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  • FIRST POST
    • sixpence.
    • By sixpence. 4th Jan 18, 7:28 PM
    • 59Posts
    • 15Thanks
    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 4
    • ivormonee
    • By ivormonee 6th Jan 18, 7:05 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    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.
    Originally posted by bostonerimus
    But, the vast majority, over a period of several years, of performance of active funds, what with their top quartile performance this year, and next, and hell maybe even the year after, to then find that they're fourth quartile for the next one, two, three years ... means that your index based portfolio will at least nudge ahead of an identical, or as close as possible, asset allocation formulated through the actives. The passive side is "boring" but after a few years your valuation will be less so than what you would most probably have achieved taking the active route.
    • ivormonee
    • By ivormonee 6th Jan 18, 7:12 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    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
    Originally posted by firestone
    But the 71 tracker funds that Vanguard have available relate to different so-called asset classes. They are not 71 versions of the same fund! Some allow you to invest in equities, some in bonds, some in commodities, etc. And, within each category there are further sub divisions allowing you to achieve the level of granularity you desire for your portfolio. Within equities, you may choose, for example, a fund that is invested in the Japanese stockmarket, and further still, a fund that might invest in the small and mid cap segments of the market etc.

    By offering 71 funds Vanguard (and others) are basically saying: here's a largish selection of funds that we can offer you, the investor, to enable you to put together a portfolio of your choice depending on how detailed you want to get within the asset classes themselves.

    If they only offered one fund you'd have less fun!
    • firestone
    • By firestone 6th Jan 18, 7:19 PM
    • 108 Posts
    • 40 Thanks
    firestone
    But the 71 tracker funds that Vanguard have available relate to different so-called asset classes. They are not 71 versions of the same fund! Some allow you to invest in equities, some in bonds, some in commodities, etc. And, within each category there are further sub divisions allowing you to achieve the level of granularity you desire for your portfolio. Within equities, you may choose, for example, a fund that is invested in the Japanese stockmarket, and further still, a fund that might invest in the small and mid cap segments of the market etc.

    By offering 71 funds Vanguard (and others) are basically saying: here's a largish selection of funds that we can offer you, the investor, to enable you to put together a portfolio of your choice depending on how detailed you want to get within the asset classes themselves.

    If they only offered one fund you'd have less fun!
    Originally posted by ivormonee
    Agree with all you say- my point was that when trackers launched they were meant to be simple and make the choice easier now there are more every year.
    But i am all for the fun in investing
    • bowlhead99
    • By bowlhead99 6th Jan 18, 8:04 PM
    • 7,128 Posts
    • 12,932 Thanks
    bowlhead99
    The problem with index funds is that almost all are wedded to investing on the basis of market capitalisation.
    Originally posted by Linton
    That is generally my problem with them too.

    What if I want to allocate my equities money in a diversified way around the world but don't want over 40% to be in companies based in or listed in any one country? Can't use a world index then. What if I want a nice broad allocation to a hundred companies or more in my region of choice, so I don't want over 3% in any one company? Can't use FTSE UK All Share or FTSE North America then. If I want small companies and I'm sold on indexing I can probably find a "small cap" index fund that will allocate most of my money to the very biggest of those small companies. Seems far from perfect.

    However if you raise such points to fans of indexing they will generally tell you that obviously they accept there are certain flaws with cheap cap-weighted indexes which they have been promoting to all and sundry... but not to worry because you could instead use the more expensive "smart beta" products which are relatively thinner on the ground and more expensive but address the reasons why traditional index funds are beaten by their active brethren (e.g. size factor, value factor, quality factor etc).

    Those 'better index funds' haven't been in existence for as long and may not be as widely available, but supporters can point to certain longer time periods in which they delivered great theoretical results in a backtested scenario.

    Although, when a supporter of active management points to the decent fund managers who have *actually* had great results in outperforming mainstream indexes by following their equities research and own personal strategies - which might include smaller companies, bottom-up evaluations of suitability of individual companies from a valuation perspective, etc etc - the index fans will poo-pooh all that and say it's all just luck and taking greater risk, and even if it isn't luck or higher risk there is a lot of competition and you wouldn't have known that the manager was worth following all those years ago.

    I have generally lost patience with fans of indexes who can't see beyond the last book or bit of research they read that was published or sponsored by someone with a vested interest. But don't think I'm biased, I'm also impatient with people who think active management is always best. So I try not to get involved in "active vs passive" threads, having already been on the boards for over a decade and seen the same stuff regurgitated time and again.

