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  • FIRST POST
    • SnowMan
    • By SnowMan 28th Jun 17, 10:49 AM
    • 3,130Posts
    • 5,797Thanks
    SnowMan
    The regulators thoughts on passive vs active
    • #1
    • 28th Jun 17, 10:49 AM
    The regulators thoughts on passive vs active 28th Jun 17 at 10:49 AM
    Interesting FCA final report out today 'FCA Asset Management Market study'

    https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf

    It covers a range of issues in the asset mangement industry, but this is one of the relevant sections about active vs passive investing.


    1.12
    We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.

    1.13
    It is widely accepted that past performance is not a good guide to future performance. We find that it is difficult for investors to identify outperforming funds. This is in part because it is often difficult for investors to interpret and compare past performance information. Even if investors are able to identify funds that have performed well in the past, this past performance is not likely to be a good indicator of future performance. There is little evidence of persistence in outperformance in academic literature, and where performance persistence has been identified, it is persistently poor performance.


    1.14
    We found some evidence of persistent poor performance of funds. However, we also noted that worse performing funds were more likely to be closed or merged into better performing funds. In our additional work, we found that the performance of the merging poorer performing funds improves after they have been merged. However, we also found that the performance of the recipient fund, on average, deteriorates slightly after the merger, although it is not clear that this is a direct result of the merger. While mergers and closures may improve outcomes for some investors, not all persistently poorer performing funds are merged or closed. It can also take a long time for worse performing funds to be closed or merge.
    Last edited by SnowMan; 28-06-2017 at 11:09 AM.
    I came, I saw, I melted
Page 3
    • Linton
    • By Linton 2nd Jul 17, 7:26 AM
    • 8,650 Posts
    • 8,626 Thanks
    Linton
    .....
    By picking active funds you need to make and regularly review decisions, and deal with the anxiety of whether you have made the right choices every time you hear some news article, blog post or forum comment arguing for different strategy, or such and such a sector/asset class etc is better/worse/about to collapse.
    .....
    .
    Originally posted by point5clue
    Not true at all, no more than you would need to with a set of trackers.

    My growth portfolio is 100% active. It is never changed in response to news, blogs or posts. Active funds are used to get the overall asset allocation I want, one that is rather different to a global index with 50% small companies and significantly less in the US. The only changes made are for rebalancing. VLS100 has been used as the benchmark but that may change to the FTSE World as outperforming VLS100 has been too easy.

    My income portfolio is again 100% active, the record of trackers providing a decent income is pretty poor. Again it doesn't change in response to news, blogs, or posts.
    • Audaxer
    • By Audaxer 2nd Jul 17, 11:03 AM
    • 669 Posts
    • 305 Thanks
    Audaxer
    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.
    Originally posted by bostonerimus
    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
    • By LHW99 2nd Jul 17, 11:42 AM
    • 999 Posts
    • 854 Thanks
    LHW99
    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.
    Last edited by LHW99; 02-07-2017 at 1:21 PM. Reason: Clarity
    • EdSwippet
    • By EdSwippet 2nd Jul 17, 11:50 AM
    • 628 Posts
    • 591 Thanks
    EdSwippet
    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.
    Originally posted by Audaxer
    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
    • By Thrugelmir 2nd Jul 17, 12:10 PM
    • 56,265 Posts
    • 49,631 Thanks
    Thrugelmir
    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.
    Originally posted by bostonerimus
    Have you cashed in on your 12% gain?
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • bostonerimus
    • By bostonerimus 2nd Jul 17, 12:37 PM
    • 1,243 Posts
    • 693 Thanks
    bostonerimus
    Have you cashed in on your 12% gain?
    Originally posted by Thrugelmir
    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.
    Last edited by bostonerimus; 02-07-2017 at 12:40 PM.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    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.
    Last edited by jamesd; 13-07-2017 at 7:19 PM.
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