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  • FIRST POST
    • sixpence.
    • By sixpence. 4th Jan 18, 7:28 PM
    • 59Posts
    • 16Thanks
    sixpence.
    Index vs managed funds the great war
    • #1
    • 4th Jan 18, 7:28 PM
    Index vs managed funds the great war 4th Jan 18 at 7:28 PM
    Hello hello

    I have been researching index funds versus managed funds, as an investing newbie. There seems to be general war between investors who believe that one is better than the other. I am in the process of rebalancing my portfolio (will be approx 24k in total in an ISA).

    I am thinking of favouring index sums but adding in some managed funds for the wow factor: 88% in mixed Index funds [70% Vanguard 60, 10% Asia pacific ex Japan, 8% global tech] and 12% in "rouge" managed funds [3% Emerging Markets, 3% UK small businesses, 3% UK growth 3% China]

    Do people on here have an opinion either way on which is better? Currently reading John C. Bogle's The Little Book of Common Sense Investing which is all about how much better index funds are.

    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Last edited by sixpence.; 04-01-2018 at 7:32 PM.
Page 2
    • bostonerimus
    • By bostonerimus 5th Jan 18, 12:31 PM
    • 1,428 Posts
    • 847 Thanks
    bostonerimus
    Remember John Bogle is American and is writing for a US audience.

    The tax treatment by the IRS of each internal sale by a US domiciled fund is different to the way in which a UK domiciled fund is treated by HMRC which makes "trading" costly hence a reasonably static Tracker fund / ETF has an advantage.
    Originally posted by AlanP
    True if held outside of tax advantages accounts.....most people will have their money in things like SIPPs and ISAs so it's not an issue.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 5th Jan 18, 12:35 PM
    • 1,428 Posts
    • 847 Thanks
    bostonerimus
    You dont need to know which funds will beat their indexes. You need a large enough portfolio to hold a non trivial amount in each of a broad range of funds. Some will beat their index and some wont. You can easily rule out any no-hopers and presumably have a better than average chance with the rest.
    Originally posted by Linton
    I hope that you will be in the minority for which your statement will be true.
    Misanthrope in search of similar for mutual loathing
    • Linton
    • By Linton 5th Jan 18, 12:41 PM
    • 8,870 Posts
    • 8,911 Thanks
    Linton
    Which sectors and markets don't have index funds?
    Originally posted by ivormonee
    A couple of ones that are important to some investors...

    Small Cap. I just checked Japanese Small Companies as an example. Trustnet lists no passive OEICs/UTs and only 1 ETF. There are 6 active funds in that sector that have been around for 5 years (and 1 which hasnt). They all beat the passive ETF over 5 years. Also you may find that the SC indexes can include some rather large companies.

    Income is impossible - I do not believe there are any satisfactory equity income passive funds that deliver a reasonable yield.

    In both cases, the Market Cap basis of almost all index funds doesnt make obvious sense. Why should big small companies be more desirable than small small companies? Large companies arent necessarily better dividend payers than small ones. Both investment sectors really require human vetting - there are plenty of moribund rarely traded small companies and and a high yield may not be sustainable or can arise from falling share prices.

    Similar to Income there is Wealth Preservation and Abs Return. In all three overall performance isnt the primary objective.
    • Prism
    • By Prism 5th Jan 18, 12:57 PM
    • 126 Posts
    • 86 Thanks
    Prism
    I hope that you will be in the minority for which your statement will be true.
    Originally posted by bostonerimus
    Just because many active funds underperform over time you can't assume that the majority if people hold those funds. Many of those funds are tiny in the main part because they underperform. I have no idea how many people are in the huge outperforming active funds compared with the tiny underperforming funds but I'm not sure if its a minority at all
    • Thrugelmir
    • By Thrugelmir 5th Jan 18, 1:01 PM
    • 56,815 Posts
    • 50,177 Thanks
    Thrugelmir
    Would be interested to know what approach you adopted and why, if you feel like sharing it.
    Originally posted by sixpence.
    Play the field that's in front of you. I do what I do the way I do it. As it's my upbringing, my career, my life experiences. Learn from the mistakes you make. Never stop learning, researching and thinking. Hindsight doesn't actually predict the future.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • BananaRepublic
    • By BananaRepublic 5th Jan 18, 1:38 PM
    • 1,059 Posts
    • 778 Thanks
    BananaRepublic
    Just because many active funds underperform over time you can't assume that the majority if people hold those funds. Many of those funds are tiny in the main part because they underperform. I have no idea how many people are in the huge outperforming active funds compared with the tiny underperforming funds but I'm not sure if its a minority at all
    Originally posted by Prism
    My recollection is that most active funds (for which there is an index) underperform the index. So the idea that you can randomly hold a collection of active funds to avoid a dog is nonsensical, since most are dogs (in the sense of underperforming) hence you are better off holding index funds.

