Fund managers

Ark_Welder

darkpool wrote: »

LOL!!! you were put on the earth to amuse!

In other words, you are unable to demonstrate how you select individual stocks.

Linton

darkpool wrote: »

i do listen, it's just your arguments are poor.

say there are 10 shares in a benchmark. the performance of them varies from rubbish to brilliant. but say overall the benchmark goes up 5%. if the shares in the benchmark are owned by unit trusts with annual charges of 3% it means the average UT will return 2%. Agreed?

So how can UTs add value? Of course some of them might return more than 5%, but overall the average return will be far lower than the benchmark.

Virtually all academic evidence suggests that the performance of UTs is down to luck and any outperformance does not last. People are paying good money for not a lot in return.

so why should I invest in something with the odds stacked against me from the very start?

Of course if you have some academic evidence that UT performance is down to skill I might reconsider my opinion, however so far no one has produced any academic evidence......

The most lucrative managed funds are niche players.

Lets look at small companies as a nice example. You could presumably buy a Small Cap Index ETF. You would then be investing in all small companies in a proportion determined by the total share value. So somewhat paradoxically it will be dominated by the largest small cap companies.

The alternative is a small cap fund which can collect a small subset of the large number of small companies. It can weed out companes like those which are small now but were previously big, those with large debts, those with frequent management changes, or use whatever criteria the fund feels appropriate It can look at company financial data, interview company managers and can employ subject matter experts to assess the companies and so can chose those companies with the best looking prospects. Finally it can choose in what proportion to buy the shares, presumably buying more of those companies with the very best prospects.

We see the results - it actually looks pretty easy to beat the Small Cap Index, almost every managed fund in that area does it. My Small Cap fund, which isnt at the top of the list, is returning on average about 14% per year since 2002.

We can also see that this wont work for say the FTSE100. Most of the companies are giant conglomerates, there are comparatively few of them, and their financial data is well known and studied throughout the world. There is little useful research that a fund could do.

So we would expect that broadly based FTSE100 (or come to that FTSE Allshare which is dominated by the FTSE 100) managed funds would fail in general to perform consistently well against the Index. What is actually rather surprising is that they tend to do well enough to pay their own fees.

darkpool

Linton wrote: »

The alternative is a small cap fund which can collect a small subset of the large number of small companies. It can weed out companes like those which are small now but were previously big, those with large debts, those with frequent management changes, or use whatever criteria the fund feels appropriate It can look at company financial data, interview company managers and can employ subject matter experts to assess the companies and so can chose those companies with the best looking prospects. Finally it can chose in what proportion to buy the shares, presumably buying more of those companies with the very best prospects.

i can see your argument that some fund managers weed out the shares that are pants. but since institutions own the bulk of the stockmarket it means other institutions own the pants shares. we can all agree that institions charge fees to the funds, so overall the return to the clients will be benchmark return minus the fees.

i'm sceptical that analysts etc can spot good or bad companies, enron was a dishonest company that fooled the auditer arthur anderson. bernie madoff's hedge fund was a giant ponzi scheme. greek debt is getting a haircut of 60%. history is full of companies that fooled the experts for a very very long time.

thelawnet

qpop wrote: »

OK guys, out of interest, of those arguing the active/passive sides, do any of you actually have access to tools such as FE Analytics to put your money where your mouth is?

Are you aware of the different measures of risk vs return and how they can be tracked over time?

The results are astounding, and there are managers who both outperform benchmarks and(importantly) do it with less volatility (measured by way of standard deviation) than the given benchmark.

There are several issues here - firstly generally speaking the fund managers do achieve lower volatility than simple index trackers, this is not difficult to achieve, the question is whether they have achieved alpha, i.e. better risk-adjusted performance than the benchmark. This is the real trick.

Firstly it is quite legal for the likes of IFAs and Hargreaves Lansdown to push trusts/OEICs in which they have a financial interest, without disclosing it, something that journalists have been imprisoned for. As you imply, identifying good fund managers is non-trivial, as indeed stock picking, but at least stock picking is not clouded by advertising and commission payments as funds are.

Secondly, as I have pointed out it's actually quite difficult to buy into 'proven' managers. The second-most popular fund according to Hargreaves Lansdown is the Trojan Fund, which is giving no discount and is charging a dilution levy to reflect the fact that they are attracting more money than they know what to do with, so the performance is shattered.

Thirdly, historical performance is no guide to the future, as I pointed out with my Blackrock Absolute Alpha example - it was a stellar fund, attracted lots of money and now it's an absolute dog. It's quite possible for a manager to get it right for 10 years - this may only amount to a single idea, such as betting on commodities, financials, etc. but that does not mean they are going to do so forever, their idea might go sour, they get bored, earn too much money, etc.

There are lots of funds that look attractive in the medium term, but then go sour - they were just lucky. For those that have out-performed in the long-term they inevitably get bloated with inflows of investors' money and might not perform that well in the future. If you choose a brand-new fund from a star manager, it's often hard to prove that the manager really is a star and not just lucky, so that's just a crapshoot.

