Active or passive global equities?

Herbalus

bigadaj wrote: »

Herbals going back to your original point, are you sure that the company covers the management costs?

This would be relatively abnormal, the costs might be paid out of the employers contribution, but this would still effectively be money coming out of your overall pot, and so reduce the amount you will end up with when you retire.

I can't recall the exact wording, so will check. It's a valid point - there could be many different charges and I'm not sure which ones the company are paying.

bowlhead99

You sometimes see that company schemes have a range of funds available for a capped management fee, but you lose the ongoing discount and pay full rates if you leave the company.

If the traditional advantage of a fund of index funds is that you can get them for half a percent (0.25% platform and 0.25% fund expenses/mgt fees), but actually on your scheme you can get actively managed funds for the same half percent, it seems like the advantage of the index fund no longer exists.

Put another way if you are sold on the idea of using low cost funds because they are cheap, and under this investment scheme they are not cheap (relatively) then there's no reason to pick that strategy any more. The actively managed funds might adopt any number of strategies which deploy your cash in different ways but if they don't charge you for the decisions, you no longer have a reason to suspect they will underperform the index by anything significant. If they have a level playing field then they should perform OK.

Additionally, the graph for the passive fund shows the fund beating the index by a small margin over the last 12 months. I was aware that a fund will not be exactly the same as the index it holds, but I thought it would only be slightly lower?

The passive fund will use a strategy to deliver similar performance of the index which may not involve literally owning every single holding in the exact same quantities at the exact same time. Particularly as people join and leave the fund all the time, money flowing back and forth, they will have a set of holdings that approximate the index rather than exactly equal it. There is a tracking error which may be positive or negative in different periods.

The other reason could be one of measurement - if the 'index' is measured at a different point in the day than the fund, you can appear to do better or worse on a January 31 to Dec 31 total return, because the timing is out by half a business day which can be half a percent or more. If the gap doesn't get bigger and bigger over the years it's probably not a big deal.

A final observation if you're saying the passive fund is only investing in one index, such that you can easily compare it to that index... then it is not exactly a well rounded standalone investment product. Hale or Monevator would tell you to build a whole portfolio out of a set of indexes, not just buy one passive index and be done with it.

So, whether you are using passive funds or active funds for each component, make sure you have a decent balance. If all the indexes and market sectors that you want / need are not available as indexes or active specialist funds under your pension plan, you could probably just take an actively managed multi-asset fund instead and be perfectly happy with the results, especially if there's a cost subsidy of some sort from the employer.

Herbalus

bowlhead99 wrote: »

A final observation if you're saying the passive fund is only investing in one index, such that you can easily compare it to that index... then it is not exactly a well rounded standalone investment product. Hale or Monevator would tell you to build a whole portfolio out of a set of indexes, not just buy one passive index and be done with it.

So, whether you are using passive funds or active funds for each component, make sure you have a decent balance. If all the indexes and market sectors that you want / need are not available as indexes or active specialist funds under your pension plan, you could probably just take an actively managed multi-asset fund instead and be perfectly happy with the results, especially if there's a cost subsidy of some sort from the employer.

Loose words on my part. Both active and passive funds invest in a range of funds (so certain percentages in uk, emerging markets, asia ex-japan, japan etc), and are benchmarked against 4 or so indexes. The passive option is around 4 different funds from L&G I believe.

bowlhead99

Herbalus wrote: »

Loose words on my part. Both active and passive funds invest in a range of funds (so certain percentages in uk, emerging markets, asia ex-japan, japan etc), and are benchmarked against 4 or so indexes. The passive option is around 4 different funds from L&G I believe.

OK, so if the passive option contains a bunch of funds from L&G and happen to be benchmarked against 4 or more indexes, then when you say...

the graph for the passive fund shows the fund beating the index by a small margin over the last 12 months. I was aware that a fund will not be exactly the same as the index it holds, but I thought it would only be slightly lower?

... you are barking up the wrong tree and the apparent 'tracking error' may be a red herring.

Presumably they have selected a benchmark blend of indexes that represent the type of markets they are in, while actually having allocations to the global regions you indicate through some underlying index holdings which follow specific models. That doesn't mean the fund is rigidly investing into those specific indexes used in the benchmark in an exact proportion.

The 'benchmark' is just some sort of allegedly-representative sample of what some similar funds with similar objectives might have achieved. Whether their passive fund beats or is beaten by the index blend in a particular year should not really make a difference to whether you like it or not unless they are deliberately aiming to match that specific blend through their holdings.

So, my thoughts on tracking error and timing differences producing the difference of the fund return vs index return, might be an irrelevance, if they were not actually trying to track those indexes specifically.