    However ... some of us do prefer active funds. And as said, some markets/sectors do not have indices.
    • Prism
    • By Prism 5th Jan 18, 1:55 PM
    • 126 Posts
    • 86 Thanks
    Prism
    My recollection is that most active funds (for which there is an index) underperform the index. So the idea that you can randomly hold a collection of active funds to avoid a dog is nonsensical, since most are dogs (in the sense of underperforming) hence you are better off holding index funds.
    Originally posted by BananaRepublic
    Agreed, though it doesn't seem like many people randomly pick active funds. Those active funds that beat the index tend to be much bigger than those that don't. Now, whether all the extra cash moved in after some good initial gains (and missed it), has left since or was there from the begining we will never know.

    All I know is that every fund that I own has beaten its benchmark (typically an index) over pretty much every reasonable time period, and most importantly, while I have actually owned it. In places where I didnt think this would be a high chance (US, global tech etc) i have passives. My starting point is always past returns of the fund and the fund manager history which breaks one of the most fundamental bits of advice. It works for me though.
    • Thrugelmir
    • By Thrugelmir 5th Jan 18, 2:08 PM
    • 56,815 Posts
    • 50,177 Thanks
    Thrugelmir
    Now, whether all the extra cash moved in after some good initial gains (and missed it), has left since or was there from the begining we will never know.
    Originally posted by Prism
    Hence why some of us avoid funds all together. With fund managers having to deal with cash inflows and outflows. Which in itself creates a market where none actually exists.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • firestone
    • By firestone 5th Jan 18, 2:36 PM
    • 108 Posts
    • 40 Thanks
    firestone
    Hence why some of us avoid funds all together. With fund managers having to deal with cash inflows and outflows. Which in itself creates a market where none actually exists.
    Originally posted by Thrugelmir
    Have seen mentioned more then once over the last 12 -18 months as to what would happen if all the people who have invested for the first time via index trackers panic in the first downturn and remove their money will that cause a bigger run or as some people have said are they at a false high due to the money coming into index funds
    As mentioned a couple of post's back their are good active funds & managers but over the years they have been swamped by all the funds that have launched.There is nothing a company/platform likes more then a new super shiny product to advertise but they do not all come with results.
    You can see the same thing with trackers/passive in the sheer number that have launched
    doing the same thing or following an index that nobody has heard of.Its not like Vanguard or Blackrock etc only have a couple of trackers or multi assets funds and there must be an ETF for everything known to man and unknown to man in some cases.
    • username12345678
    • By username12345678 5th Jan 18, 2:38 PM
    • 172 Posts
    • 74 Thanks
    username12345678
    If I was an 18 yo investor just starting out then I would be investing passively in the expectation that over many decades getting the 'market return' annually would result in better performance than the corresponding active fund.

    As it is, i'm mid-40s and want to take the least risk possible to try and achieve CPI+a bit.

    It's still a work in progress but my asset allocation (equities/bonds/wealth preservation) meant a mix of active and passive worked better for me.

