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Because the fund manager can't do anything about Systematic Risk (inflation, interest rates, natural disasters) which invariably have quite a large impact over shorter time periods.
Let's take (as an example) a Japanese Equity fund manager who went overweight (against the index) into Nuclear energy because it provided a good stable dividend.
He may have beaten the index for the last 5 years but then Fukishima happened and his fund suffered more than the index. This wasn't a risk he could mitigate but surely the important figure is the cumulative performance figure?
Taking the example of the Japanese equity fund manager the benchmark index would be the Japanese equity market. I would expect the manager to beat that index because for both the managed fund and the underlying index there is the same systematic risk. So the question to me seems the same, why the manager does not beat the index every year?
JamesU0 -
gadgetmind wrote: »Only 10 years? I'm more concerned about timescales well beyond that, so 20-30 years.
Not only 10 years - it was an example.0 -
Taking the example of the Japanese equity fund manager the benchmark index would be the Japanese equity market. I would expect the manager to beat that index because for both the managed fund and the underlying index there is the same systematic risk. So the question to me seems the same, why the manager does not beat the index every year?
JamesU
JamesU
Because in that example, the fund manager is over-exposed to the nuclear sector. They have more exposure than the underlying index.0 -
gadgetmind wrote: »Yes, but the cumulative performance versus the index over the *next* 20 to 30 years.
All that history tells us is that history tells us very little.
Like passive fund management outperforming active fund management?
Don't get me wrong, I do use passives (mainly in North America) but I don't think the other developed markets are as efficient as the US and this creates opportunities for active fund managers.0 -
Like passive fund management outperforming active fund management?
We have very strong evidence of this from the US (which is 60% of global markets) and good evidence from elsewhere.
If the high-fee active funds want our money (and lots of it) then I think they need to provide evidence (and lots of it) and rear view mirror cherry-picked "evidence" need not apply.this creates opportunities for active fund managers.
In a few niche areas, maybe. In other areas, it's just an opportunity to live life large by top slicing the pension savings of many people who really can't afford to have 2%-3% of their pots abstracted every year for decade after decade.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
The trick to checking qualifications is to put them into google and put "pass mark" afterwards.Investment Management Certificate (IMC)
Entry level, 65% pass mark.Investment Principles, Markets and Risk (J06)
55% nominal pass mark.Investment Planning (AF4)
55% pass mark.
I guess passing these exams means that you're right over half the time, which is better than nothing.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
Because in that example, the fund manager is over-exposed to the nuclear sector. They have more exposure than the underlying index.
That makes sense, over-exposure to allow for higher performance relative to the index introduces systemic risk in the process. So in effect, the actively managed fund is actually a higher risk investment relative to the underlying benchmark index?
JamesU0 -
gadgetmind wrote: »We have very strong evidence of this from the US (which is 60% of global markets) and good evidence from elsewhere.
But as you said"All that history tells us is that history tells us very little."
Is it time to re-think the Active v Passive debate?gadgetmind wrote: »If the high-fee active funds want our money (and lots of it) then I think they need to provide evidence (and lots of it) and rear view mirror cherry-picked "evidence" need not apply.
One thing to remember is that many active funds are closet trackers - they are effectively active trackers and not true active funds. You take these out and active funds have actually performed better than passives over the medium to long term.
Read the Goldman Sachs article above - you may find some of the results surprising.0
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