPIVA results [S&P Dow Jones scorecard on managers]. High marks for bringing them in, something not often seen in discussions of this type. Not noted are the persistence and style drift of SPIVA results. In addition to survivor bias with active funds, those that do survive frequently do not maintain a constant style and very few maintain their relative performance rank.
—Richard Vroman from California

Tax Implications of Charitable Distributions

Comments on “The Tax Advantages of Qualified Charitable Distributions From IRAs,” by William Reichenstein, Kirsten A. Cook and Harry Harelik, in the October 2016 AAII Journal.

Charles Schwab, where I have my IRA, allows me to have the QCD check made payable to the charity, but sent directly to me. I worked for a company that would match charitable donations, so I send the check along with its matching grants form; thus, I can still double my donation with lower tax consequences.
—El Stehno from Illinois

Like Schwab, Vanguard also cuts QCD checks payable to the charity and sends them to me to forward. No need to deal with the charity ahead of time to establish where to have the funds transferred. It’s my experience that development offices have no clue.

Also, though the discussion implies that this method of charitable donation would only benefit wealthy individuals making large donations, this need not be the case. Anyone who is taking RMDs and is in the habit of giving to charity can use this means of doing so. That said, thank you for your thorough analysis of the issue. Deferring taxes has so many implications; it’s disheartening to see them all laid out so clearly.
—Margaret L. Hagen from New York

Critiques of New Shadow Stock Rules

Comments on “New Rules for Model Shadow Stock Portfolio, Including Momentum,” by James B. Cloonan, in the October 2016 AAII Journal.

I disagree strongly that adding momentum to the criteria for the Shadow Stock Portfolio will improve long-term performance. For the better part of two decades I have been a loyal proponent and follower of the Shadow Stock Portfolio and its rules for including a stock. Now I am much dismayed and will no longer follow it. You are trading short-term improvement for long-term mediocrity in my opinion.
—F. Dirienzo from Nevada

I agree with the criticism. You have made an important turn that will result in no benefit in the long term. I would assume that you added the momentum filter because you found that it was beneficial in backtests. Is that the case? If it is, can you share the results? And if not, what drove you to add the momentum filter?
—Mike T. from Minnesota

Wayne A. Thorp, CFA, responds:
There is a wealth of academic research that shows the benefits of momentum investing. James O’Shaughnessy has also done extensive research on the best factors for stock selection, and momentum is one of them. The article “Momentum’s Role as a Driver of Stock Prices” from the May 2016 AAII Journal is definitely worth the read, especially the section on combining value with momentum.