Professional Finance people no better than amateurs

darkpool

HelpWhereIcan wrote: »

Alpha is just one thing, charges is another, beta another, volatility another, risk rating, fund manager history etc etc

well thanks very much for another very long post with multiple links that no one can understand.

earlier on we all agreed that costs were one way of filtering out funds. what are the other methods?

it seems to me the only way to filter out funds is to discard the high cost ones, so the logical conclusion is to pick trackers?

"Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile (the 20pc of funds with the lowest charges) produced higher total returns than the most expensive quintile."

darkpool

HelpWhereIcan wrote: »

Many studies use a calculation of alpha called the Unconditional Fama French model.

this is what fama and french have to say about alpha.

"In fact, our results say that for most if not all funds, trueα in net returns is negative."

well who would have though that.


"Thus, before expenses, there is no evidence that total wealth invested in active funds gets any benefits or suffers any losses from active management."

so after expenses active management destroys value?


"Fund management companies commonly provide seed money to new funds to develop a return history. Incubation bias arises because funds typically open to the public – and their pre-release returns are included in mutual fund databases – only if the returns turn out to be attractive."

what a misleading industry fund management is!!!

http://www.indexuniverse.com/sections/features/5678-new-fama-french-study-puts-managers-under-microscope.html

darkpool

cloud_dog wrote: »

Darkpoo, the reason I'm so enthralled by the question is that......... You have hooked on to the publication figure of 1.9% Alpha, repeatedly using it to blindly show it reinforces your position.

And yet, significantly, when someone posts a question which may show that an alpha value may not be as absolute as you desperately want it to be you squirm around with your typical evasive bluster.

So, please answer the question..........

Or at least have the ba**s to admit that an alpha may not necessarily be representative of absolute performance.

Come on give a little bit back to the forum.

a lot of people here seem to have me on "ignore", perhaps you would be kind enough to join them?

rockitup

Money_Saving_Dude wrote: »

ok, so I happen at the moment to be re-reading Smarter Investing (Tim Hale). He repeatedly and comprehensively posits that active investment is for mugs -- if you are in it for 20 years. So 'lazy' investing is both inaccurate and pejorative; you could just as equally use the adjective 'smarter.'

The evidence -- at least as presented by Tim Hale -- is over 20 years (indeed over much less than this) active investors don't beat passive ones.

So my view is simple -- throw away your money if you wish. But if you want to make the most out of your money, use only trackers, and use them for 20 years.

Well Tim Hale can't speak for every investor, and I for one am glad I have not left the money I began (serious investing) with in a Tracker fund since 1998. Started off with £3k into Split Capital Investment Trust warrants which were highly geared and have since used leverage also to buy other assets and one huge physical forex trade. The proceeds from £3k originally invested enabled early retirement 10 years later. A tracker would not have made that possible.

I am not against trackers, they have their place in some peoples portfolios (and I use 2x and 3x leveraged tracker/index ETF's) but they are not the be all and end all of investing.

I admit having a huge amount of luck with using leverage both on equities and property, but I have avoided the two major drops in equities in last 10 years... that was the luckiest of all. If invested in trackers I would be lucky to be sitting on £6k at the most now

What I did was active investing, moving from equities to property, back to equities, then to cash for FX trade then back to equities. A lot of reading, studying charts and taking some chances has done me no harm

EDIT: And I paid a lot in charges on various assets over the years

brasso

rockitup wrote: »

I admit having a huge amount of luck with using leverage both on equities and property, but I have avoided the two major drops in equities in last 10 years... that was the luckiest of all. If invested in trackers I would be lucky to be sitting on £6k at the most now

Hale totally accepts that in any sample of investors and fund managers there will be small minorities who enjoy good luck. But it's not the basis of a long term investment strategy.

Also, there are a tiny minority of fund managers who have a genuine insight that others have missed (Bolton, Woodford, Buffet et al). The difficulty is identifying these people early in their careers, and then having the nerve to stick with them through the bad patches.

The simple fact is that a big majority of investors and funds don't beat the market over an extended period, so it's rational to invest in a strategy that is at least guaranteed to be in the top quartile of returns, once (lack of) fees are factored in.

dunstonh

ok, so I happen at the moment to be re-reading Smarter Investing (Tim Hale). He repeatedly and comprehensively posits that active investment is for mugs -- if you are in it for 20 years. So 'lazy' investing is both inaccurate and pejorative; you could just as equally use the adjective 'smarter.'

lazy investing is bad investing. You are almost certainly going to end up with lower returns over the long term if you are a lazy investor.

