Fund Selection for first timer

jamesd

Rollinghome wrote: »

Have you actually calculated what a portfolio following those recommendations would now be worth?

About 98% of original investment value, using buy prices very roughly picked from a chart since I didn't have access to daily historic prices when writing this. A FTSE All-Share tracker would be at about 106% but with more volatility.

Total invested	£1000			
					Buy	Now	Bought	Now
30%	BlackRock UK Absolute Alpha	118	123	£300	£313
20%	Cru Investment Portfolio	100	60	£200	£120
20%	Invesco Perp Monthly Inc+	171	204	£200	£239
20%	Invesco Perp Income		1560	1670	£200	£214
10%	Neptune Global Equity		272	260	£100	£96
							£1000	£981

It's not yet clear what holders of the Arch Cru fund will end up with. Last valuation back in September was around 40% down but the plan was not to sell but instead to run off and that would presumably get closer to 100%, though without much liquidity. I assumed 40% drop above, ignoring the switch into bonds I'd have made. All above are accumulation units except Arch Cru, for which I completely ignored income.

Even so, using old published mixtures without updating them along the way isn't a good idea.

koru

Rollinghome wrote: »

My understanding is that management charges on UK active managed funds are generally higher than in the US which would make the picture for UK funds somewhat worse than shown by the US studies.

You mean that although trackers can now be had for a TER much the same as in the US, active funds tend to have a higher TER here than in the US, so a UK active fund has a bigger cost differential to overcome?

The paper which I provided a link to in post number 78 has a lot of information about US TERs. The closet trackers have average TERs of around 1.0. Fidelity Magellan is about 0.5, which is incredibly low. The truly active funds tend to be more around the 1.3 or 1.5 level. However, I don't know if this is the "rack rate" or the real rate paid by savvy punters (in the same way that a UK punter can usually get a rebate of about 0.5% on the AMC of most UK unit trusts, if they purchase through Alliance Trust Savings and some other discount brokers). Overall, I suspect US active funds have a slightly lower cost differential between passive and active.

Update: I found some further figures on this. Download the following analysis produced by Vanguard in the US:
https://institutional.vanguard.com/iwe/pdf/ICRPI.pdf
Figure 5 on page 8 shows the cost differential in the US. In the UK the average active TER would, I think, be about 1.25% (assuming an average rebate of 0.25% from HL or ATS), whereas trackers are about 0.3% TER (assuming you pick the ones with lowest costs, which are mainly Vanguard and HSBC and iShares). Therefore the cost differential in the UK is around 1%, whereas the Vanguard figures seem to suggest differentials in the US of between 0.6% and 0.8% for most sectors. Therefore, active managers in the UK seem to have a bigger cost handicap to overcome in order to beat a tracker. Therefore, the case for trackers seems stronger in the UK than in the US. Over 20 years, a 1% difference in costs will reduce total returns by about 18%, assuming 7% total returns before costs, so a UK active manager has to outperform by a cumulative 18% over 20 years, in order to offset the cost differential. (Incidentally, I realise Vanguard are putting one side of the argument, but I don't think there is any reason they would have tried to understate the US cost differential.)

Molotov

Hopefully the OP didn't mind the thread changing to a proper discussion.

I, for one, would like to thank all of those who posted reasoned and thoughtful posts without resorting to swinging handbags.

As a novice, it not only makes compelling reading but it's also interesting seeing which posters consistently strike a chord with my own simplistic views.

Rollinghome

koru wrote: »

You mean that although trackers can now be had for a TER much the same as in the US, active funds tend to have a higher TER here than in the US, so a UK active fund has a bigger cost differential to overcome?

...Therefore the cost differential in the UK is around 1%, whereas the Vanguard figures seem to suggest differentials in the US of between 0.6% and 0.8% for most sectors. Therefore, active managers in the UK seem to have a bigger cost handicap to overcome in order to beat a tracker...

Yes, that was the point I was making. Thanks for turning up the interesting analysis.

koru

The Norwegian government recently asked three professors to review the performance of the Norwegian State Pension Fund, which is run by their central bank. Section 1 of their report comprehensively reviews the evidence of academic studies on active management. Available here:

http://www.regjeringen.no/upload/FIN/Statens%20pensjonsfond/rapporter/AGS%20Report.pdf

Here is the central bank's response, which unsurprisingly is more in favour of active management:

http://www.norges-bank.no/upload/77928/active_management_enclosure.pdf