Your favourite tracker

masonic

Sam_J12 wrote: »

She has invested heavily in emerging economies and there are very good arguments for actively managed funds there.

I think the real issue goes back to what I mentioned before - why set sights on a tracker fund rather than decide what sector and market to invest money in, then decide on the most suitable way of doing it? It makes no sense to me. I think there is little point in an actively managed fund in US large cap for example, but if she wishes to invest further in emerging economies or small cap then actively managed funds become far more worthy of consideration.

Yes. but she already has existing US (and other developed market) exposure that is also actively managed, hence my questioning why she now wants to add a tracker to these active funds. What could it achieve, other than water down the active positions she is paying her current fund managers to benefit from? Perhaps she has an answer I've not considered.

TheTracker

Sam_J12 wrote: »

She has invested heavily in emerging economies and there are very good arguments for actively managed funds there.

No, there are not. It is a myth that active investing is best placed in emerging markets. This appears to stem from some ill placed belief that passive investing works best in efficient markets, and since EM is probably less efficient then it is less suited to passive strategies.

However, the argument for passive investing has nothing to do with market efficiency. To paraphrase swedroe since all emerging markets stocks must be owned by someone, and passive investors earn the market returns less low costs, and in aggregate, active investors must also earn the market return less high costs, in aggregate passive investors must earn higher net returns than active investors. Yes for EM. Active management is just as much a loser's game in emerging markets as it is in developed markets.

Now I should also point out that active investing works best (but not better than passive) in inefficient markets as inefficiencies may be better exploited. But still not better in aggregate than passive.

If you doubt this, please check out the scorecard below. It shows that 80% of actively managed EM funds do not beat the benchmark.

http://www.spindices.com/documents/spiva/spiva-europe-mid-year-2015.pdf

Linton

Funds vary in a wide range of charateristics that affect performance in addition to passive/active. Some of these can have a far geater effect than 0.75% of charges. In choosing a fund one needs to consider a range of such characteristics.

Lets look at two of them..

1) Risk

A fundamental factor in choosing investments. If you sort the Trustnet EM fund list on descending Trustnet Risk Ranking you will find the Vanguard EM tracker (the only EM UT/OEIC tracker I can see) is just in the 1st quartile - ie it is unusually risky. In 5 year performance it is as one would expect close to the middle. The top 12 funds are all of lower risk level. Note that the past 5 years havent been that good for EM in general.

2) Investments

The primary driver for investment performance of far more importance than charges is what the fund invests in. EM covers a wide variety of individual markets. The Vanguard EM fund puts 23% of its money into China, pesumably because China is big. This is high especially as China has high geography specific risks. I couldnt find any EM managed fund that did this. Some funds appear to ignore China completely, some focus on the Far East generally, others have a high % in Latin America.

So my advice is dont just look at one factor when choosing an investment, consider as many as you can and come to a decision that you can justify.

TheTracker

Linton wrote: »

Funds vary in a wide range of charateristics that affect performance in addition to passive/active. Some of these can have a far geater effect than 0.75% of charges. In choosing a fund one needs to consider a range of such characteristics.

Lets look at two of them..

1) Risk

A fundamental factor in choosing investments. If you sort the Trustnet EM fund list on descending Trustnet Risk Ranking you will find the Vanguard EM tracker (the only EM UT/OEIC tracker I can see) is just in the 1st quartile - ie it is unusually risky. In 5 year performance it is as one would expect close to the middle. The top 12 funds are all of lower risk level. Note that the past 5 years havent been that good for EM in general.

Not really. This is an artefact of the investments that are contained in each of the active funds (that is, your second point, so this is basically the same point), not a reflection of where the tracker sits in risk terms versus all emerging market money. By definition the tracker is of average risk. But on average it seems an actively managed EM fund will be less risky than the risk of all the money in the asset class (it needn't be, it just is through circumstance). You'll find different effects in different markets.

To summarise, the EM tracker is of average risk against all active managed market money, but due to the investment decisions made by individual active fund managers it shows as more risky than the active managed fund. The tracker is not "unusually risky" it is "averagely risky".

You can see the same effect when you look at the historical performance of passive funds versus active funds. You'll see that in many asset classes the passive tracker floats around the bottom of the 1st quartile or top of the second quartile. So we see regularly see headlines that passively managed funds "beat 70% or 80% or 90% of actively managed funds over a 1,5,10 year period", but in reality what they've done is return exactly the same performance (plus avoided fees) as the actively managed money market.

Your second point is of course correct. By using an active fund one can more narrowly select the investments to target different performance (and risk) profiles.

The true utility of the risk-sorted Trust Net listing is to allow an investor to select an actively managed fund that is more or less risky that the average in the sector. The investor should not use the half way or 50% point to establish this, but rather the relative position against the tracker. A fund that lies just below the tracker, despite being in the 2nd quartile, is actually less risky than the average of the EM sector on a market cap basis.

