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  • gadgetmind
    gadgetmind Posts: 11,130
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    Linton wrote: »
    The evidence from this forum has been that those who see trackers as the only sensible way to invest can provide no more justification than to refer to the Blessed Tim

    Fortunately, Mr Hale, Mr Bernstein, and many others provide references to copious amounts of academic material and studies, so "uncited" is way off the mark.

    If you've read these books, and looked at a reasonable sample of the data, and are still unconvinced, then I guess we'll have to leave it at that.

    However, insulting those who *have* looked at all of this data, and who do have the strong scientific and statistical backgrounds to be able to judge it in a cool and dispassionate way, isn't really something I think you should be resorting to.

    This isn't religion, it's science. That doesn't mean it's right, but science is the strongest tool we have ever found to stop us fooling ourselves by "seeing" patterns that aren't really there.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmind
    gadgetmind Posts: 11,130
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    Incredibly profitable though. I heard Apple makes more profit just from iphone (exc rest of Apple) then Exxon makes from all of its sales worldwide and its the largest oil company in the world (petrol can be low margin I think, tech is like 50% profit margin )

    Yes, but it's not sleep-easy investing. My tech portfolio, which I have held for many years now, is pretty much IMG, ARM and AAPL. I'm still a big believer in the story behind all of these, but I'm diversifying as fast as CGT allowances permit, and even using all of my wife's 18% CGT band.

    Happy days in the gadget household (particularly every April 6th!) but it's all too focussed on just a few companies and just a few products.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • Linton
    Linton Posts: 17,064
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    edited 28 April 2012 at 4:58PM
    thelawnet wrote: »
    You have that the wrong way round. The point is NOT that the tracker must beat the active by the cost difference, but rather that an active fund charging ~1.5% more per year has to outperform by 1.5% just to match the passive fund.


    ...

    Its the same either way round - I assert from checkable evidence that over 10 years the average FTSE allshare fund has performed very much the same as the average FTSE allshare tracker AFTER charges in both cases. Therefore the average FTSE allshare managed fund IS outperforming (before charges) by sufficient to cover the difference in charges compared with the passive fund.


    To check this for yourself:
    1) get a list of all IMA UK All Companies funds on trustnet.
    2) Use the Create Custom tab to add a column for 10 year performance
    3) It should show the IMA Allshare fund return on the top line with a return of 59.5% over 10 years.
    4) Find your chosen tracker and check its % return. It is in the range of 54%-61% or there-abouts.

    Repeat the exercise for say IMA Europe excluding UK:
    IMA: 55%, best tracker: 44%, worst tracker: 40%.

    Similarly for IMA Far East Exc Japan - actually I havent been able to find a sector where over 10 years a tracker does outperform the relevant IMA index.

    That is my data - please can you show me data that supports your position.


    If there is no inherent performance advantage of trackers and you bring other factors into consideration - say volatility or your belief in particular styles (eg contrarian) corresponds to the fund manager's - there may be very good reasons for chosing a managed fund over a tracker.


    PS: I have found a sector where a tracker outperforms the IMA fund average over 10 years. It's IMA North America (mainly USA). Now where do all these much vaunted academic studies come from?????!!!!!!
  • gadgetmind
    gadgetmind Posts: 11,130
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    edited 28 April 2012 at 5:02PM
    Linton wrote: »
    Therefore the average FTSE allshare managed fund IS outperforming (before charges) by sufficient to cover the difference in charges compared with the passive fund.

    Tracker fees have come down a lot since Vanguard hit the market and you're not allowing for survivorship bias.

    Additionally, many funds that claim to be UK all share have a habit of holding non-UK holdings and/or cash. This isn't necessarily a bad thing, but it does mean that you're comparing apples and oranges.

    Note that I don't think there is anything inherently wrong with active management, just with the high fees. Stick high fees on a tracker and it will also underperform by the same as the average active fund.
    there may be very good reasons for chosing a managed fund over a tracker.