    Generally within a few posts into a thread, you generally end up with an argument between agnostics who will meet you halfway and say that active is best in some situations and passive can be better in others, versus hardline evangelists who say you should basically use passive in every situation and if a passive fund doesn't exist for a situation, it isn't a situation you should try to get into.

    It is easy to overweight an area with minor tweaks - how does one underweight it without having separate funds that cover all other areas?
    With difficulty. If you don't want something held within an index, the only way to avoid it is to buy more and more of everything else on the planet, to drown it out.

    The 'fans of passive' would say if it exists in the index you should buy it, the fact it has a valuation at all is proof that it's valuable, and the market is efficient. However, the market is fickle and can change its mind over what it's 'fair' valuation should be within a matter of days. There are some terrible companies limping on with bad performance, terrible corporate governance and so on, that get money thrown at them by index participants who haven't made any judgements and just want to pay money for a company because it exists and is large.

    So, in some markets I prefer to pay an experienced manager with an on-the-ground research team, to not waste my money buying those stocks. The payment to the manager can save on payments to the former owners of underperforming companies.

    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.
    Originally posted by bostonerimus
    As board members of DFA you would hardly expect them not to endorse doing it the DFA way. Can DFA funds be accessed by the general public through mainstream cheap brokers these days? In the old days they were targeted at an institutional investor base, being non-retail and only available through expensive wealth managers and investment advisers.
    • bostonerimus
    • By bostonerimus 6th Jan 18, 9:20 PM
    • 1,402 Posts
    • 819 Thanks
    bostonerimus
    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
    Originally posted by firestone
    They are for slice and dicers.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 6th Jan 18, 9:27 PM
    • 1,402 Posts
    • 819 Thanks
    bostonerimus
    As board members of DFA you would hardly expect them not to endorse doing it the DFA way.
    Originally posted by bowlhead99
    Indeed they are, I was being a little ironic, and they are great DFA marketing tools.

    Can DFA funds be accessed by the general public through mainstream cheap brokers these days? In the old days they were targeted at an institutional investor base, being non-retail and only available through expensive wealth managers and investment advisers.
    DFA can only be accessed by the individual through a financial advisor. Another irony is that they promote low fees and then sit behind a paywall. There has been extensive effort expended replicating various DFA funds with mixes of Vanguard funds and it is usually a toss up as to which wins until the advisor fee is added.
    Misanthrope in search of similar for mutual loathing
    • pip895
    • By pip895 6th Jan 18, 9:28 PM
    • 490 Posts
    • 279 Thanks
    pip895
    I have run a mainly active portfolio for some 8 years its roughly 60% equity so I compare it to VLS60. Most years I beat VLS60 and have a slightly lower volatility. Overall I have drawn close to the VLS80 in performance. On a couple of years eg. 2016 VLS60 has outperformed, but what is more important to me is that in poor years and when periods when corrections have occurred my portfolio has outperformed VLS60.

    I have some new money to invest and was looking at saving some costs and using a passive portfolio however I have come to the conclusion that passives are good for US and to some extent Global investments and Emerging markets but for the UK/Japan and Europe and particularly small companies, active is better. In addition I am not happy with passives for the non equity part of my portfolio.

    My new portfolio will be about 50% Active and 50% Passive.
    • ivormonee
    • By ivormonee 6th Jan 18, 9:40 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    I have come to the conclusion that passives are good for US and to some extent Global investments and Emerging markets but for the UK/Japan and Europe and particularly small companies, active is better. In addition I am not happy with passives for the non equity part of my portfolio.

    My new portfolio will be about 50% Active and 50% Passive.
    Originally posted by pip895
    I just wondered whether you'd share your thoughts and how you arrived at the conclusion that for the UK/Japan and Europe sectors and particularly small companies, active is better?
    • Linton
    • By Linton 6th Jan 18, 9:54 PM
    • 8,849 Posts
    • 8,880 Thanks
    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.
    Originally posted by ivormonee
    You dont need to know who is going to be best fund manager in every sector to have an effective active fund portfolio. It's a false argument.

