Financial advisor is outperforming Vg LifeStrategy 80. Should I keep him?

alexis-sanchez

My financial advisor has my money invested in a range of actively managed funds.

In 4 years since July 2011, the portfolio he has created has gained about 50%, while LS 80 Acc has gained about 40%, all after going costs.

His charges on top of the ongoing costs are 0.42% for the platform plus 2% for him.

Everything I have learnt about active vs passive tells me that I should transfer my money into simple, cheap index trackers. Yet I am better off now due to active managers.

I am conflicted. Can someone offer me advice?

P.S. Here are the seven biggest holdings compared to LS 80 Acc: [Apparently I'm not allowed to post a link]

dunstonh

Everything I have learnt about active vs passive tells me that I should transfer my money into simple, cheap index trackers. Yet I am better off now due to active managers.

Then you havent learnt it. Just because it is cheaper does not mean it will perform better (or vice versa). The VLS is an investment strategy with a fairly defined asset allocation that uses trackers. The adviser will probably use data on a more fluid asset allocation (the allocations tend to be updated every 6-12 months depending on the actuary used). They will also pick funds based on their research. In my bespoke portfolios I use trackers in some areas and managed in others. Sometimes the managed underperforms but in most cases I find most of the managed outperform. Sometimes you change a fund as you feel it isnt suited for that bit of the economic cycle.

Cheapest does not mean best. It does not mean worst. Its an option. The internet does tend to be very biased to cost as the primary driver with investment potential secondary. Advisers go the other way around. Sometimes one will be better than the other on a like-for-like risk basis.

In your case, your adviser has a track record of beating a cheaper fund. So, why would you want to change it? Paying less to get less is not good money saving.

nicknameless

dunstonh wrote: »

In your case, your adviser has a track record of beating a cheaper fund. So, why would you want to change it? Paying less to get less is not good money saving.

Not trying to be inflammatory, but just curious.

Is this a track record? 4 years of records? If this were a stock or fund what would you say about track record?

Isn't this just down to what you believe to be the case - that IFAs can construct better performing portfolios on average than following cheaper trackers?

You'd need to have records for all IFAs to know that was the case wouldn't you i.e. the same theory and argument for using trackers in the first place, unless you believe you can pick the managers and actively managed funds that will consistently 'outperform', or your IFA can do the same.

Also the OP hasn't managed to post the holdings and so the differential may simply be a higher % of better performing investments over the time period concerned.

OP - sorry to clog the thread and this is not advice, or a suggestion, just a question about the basis of this statement.

dunstonh

Isn't this just down to what you believe to be the case - that IFAs can construct better performing portfolios on average than following cheaper trackers?

Trackers give mid table returns. Consistent mid table returns. So, actually having funds that outperform is not unexpected.

You'd need to have records for all IFAs to know that was the case wouldn't you i.e. the same theory and argument for using trackers in the first place, unless you believe you can pick the managers and actively managed funds that will consistently 'outperform', or your IFA can do the same.

no-one is suggesting such a sweeping generalisation. Personally, I do think that picking the best fund for the scenario is the best option. If thats a tracker then so be it. if thats a managed fund then so be it. I dont think any bias should exist in either side.

My own experience is that managed multi-asset funds tend to be a disappointment bar some exceptions. Whereas index tracking multi-asset funds are more consistent. However, I find model portfolios made up of managed and tracker tend to outperform in most periods. Maybe thats because an asset allocation that includes property and is updated more frequently that allows you to pop in Inv Perp high income (for example) for the UK allocation instead of a FTSE all share tracker could easily lead to outperformance. (indeed, just think of 9 trackers for the other sectors and Inv Perp High income for the UK and that would have outperformed). I am increasingly less keen on pre-built investment strategy funds as they don't seem to offer much other than extra layers of cost that are hard to overcome.

The mantra of passive is best is wrong. Just as it would be wrong to say managed is best.

Kernel_Sanders

Reported as potential spam.

Archi_Bald

Why would you think this might be spam?

Playing_with_Fire_2

If you believe that passive funds such as LS80 will be best for you (after costs and on average), then you should switch now while you are ahead. You should then never look at what the alternative would have been.

Your managed funds may be doing well now, but fund managers move around (generally just after poor performance) and FAs can have a streak of good luck followed by a streak of bad luck. Without a time machine you can't know if your FA is genuinely talented or having a lucky streak.

If you have read the books/ articles supporting passive investing then maybe you recall the analysis of the percentage of active fund managers who consistently outperform the market (I think Tim Hale refers to it but there must be others). I wouldn't give someone 2% of my money every year just in case they happen to be one of the few.