    Perhaps, but the calls you mention are really for fairly sophisticated investors, who still stand a good chance of being wrong. Other investors want it simple, and don't want to risk having their dart hitting a fund that's going to crash and burn.
    Now where do all these much vaunted academic studies come from?????!!!!!!

    Where has had low fee trackers for the longest?
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • Hooloovoo
    Hooloovoo Posts: 1,281 Forumite
    Linton wrote: »
    I assert from checkable evidence that over 10 years the average FTSE allshare fund has performed very much the same as the average FTSE allshare tracker AFTER charges in both cases. Therefore the average FTSE allshare managed fund IS outperforming (before charges) by sufficient to cover the difference in charges compared with the passive fund.

    So, as thelawnet said in post #81 - what a great sales pitch!

    "I'll manage a fund and make it outperform just enough to pay my fees."

    So you are admitting that a managed fund can outperform enough to cover the higher fees and return the same growth as a cheap tracker.

    So what's in it for me? I get the same growth in either case, but with the managed fund someone else has got rich off my investment.

    I think I'll stick with the cheap one!
    To check this for yourself:

    It's ok, I don't need to check. You've convinced me and confirmed that my investment strategy is the one I want to follow.
  • Linton
    Linton Posts: 17,064
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    Hooloovoo wrote: »
    So, as thelawnet said in post #81 - what a great sales pitch!

    "I'll manage a fund and make it outperform just enough to pay my fees."

    So you are admitting that a managed fund can outperform enough to cover the higher fees and return the same growth as a cheap tracker.

    So what's in it for me? I get the same growth in either case, but with the managed fund someone else has got rich off my investment.

    I think I'll stick with the cheap one!



    It's ok, I don't need to check. You've convinced me and confirmed that my investment strategy is the one I want to follow.


    No, I am saying were you to chose at random out of all UK funds you would on average get much the same return whether you happened to pick a tracker or a managed fund.

    BUT the universe of UK managed funds arent all the same, all just randomly buying and selling shares. For example there are ethical funds, there are funds which are deliberately conservative so as to reduce volatility, there are funds that follow a riskier approach based on knowledge of individual companies - eg "special situations" etc etc.

    I guess what a tracker does give you is to minimise the downside - you wont make an unusual loss, at least not unless most other funds in the sector do.

    So what fund you chose depends on what characteristics you are after. Personally I like the riskier, potentially higher return funds and am prepared to accept volatility. If you want to minimise downside, chose a tracker. But I would question that if you were sufficiently risk averse to focus on that why would you chose a FTSE tracker - a global tracker yes, a US tracker quite possibly, but a FTSE one?
  • Linton
    Linton Posts: 17,064
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    gadgetmind wrote: »
    Tracker fees have come down a lot since Vanguard hit the market and you're not allowing for survivorship bias.

    Additionally, many funds that claim to be UK all share have a habit of holding non-UK holdings and/or cash. This isn't necessarily a bad thing, but it does mean that you're comparing apples and oranges.

    Yes, but these are the funds available. The question is how you chose between those, not between one existing fund, a tracker, and some other hypothetical fund that invests in exactly the same shares as a tracker.

    Note that I don't think there is anything inherently wrong with active management, just with the high fees. Stick high fees on a tracker and it will also underperform by the same as the average active fund.

    But the data as far as it goes suggests you dont get that underperformance, at least in the UK market

    Perhaps, but the calls you mention are really for fairly sophisticated investors, who still stand a good chance of being wrong. Other investors want it simple, and don't want to risk having their dart hitting a fund that's going to crash and burn.

    True, but then I would say that such investors shouldnt be in the FTSE, trackers or not. They should be in balanced or cautious managed funds.

    Where has had low fee trackers for the longest?

    True, but isnt it more likely a factor of the maturity of the market and possibly local tax laws? After all current UK trackers, or any other tracker cant perform any better than the underlying index and if the index is suspect in some way its hardly the trackers fault.

    I agree with much of what you say!
  • Hooloovoo
    Hooloovoo Posts: 1,281 Forumite
    edited 28 April 2012 at 7:05PM
    Linton wrote: »
    BUT the universe of UK managed funds arent all the same, all just randomly buying and selling shares. For example there are ethical funds, there are funds which are deliberately conservative so as to reduce volatility, there are funds that follow a riskier approach based on knowledge of individual companies - eg "special situations" etc etc.

