Drop in well paid using IFA's

TH1878

JamesU wrote: »

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?

JamesU

In this situation, yes.

The manager may have gone overweight in nuclear but underweight in Oil & Gas - he would have less exposure to risk in this area.

gadgetmind

JamesU wrote: »

So in effect, the actively managed fund is actually a higher risk investment relative to the underlying benchmark index?

Some are, some aren't. What's important is that they deliver alpha, which is risk adjusted return. If a fund manager takes on more risk, you expect more long term return (otherwise why not hold lower volatility assets?) but most don't deliver this other than for brief periods.

There are many ways to asses this return, which mostly come under the umbrella of "alpha", but expect to see "sharpe ratio", "jensen's alpha", and "treynor ratios" mentioned.

Those who don't understand alpha are not in a position to select funds in which to invest. I do understand it (and can RAP with the best of them) but choose to invest in very few funds, and even then with rather mixed feelings.

gadgetmind

TH1878 wrote: »

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.

So, if you remove the funds that have historically underperformed, you're left with those that haven't.

What a neat trick.

So, all we need to do now is know which high-fee funds will/won't under-perform in the future.

If only we'd know that earlier!

Read the Goldman Sachs article above - you may find some of the results surprising.

Sorry, but I don't believe a word those scumbags say, and neither should you.

<edit>

Ultimate weasel words: "we believe" - how many times do these two words appear together in that document? What do they actually mean?

JamesU

TH1878 wrote: »

In this situation, yes.
The manager may have gone overweight in nuclear but underweight in Oil & Gas - he would have less exposure to risk in this area.

But then in all situations actively managed funds must be higher risk relative to their underlying indices surely? Because one would assume any deviation of an actively managed fund from the underlying benchmark index would increase the systemic risk relative to that index, and that this is a necessary requirement for the actively managed fund to obtain a higher performance (or possible under-performance) relative to the benchmark index.

JamesU

TH1878

gadgetmind wrote: »

The trick to checking qualifications is to put them into google and put "pass mark" afterwards.

Entry level, 65% pass mark.

55% nominal pass mark.

55% pass mark.

I guess passing these exams means that you're right over half the time, which is better than nothing.

I started replying to this with a bit of a rant but then thought that I'd sit back, take a breath and realised that you're probably one of those people who failed in education so has to denigrate other people's academic achievements.

So I'm laying a challenge down to you - sit and pass any of them if they're so easy. We could put a small bet on it?

As it happens, I got a distinction in both J06 & AF4 (>80%) but perhaps you should look at the number of entrants who sit them and actually attain the "easy" pass mark:

J06 - 49.40% (2010 - when I sat it) - This is a Diploma Level exam
AF4 - 60.65% (2011 - when I sat it) - This is a Chartered Level exam

http://www.thepfs.org/pages/professionaldevelopment/passrates.aspx

TH1878

JamesU wrote: »

But then in all situations actively managed funds must be higher risk relative to their underlying indices surely? Because one would assume any deviation of an actively managed fund from the underlying benchmark index would increase the systemic risk relative to that index, and that this is a necessary requirement for the actively managed fund to obtain a higher performance (or possible under-performance) relative to the benchmark index.

JamesU

Not necessarily. Systematic risk is just one reason why it's difficult for an Active fund manager to beat the index every year.

Some stocks are naturally more defensive (e.g Tobacco) and some are more aggressive (Mining). By taking a position towards one or the other, the fund manager can make the Beta (volatility) in the fund lower or higher.

Funds with a lower Beta than the benchmark will typically do worse in upwards markets and better in downwards markets. Higher Beta does better in upwards markets and worse in downwards markets.

Alpha is the additional performance that a fund manager adds in excess of the Beta. You want to see a high alpha - a negative alpha suggests the fund manager has underperformed.

Information Ratio is a better measure of Risk-Adjusted Return though

IronWolf

There are clearly some people that can beat the index, consistently over long time periods, e.g. Warren Buffett, Walter Schloss etc.

And anyone can invest in Buffetts 'fund' as its listed in the S&P500.

But I wouldn't trust any of the typical 'fund managers' to do it, the industry is too short term focussed to really beat the index.

gadgetmind

IronWolf wrote: »

There are clearly some people that can beat the index, consistently over long time periods, e.g. Warren Buffett, Walter Schloss etc.

True, and there are others, but it's not easy (understatement!) to spot them in advance, and they tend to have a style that only shows its real merit over very long terms.

Linton

JamesU wrote: »

But then in all situations actively managed funds must be higher risk relative to their underlying indices surely? Because one would assume any deviation of an actively managed fund from the underlying benchmark index would increase the systemic risk relative to that index, and that this is a necessary requirement for the actively managed fund to obtain a higher performance (or possible under-performance) relative to the benchmark index.

JamesU

What if the Index is unbalanced relative to the global economy? An Index, for example the FTSE100, can have an usually high systemic risk if its constituents are overweight in particular sectors that are volatile at the global level.

A fund manager can reduce the risk simply by having a relatively lower holding investment in such sectors.

darkpool

TH1878 wrote: »

IAs it happens, I got a distinction in both J06 & AF4 (>80%) but perhaps you should look at the number of entrants who sit them and actually attain the "easy" pass mark:

J06 - 49.40% (2010 - when I sat it) - This is a Diploma Level exam
AF4 - 60.65% (2011 - when I sat it) - This is a Chartered Level exam

ahhh, just what we need on this board. another IFA to try and convince people that IFAs are OK chaps that know their stuff.

how come so many IFAs post here? no other board seems to have professionals posting on it.

if you look through this thread it's the IFAs saying what a good job they do, and on the other side it's private individuals saying what a bad job IFAs do.

does that not tell you something?