Tim Hale - Smarter Investing

guymo

There's a graph of the distribution of the performance of actively managed funds in this article:

http://www.travismorien.com/indexactive.htm

It's a pretty strong argument in favour of indexing: if you aim to achieve market returns minus 1%, you need either a decent tracker fund, or one of the top 40% or so of active funds.

This is the kind of thing I've been after: not "how many active funds beat the market" but "how many beat a tracker".

It's also worth noticing that the curve is pretty gentle, so picking an active fund at random is not that likely to be a catastrophe; but there is survivor bias in there, so who knows? I still want to see a proper study

Sobryma

To index or not to index that is the question....................the following from Vanguard concludes a mix although avoids too exact a spec

"These analyses of U.S. and European funds demonstrate the asset allocation advantages to an investor of combining index and actively
managed funds. They also further the rationale for an overall core-satellite approach, comprising index funds for the core and actively managed funds as satellites."

https://global.vanguard.com/international/common/pdf/INTAPR.pdf

Sobryma

An issue I have with Index Trackers is I struggle to find real world comparable performance where there is a common playing field.

Admittedly for relatively short term performance periods but Architas, HSBC, Close, Scot Eq Core passive multi asset portfolios all under perform the same managers active equivalent.

Sobryma

But on the other hand, 90% of DFM have failed to meet APCIMS benchmarks

http://www.ftadviser.com/2013/11/25/investments/discretionary-management/discretionary-managers-fail-to-beat-arc-test-benchmark-QaBgik11Vi2eGIn8xKlK9H/article.html

bowlhead99

Sobryma wrote: »

To index or not to index that is the question....................the following from Vanguard concludes a mix although avoids too exact a spec

"These analyses of U.S. and European funds demonstrate the asset allocation advantages to an investor of combining index and actively
managed funds. They also further the rationale for an overall core-satellite approach, comprising index funds for the core and actively managed funds as satellites."

https://global.vanguard.com/international/common/pdf/INTAPR.pdf

It's interesting that Vanguard effectively agree with many investors and, I would suspect, IFAs, who say that you can have index at the core for general broad exposure to a sector, but the best advantages are found when mixed with "satellite" funds or "spokes around the hub" doing the actual work around the side that makes the difference in tailoring your portfolio to a particular preference, risk attitude etc, which is useful in constructing a properly balanced portfolio.

Blackrock, in their promotional material for intermediaries, about their Consensus fund range (similar to Vanguard Lifestrategy, a bunch of index funds portfolio'd together to give passive global equity and bond exposure with 10-15 underlying index funds), say the same (http://www.blackrock.co.uk/intermediaries/literature/brochure/blackrock-consensus-funds-brochure.pdf):

Core satellite approach
The Funds are designed to be an ideal core component or complement to a bespoke investment portfolio. Using these Funds in client portfolios is a wayof keeping costs down and controlling risk to a certain extent, while allowing the flexibility to invest in other specialist strategies or funds.

So effectively these major index-fund-selling manager groups (Blackrock, beyond its Consensus stuff has fingers in all sorts of pies, but Vanguard is pretty much exclusively an index lover) are in agreement that a proper portfolio has specialist fund managers making active decisions for elements of your portfolio.

In other words, even though of course you will do well if you just use cheap accurate trackers, because trackers can make decent money in the long term and do so cheaply: trackers are not however the be-all and end-all of sensible investment.

If all shares in a fairly valued and open market have the same opportunity to perform relative to their cost, but different sectors move in different directions at a time, it would seem that you are loading yourself up with risk if you follow FTSE 100 index and buy its high concentration of oilers and big pharma and financials but very few tech companies or whatever.

Sure, technically you are exposed proportionately to every investible pound on the stock exchange and your results are in line with "market" returns, but why have 1000x as much in HSBC as you have in ABCD at the the other end of the index. Is it 1000x "better" as an investment opportunity? If no then why do you want to allocate your pounds in line with market cap and take the concentration risk of being loaded with dotcoms in 1999 or financials in 2007?

There are of course equal-weight rather than market-cap-weight indices, but not as cheaply, and not for every sector and investment style - and clearly in some areas, indices with no manual thought are somewhat useless (like equity income mentioned by Linton, or where markets are not efficient nor full of perfect information - perhaps emerging markets or smallcaps are examples).

But basically through the above links we can see examples of Vanguard and Blackrock saying that their indexes are NOT to be followed exclusively because your portfolio is probably better if you add satellites to this basic broad core of exposure.