    Horses for courses as they say.
    • Thrugelmir
    • By Thrugelmir 5th Jan 18, 2:52 PM
    • 56,815 Posts
    • 50,177 Thanks
    Thrugelmir
    there must be an ETF for everything known to man and unknown to man in some cases.
    Originally posted by firestone
    ETF's are not without their risks. If the stocks held are illiquid or infrequently traded. Offloading large lines of stock isn't as simple as pressing a switch as some people believe. When the Middle Eastern investors offloaded their 25% stake in Sainsburys some years back. Took a 186 broking houses to place the stock (at a slight discount) without causing major disruption to the market.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • firestone
    • By firestone 5th Jan 18, 2:58 PM
    • 108 Posts
    • 40 Thanks
    firestone
    ETF's are not without their risks. If the stocks held are illiquid or infrequently traded. Offloading large lines of stock isn't as simple as pressing a switch as some people believe. When the Middle Eastern investors offloaded their 25% stake in Sainsburys some years back. Took a 186 broking houses to place the stock (at a slight discount) without causing major disruption to the market.
    Originally posted by Thrugelmir
    think its the amount of ETF's that seem to come out everyday,covering new products/markets
    • talexuser
    • By talexuser 5th Jan 18, 3:22 PM
    • 2,345 Posts
    • 1,818 Thanks
    talexuser
    True if held outside of tax advantages accounts.....most people will have their money in things like SIPPs and ISAs so it's not an issue.
    Originally posted by bostonerimus
    Still true inside a SIPP or ISA since fund trading costs are different between the countries and will affect fund profits. We for example have more dividend orientated funds than the USA which is the most researched market in the world and thus the most difficult to outperform an index, and remains the most suitable for an index tracker. Results show the UK and Europe have a higher % of active index beaters than the USA. Thus USA investing experiences are not absolutely comparable to investing here unless saying the USA market is perhaps the best candidate for index tracking.
    http://www.telegraph.co.uk/finance/personalfinance/investing/funds/11512441/Do-trackers-beat-active-funds-Our-new-analysis-has-the-answer.html
    • Filo25
    • By Filo25 5th Jan 18, 4:30 PM
    • 1,254 Posts
    • 1,870 Thanks
    Filo25
    Rightly or wrongly I am going for passive in the US and Active elsewhere in the new SIPP that I am transferring money into, time will tell if that is a wise decision or not!
    • username12345678
    • By username12345678 5th Jan 18, 4:53 PM
    • 172 Posts
    • 74 Thanks
    username12345678
    Rightly or wrongly I am going for passive in the US and Active elsewhere in the new SIPP that I am transferring money into, time will tell if that is a wise decision or not!
    Originally posted by Filo25
    I think the case for passive in the US is pretty clear cut.

    My SIPP (when I finally get my hands on it) will have passive exposure to the US & Japan with active covering the rest.
    • cloud_dog
    • By cloud_dog 5th Jan 18, 5:20 PM
    • 3,362 Posts
    • 1,901 Thanks
    cloud_dog
    There is a small skirmish going on over here

    http://forums.moneysavingexpert.com/showthread.php?t=5719527

    That might interest you.
    Originally posted by TBC15
    Actives beating passives atm by 30%. Although, really too early to tell and too small numbers for great relevance just yet. It will be an interesting experiment if people can continue with it.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • bostonerimus
    • By bostonerimus 5th Jan 18, 5:27 PM
    • 1,428 Posts
    • 847 Thanks
    bostonerimus
    Actives beating passives atm by 30%. Although, really too early to tell and too small numbers for great relevance just yet. It will be an interesting experiment if people can continue with it.
    Originally posted by cloud_dog
    My passive index portfolio is lagging some actives and beating others.....just as expected. I will not end up with the highest returns, but I don't expect to have the smallest gains either. Being about average is my goal.
    Misanthrope in search of similar for mutual loathing
    • Thrugelmir
    • By Thrugelmir 5th Jan 18, 5:28 PM
    • 56,815 Posts
    • 50,177 Thanks
    Thrugelmir
    Actives beating passives atm by 30%. Although, really too early to tell and too small numbers for great relevance just yet. It will be an interesting experiment if people can continue with it.
    Originally posted by cloud_dog
    Hopefully yes. As unlike academic studies that are to a degree flawed. These are actual portfolios.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • TBC15
    • By TBC15 5th Jan 18, 5:41 PM
    • 319 Posts
    • 123 Thanks
    TBC15
    Hopefully yes. As unlike academic studies that are to a degree flawed. These are actual portfolios.
    Originally posted by Thrugelmir
    +1, The theoretical flapping of gums is no comparison to the real world.

    All the wisdom purveyors, check your bottom line, then contribute.
    Last edited by TBC15; 05-01-2018 at 5:45 PM.
    • fun4everyone
    • By fun4everyone 5th Jan 18, 5:48 PM
    • 854 Posts
    • 1,400 Thanks
    fun4everyone
    Is there a way of researching which sectors are better for index funds? I can see how for a more stable economy like the US I would use an index fund, but for say China a managed fund might be best.
    Originally posted by sixpence.
    Your thinking about it in the right way, Linton made a good post on the subject in this thread as well.
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