The evidence -- at least as presented by Tim Hale -- is over 20 years (indeed over much less than this) active investors don't beat passive ones.

he is entitled to his opinion but there is absolutely no way he could have evidence to support that. An active investor will flit between investments over time and will not stay in one fund. He compares them staying in one fund. If you are going to stay in one fund then that makes you a lazy investor and you would be better off either using tracker funds or a portfolio fund.

HelpWhereIcan

darkpool wrote: »

this is what fama and french have to say about alpha.

"In fact, our results say that for most if not all funds, trueα in net returns is negative."

well who would have though that.


"Thus, before expenses, there is no evidence that total wealth invested in active funds gets any benefits or suffers any losses from active management."

so after expenses active management destroys value?

So, still sticking ridgidly to the belief that a negative or zero α (alpha) means that a fund returns less than the benchmark? Is there something you do not understand?

In that case, do you at least accept that Tracker funds can have negative alpha too?

That way we can find out why you would focus on alpha alone and never look at the real return. Commentary based on real funds in the real world help.

darkpool wrote: »

"Fund management companies commonly provide seed money to new funds to develop a return history. Incubation bias arises because funds typically open to the public – and their pre-release returns are included in mutual fund databases – only if the returns turn out to be attractive."

darkpool wrote: »

Again, in isolation not untrue, but not a reason to ignore active funds (by the way, you do know that - like Unit Trust - 'mutual fund' is a term that includes both active and passive funds.

Passive funds also have seed money and the statement applies to them equally).

That is the reason I chose to look at 3 funds that all have some history.

The Standard Life Fund was launched in 1992

HSBC 1990

Schroder 1970

So yes, one of the other things you look at is how long the fund has been going.

Another one some consider is the size of the fund - can you google why that is?

qpop

There are a couple of major flaws in the academic arguments put forward by passive investors.

The first is that the passive investing concept is completely reliant on active investors. What the computer models are achieving is a copy of the "average" investor in a market; if it was all a computer model the system just wouldn't work.

The second is that the arguments used in the research are flawed; I haven't read any research that takes a look at above-average funds over say, 3-5 years, and then compared their long term performance to trackers. The research focuses on the whole market of funds (understandably from an academic perspective, but completely immaterial from an investment point of view). What would be a far better comparison would be to take the universe of funds with 3 and 5 year total returns that are above their benchmarks, and compare their performance over time with trackers.

And finally, the crux of the argument is; would you like a guaranteed mediocre return (in respect of the market as a whole), or a potentially increased (or decreased) return?

To be clear, my views don't fall on one side or the other regarding active/passive investing, and contrary to darkpool et al's beliefs, a well-informed IFA is capable of recommending either, as the advice fee needn't be paid directly from the product's trail.

HelpWhereIcan

brasso wrote: »

Also, there are a tiny minority of fund managers who have a genuine insight that others have missed (Bolton, Woodford, Buffet et al). The difficulty is identifying these people early in their careers, and then having the nerve to stick with them through the bad patches.

A good point. This is the reason some people will follow Fund Managers rather than funds. You have to look at the fund's remit and investment strategy to ensure it is consistent with the past - and your own investment philosophy - but the option remains.

The principle of sticking with it also applies to Passive Investment. Hale does one of the best discussions of market timing and explains the nerve that is needed to stick with falling trackers - especially when markets are falling and there is a temptation to switch to cash or active management that may seem to be mitigating the drops better.

brasso wrote: »

The simple fact is that a big majority of investors and funds don't beat the market over an extended period, so it's rational to invest in a strategy that is at least guaranteed to be in the top quartile of returns, once (lack of) fees are factored in.

I would suggest that most trackers end up in the 2nd quartile with some even 3rd - by their nature of being close to the benchmark they will stay between the halfway point and just above.

This is where the fees argument comes in - not all Active Funds are expensive and not all Trackers are cheap (again the discussion about real costs, tracking error, portfolio turnover rate etc comes in)

MrMalkin

qpop wrote: »

The first is that the passive investing concept is completely reliant on active investors. What the computer models are achieving is a copy of the "average" investor in a market; if it was all a computer model the system just wouldn't work.

That really isn't a flaw of passive investing. Nobody is (or should be) arguing that everyone should be a passive investor, just that most retail level investors, i.e. the bread and butter of this website, will find that passive investing is probably their best shot at success (or avoiding failure), especially during the accumulation phase of an investment career.

There will always be market movements in terms of day traders, corporate share actions, hedge funds, and all sorts of others. Even passive investors will buy and sell shares as they rebalance portfolios. Plus as posters like Linton like to point out, there are investment goals that don't really work with passive vehicles - dividend yield seekers for example. They will all continue to drive the markets.