Passive v active

Surreyboy

I've been trying to sort out my portfolio recently, to include cutting costs.

One of my funds is a Japan fund - GLG Japan Core Alpha. I was thinking about whether to replace it with a tracker - maybe the Black Rock Japan Equity Tracker. However, I was comparing the data for the above active and passive funds and (although it has performed worse than the tracker in some years) the active fund has performed about 27% better over 3 years (and its 5 year figures are quite good too).

I was wondering whether any one knows if the performance figures in these tables (eg on the III/HL websites) are gross of charges or net? This is obviously relevant when comparing a tracker with an active fund.

Subject to the above, it's probably not worth incurring the cost of selling the active and buying a passive fund if the passive fund's performance is slightly worse.

Thanks for your help.

masonic

The performance figures are net of charges since the charges are taken by adjusting the fund price (or income paid out). However, we're now in a situation where there are a series of clean class funds with lower charges and past performance data for older dirty class funds, so if you are looking at historical performance you might see the effect of higher charges than you will be paying going forward, potentially painting a very slightly more pessimistic picture of active funds. Some fund managers have calculated performance data retrospectively for the clean classes, but not all, and different websites seem to be doing different things to fill in the gaps.

Regarding whether or not to sell the active fund, if you've worked out you've outperformed the tracker so far by holding this fund, you are comfortable with its performance both in rising and falling markets, and you don't see anything on the horizon that may change that, then it's reasonable to decide to keep it, but you might aim to get rid of it at the first sign of underperformance, before you wipe out all of your accumulated gains. However, since you are planning to hold a global tracker at the core of your portfolio, which is already going to contain an appropriate allocation to Japan, you might ask yourself the question why do you need more exposure to this sector?

Surreyboy

Thanks for the advice. As regards the last question, the global fund will only be part of my portfolio and , without having the Japan fund to 'top up' my exposure to Japan, my allocation to Japan would only be about 1.2% of the portfolio, which seems quite low.

masonic

Surreyboy wrote: »

Thanks for the advice. As regards the last question, the global fund will only be part of my portfolio and , without having the Japan fund to 'top up' my exposure to Japan, my allocation to Japan would only be about 1.2% of the portfolio, which seems quite low.

That's surprising since Japan would normally make up 8% of the global index (and does make up almost 8% of the Vanguard fund). Conventionally one would use a diversified global tracker as the major holding within a portfolio, typically 50% or more and then add small allocations (or 'tilts') towards a small number of more adventurous areas. I'm unsure of the virtues of holding it as a minor constituent - I'd imagine you'd need additional funds for each of the geographic sectors to end up with a balanced portfolio, which might make it simpler to just use the individual geographic funds.

dale_cotterill

There is a school of thought that suggests that active management could be more beneficial in 'niche' markets where there is less data and research so an active manager can add more value.

Money_Saving_Dude

dale_cotterill wrote: »

There is a school of thought that suggests that active management could be more beneficial in 'niche' markets where there is less data and research so an active manager can add more value.

No doubt promoted by the active manager community.

If you wish to get better than average returns you need to explore individual companies and understand what the shares you are buying represent. That means drilling into their annual reports to see how you think they will grow your investment with them.

Otherwise everyone (ironically this also includes fund managers) should go for a tracker (Vangaurd Life Strategy are so good in my opinion that it is difficult to better them).

Remember all active fund managers *have* to produce better results all of the time. If you really must have the better than average returns look at value investing or the HYP approach promoted on fool.co.uk. But remember, *no one* knows the future and even these approaches may fail (or you may have several years of under performance until they come good).

If you really must go for active funds then good luck, but be aware that study after study shows how unlikely you are to outperform the market, whereas VLS funds give you the average all the time, with automatic rebalancing done daily.

Surreyboy

I think it's true that many or most active managers do fail to outperform the market over long periods, but there is a small band of managers/funds who seem to be able to outperform their respective indexes over the long term , for example Scottish Mortgage (also low cost), F & C Global Smaller Companies, Finsbury Growth & Income (these are trusts rather than funds, but it is the same point). I personally think that a mix of passive and active funds makes sense.

Surreyboy

masonic wrote: »

That's surprising since Japan would normally make up 8% of the global index (and does make up almost 8% of the Vanguard fund). Conventionally one would use a diversified global tracker as the major holding within a portfolio, typically 50% or more and then add small allocations (or 'tilts') towards a small number of more adventurous areas.

Yes. I thought you'd say that (!) and you're basically right. It's a bit complicated in my case, as I'm using my ISA to supplement my pension and I'm looking at the two 'in the round'. My pension already has holdings in USA UK, Asia/Pacific and Europe funds. It's bit difficult to change the pension holdings, as there's only a limited no of decent , alternative funds,and I don't want to change the pension as a whole, as the charges are very low and it has performed quite well. I'm just trying to tweak everything to get to approximately a reasonable overall allocation.

But it's useful advice and I'll probably now have a higher amount in the global tracker than I'd previously planned.

Thanks

Lokolo

Money_Saving_Dude wrote: »

If you really must go for active funds then good luck, but be aware that study after study shows how unlikely you are to outperform the market, whereas VLS funds give you the average all the time, with automatic rebalancing done daily.

With tracking and management cost this will be below average.

dunstonh

Otherwise everyone (ironically this also includes fund managers) should go for a tracker (Vangaurd Life Strategy are so good in my opinion that it is difficult to better them).

You do realise that VLS is actually a form of active management. Whilst it uses trackers as the underlying investments, they decide the allocations and make management decisions on how much goes into each sector and which sectors are included and which sectors are not.

Remember all active fund managers *have* to produce better results all of the time.

No they dont. Indeed, it can be impossible for many funds to do that due to the way they invest. Some funds will only outperform the market average in parts of the economic cycle.

If you really must have the better than average returns look at value investing or the HYP approach promoted on fool.co.uk. But remember, *no one* knows the future and even these approaches may fail (or you may have several years of under performance until they come good).

Strange that you tell people to consider HYP and not sector/asset allocation. Yet you mention VLS which uses sector allocation.

princeofpounds

There are good things about passive funds, and a lot of nonsense spoken as well.

The first piece of nonsense is that it is possible to ever avoid active fund managment. Even if you buy all passive instruments, you are still making asset allocation decisions which will have an overwhelming impact on your returns.

Unless, possibly, you own the Market Portfolio (something which is theoretical, impossible to know and impossible to attain) then there is no genuinely 'neutral' asset allocation.

http://en.wikipedia.org/wiki/Market_portfolio

The second piece of nonsense is that the benchmark is always the 'average' choice in some way. A benchmark is always an entirely artificial, man-made arbitrary construct; it is only representative of 'the market' if you happen to define 'the market' the way the index provider did (and there are many different and valid ways to do so). Actually by selecting a benchmark you are making almost as a big a choice as which stock to buy.

See the story below for one example of the divergence produced from different methodologies. You get the same things arise from FTSE vs MSCI, capped weights vs. non-capped, rebalancing frequencies etc.

http://www.nasdaq.com/article/equalweight-etf-trounces-traditional-sp-500-peers-cm242163

Don't kid yourself, the real value of passive investment instruments is the low fees - where they do really have an advantage - and nothing else.

Whilst I'm on the topic, I personally have always thought that active funds should actually be 'benchmarked' against a relevant ETF, rather than the benchmark indexes themselves. It's a far more relevant comparison, and also more realistic in terms of achievable market returns. ETFs often do a great job of selling you the benchmark, when in fact they deliver benchmark minus fees minus rebalancing fees. (I am merely criticising the marketing spin by the way, not the implementation itself)