In their promotional material they pretty much have to accept and admit their limitations, to keep credibility with the investment community rather than blindly parroting that indexes generally outperform active funds. Vanguard, who does not offer active funds, publishes research stating the best portfolios mix its funds with other types of funds? Why would this be, if indexing gives you an advantage over active? Wouldn't you just want 100% passive after that active decision on what asset class or region??

Maybe from a marketing perspective, it knows most people use active management and would use more than one manager, so it simply realises it needs to get on their wishlist but would appear shortsighted and biased to say you should put all your money in Vanguard, so refrains from doing so, even though it honestly believes that you should. But I suspect there is truth to its contention that you should mix active with passive to get some smart outperformance mixed with low cost exposure. I do this myself and it seems to work reasonably well, although without 40 years of doing it at current management fee rates and platform price structures, I can't prove it easily.

But effectively, the index fund managers publishing their conclusions on their own websites are not so arrogant as to be saying they are the only sensible game in town; they are saying they are one of the games in town and why don't you give us a try along with the other elements of your portfolio which we wouldn't be good at, and might suit you better depending on your personal needs, goals and risk tolerance.

If the overall portfolio could be demonstrably better just following an index for each asset class, you can be sure they would try to demonstrate that very specifically with lots of raw research. But they don't, they simply comment that most active managers don't beat the index so please include us index funds in your portfolio.

They don't say I can't find 5 active Emerging Markets managers that over rolling 5-10 year periods have consistently outperformed the MSCI emerging index by a great margin. They just say that many managers don't do this. But that's common sense: there are many more individuals or firms passing themselves off as 'fund managers' in say China than there are listed companies in that region. Many will promise the world and deliver little and get away with it because dumb investors will throw money at the region hearing it has good returns and not do their due diligence on who is going to deploy their money where and how.

They can be complacent and expensive and underperforming, yet still stay in business, much as the fund managers in the Developed sectors could be, say 5-10-20 years ago before we had MSE, Motley Fool and instant free global information via the internet.

Vanguard do not actually contend that YOU can't find a quality manager, or that quality managers aren't screamingly obvious from their track records in up and down markets. Only that quality managers are not the majority and therefore you might like to buy their index rather than search for the diamond in the rough or needle in haystack. In some areas like US largecap I might agree. But in more specialist markets with greater disparity in results: the diamonds shine brightly and the needles stab you while digging for them, so many competent investors can in fact identify them if they are willing to put thought into it rather than a pin into a phone book.

So: if you were an index fund evangelist like Tim Hale, you could easily pay for some index fund manager to give you a vox-pop for your book that says they did some research over a long time period and found index funds are not typically outperformed by the 'average' active funds. They might not even want paying because it promotes their own cause - the author wants a good article with comments from industry stalwarts with data soundbites to back up his views, and the fund house wants their philosophy to reach hundreds of thousands of investors.

So you can find pro-passive views all over the place. It doesn't stop Warren Buffet or The Naked Trader building their careers and wealth from exploiting market timing and mispricing, and then selling out after-dinner speaking spots on the back of it. Although the former warns the general public to not bother for themselves, and to stick with indexes because active stuff is more expensive and hard to do well. Difficult to know who is right but I think a lot of people agree that a core/satellite approach with both fund types is at least as good or better as one-or-the-other.

Sobryma wrote: »

But on the other hand, 90% of DFM have failed to meet APCIMS benchmarks

http://www.ftadviser.com/2013/11/25/investments/discretionary-management/discretionary-managers-fail-to-beat-arc-test-benchmark-QaBgik11Vi2eGIn8xKlK9H/article.html

This doesn't really prove anythng one way or another.

The report said:

“The last three years have been a period when multi-asset-class investing has not delivered the expected uplift in risk-adjusted returns.”

So basically we *expect* if we use multiple classes and periodic rebalancing we should be able to get the same or better returns with reasonable volatility compared to just using one class (high risk/high return or low risk/low return). But this three years hasn't delivered that "expected uplift". Well, go away and try it for twenty three years ?!

'Arc said the likely reasons for the underperformance were both “a bias towards domestic equity exposure and/or emerging markets” and the fact that “none of the traditional income-producing and/or risk-diversifying assets have delivered attractive risk-adjusted returns”.'

So basically nothing you could diversify into would deliver better returns, once risk adjusted. But depends what your base case was and exactly what period. Looking at equity income funds, stable blue-chip shares delivering solid dividends had a great set of returns over the last few years considering that it was a general bull market and they would generally do well in a downturn too. Corporate bonds and gilts over recent years (not so much the last one) have done extremely well, pushing to all time highs - i.e. people are paying more for them than they ever have before for an instrument with that risk profile before. Wasn't that an 'attractive risk-adjusted return'? Perhaps less attractive from here onwards.

