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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 3
    • Thrugelmir
    • By Thrugelmir 5th Jan 18, 5:54 PM
    • 56,757 Posts
    • 50,121 Thanks
    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
    Originally posted by firestone
    People are fickle. Herd investment mentality. When the lion roars then many head for the exits. With more sellers than buyers then prices naturally dip. Offering the opportunity to exploit mispricing of individual stocks.
    Last edited by Thrugelmir; 05-01-2018 at 5:58 PM.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • A_T
    • By A_T 5th Jan 18, 6:17 PM
    • 283 Posts
    • 166 Thanks
    A_T
    I tend to go active for small cap and index for large cap. There seem to be very few if any satisfactory (for me at least) small cap trackers.


    I also go active for China because if you go index you are stuck with Emerging Markets which include Russia, Brazil, India, etc. in which I have little confidence.
    • Audaxer
    • By Audaxer 5th Jan 18, 6:50 PM
    • 795 Posts
    • 403 Thanks
    Audaxer
    I think there is room for both passives and actives. Although I have recently set-up an income portfolio of active funds, and think I have picked a decent allocation to get income and some growth, I am not as confident as I am when selecting a low cost multi asset fund. Time will tell whether my income portfolio does better than my VLS funds.

    For experienced investors with a large single sector portfolio, the consensus seems to be to use a mix of passives and actives. For inexperienced investors I think multi asset funds like VLS containing passives are a good option. Some other low costs multi asset funds of passives like L&G MI and HSBC Global Strategy funds have actively managed allocations so also good options for inexperienced investors. I'm sure that I read that asset allocation in a portfolio is as important if not more important than the actual funds used, so the fact that asset allocations in these multi asset funds are professionally selected and managed gives me a good bit of faith in them.
    • sixpence.
    • By sixpence. 6th Jan 18, 12:32 AM
    • 59 Posts
    • 16 Thanks
    sixpence.
    So helpful to read through this. Thank you everyone.

    Linton's comment was particularly helpful. I suppose it comes to whether or not you trust a particular market/sector as a whole to preform better than a fund manager. Something to think about. A US index is obvious but a Japanese one maybe not so much.

    In Benjamin Graham's The Intelligent Investor (revised edition, 2003) the following criteria are suggested for selecting managed funds:

    1. Their managers are the biggest shareholders.
    2. Charges are cheap.
    3. They dare to be different (in terms of stock selection)
    4. They closed to new investors (this refers to funds having a number of possible investors and I'm not sure if it applies to the UK... also how would you buy a fund if it was closed to new investors anyway...).
    5. They don't advertise.
    6. The manager has a good reputation/track record.

    If anyone has any criticism/addition for this then go for it I'll be doing some active fund selecting research (for the 15% of my portfolio that will be active funds) once I'm done reading my first few books.
    • firestone
    • By firestone 6th Jan 18, 8:48 AM
    • 108 Posts
    • 40 Thanks
    firestone
    So helpful to read through this. Thank you everyone.

    Linton's comment was particularly helpful. I suppose it comes to whether or not you trust a particular market/sector as a whole to preform better than a fund manager. Something to think about. A US index is obvious but a Japanese one maybe not so much.

    In Benjamin Graham's The Intelligent Investor (revised edition, 2003) the following criteria are suggested for selecting managed funds:

    1. Their managers are the biggest shareholders.
    2. Charges are cheap.
    3. They dare to be different (in terms of stock selection)
    4. They closed to new investors (this refers to funds having a number of possible investors and I'm not sure if it applies to the UK... also how would you buy a fund if it was closed to new investors anyway...).
    5. They don't advertise.
    6. The manager has a good reputation/track record.

