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

MrMalkin

Aegis wrote: »

My own recollection is that on average a managed fund in the US will outperform the index before taxes but will underperform after taxes on a yearly basis. As time passes, the bias will cause a more marked underperformance, which might explain the 20% level you mentioned.

You're correct that most of the evidence for this comes from the US, like I said index investing hasn't really taken off in the UK. I can't quote sources because I don't have them with me at the moment but if I remember I will add them later. I think the evidence for UK funds will be harder to come by but I believe that the advantages, whilst less pronounced, are still worth it. Also bear in mind that until recently even index trackers in the UK had quite high charges, HSBC only dropped theirs to 0.25% a couple of years ago IIRC so that won't have filtered through to the longer term stats yet.

e: Late edit but this article says that 70% of fund managers fail to beat their market over 5 years, and it implies that's before charges. They don't say where they got that figure from so I can't check up the original academic literature that backs it up: http://www.thisismoney.co.uk/money/investing/article-1680161/Spotlight-Are-tracker-funds-right-for-you.html

One thing to bear in mind with talking about 'average' fund performance, typically it only includes surviving funds. Funds that closed or were merged into other funds would drag average performance down but are not included in the types of statistics available.

Anyway I don't want this thread to become an active vs. passive debate, I just thought it was worth posting it as an option worthy of consideration. By far the most important thing is to be comfortable with your portfolio and your approach to managing it, especially when you live in interesting times like the present.

darkpool

MrMalkin wrote: »

Quite frankly I'm surprised that on a website called MoneySavingExpert, so many of you investors have bought managed funds with high charges. There's been tons of research done that shows that if you buy managed funds, after expenses you only have around a 20% chance of beating the baseline index for the asset class.

yeah, you get people wetting their pants on this site because they manage to save 5p on their grocery bill. then you get people here happy to give thousands a year to a fund manager, even though most research shows active fund management isn't worth it.

Ark_Welder

darkpool wrote: »

yeah, you get people wetting their pants on this site because they manage to save 5p on their grocery bill. then you get people here happy to give thousands a year to a fund manager, even though most research shows active fund management isn't worth it.

Back again? You are such a source of entertainment!

Keep it up!!!

crittertog

darkpool wrote: »

yeah, you get people wetting their pants on this site because they manage to save 5p on their grocery bill. then you get people here happy to give thousands a year to a fund manager, even though most research shows active fund management isn't worth it.

I found this Morningstar video quite an interesting (and seemingly balanced) discussion on active vs passive funds: http://www.morningstar.co.uk/uk/news/article.aspx?articleid=101037&categoryid=5.

The over-arching point seemed to be that in well-researched markets, passive funds are probably better, but in others, active funds may be better - i.e. there is no one answer. Personally, my active funds have all out-performed the relevant index by 3-10%/year over the last 5-10 years.

darkpool

Ark_Welder wrote: »

Back again? You are such a source of entertainment!

Keep it up!!!

sorry, do i know you? i don't think i've ever seen one of your posts....

darkpool

crittertog wrote: »

I found this Morningstar video quite an interesting (and seemingly balanced) discussion on active vs passive funds: http://www.morningstar.co.uk/uk/news/article.aspx?articleid=101037&categoryid=5.

The over-arching point seemed to be that in well-researched markets, passive funds are probably better, but in others, active funds may be better - i.e. there is no one answer. Personally, my active funds have all out-performed the relevant index by 3-10%/year over the last 5-10 years.

I saw the article below in the FT. People used to think the earth was flat, I think in a few hundred years time people will be amazed that so many used to think active management was worth the fees.

The articles that "prove" that AM is worth the fees come from organisations that make money from selling UTs etc. Most/ All independent academic evidence suggests AM isn't worth the fees...


http://www.ft.com/cms/s/0/b4cb4ed2-fdc6-11de-9340-00144feab49a.html#ixzz1hLbJzPeg


"Research into more than 700 pooled funds available to UK pension schemes over a 25-year period by Clare, Cuthbertson and Nitzsche in 2009 found there was little evidence the managers studied could outperform their benchmark index. They also studied “performance persistence”, – whether a manager outperforming in one period tended to outperform in the following period – again they found little evidence of persistence.
A further piece of research comes from the US by Busse, Goyal and Wahal, in 2008 where more than 4,000 US institutional equity funds were analysed over a 16-year period. They found no evidence of manager outperformance on average and also no evidence of performance persistence."

