How you pay for the City

doughnutmachine

Lokolo wrote: »

I am sorry but I don't agree with this. If you can show me evidence that fund charges have a low deviation then I will quite happily accept it. (and I would be very interested to see this data actually!)

ehhhhmmmm most managed funds charge the same AMC year in year out? is that not a low deviation?

doughnutmachine

N1AK wrote: »

I personally think passive investing is the better idea. I find it hard to get too passionate about the issue of active funds though because all the information needed to make an informed decision is available. It's not like active investors are guaranteeing better returns or hiding the fees.

tbh I think the active fund managers do hide their fees. the standard Annual Management Charge is only part of the total fees paid by investors. Total Expense Ratio is not that much better.

IMHO active funds should publish the total charges paid by investors ie including trading costs etc.

cepheus

Strictly speaking there is more to it than performance. Fund managers will be looking at risk as well as performance for the sector. However, I've never seen any evidence this is any better than the alternatives. I think we had a thread relating to this a while back on absolute return funds.

Ark_Welder

What many people fail to grasp is that their own investment objectives, timescales, risk tolerance, attitudes and level of interest are not the same as everyone else. So they tend to get a bit insecure about their own investment approach when someone else is happy to take an approach that is different to their own.

If your chosen investment method is passive, then go for it. If your chosen investment method is active, then go for it. Just don't be frightened that someone else is happy to do something differently.

grey_gym_sock

John1993 wrote: »

Again, you don't seem to understand the point of a managed fund. You seem to think that its intention is necessarily to beat "the markets". Why would you think this?

the intention of an actively managed fund should be to beat not "the markets" in general but the relevant market and style* - i.e. whatever niche the fund is specalizing in. otherwise the higher costs of active management will make passive a better way to gain exposure to that niche.

i think the main way that active can make sense is where there is no comparable passive fund available, or even no suitable index to compare with.

*note: style needs to be given a rigorous meaning, or active funds will be able to avoid comparisons by defining their style too vaguely. e.g. for equities, it's OK to have things like "size" or "value vs growth".

thelion

Lokolo wrote: »

What I don't agree with is the premise that showing the costs will benefit in any way. As I gave an example above, once you know what return you get, why does it matter how much it cost to get there? If you are happy with the end result, you are happy with the end result.

It was said during the show that exposing these costs would be of great benefit



How on earth will that be helpful? We already see the end return of the product, so we can already compare with other funds, with returns from banks and make an informed decision of how to proceed in the future. How is telling us that we got a 9% return over the past year and the costs before that return were y% helpful?

I am not an expert but I would want to know how much I was being charged. If the performance after fees looked good, I would still want to know how much had been creamed off in fees because if next years performance was not so good the fees would still be applied.

Ark_Welder

grey_gym_sock wrote: »

the intention of an actively managed fund should be to beat not "the markets" in general but the relevant market and style* - i.e. whatever niche the fund is specalizing in. otherwise the higher costs of active management will make passive a better way to gain exposure to that niche.

A passive approach is not a better way of gaining exposure, it is a way of gaining exposure. Don't assume that how you might choose to invest is how everyone ought to invest.

I choose to avoid UK large cap trackers because of the sector and company concentrations: in the event of a problem that affects a particular industry, the downside could affect the whole sector, and with some of the sizes of some individual companies in the indices, that could be quite a hit. And I am far more concerned about downside potential than with being 'left behind' when these sectors are in favour.

And from an income perspective, I'm happy for my selected fund managers to avoid having to invest in those companies that have, will - or just might - cut their payouts. And on the whole, I believe that a professional fund manager is in a much better position than am I in making these decisions.

My money, my choice, my result. Other investors will differ on all three counts, and will invest accordingly.


It isn't for us to state how any fund should operate, it is down to the board/management to declare how they intend to deliver a return. The investor can then decide whether that is likely to fit their objective. Tracking an index is not everyone's objective.

blinko

it would be interesting to see how a simple tracker compared over the lifetime of the average fund...

bowlhead99

blinko wrote: »

it would be interesting to see how a simple tracker compared over the lifetime of the average fund...

But the problem is there is nothing directly to compare. Over a lifetime you may find the active fund and the passive fund change their management fees, change their fund size resulting in the general ongoing costs being a different percentage from year to year, the active fund changes its manager and/or strategy, etc.

More fundamentally, no active fund aims to track the market by holding all shares in the market (or market sector) proportion to market cap. So there is no 'average fund' to compare the tracker against. The different mix of assets held will result in a change in 'risk' and so it is not an apples to apples comparison if Active Fund A beats Passive Fund B by 3% annualized but with perhaps greater volatility.