    If anyone has any criticism/addition for this then go for it I'll be doing some active fund selecting research (for the 15% of my portfolio that will be active funds) once I'm done reading my first few books.
    Originally posted by sixpence.
    Good luck with your reading but note that the UK is not the same as America for all info.I have
    some managed funds mainly IT's and would say to your bullet points for selecting
    1.not 100% sure what that means without the book 2.not very many 3.probably yes but some will follow the index pretty much 4.you have Open ended funds(OEIC) and say an IT that has issued a set amount of shares but you can still buy into both. 5. the bigger funds do. 6.Hopefully- but as others will say that's in the past but could be a guide
    Last edited by firestone; 06-01-2018 at 8:51 AM.
    • Thrugelmir
    • By Thrugelmir 6th Jan 18, 11:07 AM
    • 56,757 Posts
    • 50,121 Thanks
    Thrugelmir
    4. They closed to new investors (this refers to funds having a number of possible investors and I'm not sure if it applies to the UK... also how would you buy a fund if it was closed to new investors anyway...).
    Originally posted by sixpence.
    Investment Trusts are closed funds. The shares of the IT trade independently to the funds managed. Fund managers are therefore not constrained by what the activity of it's investors is.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • sixpence.
    • By sixpence. 6th Jan 18, 2:51 PM
    • 59 Posts
    • 16 Thanks
    sixpence.
    Thanks will look into ITs

    Also looking for books about selecting managed funds which are UK based. Found this even though its a few years old:

    https://www.amazon.co.uk/gp/product/0273732854/ref=as_li_tl?ie=UTF8&!!!!!taabalab-21&camp=1634&creative=6738&linkCode=as2&creativeAS IN=0273732854&linkId=36938b11acac9d371e8e775f20e3c 68d

    There is also a separate one for ITs:

    https://www.amazon.co.uk/gp/product/B00NBDFUBC/ref=as_li_tl?ie=UTF8&!!!!!taabalab-21&camp=1634&creative=6738&linkCode=as2&creativeAS IN=B00NBDFUBC&linkId=b9650fcb6ddd6cb21584e93234cdc 8c8

    There's also plenty on YouTube. Talking to people on here really helps, so thanks again, and I hope other beginners might read through this thread and find it helpful as I have with others.
    • bostonerimus
    • By bostonerimus 6th Jan 18, 3:51 PM
    • 1,419 Posts
    • 835 Thanks
    bostonerimus
    Thanks will look into ITs

    Also looking for books about selecting managed funds which are UK based. Found this even though its a few years old:

    https://www.amazon.co.uk/gp/product/0273732854/ref=as_li_tl?ie=UTF8&!!!!!taabalab-21&camp=1634&creative=6738&linkCode=as2&creativeAS IN=0273732854&linkId=36938b11acac9d371e8e775f20e3c 68d

    There is also a separate one for ITs:

    https://www.amazon.co.uk/gp/product/B00NBDFUBC/ref=as_li_tl?ie=UTF8&!!!!!taabalab-21&camp=1634&creative=6738&linkCode=as2&creativeAS IN=B00NBDFUBC&linkId=b9650fcb6ddd6cb21584e93234cdc 8c8

    There's also plenty on YouTube. Talking to people on here really helps, so thanks again, and I hope other beginners might read through this thread and find it helpful as I have with others.
    Originally posted by sixpence.
    You will probably be better off with out active funds and ITs.....investing is one area where a simple solution usually works perfectly well for most people. You can become paralyzed by choice when using active funds and ITs and it can be difficult to maintain a disciplined approach, for example look at all the Woodford folks jumping ship. I bet many are going to Fundsmith and with 28 shares it might be from the pan to the fire in 2018....who knows.
    Last edited by bostonerimus; 06-01-2018 at 6:21 PM.
    Misanthrope in search of similar for mutual loathing
    • talexuser
    • By talexuser 6th Jan 18, 4:14 PM
    • 2,345 Posts
    • 1,818 Thanks
    talexuser
    If Terry Smith had 28 funds it would be a much bigger firm. Actually it's shares and his approach to companies is quite similar to Buffet. And since Woodford Income is still 8.25 billion in size you're beginning to sound like a broken record trying to run him down at every opportunity, particularly since we are still in the short term from inception to know.
    • TBC15
    • By TBC15 6th Jan 18, 4:24 PM
    • 319 Posts
    • 123 Thanks
    TBC15
    I’ll put the tanned cockney in the classic suite front and centre above all those who wish to be average. I like what he says and I like the way he says it.
    • chrisgg
    • By chrisgg 6th Jan 18, 4:32 PM
    • 46 Posts
    • 30 Thanks
    chrisgg
    Boston, do you work for Vanguard or iShares?

