The regulators thoughts on passive vs active

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  • Audaxer
    Audaxer Posts: 3,506 Forumite
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    bostonerimus wrote: »
    Income is just as good from capital gains as it is from dividends or interest. My passive index portfolio produced about 2% yield, but it gained by 12.5% over the last 12 months and that's a nice bit of income.
    The way I am looking at it as regards income is that if you are transferring a large sum at this time from Cash ISAs, say £50k, I could add it to my VLS or I could invest in income producing active funds and ITs. If there is a large equity crash just after I invest it, I would not want to sell any of the VLS for income until the market recovers, whereas with the active income generating funds, even although the capital value will have dropped, I would still get around £2k or so if they average a 4% yield. I would also probably use a crash as an opportunity to transfer more cash to income generating ITs as I will get more shares for my cash and therefore a higher yield on the further cash I transfer in.

    I still like passive and will keep some of my portfolio in VLS funds, but I think the above is a big plus point of also using active funds for regular income. Do others agree?
  • LHW99
    LHW99 Posts: 4,203 Forumite
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    edited 2 July 2017 at 1:21PM
    With regard to income, I am not at that stage yet, however I did help my late mother arrange a small PEP/ISA which ivested in a range of active funds and provided the natural interest as monthly income.
    It gave a regular 3.6% anual income (of the original capital, approx) and delivered that through a couple of stock market crashes, reducing the capital invested by just over 30% at one point.
    Nevertheless, that income continued unaffected, and the capital value crept back up again to finish slightly above the amount invested.
    Served its purpose, and supplemented her SP and (small) company pension.
    Possibly she could have done better with passive funds, by selling unuts as required, but that wasn't something she was confident with, and when everything was crashing could have depleted the units she needed to maintain that additional small income.
  • EdSwippet
    EdSwippet Posts: 1,588 Forumite
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    Audaxer wrote: »
    I would also probably use a crash as an opportunity to transfer more cash to income generating ITs as I will get more shares for my cash and therefore a higher yield on the further cash I transfer in.
    After a crash is the time to move cash to stocks, but it's no argument for increasing your active management proportion over passive. Just as ITs become 'cheaper' for a given dividend, so too do trackers, and income-focused trackers certainly exist.

    A rising tide lifts all boats. And a falling one lowers all of them :-)
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    bostonerimus wrote: »
    Income is just as good from capital gains as it is from dividends or interest. My passive index portfolio produced about 2% yield, but it gained by 12.5% over the last 12 months and that's a nice bit of income.

    Have you cashed in on your 12% gain?
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
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    edited 2 July 2017 at 12:40PM
    Thrugelmir wrote: »
    Have you cashed in on your 12% gain?

    Before I retired I would regularly rebalance my 60/40 portfolio. Since my pension began I've let my asset allocation drift up to 70/30 and I'm rebalancing there......so my gain is reinvested.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • jamesd
    jamesd Posts: 26,103 Forumite
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    edited 13 July 2017 at 7:19PM
    Interesting that the FCA found that active funds outperformed passive funds by 0.65% on average. Table 4 in the appendix showing active with weighted average performance compared to benchmark of 0.13% and passive at -0.52%.

    Table 5 shows that they found an even larger difference for equity funds, with active beating passive by 1.34%. Active 0.91% vs passive -0.43%.

    Table 6 shows pretty much expectable variation in active beating passive by region, with the US of course showing the expected average significant underperformance of actives vs passives and somewhat similar for global, which is likely to have a 60 percent or so US component. Perhaps a useful table to give some idea where to go passive rather than active, it's actually close to how I split between the two.

    Though personally I found paragraph 30 most interesting because paraphrased it says that the results of the FCAs work are largely meaningless due to the wide variations between funds.
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