    Yes. And that is the problem. There are so many funds that it's practically impossible to chose between them and pick the ones that are going to outperform without relying on a large dose of luck.

    Only a handful of managers have shown any ability to outperform over their entire careers - Anthony Bolton et al. Most have only ever outperformed over short periods, much of which can be shown to be more related to sector performance rather than obvious skill.

    Assuming you do find a manager you believe has some skill to outperform, what do you do when they jump around and move funds, as most of them do every few years? Switch out funds to follow them?

    Once you have 20 years of data on a fund manager and they have proved their worth, you can't have them manage your own money for the next 20 years because they have retired!

    No one is denying that active funds can, have, and do outperform the market. The problem is finding the managers that can do that now for your own money - not the ones that were good over the past 20 years.

    Who in 1979 knew that Anthony Bolton was going to be one of the best fund managers ever? If you had invested in his Special Situations fund based on the past returns of 8% per year over the last nine years in 1989, three years later you would have been 45% behind the market. At that point in 1991 you simply don't know whether he is brilliant or whether his luck has just run out.

    It's little more than gambling.
    I guess what a tracker does give you is to minimise the downside - you wont make an unusual loss, at least not unless most other funds in the sector do.
    That's it exactly.

    You minimise the downside, while at the same time foregoing the (very slim) chance that you would have picked a fund manager that no only turned out to be one of the best, but also continued to manage the fund for the life of your investment.
    So what fund you chose depends on what characteristics you are after. Personally I like the riskier, potentially higher return funds and am prepared to accept volatility. If you want to minimise downside, chose a tracker.
    Yes. It's all a question of managing risk.
    But I would question that if you were sufficiently risk averse to focus on that why would you chose a FTSE tracker - a global tracker yes, a US tracker quite possibly, but a FTSE one?
    I'm not sure where you're getting this from.

    Who has suggested investing in only a FTSE tracker?

    The very foundation of passive investing is to buy into the global market. So you are quite right, you would not chose solely a FTSE tracker. You chose either one global index tracker, or a selection of trackers that provide regional diversity throughout the global market.

    I chose to do the latter. The question then becomes how to best weight the different regions in the global market, which takes us back to post #1 in this thread.
  • Linton
    Linton Posts: 17,064
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    Hooloovoo wrote: »
    Yes. And that is the problem. There are so many funds that it's practically impossible to chose between them and pick the ones that are going to outperform without relying on a large dose of luck.

    Only a handful of managers have shown any ability to outperform over their entire careers - Anthony Bolton et al. Most have only ever outperformed over short periods, much of which can be shown to be more related to sector performance rather than obvious skill.

    Assuming you do find a manager you believe has some skill to outperform, what do you do when they jump around and move funds, as most of them do every few years? Switch out funds to follow them?

    Once you have 20 years of data on a fund manager and they have proved their worth, you can't have them manage your own money for the next 20 years because they have retired!

    No one is denying that active funds can, have, and do outperform the market. The problem is finding the managers that can do that now for your own money - not the ones that were good over the past 20 years.

    Who in 1979 knew that Anthony Bolton was going to be one of the best fund managers ever? If you had invested in his Special Situations fund based on the past returns of 8% per year over the last nine years in 1989, three years later you would have been 45% behind the market. At that point in 1991 you simply don't know whether he is brilliant or whether his luck has just run out.

    It's little more than gambling.

    No - the success of Fidelity SS wasnt, I believe, because Anthony Bolton had a special personal stock picking skills but rather his approach. Similar success though admittedly lesser was achieved in that era by other "Special situations" value funds. If one is in the FTSE sector a viable approach I believe is to identify potentially good funds and spend a bit of time understanding what they invest in. If it's random pickings, then yes the fund is unlikely to be worthwhile. If there is a clear underlying approach and consistent characteristics then the outlook is I believe much more promising.

    That's it exactly.