Or loses to it by 5% annualized over the life of the product - maybe it is aiming to have lower volatility or more stable dividend income or whatever, resulting in underperformance in bull markets and bull markets happened to exceed bear markets in the 20 years it was running.

A passive approach is not a better way of gaining exposure, it is a way of gaining exposure. Don't assume that how you might choose to invest is how everyone ought to invest.

It isn't for us to state how any fund should operate, it is down to the board/management to declare how they intend to deliver a return. The investor can then decide whether that is likely to fit their objective. Tracking an index is not everyone's objective.

I completely agree with those two statements.

Your objective might be to try to invest an equal amount in all shares in the market, providing an opportunity to share in the upside and downside of every company out there, equally. It sounds like the most basic thing in the world to do, but it is of course harder to deploy lots of cash into the smaller companies as efficiently as you can in the big ones, and the periodic rebalancing to take profits and get back to equal shares, will be expensive in transaction fees. So fund houses don't typically offer this.

Your objective might be to invest in all shares in the market, weighted to the biggest shares, so you have a heavy concentration in certain companies and sectors and virtually nothing in others, but be able to say that your pound received the average return of every pound out there. Most of your pound is in HSBC or Apple because there are hundreds of billions of other pounds in those, and you're more concerned about keeping up with those than you are about keeping up with the fewer billions (or just millions) of pounds in Mulberry or ASOS or William Hill, or the smaller AIM companies, or the huge numbers of massive but privately owned companies which aren't in the index.

The return on this latter 'market cap weighted average index' objective will likely be radically different from the return you would get from investing in the 'average' company (my first objective above). But it is some sort of average, that you can read about in the papers - and therefore you might not be too disappointed if you get close to it, particularly when you don't know what you could have got instead because only the weighted-cap index makes the news.

Or your objective might be to weight your holdings to a fewer number of companies which pay a greater dividend as a proportion of their share price. That approach might provide more stability in a rocky market and a useful cash inflow without needing to periodically liquidate some of your holding. Of course if you (or your active manager or index manager) buys all of the 'above average income' companies you will include the ones which don't look like they can sustain the dividend going forward or have had share price reductions because everyone thinks they're going bust, which seems stupid.

Similarly, in developing markets where growth opportunities are huge but markets are immature and don't have the same transparency and corporate governance, there are undoubtably good investments available but the indexes they sit inside will also contain some absolutely terrible companies. So it may well be worth paying a talented manager with a track record, as long as you can avoid picking a lazy manager who is simply selling the idea of getting exposure to a good market without offering the talent you need to navigate it.

So, not all approaches are suited to cheap formulaic index investing. Once you have accepted that, you'll be looking at a bunch of managers with different strategies and different prices. Some will suit your personal philosophy or views on the market, some will suit the type of return (not just amount of expected return, but amount of dividends, volatility etc) that you want, some will not. Some will charge fixed fees, others a combination of that and performance fees with a watermark. It is up to you to decide what type of fee structure you prefer and assess what it buys you.

IMHO active funds should publish the total charges paid by investors ie including trading costs etc.

Regardless of fees, when you compare the bid-to-bid total return over a long enough time, you can decide whether it was worth it. Whether the fees were visible as management fees or visible as audit fees or invisible as capitalized broker fees, it doesn't really matter where they went, it matters what you got back net. Unfortunately it's then too late to go back in time and buy more or sell more.

Say one fund is going to charge 0.3%, one 1.25%, one 1.5% + performance fee. Yes, agreed, you can see that if all funds break even or lose an equal percentage before fees, the first one is the best to be in. If costs are the only component of a return, then sure, try to minimise them.

However,your investment goal is very unlikely to be to position yourself in funds which break even or lose before fees and it is unlikely they will all make or lose an equal percentage anyway. Your net result depends on whether the better funds made enough more, or lost enough less, to cover the fees, which you can only see with hindsight, but you can take a view in advance. Unsurprisingly, different people have different views.

John1993_2

doughnutmachine wrote: »

so what is the point of a managed fund then? why do fund managers charge large sums of money if it's not to beat the markets?

To tailor expected returns to a person's needs. This can be as simple as matching risk apppetite to appropriate products, but can go to a far higher level of sophistication than this.

One simple example would be if you want a fund to deleverage in times of stress, but a managed fund can get as specific as yo want in terms of matching a client's needs to an appropriate portfolio.

I looked at a job a few years ago managing ultra-high net worth people's money (I think the requirement was over $30m in liquid assets), and that was basically what this would have involved; looking at the client's requirements, and then getting into and out of them as efficiently as possible. What I would have been paid for would have been meeting their needs. If their needs were to have a large exposure to China, moving from bonds to equities over te course of a year, and if China had then crashed, no-one would have suggested that I had provided poor value service just because a post-office savings account or a Hang Seng tracker would have done better.