FWIW, I've just moved the last of my managed pension funds over to index funds, they had been lagging LS after costs until the recent drop, and then moved ahead (which I took to be a more defensive position). This only convinced me that the passive funds were better value. YMMV

Best of luck

BLB53

I suppose 4 yrs is not such a long period but over the longer periods, all the evidence I have seen suggests most managed funds don't do as well as the low cost index funds.

As time goes by, and with the impact of 2% adviser fees, my best guess would be that the VLS80 index fund will overtake the portfolio of advised managed funds. It may not happen but its all about probabilities.

Personally, I would switch to the index fund whilst I was ahead of the game.

bowlhead99

Playing_with_Fire wrote: »

Your managed funds may be doing well now, but fund managers move around (generally just after poor performance) and FAs can have a streak of good luck followed by a streak of bad luck. Without a time machine you can't know if your FA is genuinely talented or having a lucky streak.

Financial advisors do not set out to have lucky streaks or unlucky streaks or get the best performance in one year for a client. They set the client up with an investment portfolio suitable for his/her needs in terms of risk tolerance, risk capacity, levels of understanding, tax, etc etc and they ensure it continues to be suitable over the years.

If their objective is not to deliver the same performance and volatility of a generalist tracker or fund-of-trackers, because that's not what best suits the needs of the client, you woud not call them 'lucky' if their performance was higher than the tracker or unlucky if it was not.

The client may read the internet and hear they should do it all themselves to save fees; and within the funds they choose, they should choose equity trackers - because trackers are the cheapest type of fund and equities have potential to give the greatest gains over the long term. However, tracking the indexes up and down gives a portfolio that can go down 50% in a year or up 80% in a year, and that might not be what they really need.

It is unfortunately true that while listening to a regulated industry professional is more likely to deliver the desired outcome in terms of long term gross performance and volatility and comprehension than just winging it yourself without adequate research, it's not possible to tell if the DIY solution and consequent cost saving would have in fact been a better choice without the benefit of hindsight a couple of decades down the line. Without that time machine, none of us will know whether you might have done decent research and made sensible adjustments yourself, or not.

FWIW, I've just moved the last of my managed pension funds over to index funds, they had been lagging LS after costs until the recent drop, and then moved ahead (which I took to be a more defensive position). This only convinced me that the passive funds were better value. YMMV

I can't see how the factors in that sentence could possibly convince you that passive funds were better value.

Firstly the Lifestrategy funds have only been going since mid 2011, so you can't have been comparing them over a decent time period in which to make meaningful conclusions (compared to the sort of time period over which the average person accumulates and decumulates their pension pot).

Secondly the markets over the six years from end of Q1 2009 and Q1 2015 were, on average, a very strong bull market. If equity and debt is all going up in value then any muppet can make money. If all you want to do is for your portfolio to ride the index, then it's not particularly surprising that the LS fund gave a return that would be satisfactory to you: a dumb tracker turns in a decent performance when indexes are rising strongly.

You mention that your managed funds started to move ahead of the passive fund when the market had a shake recently, which you took to be a more defensive position. They did a better job of preserving your capital in a downturn, presumably because their holdings were not so concentrated in overpriced assets whose values corrected downwards in the correction.

So, if their objective was indeed to deliver a more defensive position than the comparable index (if a comparable index exists for what they're trying to do) then you would say that they have achieved their objectives, correct? If a fund achieves its objectives and lost less money - even after its high costs - than your cheapo index, I can't see why that should convince you that indexes are better value and you should sell the last of your managed funds.

Perhaps you got rid of them because at the end of the day you simply don't want defensive funds, you want more aggressive funds. But a preference for aggressive or defensive funds is not really about active vs passive, is it. If you're unhappy with the return of the managed fund you'd selected because it was too defensive, perhaps it was a poor choice on your behalf. There are certainly plenty of managed funds which are more aggressive. Anything that uses smaller companies for example, would have soundly outperformed an LS fund which is very heavily to the FTSE100 for its UK allocation, S&P500 for US allocation etc.

grey_gym_sock

alexis-sanchez wrote: »

In 4 years since July 2011, the portfolio he has created has gained about 50%, while LS 80 Acc has gained about 40%, all after going costs.

His charges on top of the ongoing costs are 0.42% for the platform plus 2% for him.

do you mean that the return has been 50% after paying the 0.42% + 2% per year, or before?

gadgetmind

alexis-sanchez wrote: »

In 4 years since July 2011, the portfolio he has created has gained about 50%, while LS 80 Acc has gained about 40%, all after going costs.

What's his asset allocation? Over such a short time period, which has mostly been an equity bull market, this is the most critical factor covering returns. Over other parts of the market cycle, things could be very different.