    Out of my 6 main funds 2 are 1st quartile over 3 years, 2 are 2nd quartile, 1 is 3rd quartile and 1 is 4th quartile. And yet the portfolio as a whole has beaten VLS100 every year. If I did have mystic powers the returns would of course be much better but sadly I dont.
    • ivormonee
    • By ivormonee 6th Jan 18, 10:36 PM
    • 108 Posts
    • 81 Thanks
    ivormonee

    Out of my 6 main funds 2 are 1st quartile over 3 years, 2 are 2nd quartile, 1 is 3rd quartile and 1 is 4th quartile. And yet the portfolio as a whole has beaten VLS100 every year. If I did have mystic powers the returns would of course be much better but sadly I dont.
    Originally posted by Linton
    Exactly! You have done well, beating a comparative asset allocation with your own choice of funds - especially, weightings/ other factors being equal, as 4 out of 6 of your funds are 1st or 2nd quartile. But, for every Linton portfolio there is a non-Linton with a portfolio where whose choices have resulted in the opposite - 4 out of 6 funds being in the 3rd and 4th quartiles. It's the maths: If you have four quartiles then half will be above and half will be below. For every active fund winner there is an active fund loser and, due to the ever changing landscape of active fund performance, the top funds interchange with the bottom funds and there is no way anyone can be sure which fund will do well or badly next. Or is there?

    It is precisely because of the lack of "mystic powers" and the lack of consistency amongst active fund managers that your portfolio cannot always be a winner. It's done well, it might do very well again for some time but at some point you would expect it to underperform, would you not?

    This is the conundrum at the crux of the great mystery: to index or not to index, that is the question.
    • pip895
    • By pip895 6th Jan 18, 10:38 PM
    • 490 Posts
    • 279 Thanks
    pip895
    I just wondered whether you'd share your thoughts and how you arrived at the conclusion that for the UK/Japan and Europe sectors and particularly small companies, active is better?
    Originally posted by ivormonee
    Simply looking at how my active funds compared. My suspicion is that much of it is small company advantage - UK all company funds I pick always seem to have more small companies than the All Share index. Similarly with the Japanese and European funds, though a little less marked.

    With the non equity stuff the active funds seem to perform better and are less volatile. One issue I have is that many funds don't have a history that goes back far enough - I like to see how they performed in 2008 - then this point covers many passives as well.
    • ivormonee
    • By ivormonee 6th Jan 18, 10:46 PM
    • 108 Posts
    • 81 Thanks
    ivormonee
    Simply looking at how my active funds compared. My suspicion is that much of it is small company advantage - UK all company funds I pick always seem to have more small companies than the All Share index. Similarly with the Japanese and European funds, though a little less marked.

    With the non equity stuff the active funds seem to perform better and are less volatile. One issue I have is that many funds don't have a history that goes back far enough - I like to see how they performed in 2008 - then this point covers many passives as well.
    Originally posted by pip895
    Actually it's very true that we don't have data that goes back far enough. The standardised data on fund factsheets covers five discrete years. What would be good would be to have ten discrete years - we'd get a much clearer picture on performance then. This is especially true in 2018 where, if we go back the maximum of five years, all we get to see is a fairly stable (in relative terms) and steady increase in valuations, as markets have behaved in a similar fashion with no sudden, nasty shocks.
    • Prism
    • By Prism 6th Jan 18, 10:54 PM
    • 120 Posts
    • 82 Thanks
    Prism
    Actually it's very true that we don't have data that goes back far enough. The standardised data on fund factsheets covers five discrete years.
    Originally posted by ivormonee
    Trustnet goes back 10 years in its tables and using the graphs back to 2000. Its interesting to see how various funds and managers coped with 2008/2009
    • Audaxer
    • By Audaxer 6th Jan 18, 11:08 PM
    • 779 Posts
    • 386 Thanks
    Audaxer
    Exactly! You have done well, beating a comparative asset allocation with your own choice of funds - especially, weightings/ other factors being equal, as 4 out of 6 of your funds are 1st or 2nd quartile. But, for every Linton portfolio there is a non-Linton with a portfolio where whose choices have resulted in the opposite - 4 out of 6 funds being in the 3rd and 4th quartiles. It's the maths: If you have four quartiles then half will be above and half will be below. For every active fund winner there is an active fund loser and, due to the ever changing landscape of active fund performance, the top funds interchange with the bottom funds and there is no way anyone can be sure which fund will do well or badly next. Or is there?

    It is precisely because of the lack of "mystic powers" and the lack of consistency amongst active fund managers that your portfolio cannot always be a winner. It's done well, it might do very well again for some time but at some point you would expect it to underperform, would you not?

