Professional Finance people no better than amateurs

qpop

JamesU wrote: »

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

JamesU

Well, at this stage it becomes apparent that his arguments are entirely hinged on cost.

He obviously must believe active management is more effective than tracking an index because his investments are in individual shareholdings, yet he thinks that active fund managers are the scum of the earth.

I would hasten to point out that I asked darkpool some time ago to provide any evidence whatsoever that his individual shareholdings have outperformed managed funds, and never heard a whisper in response.

Sadly I fear it is a case of ego ahead of ability.

psychic_teabag

They need not be entirely incompatible : perhaps he believes that active management can beat the index, but not to an extent that justifies the management charges. Hmm, though that said, I think he has said that active funds underperform the index by the full amount of the annual charges, so no amount of charge can be justified - not even dealing fees.

JamesU

qpop wrote: »

Well, at this stage it becomes apparent that his arguments are entirely hinged on cost.

The published evidence discussed earlier on the absence of skilled fund managers was reported net of costs, and the arguments put forward still seem to be valid.

JamesU

qpop

JamesU wrote: »

The published evidence discussed earlier on the absence of skilled fund managers was reported net of costs, and the arguments put forward still seem to be valid.

JamesU

I'm not talking about the general debate here, more a single individual's input.

I will also repost my thoughts on the discussion for your benefit, regarding the academic research produced:

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.

jem16

darkpool wrote: »

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

So a negative alpha means that the fund doesn't beat the index after costs according to what you are saying.

Please explain the following then.

Schroder Recovery

Alpha over 3 years = -0.77 ( ie negative 0.77)

Index = FTSE All Share = 75.0% ( 3 yrs)
Index = UK All Companies = 73.7% (3yrs)

Schroder Recover = 91.8% (3yrs)

All data from Trustnet which shows returns after all costs.

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=SCREC&univ=O

fairleads

dunstonh wrote: »

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.

Its been a long and winding road but we've now reached a positive conclusion, or rather the end of the beginning, because now we need to determine our asset allocation.

brasso

dunstonh wrote: »

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.

For long term investing, a deliberate decision not to over-tinker is not "lazy investing", but a strategy.

The strategy is built on a number of assumptions and beliefs e.g.

• that trying to time the market is likely to be unsuccessful over a long period
• that statistically, only a minority of investors and fund managers will beat the market because "the market" benchmarks are, by definition, an aggregate of all activity
• that we are very poor judges of our own abilities in relation to the norm. For instance, more than 80% of drivers regard themselves as "a better driver than the average". Statistically impossible of course
• Past performance is not a reliable pointer to future performance
• Fund managers are actually not that good. We lionise the few, but the majority will struggle to make an impression
• Charges for active maangement, when compounded and assessed over a long period, are frankly savage -- and can have a very significant impact on returns

And there's more. Much more.

dunstonh wrote: »

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.

Ah, I've just realised. You've not actually read the book.

brasso

Just a final point from me (I hope) about some of the thinking behind a determinedly passive investment strategy, and the Tim Hale book.

There have been more than a couple of posts claiming that passive investors - and presumably Hale - do not acknowledge that some fund managers regularly and consistently beat the market.

This isn't true.

Hale absolutely accepts that some managers are very good in relation to the norm. He talks about a number of them in some detail, and it is clear that he holds these people in some awe.

What he says, however, is that it is virtually impossible to identify these genuine stars early enough in a long term investment period (say 20 years +) to actually benefit fully from them.

It's possible for a fund manager to be lucky in his/her drive to perform above the market average. Take a hundred people at random. They all toss a coin. Roughly 50 will toss a head. Those 50 toss again, and 25 now toss a head. Again, and we are left with 12, then 6, then 3 who are still tossing heads. Same with fund managers. Even after 5 or 6 years there would be 3% who would seem astonishingly talented but in fact would be just being randomly fortunate.

The problem is that there are some fund managers who really are talented, and these are also showing market-beating returns after 6 years. How does the man int he street tell them apart?

Hale reckons the 25 years of Anthony Bolton's career, in which he achieved an annual average of 20% real returns, is a pretty good basis for declaring him a genuine talent. Trouble is that the average fund manager duration is a mere 3 years.

To the poster who complained that we shouldn't be aiming for the "mediocrity" guaranteed by trackers, Hale's position would be that aiming to match the market would provide real returns that are in excess of those achieved by the average investor, and that therefore you are statistically safer to go for a range of trackers diversified to match your risk tolerance.

The trouble is (and Hale talks about this particularly male characteristic) our instincts are to avoid this safe approach. It was nicely exemplified by the poster choosing to use the word "mediocrity" rather than "average".

I'm not a Hale zealot, but I read his book recently, and I have to say that it is beautifully argued and very well written. For those who haven't read it, particularly IFAs, I warmly recommend that this £10-ish purchase might be one of the most thought-provoking and valuable investments you ever make.

darkpool

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?

no i don't think i can beat the market year in year out.

but with direct holdings the costs are miniscule, something like £8 a quarter in my nominee account. i also have the advantage that i don't hold some of the dodgier companies on the ftse 100.

darkpool

it's strange how quite a few of the "amateur" investors here seem to follow the arguments regarding the value (or lack) of active fund management. it seems to be the IFAs that struggle to get the concept that active managment destroys value.

strange that isn't it?

i think on this thread a lot of well researched evidence has been presented that shows active management just doesn't work. perhaps the IFAs could post the evidence that explains why they believe in active management so much?