Professional Finance people no better than amateurs

HelpWhereIcan

darkpool wrote: »

Yes, i don't understand how you can post a long boring thread that bamboozles people with jargon that implies fund management is ok really, when the academics you quote think fund mangement does not cover the costs of the investor.

The pay off for actually reading things is that you may learn something and stop making expensive assumptions

darkpool wrote: »

"Over the longer term, the study of net returns to investors found that a dominant cross section of fund managers lacked "skill sufficient to produce expected returns that cover the costs funds impose on investors," Fama and French noted."

They judge the returns they expect, and express them, in terms of alpha.

In other words they are saying "in our opinion, a fund manager taking this level of risk, investing in these types of assets etc needs to outperform the index by this much for us to believe they have added value".

It is just that, an opinion - one based on research but an opinion nonetheless. Some people would not expect outperformance of the same level, some people would expect more.

Even if you ignore the fact that some/many Trackers will have negative alpha they do not say the Fund Managers do not outperform the index or Trackers in real terms i.e how much your money is worth in £ and p after fees, inflation etc.

I'd be happy saying "I got 92.4 over 3 years compared to the index at 73.7" even if the alpha was negative (-0.77) - as long as the fund fitted the risk I was willing to take. To me, in real terms, that Fund Manager would have earned his fees.

Are you still not sure what alpha is and what it tells us? You should be if you want to keep quoting people who use alpha alone as the basis of their argument.

dunstonh

quite a bold statement, do you have any proof that "buy and hold" is worse than changing UT every couple of years?

Look up modern portfolio theory. Asset allocation is more important than anything else. Someone who is a lazy investor and going 100% into a single tracker fund is gambling on that sector being the best every single year for 20 years. If they build a portfolio of funds (doesnt matter if its tracker, managed or combination) and then leave them to their own devices then the allocations in each sector will go out of sync and no longer be efficient. Plus, the risk profile is likely to increase over time as well and for an inexperienced investor (which lazy investors typically are) they may well make decisions based on behavioural finance when their statement comes in after a drop that is bigger than their tolerance.

Rebalancing keeps the portfolio efficient and within risk profile. And yes, there is evidence for that.

atush

this thread is no so long and so boring I can't rmember if someone has pointed out an Obvious failing of trackers.

Because they track an index, they are forced sellers of shares that drop out so compound losses, and forced buyers at high prices of the ones entering an index. This means by simple maths that they often lag the index.

Not that I am a fan of managed funds, except contrarian ones perhaps. But it is another reason I like boring old ITs as they aren't forced to buy or sell like some UTs and Oeics are.

MrMalkin

atush wrote: »

Because they track an index, they are forced sellers of shares that drop out so compound losses, and forced buyers at high prices of the ones entering an index. This means by simple maths that they often lag the index.

Which is why it may better to go with a whole-of-market tracker like the All-Share than something like a FTSE-100 tracker. Then you don't have to worry about companies moving past arbitrary size criteria, you just get the effect of newly listed companies or bankruptcies.

Or, you can mix and match large/medium/small cap trackers to mitigate the effects.

psychic_teabag

atush wrote: »

Because they track an index, they are forced sellers of shares that drop out so compound losses, and forced buyers at high prices of the ones entering an index. This means by simple maths that they often lag the index.

If the index covers a large enough market, wouldn't it buy the shares when they're still relatively small ? And on the way down, by the time they've fallen out of the index, they're back to being a tiny part of the index anyway.

darkpool

HelpWhereIcan wrote: »

In other words they are saying "in our opinion, a fund manager taking this level of risk, investing in these types of assets etc needs to outperform the index by this much for us to believe they have added value".

No,what they mean by alpha is a return that beats the index after costs.

I've asked before, apart from cost how doyou pick funds?

"For fund investors the simulation results are disheartening. When α is estimated on net returns to investors, the cross-section of precision-adjusted α estimates, t(α), suggests that few active funds produce benchmark adjusted expected returns that cover their costs."

darkpool

cloud_dog wrote: »

The problem is that darkpoo has a scotoma when it comes to investments. He is very much blinkered in to his one and only obsessive thought that anything other than a tracker is bad.

ahhh, always good to have someone new on the thread!

I have no trackers, only direct shareholdings

cloud_dog

darkpool wrote: »

I have no trackers, only direct shareholdings

But thats not what you're arguing for so......... nice post but mute point.

qpop

So darkpool doesn't believe that professional investerscan beat the market, but he believes that he can...?

At this point, just about any further argument put forward is invalidated, right?

JamesU

qpop wrote: »

So darkpool doesn't believe that professional investerscan beat the market, but he believes that he can...?

At this point, just about any further argument put forward is invalidated, right?

Wrong, because you have not defined what you mean by a professional investor.

JamesU