I won't accept arguments based on past out-performance of a few funds, that's no different to saying 'look Tate & Lyle shares have gone up' to prove that buying individual shares is better.

I was looking for unit trust recommendations from 5 years ago, but instead I found this:

http://www.telegraph.co.uk/finance/personalfinance/savings/2947768/Consider-your-options-as-unit-trusts-miss-the-mark.html

Shocking new research shows that nearly three out of four unit trusts in the most popular UK sector failed to match their benchmark index over the last three years.

According to T. Bailey, the Nottingham-based fund manager, only 26 per cent of the 278 unit trusts and open-ended investment companies (Oeics) in the UK All Companies sector outperformed the FTSE All-Share index.


Here's another article that speaks the truth, this one more recent:


http://www.telegraph.co.uk/finance/personalfinance/investing/8767542/Citys-best-kept-secrets-beat-unit-trusts-hands-down.html


They are described as the City's best-kept secret. Even though investment trusts are less popular than unit trusts, the average investment trust has outperformed the average unit trust in every sector except one – Japan – over the past 10 years.


And here's another, 22nd April 2006:

http://www.telegraph.co.uk/finance/personalfinance/investing/2937272/Dont-be-put-off-by-riots-and-rows.html

It lists the following European unit trusts as top performers:

• Merrill Lynch European Dynamic fund
• Neptune European Opportunities fund
• Artemis's European Growth
• Odey Continental European
• Fidelity European
• Jupiter European Special Situations Fund
• JP Morgan Europe

Typical quote:
"Artemis and Fidelity using their European Growth Funds, together with Jupiter and its European Special Situations Fund. Each has provided substantially better returns than most from investment strategies that have achieved below average volatility over the years."

Ok, so let's look at these funds:
Artemis http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=8AEUGT&univ=U
103/111 in 1 year, 91/96 over 3 years

So an absolute stinker

Jupiter Special Situations
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=RWESS&univ=U
23/96 over 3 years - good

Merrill Lynch (BlackRock) European Dynamic
http://citywire.co.uk/fund/blackrock-european-dynamic/c10102?section=money
A good performer.

Odey
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=CGOE&univ=U
88/96 over the last 3 years, another stinker

Next: Fidelity,
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FIF80&univ=U
89/96 over 3 years, 49/111 over 1 year. No value added here.

JP Morgan
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=SPEU&univ=U
81/96 over the last 3 years, also a lame duck

Neptune European Opportunities
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=DJF60&univ=U
10/96 over 3 years, a good performer

So out of 7 tips given 5 years ago, 4 have performed poorly, 3 are good funds, ok not a very good sample size, but it just goes to show that past performance of fund managers does not prove that they are any better than average, and the performance of these tipped funds is no better than you would expect with a pin, plus these pundits are just generating expensive hot air.

It's not that hard for the fund managers to make money - for themselves.

The way they do this is set up a bunch of funds, some will perform well, some poorly, this is basically random noise, the ones that do well will attract more cash, often over a billion pounds, this earns the fund management company a LOT of money, ok that 1.76% TER doesn't all go to them, they have to pay commission to the adviser and fund platform, but even 0.5% of a billion quid still pays a lot of bonuses.... Once the funds have got lots of money invested they just tick over eating up fees (and your investment!) following the benchmark, the funds by this point are basically run by computer and then the Fund Managers marketing team come up with a new idea to keep the managers busy, this attract some more cash and the cycle repeats.

Anyone can mine the stats on shares or funds - none of it will ever prove that a given share or fund will make you money in the future.

The analysis done in the US shows that the fund sector as a whole is essentially parastical and do not add value, but rather destroys it due to high costs and high turnover (and remember, as my example shows, a carefully chosen 'high-performing' fund is probably not going to do any better in future than a randomly chosen one would, in terms of performance relative to its sector).

For the UK I'm not sure that so much fund analysis has been done - but I would have serious doubts about the ability of UK fund managers to outperform given their costs. It's true that funds are as a whole less volatile than shares (and share-like products such as ETFs), but asset allocation has been studied for many decades now and you can achieve the exact same reduced volatility that funds give you simply by balancing your asset classes (of course with funds you are still going to need to balance your investment areas).

The 'outperforming' managers stuff is 95% marketing guff - they stick up a picture of the fund manager and his biography in an attempt to sell a personality rather than a product and to differentiate themselves from their competitors - don't fall for it, you have no idea what's going on behind the scenes and by the time the fund has 'proven' itself it's likely grossly overweight with cash anyway.

Lokolo

darkpool wrote: »

i do listen, it's just your arguments are poor.

say there are 10 shares in a benchmark. the performance of them varies from rubbish to brilliant. but say overall the benchmark goes up 5%. if the shares in the benchmark are owned by unit trusts with annual charges of 3% it means the average UT will return 2%. Agreed?

So how can UTs add value? Of course some of them might return more than 5%, but overall the average return will be far lower than the benchmark.

