Help me rebalance my failing S&S ISAs Portfolio - Sept 2011

darkpool

Linton wrote: »

My far east managed funds which I have held for around 10 years are showing an average return of about 10% annually (and that's after the recent falls).

I was wondering what your far eastern funds were?

darkpool

Linton wrote: »

Err no. The academic evidence is mainly from the US where different tax rules penalise managed funds . If you look at the paper you quote you see that it is based on an analysis of some 2000 US funds.

In the UK stamp duty on shares is 0.5%. The stamp duty on shares in America is 0%? What are the taxes that American fund managers pay that British ones dont?

Ilya_Ilyich

Linton wrote: »

There is no evidence that trackers outperform managed funds.

My understanding of the logic is that passive investors get the mean return of all active investors. On top of this actively-managed funds typically charge at least 1% higher TER and are likely to incur higher dealing charges. How then could an active-fund investor hope to outperform a passive investor over the long-term other than by successfully picking a fund each year that manages to significantly outperform the market?

Ark_Welder

darkpool wrote: »

In the UK stamp duty on shares is 0.5%. The stamp duty on shares in America is 0%? What are the taxes that American fund managers pay that British ones dont?

Already answered for you be Aegis in this post

The reason for this is that US funds are taxed on capital gains within the fund. UK funds aren't subject to any such taxation, so it's easier for active teams to get a good result even if their turnover rate is higher. The rules in the US favour longer term holdings, therefore portfolio turnover rates are kept to a minimum to reduce tax, which makes them more like tracker funds. Tracker funds with active fees will always be worse than tracker funds with tracker fees, so they do better.

Ark_Welder

Ilya_Ilyich wrote: »

How then could an active-fund investor hope to outperform a passive investor over the long-term other than by successfully picking a fund each year that manages to significantly outperform the market?

By not having to be 100% invested when markets are falling. Trojan Fund has 'underperformed' the All Share at times, but hasn't lost money (or lost less) when markets have been falling:

5-year total return on the All Share is about +6%, Trojan is +53%
10-year figures are +60% and +150%

Ilya_Ilyich

So all an active fund investor has to do is successfully pick one of the small percentage of funds that will outperform the market in the future?

Ark_Welder

Ilya_Ilyich wrote: »

So all an active fund investor has to do is successfully pick one of the small percentage of funds that will outperform the market in the future?

No. They have to invest in a fund that matches their requirements.

Ilya_Ilyich

That doesn't mean anything though. Are you saying all you need to do is time the market?

Ark_Welder

It means everything: some investors might feel that they need to track a market, others might want greater diversification, concentration or specialisation.

Take the FTSE100 market. What does that index track? A large part of company earnings are from overseas, a number of companies report their earnings in a foreign currency, and some companies are not even based in the UK. So what does it represent?

I wouldn't say to anyone that they shouldn't get a tracker if that is what they want, I just say to those who are index investors that an index performance is not an interest for everyone and a tracker may even be undesirable at times for some.

Linton

Ilya_Ilyich wrote: »

My understanding of the logic is that passive investors get the mean return of all active investors. On top of this actively-managed funds typically charge at least 1% higher TER and are likely to incur higher dealing charges. How then could an active-fund investor hope to outperform a passive investor over the long-term other than by successfully picking a fund each year that manages to significantly outperform the market?

Look at the quote from the highly academic paper.

"Most actively managed funds provide either positive or zero net-of-expense alphas, putting them at least on par with passive funds.” False Discoveries in Mutual Fund Performance - Measuring Luck in Estimated Alphas (2008)

So, the evidence even from the US is that after taking fees into account most active funds perform on average as well as trackers.

From the information given by the passive enthusiasts a novice investor may be led to believe that the TER is something additional they will have to pay. It isnt - the published performance of a fund INCLUDES the charges.


As to how an active investor could outperform the index...

One method would be to put together a much more balanced portfolio. The FTSE 100 is a somewhat randomly disparate set of large companies that just happen to sell their shares on the London stock exchange. It contains a disproportionately high number of banks and Asian mining/oil companies and very few large technology businesses (Vodaphone & BT are more like utilities) and manufacturers. It doesnt contain one car manufacturer, but does include 2 very large drug companies.