    You minimise the downside, while at the same time foregoing the (very slim) chance that you would have picked a fund manager that no only turned out to be one of the best, but also continued to manage the fund for the life of your investment.

    Yes. It's all a question of managing risk.

    Yes - one way of minimising risk is to only invest in funds that cannot be the very worst. The downside is that they wont be near the best either. My own way for long term growth is to invest in a wide range of funds of types/sectors that are riskier, but if they win, they can win big. The downside there is that when everything everywhere slumps they all slump fairly badly, perhaps rather more badly then a set of trackers. But them I'm an optimist. Slumps are short term.

    My belief is that each investor should make a rational decision for themselves based on objectives, timescales and acceptance of volatility. IMHO the suggestion that there is only one sensible way of investing, and that particular way has been proven to maximise long term returns seems to me to be wrong (ie incorrect) and dangerous particularly for newbies who leap in and buy one tracker as they have understood that it must be both safe and relatively lucrative.

    Who has suggested investing in only a FTSE tracker?

    The very foundation of passive investing is to buy into the global market. So you are quite right, you would not chose solely a FTSE tracker. You chose either one global index tracker, or a selection of trackers that provide regional diversity throughout the global market.

    But the FTSE100 (or allshare being 80% FTSE100) does not provide much regional diversity. It is dominated by large multinationals from a restricted range of sectors (hence the volatility), does not include much of British industry as that is foreign owned, and is strongly influenced by sectors with relatively little UK content, in particular mining and oil. If you want a regional UK focus could I suggest the HSBC FTSE250 tracker as being much more UK based.

    I chose to do the latter. The question then becomes how to best weight the different regions in the global market, which takes us back to post #1 in this thread.

    Your choice, if it's right for you it's right. But it's far from being the only way, each has its own advantages and disadvantages.


    Interesting, well I find it so anyway.
  • Hooloovoo
    Hooloovoo Posts: 1,281 Forumite
    Linton wrote: »
    No - the success of Fidelity SS wasnt, I believe, because Anthony Bolton had a special personal stock picking skills but rather his approach. Similar success though admittedly lesser was achieved in that era by other "Special situations" value funds. If one is in the FTSE sector a viable approach I believe is to identify potentially good funds and spend a bit of time understanding what they invest in. If it's random pickings, then yes the fund is unlikely to be worthwhile. If there is a clear underlying approach and consistent characteristics then the outlook is I believe much more promising.

    It still doesn't alter the fact that over the next 20 years finding which fund manager is going to have the right approach, or skills, or whatever it is, is very difficult if not impossible.
    My belief is that each investor should make a rational decision for themselves based on objectives, timescales and acceptance of volatility.
    Absolutely.
    IMHO the suggestion that there is only one sensible way of investing, and that particular way has been proven to maximise long term returns seems to me to be wrong (ie incorrect)
    It would indeed be incorrect, if that was what was being suggested. It isn't. No one has ever said that passive investing has been proven to maximise long term returns - quite the opposite in fact.

    It's about loading the probability in your favour that you will see market return over the life of your investment.

    Sure you might miss out on massive gains had you somehow had the foresight to pick a star fund manager, but likewise you should also miss out on the massive losses you might also incur by picking a bad manager.
    But the FTSE100 (or allshare being 80% FTSE100) does not provide much regional diversity. It is dominated by large multinationals from a restricted range of sectors (hence the volatility), does not include much of British industry as that is foreign owned, and is strongly influenced by sectors with relatively little UK content, in particular mining and oil. If you want a regional UK focus could I suggest the HSBC FTSE250 tracker as being much more UK based.
    Who said anything about wanting a UK focus? The same people who said to only invest in a FTSE tracker? Where are you reading this? It's clearly not in this thread.

    By regional diversity I meant globally. Hence me choosing the six different trackers I have selected that cover the whole global market, or as close as I can get.
    But it's far from being the only way, each has its own advantages and disadvantages.
    I've never said or thought otherwise. There are certainly many ways of choosing investments. Passive investing just happens to be the rational choice that makes sense to me ... YMMV.
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