Virtually all academic evidence suggests that the performance of UTs is down to luck and any outperformance does not last. People are paying good money for not a lot in return.

so why should I invest in something with the odds stacked against me from the very start?

Of course if you have some academic evidence that UT performance is down to skill I might reconsider my opinion, however so far no one has produced any academic evidence......

I cannot believe i am replying to this post. The reason i may well choose an active fund is because maybe i want to take a different approach. Maybe i want to concentrate on different cap size? A tracker on these 10 may not giveme that. Maybe i only want the 5 smallest of these invested. Now if an active manager comes along and says she or he is aiming to provide growth by investing in small and mid cap of this index, well then by golly thats just what iamlooking for!!

As i keep saying, active fund management is needed and is good in some investing methods, whereas trackers are better in other areas, to say anything otherwise makes you ignorant.

You also keep banging on about 3% but post RDR and yet you dont mention tracker funds costs which also include tracking error. Although this may not be as high as active funds its still a cost which you seemed to have not considered.

gadgetmind

Lokolo wrote: »

You also keep banging on about 3%

I think 2% is probably a better figure, but it depends on dealing costs and everything else that isn't in the TER.

Although this may not be as high as active funds its still a cost which you seemed to have not considered.

I've looked closely at TER and tracker error for various trackers. Vanguard charge an up-front fee to cover stamp duty etc. whereas HSBC cover this internally and hence have a greater tracker error. Long-term, Vanguard are the better bet.

Totton

A real shame that this thread provoked some of the personal attacks that it has, but nevertheless thanks to everyone who contributed as I found it very interesting indeed. My take on it is that many of my UT's & OEICS have done very well despite the usually high charges, I am very pleased with most of them. The ones that I have not been pleased with have typically been the ones pushed heavily and which I held for too long in the forlorn hope they would improve.

I don't believe that you can leave OEICS/UT's alone for long term, they need monitoring and evaluating as if they were an equity, perhaps a little less so but I certainly don't see investments as long term holds although am happy to do so in many cases.

My personal preference is for Investment Trusts and ETF's, both because of lower costs and better performance but also because I enjoy being 'involved' with the IT's whereas OEIC managers are more 'distant' from the investor and hardly keep me well informed about the fund in comparison to the IT's.

If you have the time and skill then direct equities and bonds is the way to go, I don't have enough free time for that so I stick to what I feel is more manageable for me. I am though tempted to start splashing 10% into some small cap stuff for 'excitement'.

So, imho you would be wrong to exclude OEICS and UT's from your investment choices based solely on their costs. In these days of zero direct charges through fund supermarkets you can easily buy and sell them cheaper than you can equities etc, they may not be the best in most circumstances but in some cases they may well be worthwhile.

Regards to all,
Mickey

darkpool

gadgetmind wrote: »

I think 2% is probably a better figure, but it depends on dealing costs and everything else that isn't in the TER.

my understanding of UT costs is that the TER is typically 1.6%. The TER doesn't include the auditer fees (typically 0.1/ 0.2). The TER also doesn't include the dealing costs of the fund, the Which report below points to annual dealing costs of 1.8%.

Even if the investor gets the trail commission back he'll be paying 3% a year. If the IFA gets the trail commission the investor is paying nearly 4% of his portfolio each year. Of course the dealing costs will vary, however i believe 1.8% is a good approximate value.

The Financial Services Authority (FSA) carried out a study into this in 2005, and found that an annual turnover rate of 100% (all assets in the portfolio had been bought and sold in one year) would cost you an extra 1.8%. Add that to the average TER of 1.67% and you’re looking at annual costs of over 3%. Of course, the trades taken by the fund could boost your returns by even more and a good manager wouldn't spend money on the trades without thinking it would enhance performance.


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darkpool

Lokolo wrote: »

I cannot believe i am replying to this post. The reason i may well choose an active fund is because maybe i want to take a different approach. Maybe i want to concentrate on different cap size? A tracker on these 10 may not giveme that. Maybe i only want the 5 smallest of these invested. Now if an active manager comes along and says she or he is aiming to provide growth by investing in small and mid cap of this index, well then by golly thats just what iamlooking for!!

As i keep saying, active fund management is needed and is good in some investing methods, whereas trackers are better in other areas, to say anything otherwise makes you ignorant.

You also keep banging on about 3% but post RDR and yet you dont mention tracker funds costs which also include tracking error. Although this may not be as high as active funds its still a cost which you seemed to have not considered.

i can understand that UTs can give exposure to a specific area. what i object to is people saying that UTs deliver any alpha return, the overwhelming evidence is that they don't.

i also object to people saying there is a method of picking the funds that outperform. again the bulk of evidence says this does not happen.

Lokolo

darkpool wrote: »

i can understand that UTs can give exposure to a specific area. what i object to is people saying that UTs deliver any alpha return, the overwhelming evidence is that they don't.

i also object to people saying there is a method of picking the funds that outperform. again the bulk of evidence says this does not happen.

So, you now think that active management funds are useful in some areas?