Professional Finance people no better than amateurs

JamesU

Linton wrote: »

I have yet to see any UK evidence that trackers even in mature markets outperform equivalent managed funds. What evidence I have seen seems to indicate that managed funds perform on average much the same as trackers after fees have been taken - ie the managers do well enough on average to pay their own fees. That is what the 10 year performance comparison would seem to indicate. If you have some different evidence I would be interested to see it.
The figures are for 1 year and 3 year volatilities, performance is over 5 years.

Scot Widow AllShare (Best performing tracker): 17.0/17.96
MFM Slater Growth (Best performing managed fund): 14.23/17.6
Liontrust Special Sit (2nd best performing fund): 13.04/13.53
Baillie Giff Equity (1st quartile fund): 18.25/16.7
Investec UYK Alpha (Median fund): 18.98/18.26
M&S Select portfolio (3rd quartile fund): 16.5/17.26
Manek Growth (Worst performing fund):19.26/20.25

Linton, I have put together a plot and data from Trustnet based on your examples i.e. top performing fund, lowest performing fund, your "best" SW tracker. I have also added the UT UK all companies sector fund average and HSBC FTSE allshare as a representative tracker that is familiar.



As far as I can see the conclusion is that the SW tracker performs better than the UT sector average over 5 and 10yrs. The HSBC FTSE allshare tracker performs better than the UT sector average over 5 yrs, but not 10yrs (the difference in performance here most likely due to the efffect of the reduction in the annual cost of the tracker in the last five years).

The only conclusion I can reach is that a FTSE allshare tracker performs better than the average of the UT UK all companies sector based on the cumulative performance data and, as it was not possible five years ago to predict whether to buy the top performing fund or the bottom performing fund, it is more compelling to buy a tracker instead, as this performs as well as, or above the average for that UT sector.

If I have overlooked something, let me know and I can change it.

JamesU

gadgetmind

Linton wrote: »

What evidence I have seen seems to indicate that managed funds perform on average much the same as trackers after fees have been taken

On average, they underperform by the magnitude of their fees. Any other outcome is mathematically impossible.

Of course, you might be lucky and get a fund that overperforms over the long term, and perhaps even realise this gain by having the confidence to stick with it during the inevitable short-term periods of underperformance, but more likely you'll end up with a dog.

So, you instead buy a few funds, and end up with a high-fee closet tracker.

BestInvest have just published their spring 2012 "Spot the dog" article on funds that have underperformed their index by >10% for each of the last three years. There are a whole load of them including many big names.

psychic_teabag

gadgetmind wrote: »

On average, they underperform by the magnitude of their fees. Any other outcome is mathematically impossible.

A followup argument is that it's easy to pick out a group of those managed funds which consistently underperform the market (those run by banks and things) and so the average of the remaining must be above the average, before fees. You might still pick one which which will underperform, but the odds are now in your favour ; picking a selection should give you the average of that better-than-average return.

But above-average before fees does not necessarily mean above-average after fees.

gadgetmind

psychic_teabag wrote: »

A followup argument is that it's easy to pick out a group of those managed funds which consistently underperform the market (those run by banks and things)

So, funds from M&G, Marlborough, AXA, L&G, Jupiter, Neptune, Old Mutal and Henderson would be unlikely to underperform?

If only it was that simple!

HelpWhereIcan

my my, we have been busy while I've been away - seems daft to go back to this so far down the line but ...

darkpool wrote: »

sorry, i just don't get your points about nominal and real returns. You seem to suggest we should just ignore inflation when looking at returns?

Not at all, just a case of ensuring some balance is there i.e. 2.5% out of 5% sounds much more dramatic than 2.5% out of 8% - especially if you try to claim Direct Investment into Trackers would be 0% out of 5%. (the figure is likely to be 1% plus by the way - trackers have PTR as well)

darkpool wrote: »

sorry, that answer is not good enough to convince me to start using an IFA. It has a fair sprinkling of technical words, like "synthetic ETFs" and "rebalancing" but you've not convinced me that the Fund Industry/ IFAs provide a worthwhile service for the fees they charge.

Sorry to confuse you there. In my defence I thought you were an experienced investor who knew the investment market inside out.

I thought someone who invested using Trackers and took Tim Hales' advice about asset allocation etc would know exactly what an ETF is and what rebalancing is. Just as well I didn't mention VCTs and EIS bearing in mind your family's position.

darkpool wrote: »

LOL!!! I would love to hear what you have to say about derivatives, I bet I know ten times as much as you!!!

sigh! and I bet your dad's bigger than mine too!!!

darkpool wrote: »

As an aside, perhaps you could direct me to any IFA forum websites? You IFAs seem happy posting on a consumer website telling everyone what a good job you do, I think it might be fun posting on an IFA website saying what I think of IFAs.

