Active funds vs Trackers (again...)

jamesd

Loughton Monkey, two charts that illustrate the effect, total return over three then five years:


The dark blue line is the FTSE All Share Index itself. Yellow is Invesco Perpetual Income and brown Invesco Perpetual Corporate bond, both of which clearly aren't simple FTSE All Share Index trackers.

The other lines are some that koru mentioned: Allianz RCM UK Equity A, Ecclesiastical UK Eq Gth A (instead of C), CBF Church of England UK Equity Acc, Fund and GAM MP UK Equity Acc, all of which appear to be effectively trackers, but under-performing the index because of fees.

Here's another chart over five years showing the best of those not quite trackers, Ecclesiastical with 1% AMC (red), with the index and the institutional HSBC All Share Index tracker (at 0.28% TER)(yellow):
This shows the open tracker clearly doing better than the best of the other trackers. Better to buy the HSBC tracker if you're buying from HL, you get better results.

Or better to go for something that's really behaving differently from the index. The Invesco Perpetual Income fund for example, which matched the FTSE performance over three years, but with reduced up and down movements, and has clearly beaten it over five years (and also over longer periods). But it's not always best - in 2009 you could have done better in the FTSE tracker. Yet that's also not the whole picture. This is the same set of funds as the last one but with the popular emerging markets fund Aberdeen Emerging Markets fund added:
And that well illustrates why some emerging markets holding can be useful, but also the greater up and down movements that you get with such funds.

I do agree that there are active managed funds that just don't beat the index as well. But that's different from the closet trackers that are actually deliberately tracking the index but charging higher fees than openly declared trackers. Both types exist.

koru

Thanks James. It might be worth adding that although the light blue line seems to be very different from the index in the five-year figures (the second chart), this is because it relates to a fund which has not existed for a full five years. Therefore, it starts at 0% in November 2006, whereas all the other funds had already grown by about 20% by that time. The three-year chart shows that this fund has closely shadowed the index ever since it was created.

koru

Of course, part of the excellent performance of the emerging markets fund is simply due to the plunge in the value of sterling versus emerging markets currencies over the last couple of years. The performance of the underlying investments in local currency terms is boosted because the same amount of, say, Chinese Yuan is worth more pounds than it was two years ago.

You can of course get emerging markets trackers (such as the Vanguard one, which you can buy through Alliance Trust Savings). However, I think there is a much stronger case for active funds when you are investing in something like emerging markets, because there are far fewer fund managers operating in this sector and there is a much better chance that a smart manager can persistently outperform the market.

koru

Interesting charts in relation to Invesco Perpetual Income. Although the fund looks really good in the five-year chart, the key difference comes from a short period from about May 2006 to early 2007, where the fund steadily outperforms the index, but then resumes following the index, which is why the gap in cumulative return is no wider now than in mid-2007. The fund did manage to avoid the worst of the crash in late 2008, which opened up a bigger gap for a while, but then it obviously missed the rebound in the market which began in early 2009, and the fund slipped backwards, so that over the last three years the fund has delivered almost exactly the same cumulative performance as the index. Essentially, the fund manager has therefore significantly departed from the index on three occasions over the last five years and he got it right twice and wrong once.

koru

koru wrote: »

The reason the report is misleading is that it is not comparing like with like

... I don't know for sure, but I would bet that trackers that are tracking smaller companies indexes would compare much more favourably with HL's figures for actives.

...If HL redid their figures, comparing actives and passives that have the same broad asset allocation, I will bet that the average active performs slightly worse than the average passive.

Inspired by James showing how to embed charts, I can now prove the point in my original post with the following chart:

The blue line is the total return over 5 years from the UK All Companies unit trust sector, which is what HL used in their analysis, though they used 20 years. I can only get 5 years. The orange line is HSBC's FTSE 100 tracker, which is perhaps 2% behind the sector average over 5 years. That's much less difference than HL claim. Perhaps that's because the average tracker has higher fees than HSBC. (Many UK trackers have fees of more than 1%, particularly those that existed 20 years ago. HL would be right to suggest that these are unlikely to be better than an active fund. But these days you can pay as little as 0.25% for a UK tracker.)

The green line is the HSBC FTSE 250 tracker, and clearly this has performed much better than the average active fund (the blue line). Which proves my point that trackers that are tracking smaller companies indexes would compare much more favourably with HL's figures for actives. And if you want the greater potential returns from smaller companies (and accept the higher risk), then don't choose a FTSE 100 or FTSE All Share tracker.

Conclusion: HL are talking tosh.

dunstonh

HSBC250 is not reflective of the typical uk all companies sector fund. It is as higher risk fund within the sector. It should be compared to the other mid cap funds. Though, it will typically be in the top of those.

jamesd

koru, you didn't prove that HL was wrong, because they were using averages. As you implied in your post, the average tracker does worse than the HSBC tracker, due to fees, which would average between 1% and 1.5% (1% being typical in a pension, 1.5% outside). You'd also need to find some fund to represent the average managed fund, which may be a more difficult task.

I don't think that there's a reason to disbelieve HL but what is more interesting is working out how to do better than average. Eliminating the poor performers works for both active and passive funds.

DavidLaGuardia

Loughton_Monkey wrote: »

[I stress I am in no way comparing the fund manager community with an infinite load of monkeys. The number of fund managers is not infinite.]

lolololololol!!!!

DavidLaGuardia

In comparing trackers and active managers it has already been mentioned that many "managed" funds are closet trackers.

My own thoughts are that this may be inevitable when a fund exceeds a particular size and is less able to be as fluid in its trading.

What has not been pointed out is that trackers favour certain markets better than others. The FTSE and Dow Jones are closer to a perfect market model whereas active management is MUCH more significant in the Emerging Markets and Sammler Companies.

Perhaps any well distrbuted portfolio must always take on some managed funds even if trackers are chosen?

jamesd

The Dow is a bit small but a fairly recent study of the NYSE (I think) found that active funds outperformed passive before tax. After tax the passive did better. The US has a higher CGT rate on shares held for up to a year.

I don't know about having to have some managed or some active but I do have both.