    This is the conundrum at the crux of the great mystery: to index or not to index, that is the question.
    Originally posted by ivormonee
    If I understand him correctly, it is not having the best active funds that has made Linton's growth portfolio so successful, but rather having a very diverse asset allocation including high volatility funds in different sectors and geographical regions that are not correlated, so the portfolio overall will possibly not be any more volatile that the likes of the VLS100, but will still get better returns.
    Last edited by Audaxer; 06-01-2018 at 11:12 PM.
    • jamei305
    • By jamei305 7th Jan 18, 7:46 AM
    • 272 Posts
    • 325 Thanks
    jamei305
    If it's possible to pick active funds that will outperform their peers or passive equivalents, then surely we'd see funds consisting of sets of active funds that satisfy the magic formula. Asia Pacific Best Managers or something.
    • Linton
    • By Linton 7th Jan 18, 7:56 AM
    • 8,849 Posts
    • 8,880 Thanks
    Linton
    Trustnet goes back 10 years in its tables and using the graphs back to 2000. Its interesting to see how various funds and managers coped with 2008/2009
    Originally posted by Prism
    Trustnet chart data can go back longer than that, the limitation is that many of the funds and indexes were started more recently. You can analyse the tech bubble as well for further insight.
    Last edited by Linton; 07-01-2018 at 8:00 AM.
    • Linton
    • By Linton 7th Jan 18, 8:07 AM
    • 8,849 Posts
    • 8,880 Thanks
    Linton
    If I understand him correctly, it is not having the best active funds that has made Linton's growth portfolio so successful, but rather having a very diverse asset allocation including high volatility funds in different sectors and geographical regions that are not correlated, so the portfolio overall will possibly not be any more volatile that the likes of the VLS100, but will still get better returns.
    Originally posted by Audaxer
    That was my aim. I donít claim the portfolio is wildly successful, just a useful bit more successful over the past few years than one based on index funds which after all donít claim to be more than marginally better than average.
    • BananaRepublic
    • By BananaRepublic 7th Jan 18, 4:27 PM
    • 1,041 Posts
    • 764 Thanks
    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.
    Originally posted by bostonerimus
    Iím not someone who has done well just in the last year or so. I started investing over 20 years ago, and my one regret is that I swallowed the passive hype. As a result some of my returns were less than they could have been. Vanguard is largely in the US market, and US index funds do indeed do well. Linton has already made many of the points I would have made.

    Some of my poor funds were in company pensions where you have a limited choice of fund, and hence I transferred out when I could. But I suspect a lot of poor performing active funds are bought as part of a pension fund where the prime objective is large commission for the pension advisors. And a lot are sold to unsuspecting and naive investors. I have the impression quite a few new funds are sold on the basis of a name fund manager, and they go on to underperform. Frankly it is not hard to find active funds that perform well, and by diversifying you avoid the risk that a given sector or market underperforms. I donít think anyone denies that something like Vanguardís index funds are decent, but picking good active funds is easy, and simply denigrating active funds because most underperform is silly.
    • Amoux
    • By Amoux 7th Jan 18, 5:11 PM
    • 7 Posts
    • 7 Thanks
    Amoux
    I think regardless of whether you go the active or passive route, or even just a mixture of the two what really matters is your asset allocation, diversification and whether you stick to your plan and see it through - i.e not get spooked in times when markets crash. That would have a far more detrimental effect on your investments than whether you went for index trackers or active management.

    Personally I'm a passive investor, only because I have an obsession with minimising costs. I cannot predict future market performance, but costs are something which I feel I have control over. This means finding the cheapest possible platform and the cheapest way to diversify my portfolio. Trackers were just the simplest and cheapest way to achieve my goals.
    • Audaxer
    • By Audaxer 7th Jan 18, 5:27 PM
    • 779 Posts
    • 386 Thanks
    Audaxer
    I don’t think anyone denies that something like Vanguard’s index funds are decent, but picking good active funds is easy, and simply denigrating active funds because most underperform is silly.
    Originally posted by BananaRepublic
    I have learned a lot on this forum, but picking the right mix of active funds to get a fully diversified and balanced asset allocation is not that easy for the inexperienced investor. A post on here recently advised that even IFAs buy in their asset allocations, so it can't be that easy.

    With low cost multi asset funds you may not do as good as a well devised active or hybrid (active and passive) portfolio, but they are low maintenance and you have a level of confidence that they will give you decent long term returns, probably a lot better than most DIY active portfolios.
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