How you pay for the City

cepheus

blinko wrote: »

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

There are studies comparing managed funds with the market in general and a tracker wouldn't deviate much from the market.

a study by research firm WM Company found that 82% of managed funds failed to beat the market over the course of twenty years. While you may think that sounds bad, it's actually even worse, because this figure only includes funds survived for the whole twenty years -- many poorly performing funds are shut down or get merged into other funds.

This means that the chances of picking a fund now that will do worse than the market over the next twenty years is likely to be a lot higher than 82%, and is probably well in excess of 90%. Some people, however, believe that it's possible to consistently pick one of the few funds that will beat the index, although this is obviously hotly debated.
http://www.fool.co.uk/Your-Money/guides/Index-Trackers-Vs-Managed-Funds.aspx

doughnutmachine

bowlhead99 wrote: »

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.

there is some fairly robust academic evidence that shows active fund management does not work. ie it does not generate the additional returns for it to be cost effective for private investors.

I personally wouldn't invest in an actively managed fund because the evidence strongly suggests that the additional costs will not be recouped.

Of course I 100% accept that people have a right to invest how they see fit.

I still think total costs of a fund should be available to investors.

doughnutmachine

John1993 wrote: »

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.

It's strange when I see adverts for managed funds that they mention how they are in the top quartile for so many time periods.

The underlying message that the active fund managers seem to portray is that they will outperform the market.

I'd suggest that the HNW individuals, you talk about, would be unhappy if they paid for your investment expertise and your advice underperformed the market..... you'd probable get a few phone calls from irate clients....

bowlhead99

I'd suggest that the HNW individuals, you talk about, would be unhappy if they paid for your investment expertise and your advice underperformed the market..... you'd probable get a few phone calls from irate clients....

But what was "the market" return that was underperformed?

If it is an average of funds in that sector, then fine, if you invest in a sub-average fund, one of the worse ones around, you may have irate clients. Of course, you will never get advisers saying a fund will get the absolute best return, only that it shouldn't be a bad one over a long enough time period - one can't expect to "win" every year- and so the clients might be told to not be so unreasonably irate, and wait a few years to see how it actually shakes out.

If by "underperforming the market" you simply mean "didn't keep up with the FTSE100 that particular year", that is also quite easy to defend against - because the FTSE is not a well diversified index and the weightings within it are heavily sector focussed and skewed towards a few large companies which the typical person would understandably not necessarily want to pile into.

talexuser

doughnutmachine wrote: »

It's strange when I see adverts for managed funds that they mention how they are in the top quartile for so many time periods.

It could be that particular index tracker might also be top quartile, so more than 3/4 of the other active funds underperformed partly because of high fees?

Glen_Clark

doughnutmachine wrote: »

I personally wouldn't invest in an actively managed fund because the evidence strongly suggests that the additional costs will not be recouped.

True, but what about an Investment Trust selling on a 20% discount?
You get £100 of assets for £80
Discounts tend to be longstanding so you will probably still only get £80 for your £100 of assets when you sell them.
But in the meantime you get £100 worth of earnings on an £80 investment, which might pay the extra fees?

doughnutmachine

Glen_Clark wrote: »

True, but what about an Investment Trust selling on a 20% discount?
You get £100 of assets for £80
Discounts tend to be longstanding so you will probably still only get £80 for your £100 of assets when you sell them.
But in the meantime you get £100 worth of earnings on an £80 investment, which might pay the extra fees?

yeah, I agree that the 20% discount might be enough to overcome the drag of active management

cepheus

doughnutmachine wrote: »

yeah, I agree that the 20% discount might be enough to overcome the drag of active management

What use is a discount if there is as much chance of it being widened as shortened?

doughnutmachine

cepheus wrote: »

What use is a discount if there is as much chance of it being widened as shortened?

yeah, valid point.

but perhaps buying ITs when the discount is at a historic high could be a good investment. my perception is that a lot of IT investors will panic sell when the market crashes, so you could buy IT shares cheap after a market crash.

maybe the lesson that should be learned from discounts on ITs is that active management does not add value....... it's type of hard to argue that fund managers do a good job of adding value when they turn £100 of assets into £80.

people have posted analogies of what fund management is like, my analogy is that it's like feng shui....

Glen_Clark

cepheus wrote: »

What use is a discount if there is as much chance of it being widened as shortened?

In that case the odds are it will stay the same and you will get £80 for £100 of assets, the same ratio you paid for them.
But in the meantime you are getting the income from £100 of assets, for every £80 you invest. Its like putting £80 in a savings account and the building society paying you the interest on £100. This extra income will go some way towards paying the fund managers fees.