It might. Unfortunately for you they expect people to answer as well as ask questions. A little like here really (not that it's ever bothered you).

How about volunteering to take part in my experiment? Open yourself to peer review. That way you can show us all how clever you are without having to rely on hindsight and polemic

HelpWhereIcan

Anyway, to try and rejoin the debate in a constructive way, as I mentioned to darkpool

HelpWhereIcan wrote: »

Above all I would remind you not to prejudge where I stand on the passive/active argument and that the price you pay for investing 'direct' into some funds using the likes of HL etc is not neccesarily less or even the same as it would be using me and the explicit charging platforms I use.

I would suspect that most of the IFAs here do not see themselves as Investment Fund Managers - that is quite different to the Financial Planning role we do.

I am actually persuaded by much of the passive argument and have read and agree with a lot that Tim Hale writes - as, I believe, do many of the IFAs here.

I tend to favour a Core-Satellite approach where appropriate as it can indeed help keep costs down. That does not mean I accept active funds do not have an important role to play.

I recently found

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869748

False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas

This paper uses a new approach to determine the fraction of truly skilled managers among the universe of U.S. domestic-equity mutual funds over the 1975 to 2006 period.

First, we find that the majority of funds (75.4%) pick stocks well enough to cover their trading costs and other expenses, producing a zero alpha, consistent with the equilibrium model of Berk and Green (2004).

Further, we find a significant proportion of skilled (positive alpha) funds prior to 1995, but almost none by 2006, accompanied by a large increase in unskilled (negative alpha) fund managers—due both to a large reduction in the proportion of fund managers with stockpicking skills and to a persistent level of expenses that exceed the value generated by these managers. Finally, we show that controlling for false discoveries substantially improves the ability to find funds with persistent performance.

Now there's an academic study. It is plainly pro passive and based on the US market (which has different taxation between the two types of fund IIRC) but interesting all the same.
It also quotes a couple which support Active Management. Unfortunately I have not had chance to look them up yet but will do.

A little more grown up than some of what we tend to see in this thread and evidence that there is an argument on both sides and supportive of the likes of Dunstonh and others who try to put both sides forward.

darkpool

HelpWhereIcan wrote: »

my my, we have been busy while I've been away - seems daft to go back to this so far down the line but ...

Not at all, just a case of ensuring some balance is there i.e. 2.5% out of 5% sounds much more dramatic than 2.5% out of 8% - especially if you try to claim Direct Investment into Trackers would be 0% out of 5%. (the figure is likely to be 1% plus by the way - trackers have PTR as well)

Sorry to confuse you there. In my defence I thought you were an experienced investor who knew the investment market inside out.

I thought someone who invested using Trackers and took Tim Hales' advice about asset allocation etc would know exactly what an ETF is and what rebalancing is. Just as well I didn't mention VCTs and EIS bearing in mind your family's position.

sigh! and I bet your dad's bigger than mine too!!!

It might. Unfortunately for you they expect people to answer as well as ask questions. A little like here really (not that it's ever bothered you).

but if the nominal return is 8% and inflation is 3% the real return is still 5%. So 2.5% annual fees still means half the real return is getting swallowed in costs. To me that is a dramatic reduction in return.

To be fair I do know what an ETF is, I also know what VCTs and EISs are. It seems IFAs here like using acronym to make them appear smart.

OK, since you like answering questions ..... why do so many IFAs want to post on a consumer website? There have been 6 so far on this thread, plus i wouldn't be surprised if other posters were related to an IFA or worked in the financial industry.

psychic_teabag

HelpWhereIcan wrote: »

Not at all, just a case of ensuring some balance is there i.e. 2.5% out of 5% sounds much more dramatic than 2.5% out of 8% - especially if you try to claim Direct Investment into Trackers would be 0% out of 5%. (the figure is likely to be 1% plus by the way - trackers have PTR as well)

Sorry, I'm with darkpool on this one. Yes, 2.5% is less dramatic if expressed out of 8% rather than 5%, but it's still 2.5% off your return.

Could do it that way round if you prefer : 2.5% off 8% leaves 5.5% absolute return, but now the inflation of 3% is taking a more dramatic munch. You still end up with 2.5% which ever way round you perform the subtraction.

[apologies if I've misunderstood usage of 'nominal' and 'real' return]

atush

OK, since you like answering questions ..... why do so many IFAs want to post on a consumer website?

I would imagine (but don't know because I am not one nor do I know one) because of the large lack of knowledge of some of the posters here.

But to ask them to answer more questions when you only ask and never answer yourself seems a bit odd to me.

Lokolo

atush wrote: »

I would imagine (but don't know because I am not one nor do I know one) because of the large lack of knowledge of some of the posters here.

But to ask them to answer more questions when you only ask and never answer yourself seems a bit odd to me.

and because it's a slow day at work....

The day I come to work and find this site is blocked.... oh heavens, no idea what I'd do!