For the OP, it is useful if they wanted to invest in EM but were concerned about the risk level and wanted to water it down. Personally, I'd just invest less in the "average risk" tracker but its possible to instead choose a less risky actively managed fund in the class.

All assuming no tracking error, of course. Just theory. And survivorship bias will also effect the 5 year position so don't read too much into it.

Mrs_Z

Hi, the reason for me considering a tracker is that I don't have one yet in my portfolio, and as you have rightly spotted, the balance of my current investments it on the emerging markets. I am thinking of adding one that tracks the UK market more than anything. As the UK market is already well established, I thought a boring tracker (as someone put it) that I can forget about, would be a good addition.

TheTracker

A boring tracker for the UK market is one that tracks the FTSE UK All Share. This means it tracks the top 650 companies by value, not just the top 100, however do note the top 100 represent 80%+ of the value inside the All Share. The FTSE 100 is seen by many to be poorly diversified and poorly performing so others like to hold a FTSE 250 tracker instead.

You shouldn't select trackers "because you don't have one". You should select markets (eg EM, UK, Intl) because you are not diversified into them. And then make the choice of whether to go tracker or not.

masonic

Mrs_Z wrote: »

Hi, the reason for me considering a tracker is that I don't have one yet in my portfolio, and as you have rightly spotted, the balance of my current investments it on the emerging markets. I am thinking of adding one that tracks the UK market more than anything. As the UK market is already well established, I thought a boring tracker (as someone put it) that I can forget about, would be a good addition.

So does the UK-based Artemis Income fund still suit your needs? If so, how will adding a UK tracker to it improve your overall portfolio? Won't there be a lot of overlap? Why have you decided not to top up the Artemis fund?

If not, are you intending to sell the Artemis fund and use the proceeds to add to your chosen UK tracker?

darkidoe

masonic wrote: »

Yes. but she already has existing US (and other developed market) exposure that is also actively managed, hence my questioning why she now wants to add a tracker to these active funds. What could it achieve, other than water down the active positions she is paying her current fund managers to benefit from? Perhaps she has an answer I've not considered.

Interesting chat about passive vs active funds! On market exposure issue, so is it a better strategy to be solely exposed to a market through a single fund? Do people usually buy different funds for a specific market if the funds contain various different investments?

Kendall80

darkidoe wrote: »

Interesting chat about passive vs active funds! On market exposure issue, so is it a better strategy to be solely exposed to a market through a single fund? Do people usually buy different funds for a specific market if the funds contain various different investments?

If the funds do not overlap then i'd have no problem doing so. Trackers can give regional or global whole market exposure. However, you might have a favoured fund manager displaying long term outperformance relative to the index with a more concentrated portfolio. The likes of Fundsmith, Woodford, Slater and Lindsell train come to mind.

Linton

TheTracker wrote: »

A:
.........By definition the tracker is of average risk. But on average it seems an actively managed EM fund will be less risky than the risk of all the money in the asset class (it needn't be, it just is through circumstance). You'll find different effects in different markets.

To summarise, the EM tracker is of average risk against all active managed market money, but due to the investment decisions made by individual active fund managers it shows as more risky than the active managed fund. The tracker is not "unusually risky" it is "averagely risky".
B:
You can see the same effect when you look at the historical performance of passive funds versus active funds. You'll see that in many asset classes the passive tracker floats around the bottom of the 1st quartile or top of the second quartile. So we see regularly see headlines that passively managed funds "beat 70% or 80% or 90% of actively managed funds over a 1,5,10 year period", but in reality what they've done is return exactly the same performance (plus avoided fees) as the actively managed money market.

A:
You assume that a tracker is the average of all retail active funds. According to the ONS statistics (admittedly for 2010) unit trusts owned 6.7% of UK quoted shares by value. 44% of UK quoted shares are owned outside the UK. So your core assumption that trackers are equivalent to the average of the funds could easily be invalid - as they own only a small % of the market retail fund managers could on average behave quite differently to the index. Unless of course you have evidence to the contrary.

B:
According to my review of the statistics from trustnet, if you look at the UK all Shares Sector the only trackers in the top half of the 10 year performance table are FTSE250 trackers. The worst tracker (Halifax FTSE100) is at position 174 out of 182. The best AllShare tracker is at position 96. So little evidence of long term outperformance - surely if there is any, after 10 years it should be very obvious.

Ahh its all down to survivorship bias!! Any evidence? There must have been a lot of awful funds closed down to turn the above figures into proof of the advantages of the passive funds. In my purely anecdotal experience very few mainstream funds disappear except perhaps when the provider is taken over. None of the few funds I have lost over 15 years were performing unusually badly - one of them had been top of its sector the previous year (Scot Widows US small companies).

PS: Foreign ownership of UK shares is now at 54%