    As for the active vs passive, I'm afraid there's no definite answer. It is difficult for US funds to outperform the S&P500, but it's not difficult to find a UK fund that out performs the FTSE 100.

    A sensible long term equity 'lazy' portfolio (for a a UK investor) would be comprised of something like a global equity tracker, an active UK All Companies fund and an Asia/EM active fund. But that's just my opinion, and as they say, opinions are like... everyone has one.
    • ivormonee
    • By ivormonee 6th Jan 18, 5:10 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    Most fans of active funds say that the reason they are better is because you can pick the best fund managers for their respective sectors who will, overall over time, beat their respective index benchmarks. In other words, for each sector there will be a selection of managers who will be favoured over others. But what we see is that, amongst the active investors, there is no consensus of who these fund managers are or which the "best" funds are. By "best" we would assume funds that generally and consistently do better than the index and the lesser mortal actives. And this should be a matter of fact not of opinion. And this is where the active argument falls down, in my opinion, because investor A might say ABC fund/ fund manager is best for, say Japanese Smaller Companies whereas investor B might say no, it's XYZ fund/ fund manager that's best for this sector. Therein lies the problem. My challenge to the actives would be to arrive at a consensus of "best" funds/ managers for each sector and see what we can come up with.
    • TBC15
    • By TBC15 6th Jan 18, 6:02 PM
    • 319 Posts
    • 123 Thanks
    TBC15
    Well some of us are trying to put this one to bed over here.

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

    You can’t argue with the facts unfortunately, active funds overall tend not to beat the index.

    My contention is that the majority of active funds are not held by active investors. Some poor soul was sold them by a man in a suite.
    • BananaRepublic
    • By BananaRepublic 6th Jan 18, 6:10 PM
    • 1,056 Posts
    • 774 Thanks
    BananaRepublic
    Well some of us are trying to put this one to bed over here.

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

    You can’t argue with the facts unfortunately, active funds overall tend not to beat the index.

    My contention is that the majority of active funds are not held by active investors. Some poor soul was sold them by a man in a suite.
    Originally posted by TBC15
    Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.
    • firestone
    • By firestone 6th Jan 18, 6:21 PM
    • 108 Posts
    • 40 Thanks
    firestone
    Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.
    Originally posted by BananaRepublic
    while you are right that trackers may suit people who do not pay much attention to their funds there are still Banks/BS & fund companies talking these people into investing in funds for the first time using just as much spiel.Hopefully we do not get a PPI type claim for mis-selling but i could see it happening (only half joking)
    Last edited by firestone; 06-01-2018 at 6:25 PM.
    • bostonerimus
    • By bostonerimus 6th Jan 18, 6:30 PM
    • 1,419 Posts
    • 835 Thanks
    bostonerimus
    Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.
    Originally posted by BananaRepublic
    I'm glad for you. We always hear from the winners, the folks that have made good "choices". I look at the basic maths and the average person is better off using indexes, keeping costs down and rebalancing once in a while. Hubris is the enemy of success for most investors, but a friend for the minority that come out ahead. I will always have lower annual returns with my indexing strategy than the "good" active investors, but I came to the belief/realization that yesterday's winners are tomorrow's losers and so decided to be average. I am a broken record, but in no way working for Vanguard etc. I have been a client of Vanguard for 20 years and been indexing for 30 years getting an annual average of 8.5% return and now have a mid 7 figures portfolio. So it worked well for me and I did nothing special at all....other than saving 20% of my wages and indexing.
    Last edited by bostonerimus; 06-01-2018 at 6:37 PM.
    Misanthrope in search of similar for mutual loathing
    • Linton
    • By Linton 6th Jan 18, 6:30 PM
    • 8,864 Posts
    • 8,907 Thanks
    Linton
    Most fans of active funds say that the reason they are better is because you can pick the best fund managers for their respective sectors who will, overall over time, beat their respective index benchmarks. In other words, for each sector there will be a selection of managers who will be favoured over others. But what we see is that, amongst the active investors, there is no consensus of who these fund managers are or which the "best" funds are. By "best" we would assume funds that generally and consistently do better than the index and the lesser mortal actives. And this should be a matter of fact not of opinion. And this is where the active argument falls down, in my opinion, because investor A might say ABC fund/ fund manager is best for, say Japanese Smaller Companies whereas investor B might say no, it's XYZ fund/ fund manager that's best for this sector. Therein lies the problem. My challenge to the actives would be to arrive at a consensus of "best" funds/ managers for each sector and see what we can come up with.
    Originally posted by ivormonee
    A strawman argument as are so many on the passive side.

