Passive Funds

Zippeh

I've been reading Smarter Investing, and the author is explaining the virtues of a balanced portfolio and the use of passive funds to track indices versus active funds. I haven't yet finished the book, so I might be getting ahead of myself, but is there any reason not to just invest in a Vanguard LifeStrategy X and then just leave that to do it's thing? What are the additional benefits of looking at individual funds over that one?

noggin1980

You can do it yourself slightly cheaper say £1 a year cheaper for each £1000 invested and if you pick for yourself you can tailor the choices to yourself better (doesn't mean you make the right choices though). I don't think the lifestrategy funds have any property and perhaps you want some? for instance

There is absolutely nothing wrong with going for a vanguard lifestrategy as a core holding or your only holding.

Zippeh

Also, if you have two funds which track the FTSE 100 for example, then surely their return would be the same? In that case, does the difference come down to fees?

dunstonh

but is there any reason not to just invest in a Vanguard LifeStrategy X and then just leave that to do it's thing?

That is the option for a "lazy" investor. Not building a portfolio as the book suggests.

Also, if you have two funds which track the FTSE 100 for example, then surely their return would be the same?

You dont need two funds doing the same thing. Also, the FTSE100 is not a great index to track.

noggin1980

Zippeh wrote: »

Also, if you have two funds which track the FTSE 100 for example, then surely their return would be the same? In that case, does the difference come down to fees?

No fund tracks perfectly (but the big players are all close enough) and some funds manage their costs differently (ie the vanguard one charges you a small percentage when you put money in to pay the costs they incur buying the shares for you, whereas some others don't and it just makes the fund as a whole worth a tiny bit less, if you plan to keep your money there for years the vanguard model is better, if you want to take it out soon, or want to be moving money between funds alot then the other way works out better.) Other than that though sure it just comes down to fees.

noggin1980

dunstonh wrote: »

That is the option for a "lazy" investor. Not building a portfolio as the book suggests.

It's buying a portfolio already built by someone with more information and knowledge than you but without tailoring it to you specifically. You can say it's lazy or you can say you are accepting that vanguard know more than you and are willing to pay the extra 0.1% per year to take advantage of that and automatic rebalanceing.

dunstonh wrote: »

You dont need two funds doing the same thing. Also, the FTSE100 is not a great index to track.

what a strange thing to say, why? or do you mean it's not ideal just to track that index? which I agree with

Linton

The reason for going for a bespoke range of funds rather than simply using a Vanguard LS fund is that "investing" covers a wide range of different objectives under a wide range of different constraints. For example you may want income now or may be investing for capital growth. Your timescales may be short, say 5-10 years or very long, say 30-40 years. You may be concerned about avoiding major downturns or you may welcome them as an opportunity to buy further investments cheaply. Total return may be key, or your primary concern may be to safeguard your wealth at the expense of some return. You may have beliefs that particular areas of the world or industries are a good or bad long term investment.

The advantage of the VLS funds is that assuming you choose an appropriate % they are unlikely to be disastrously wrong. The disadvange is that they may well not be optimised for your requirements. They have specific characteristics - their allocations to the major geographies, their focus on larger companies, the high allocations of government versus corporate bonds. By choosing an appropriate range of funds an experienced investor can set up a portfolio with quite different characteristics.

Linton

noggin1980 wrote: »

.
Originally Posted by dunstonh
You dont need two funds doing the same thing. Also, the FTSE100 is not a great index to track.

what a strange thing to say, why? or do you mean it's not ideal just to track that index? which I agree with

In my view it is an index to be actively avoided because it is mainly based on global companies that happen to choose to be quoted on the London Stock Exchange. That is the only common characteristic of the FTSE100 constituents. The effect of this somewhat arbitrary list is that it is very oddly diversified. Compared to the global market there is a large % of extractive industries (mining and oil) some of which are somewhat esoteric/bizarre - eg a Mexican silver miner. There is a low % of manufacturing and a complete absence of some of the worlds largest industries eg vehicle manufacturing, consumer electronics, IT.

So why should anyone choose this as a basis for their investing?

BLB53

I might be getting ahead of myself, but is there any reason not to just invest in a Vanguard LifeStrategy X and then just leave that to do it's thing?

This would be a smart move imho and, over time, I believe you would come out ahead of the vast majority of investors (including most of the professionals!)

princeofpounds

There is no such thing as passive investing, when it comes down to it.


There are passively-managed investment instruments, which are low fee. They will - usually - quite nicely track a benchmark for you, with a moderate amount of underperformance due to rebalancing costs (despite the marketing spiel, you aren't getting true benchmark exposure, it is not possible unless you can trade for free or you pay someone who has to trade to offset your exposure. But it can be close.).


But just sticking your wealth into lifestrategy is an abdication of the one active decision you cannot get away with, which is allocating your assets. Picking an asset class and a benchmark to track is actually the biggest active decision and investor typically makes.


There is a big misconception that picking a benchmark investment is somehow the 'neutral' option. When benchmarks are often largely arbitrary creations, as much the creation of popularity, brand and a human-selected methodology as anything else. All benchmarks have intrinsic biases.


To consider a specific example - why not just buy a FTSE100 tracker? That is what everyone looks at when they talk about the UK market.


So far this century, that benchmark has delivered 68% total return (minus fees, minus costs of course).


BUT - why not the FTSE All-share (which incidentally does not contain all the shares, but that's another story)?


Over the same time period, that delivered 91% total return. That rate of return is one-third(!) higher.


OR - we could try the MSCI UK Local index. Maybe THAT is the real UK market?


That delivered 76%.


I hope you understand my point here - the UK is a big, mature market and yet there is a proliferation of passive products which can produce large performance differentials (incidentally, even more significant than the difference in fees between active and passive products they spend all their time banging on about!).


So it matters. Yet is largely ignored and glossed over by the marketing of passive products.


I don't think these are bad products. I just think that people misunderstand what passive and active investing really means, and don't realise you cannot avoid making an active choice at some level.


So what does this mean for you?


- actually look at what is in lifestrategy before you put your money there. I mean really look at it.
- consider what you might want in terms of your asset allocation before you plunge blindly into buying a benchmark just because it looks official and has the right brand name.

dunstonh

what a strange thing to say, why? or do you mean it's not ideal just to track that index? which I agree with

Not strange at all. It is heavily weighted to a limited range of companies and industry spread giving your poor diversification. Historically, it is one of the worst performing indices in the Western world.

Data until October 2014:
Last Month Rank: 20 out of 23
Last Year Rank: 23 out of 23
Last 5 Years Rank: 20 out of 23
Last 10 Years Rank: 21 out of 23

It's buying a portfolio already built by someone with more information and knowledge than you but without tailoring it to you specifically. You can say it's lazy or you can say you are accepting that vanguard know more than you and are willing to pay the extra 0.1% per year to take advantage of that and automatic rebalanceing.

The term "lazy investor" indicates someone that doesnt want to do their own research. I am not calling anyone lazy. Just using the phrase.