BLB53

I believe a big factor in underperformance of these managed funds is charges, the average seems to be around 1.5% but some as high as 3%. Compared to low cost trackers charging between 0.3% and 0.5%, over the longer period, they obviously have an advantage.
Of course, the cheapest option is to buy the individual shares (or low cost ITs) and hold. No costs at all after the initial purchase!

Ark_Welder

darkpool wrote: »

I saw the article below in the FT. People used to think the earth was flat, I think in a few hundred years time people will be amazed that so many used to think active management was worth the fees.

The articles that "prove" that AM is worth the fees come from organisations that make money from selling UTs etc. Most/ All independent academic evidence suggests AM isn't worth the fees...


http://www.ft.com/cms/s/0/b4cb4ed2-fdc6-11de-9340-00144feab49a.html#ixzz1hLbJzPeg

Dear oh dear. More selective edits? For those that do not have a logon, the concluding two paragraphs from the FT article are as follows:

Research into US equity retail funds by Cremers and Petajisto in 2009 used data on more than 2,500 funds over a 24-year period. They analysed the concept of “active share”, which is the proportion of a manager’s portfolio that does not overlap with the benchmark index. They define a closet indexer as a manager with an active share of less than 60 per cent. They found that managers with a high active share, the concentrated stock pickers, significantly outperformed the closet indexers. They also investigated past performance alongside a manager’s active share, and found outperforming managers with a high active share showed strong performance persistence.


So have we found the Holy Grail – pick top performing managers with a high active share? As ever, there are lies, damn lies and statistics and one piece of research is not an irrefutable proof. However, for investors committed to active management, the message is clear that closet indexers should be avoided and the focus should be on genuine active managers.

The article in its entirety does "prove" something, but it ain't anything to do with active or passive investing.

Rollinghome

Aegis wrote: »

Under those circumstances, a manager either has to hold stocks for longer, in essence becoming a closet tracker fund with higher charges, or he needs to significantly outperform the market just to break even on taxes.

You seem to misunderstand what a "closet tracker" is. Holding stocks for the long term does not make a fund a closet tracker. Warren Buffet famously holds stocks for the very, very long term but that does not make him a closet tracker either.

Nor does the ability to constantly churn a portfolio necessarily give a fund manager an advantage as you seem to assume. Churning pfs can add 2% or more to costs - over and above both the quoted AMC and the TER and which is not revealed to investors in the UK. Neil Woodford has been more successful than many with the help of a low churn rate.

You also, as usual, conveneniently overlook the very much higher charges of managed funds in the UK compared with those in the US which makes the argument against them stronger. Retail managed unit trusts in the UK are extraordinarily expensive.

As a member of the absolutist pro managed fund Taliban, it would be appreciated if you made your vested interest, and that of your employer, clear. Managed funds have an advantage to most IFAs whether they are commission based, with many trackers not paying them commission, or fee based, where managed funds give them the opportunity to justify their high ongoing fees for "reviewing" and churning funds in a way that tracker funds don't.

As it happens I don't own any tracker funds and prefer to avoid all retail unit trusts whenever possible but I do recognise that for very many people they make the most sense. Many like to pretend that they, unlike ordinary mortals, have the knack of picking the "best funds". Most don't.

Certainly not for all, but for many, if not most, a tracker makes far more sense than the constant switching to last year's winners in a vain attempt to beat the markets we see on this board.

It would help if we could have more objective discussions of the subject rather than the slanted absolutist waffle of vested interests we tend to get here whenever the subject crops up.

Ark_Welder

Rollinghome wrote: »

It would help if we could have more objective discussions of the subject rather than the slanted absolutist waffle of vested interests we tend to get here whenever the subject crops up.

It would also help if there was an acceptance that different investors might use different methods to achieve their aims, that they can be successful in achieveing their aims, and that everyone's aims are not [edit] necessarily the same.