Smallcaps did great in the last 18 months; sure, higher risk equals higher reward and all, so maybe 'risk-adjusted' it wasn't any better than the returns of bluechips. But its not obvious that managers of such funds are failing to deliver what investors want, nor that they're failing to beat the indexes; many managers don't try to replicate an index in one specific year but have a general strategy to give a better result over time in terms of value or volatility.

And surely a well-balanced, non-'eggs in one basket' approach is desirable rather than saying you cant get more return without risk so don't bother trying... Sure, if debt and equity markets are all going up you can hold anything or everything and you'll do well whatever. Maybe active management is not so valuable on a major bull run while any idiot can make reasonable money. And clearly if you sought diversification in emerging markets the last 2 years you would have got a lower return than in major developed markets of UK/ Europe /US /Japan. BUT that doesn't mean it wasn't sensible to take exposure to that market or that you shouldn't try it again because it will never be worth taking risks or paying to find superior returns

It's eminently sensible to be invested there(i.e. Emerging markets and asset classes) IMHO. And if you are in agreement to stay in that under-developed market I would say don't buy 80% of the crap that comes along in the index, buy the stuff you want - or if you're not sure because you're not an emerging Asia specialist to know what you should be buying, buy the stuff a good Asia specialist will stake his reputation on buying, some charging you a fee.

Surprise surprise that article, after sensationalising that Discretionary Fund Managers, employed to construct private portfolios, had in a short period of unusual market conditions failed "to beat the Arc benchmark" (whatever that is worth in the real world) they did acknowledge that

"DFMs had delivered reasonable returns in the long term but had struggled in recent years.

"He attributed the struggles to “curious” market conditions that have left DFMs struggling to find non-correlated assets."

"The Arc report found that during a longer period – the 90 months from December 2005 to the end of September 2013 – discretionary managers had much better relative performance to the cash/world equities benchmark."

So, over a proper investing timescale it's all fine then really! :beer:

pip895

bowlhead99 brilliant post - Tank you:)

dunstonh

but Vanguard is pretty much exclusively an index lover

It is not. Vanguard has a massive amount under management on managed funds. It is relatively new to the UK retail market and currently only offers index trackers to that market. However, in the US, it offers both.

ExMugPunter

It seems to me that the more traction this 'active V passive' discussion receives the more distorted the argument becomes.

In my opinion Hale describes it well when he suggests that the difference between the two are that active investors want to gain as many points as possible where as the goal of the passive investor is to keep as many points as possible.

It is this basic mental or behavioural difference that accounts for the difference in actual returns of the average or majority of portfolios (note the majority, not all). Comparing one active fund with an index fund on a graph is miss representing the argument.

People are beginning to ignore the fact that the central pillar of passive investing is to buy and hold for eternity regardless of short term performance. The majority of active investors however are constantly chasing performance chopping and changing funds and managers to improve performance (gain as many points as they can). The industry is set up for you to chop and change and billions is spent enticing you to do so. Think about HL Wealth 150 or 'Should you be in gold' headlines etc.

The key thread to the arguement is that it is this choppping and changing (with its applied costs) that lowers the returns of many peoples ACTUAL returns that is the key rather than a straight active fund v index fund line on a graph debate.
For example, Hale cites a powerhouse performing fund (CMG Global)that produced 18% returns. But the investors ACTUAL was -11% simply because of the behavioural nature of active investing. They bought the fund high couldnt tolerate the drops so sold and therefore missed the vast majority of that funds performance. There is also a study of american investers that found that the average ACTUAL return of an active invester was just 4% per year (for the period 1991-2011) where as the market achieved 10% per year.
In the UK people rave about the performance of Neil Woodford, but how many have ACTUALLY recieved his massive returns? How many people raving about him have actually only picked up a percentage of his returns (by buying and selling at the wrong time - or being too late to the party) and therefore his actual performance (for them) was no more than an Index fund would have provided?

You can look at all the pretty graphs in the world and compare theoretical or paper returns, but the real key to active V passive is the behaviour that these approaches promote in the majority of their followers. For many, many people the draw of chasing points (or improved performance) will result in under performance. That is actually the key to all of this.

Furhermore, I am sure that some people can pick the good managers, sectors and (roughly) time when and where to invest, but i would guess that 95% of cant.

Well done and fair play to those 5% (my finger in the air figure), but I dont believe that I have that ability, so i will stick with my trackers.

