Passive or Active funds?

PipPip

I have around £250,000 in my work DC pension scheme and contributions of around £27,000 going in each year. I'm 42 and hope to retire aged 65 on a reasonable pension (ideally around £50k pa, I have an investment property with £200k equity in and £80k in ISAs so the pension is not everything). I've been looking through the various funds I can choose from in my employers scheme. I noticed a few things:
- The passive UK equities and Global Equities funds seem to have outperformed their active equivalents in the last 5 years
- The active funds around 0.9% per year annual fees whereas the passive funds charge 0.09%

I last reviewed my fund choices a couple of years ago and split it roughly 50% active, 50% passive and roughly 60:40 UK:Global equities (100% in equities given over 20 years to retirement). Having looked at this again this morning and the fact that the active funds are rated "average" by Morningstar, I am thinking of going 100% passive funds. Is this sensible in the long run or do any experts think this is a mistake?

Lokolo

Are you only planning to invest in the Global and UK funds? What about Asia specific? Emerging Markets? USA?

And what about 10 year performance?

PipPip

Lokolo wrote: »

Are you only planning to invest in the Global and UK funds? What about Asia specific? Emerging Markets? USA?

And what about 10 year performance?

Passive UK fund is 100% UK equities and passive Global Fund is 60% UK and 40% Global which is a broad mix of US, Europe and Asia. Was thinking I might keep 10% of pension in an active emerging markets fund which seems to perform OK despite relatively high charges (1.16% pa) but I am unsure.
My ISAs are in a few riskier funds - Japan, Asia-Pac, Emerging markets etc.

Lokolo

Well tbh there's not much to say. If you are happy with the passive funds in the UK and Global equity funds with the performance then go for it. I can't say whether you are making the right decision as unfortunately, I cannot see into the future.

You have your ISAs for the riskier areas.

I am surprised in the difference in the cost of active vs. passive though.

dunstonh

- The passive UK equities and Global Equities funds seem to have outperformed their active equivalents in the last 5 years

Are you sure they are equivalents. Typically, managed funds have objectives which are different. There is little point having a managed fund with the same objective. This frequently means that managed fund will have a different risk level. This could be lower or higher. Big generalisation but lower risk funds in the same sector tend to underperform in growth periods and out perform in poor periods.

Are you comparing discrete or cumulative performance? Use discrete. Not cumulative. That is one way to see if the differences in volatility risk is paying off or not. Short term cumulative can hide so many things.

You dont mention what the managed funds are. If they are passive managed then you wouldnt want them but if they are active managed and with a different objective to the the tracker then they could offer value.

PipPip

Lokolo wrote: »

Well tbh there's not much to say. If you are happy with the passive funds in the UK and Global equity funds with the performance then go for it. I can't say whether you are making the right decision as unfortunately, I cannot see into the future.

You have your ISAs for the riskier areas.

I am surprised in the difference in the cost of active vs. passive though.

Thanks for this. I was very surprised too. UK active charges 0.93% per year (Morningstar rates it average), UK passive charges 0.09%. Global active funds - two to choose from with 0.69% pa and 0.83% pa (both Morningstar average) while Global equity passive charges 0.09%. Performance summary from the pension provider shows UK passive outperformed the active fund last 5 years while the Global passive was broadly in line with the active funds. Tricky one as past performance is no guarantee of future etc but it does suggest to me that these particular active fund managers are not worth their charges!

PipPip

dunstonh wrote: »

Are you sure they are equivalents. Typically, managed funds have objectives which are different. There is little point having a managed fund with the same objective. This frequently means that managed fund will have a different risk level. This could be lower or higher. Big generalisation but lower risk funds in the same sector tend to underperform in growth periods and out perform in poor periods.

Are you comparing discrete or cumulative performance? Use discrete. Not cumulative. That is one way to see if the differences in volatility risk is paying off or not. Short term cumulative can hide so many things.

You dont mention what the managed funds are. If they are passive managed then you wouldnt want them but if they are active managed and with a different objective to the the tracker then they could offer value.

The active funds aim to outperform their respective indices by 2%. They are: River & Mercantile UK Equity High Alpha and the Global splits 50% Baillie Gifford Long Term Global Growth, 50% Schroder QEP Global Active Value. The passive funds are both Blackrock Aquila funds (60:40 Global Equity and 100% UK Equity). The pension provider shows performance last year for each fund and respective benchmark performance plus the annual performance on each fund (and benchmark) since each fund incepted. Passive UK equity has yielded 5.2% pa since inception whereas active fund generated 4.3% pa. Global active yielded 3.1% pa whereas Global passive yielded 3.3% pa since inception.

jamesd

I'm wondering how you picked those particular managed funds.

dunstonh

Forget inception dates. They wont all be the same. The active funds are clearly at different volatility/risk levels. You can't really compare a passive UK equity fund with a UK High Alpha fund.

River & Mercantile UK Equity High Alpha outperformed the sector in 2009,2010 and 2012. it had a poor 2011 but you would expect that. It's not a stand out fund but it is generally doing what it is meant to and outperforming.

PipPip

jamesd wrote: »

I'm wondering how you picked those particular managed funds.

I didn't pick them, the trustee of the occupational pension scheme picked them. We have a choice of the above mentioned funds plus an active emerging markets fund, a corporate bond fund and a few gilt/money market funds. That's it, 12 funds within the company pension scheme from which we can choose. Or we can go for a lifestyle option which just puts all the money in the passive global equity fund until you near retirement then switches it into a gilt fund.

PipPip

dunstonh wrote: »

Forget inception dates. They wont all be the same. The active funds are clearly at different volatility/risk levels. You can't really compare a passive UK equity fund with a UK High Alpha fund.

River & Mercantile UK Equity High Alpha outperformed the sector in 2009,2010 and 2012. it had a poor 2011 but you would expect that. It's not a stand out fund but it is generally doing what it is meant to and outperforming.

Thanks, this is helpful. I just realised that the inception date small print says its October 2010 for all of the funds so its like for like but a relatively short period. This is the date the pension fund was given to Zurich to administer. All the funds are branded "Zurich Ballie Gifford etc etc" as it obviously has pension fund of fund reinsurance contracts in place with the underlying managed funds.