    I am currently 100% active and I am not interested in "the best manager" for a sector. There isnt one. One may have have a style of investing that is appropriate at some stages of the market and do well for a few years, but then circumstances change and someone else picks up the baton. The point is that by focussing on asset allocation it doesnt matter much where the manager fits in the pecking order, just go for someone who has consistently had a reasonable record. Avoid the obvious no hopers and avoid the ones with good records due to a single lucky year or who are wildly inconsistent.

    The problem with index funds is that almost all are wedded to investing on the basis of market capitalisation. Is there any evidence that big companies provide better returns than small companies? The easily accessible evidence as I have shown elsewhere is the reverse. The example of Japanese Small Companies is interesting as all the active funds consistently outperform the only passive fund available for that sector.

    I want a portfolio with a high % of small companies and a relatively low % of US. I want a portfolio with only a moderate % of Finance etc etc It is much easier to do this with appropriate active funds where the managers share my preferences rather than try and tweak a global index with minor holdings. It is easy to overweight an area with minor tweaks - how does one underweight it without having separate funds that cover all other areas?
    • bostonerimus
    • By bostonerimus 6th Jan 18, 6:32 PM
    • 1,419 Posts
    • 835 Thanks
    bostonerimus

    I want a portfolio with a high % of small companies and a relatively low % of US. I want a portfolio with only a moderate % of Finance etc etc It is much easier to do this with appropriate active funds where the managers share my preferences rather than try and tweak a global index with minor holdings. It is easy to overweight an area with minor tweaks - how does one underweight it without having separate funds that cover all other areas?
    Originally posted by Linton
    I agree about the pre-eminent importance of asset allocation. It is perfectly possible to come up with your desired allocation with low cost indexes and is done by DFA. French and Fama would approve of your asset allocation strategy, but would recommend you do it with low cost index funds.
    Last edited by bostonerimus; 06-01-2018 at 6:36 PM.
    Misanthrope in search of similar for mutual loathing
    • firestone
    • By firestone 6th Jan 18, 6:55 PM
    • 108 Posts
    • 40 Thanks
    firestone
    given a few more years it will be just as hard to pick a tracker.I have one Vanguard fund from the 71 on their site (inc. active ones) does it really need that many? or does it look better to have more funds on offer
    • ivormonee
    • By ivormonee 6th Jan 18, 6:57 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    A strawman argument as are so many on the passive side.

    I am currently 100% active and I am not interested in "the best manager" for a sector. There isnt one. One may have have a style of investing that is appropriate at some stages of the market and do well for a few years, but then circumstances change and someone else picks up the baton. The point is that by focussing on asset allocation it doesnt matter much where the manager fits in the pecking order, just go for someone who has consistently had a reasonable record. Avoid the obvious no hopers and avoid the ones with good records due to a single lucky year or who are wildly inconsistent.
    Originally posted by Linton
    Ok, let me rephrase the proposal: arrive at a consensus of "best" funds/ managers for each sector, appropriate to the stages/ lifecycle/ circumstances of the markets/ economy.

    We still won't see any consensus!

    And we won't know when circumstances will dictate that the the time is right for "someone else to pick up the baton". If we did, that would mean we had good skills at seeing into the future and being good at market timing which, I think we probably will agree, is simply not consistently possible.
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