PS Hale himself also states in his book that 'there is more than one way to skin a cat'. On more than one accasion he says that there isnt an ultimate method to investing, you just have decides waht is right for you. On several occasions he advises that if you cant find a tracker to suit your needs with the appropriate charges, then go for an active fund to do the job.
Some of the interpretations in this thread of what Hale 'says' differs considerably to what is actually in it!

gadgetmind

bowlhead99 wrote: »

So effectively these major index-fund-selling manager groups (Blackrock, beyond its Consensus stuff has fingers in all sorts of pies, but Vanguard is pretty much exclusively an index lover) are in agreement that a proper portfolio has specialist fund managers making active decisions for elements of your portfolio.

http://www.vanguard.com/pdf/icrcs.pdf

"We conclude that indexing is a powerful strategy in all segments of the market, and that the active/index decision should therefore be predicated on an investor’s ability to identify low-cost, talented managers, and not on the indiscriminate selection of active managers in market areas perceived to be inefficient."

Linton

ExMugPunter wrote: »

It seems to me that the more traction this 'active V passive' discussion receives the more distorted the argument becomes.

In my opinion Hale describes it well when he suggests that the difference between the two are that active investors want to gain as many points as possible where as the goal of the passive investor is to keep as many points as possible.

It is this basic mental or behavioural difference that accounts for the difference in actual returns of the average or majority of portfolios (note the majority, not all). Comparing one active fund with an index fund on a graph is miss representing the argument.

People are beginning to ignore the fact that the central pillar of passive investing is to buy and hold for eternity regardless of short term performance. The majority of active investors however are constantly chasing performance chopping and changing funds and managers to improve performance (gain as many points as they can). The industry is set up for you to chop and change and billions is spent enticing you to do so. Think about HL Wealth 150 or 'Should you be in gold' headlines etc.

The key thread to the arguement is that it is this choppping and changing (with its applied costs) that lowers the returns of many peoples ACTUAL returns that is the key rather than a straight active fund v index fund line on a graph debate.
For example, Hale cites a powerhouse performing fund (CMG Global)that produced 18% returns. But the investors ACTUAL was -11% simply because of the behavioural nature of active investing. They bought the fund high couldnt tolerate the drops so sold and therefore missed the vast majority of that funds performance. There is also a study of american investers that found that the average ACTUAL return of an active invester was just 4% per year (for the period 1991-2011) where as the market achieved 10% per year.
In the UK people rave about the performance of Neil Woodford, but how many have ACTUALLY recieved his massive returns? How many people raving about him have actually only picked up a percentage of his returns (by buying and selling at the wrong time - or being too late to the party) and therefore his actual performance (for them) was no more than an Index fund would have provided?

You can look at all the pretty graphs in the world and compare theoretical or paper returns, but the real key to active V passive is the behaviour that these approaches promote in the majority of their followers. For many, many people the draw of chasing points (or improved performance) will result in under performance. That is actually the key to all of this.

Furhermore, I am sure that some people can pick the good managers, sectors and (roughly) time when and where to invest, but i would guess that 95% of cant.

Well done and fair play to those 5% (my finger in the air figure), but I dont believe that I have that ability, so i will stick with my trackers.

PS Hale himself also states in his book that 'there is more than one way to skin a cat'. On more than one accasion he says that there isnt an ultimate method to investing, you just have decides waht is right for you. On several occasions he advises that if you cant find a tracker to suit your needs with the appropriate charges, then go for an active fund to do the job.
Some of the interpretations in this thread of what Hale 'says' differs considerably to what is actually in it!

I think you are confusing two different and independent arguments....

Buy and hold versus trading: I guess most people here, including myself, would advocate that the private investor buys and holds through the good times and bad and would believe that timing the market is futile. Traders who hold other views tend to congregate on other forums.

Index tracking versus managed funds: It is here where the argument rages, On the pro-tracker side it has been said that an investor should never buy a managed fund as a tracker will perform better, if a sector doesnt have a tracker then one shouldnt invest in it. Tim Hales isnt that extreme but he does make his view clear that a managed fund is a last resort. He does not appear very interested in different sectors, but acknowledges that perhaps there may be something in small companies.

My view for what its worth is that the main decision to be made is what sectors to invest in and in what proportions. Then one can choose the appropriate funds to provide the coverage. There could be many criteria leading to the choice of any particular fund. Past performance perhaps, evidence of golden hands investing maybe, volatility, what sort of companies the fund invests in, the balance of the overall portfolio etc etc and charges. If the selection process comes up with a tracker, fine. If it doesnt that's fine as well. Its a mistake to decide in advance one way or the other.