Record inflows of $236bn into Vanguard funds in 2015

InvestInPoker

Passive investing appears to be increasingly vastly in popularity.

http://www.wsj.com/articles/investors-poured-record-236-billion-into-vanguard-last-year-1452035259

Interestingly

Investors pay just under 18 cents per $100 invested in Vanguard products, according to Morningstar. That compares with $1.23 for the average actively managed fund and 89 cents for the average passive fund

The "average passive fund" does not appear to be THAT much cheaper than the "average actively managed fund" despite the cheapness being the usual selling point. However Vanguard funds do appear to be significantly less expensive.

I am sure this forum has contributed some towards Vanguards popularity as it is a popular recommendation/fund purchase here. I do not use the VLS products but I am very glad they are available here, and I do use other Vanguard funds in my portfolio. I wonder what Ryan Futuristics would have made of this article

bowlhead99

InvestInPoker wrote: »

Passive investing appears to be increasingly vastly in popularity.

No arguing that passive is getting more popular, though it's worth noting that the $236bn of new money received by Vanguard is not necessarily all going into passives because in their USA homeland they have quite a few active products which the article doesn't acknowledge - passive investing is what really helped make their name

The "average passive fund" does not appear to be THAT much cheaper than the "average actively managed fund" despite the cheapness being the usual selling point. However Vanguard funds do appear to be significantly less expensive.

When they talk about average passive fund costing 0.89% this is probably based on number of funds in the market rather than a weighted average of where people actually put their money. The ones from Vanguard or Blackrock et al are at the way cheap end of the scale and take in trillions, while the ones from Virgin at 1% are not really taken seriously by the masses of real passive investors.

Of course, a number of the expensive retail products like Virgin's ISA are available without an arm's length platform fee being paid, unlike Vanguard's OEICs or UTs (assuming you don't meet their £100k minimums to go direct) so it is perhaps not an apples to apples comparison.

There are no doubt some people paying something approaching a 0.5% platform fee on quite a substantial amount, to access a 0.2% cheapo tracker and thinking it's a good deal because the headline price of the tracker on the platform is 80% lower than the headline cost of what they could buy direct off a lazy manager - when the saving on the all in cost is 'only' 30%.

Sam_J12

I think it is a really positive trend. Financial professionals pocket a huge proportion of the profits that investors make, and tracker funds help reduce this. I think there is also an interesting trend for actively managed funds to become cheaper in response to increasing awareness surrounding fees, which further reduces the money trousered by the professionals.

redux

On the other hand, a slight antidote to saying that tracker funds are better because of lower charges, there are recent threads here expressing disappointment with their fund performance over the last year or two, has the market reached a peak etc, and these seem to be mainly people in trackers.

Active funds vary in performance of course, and the better ones are better than averages achieved by index trackers, for example some investment trusts are up 20 to 40% on the year. So something may depend on one's degree of confidence in picking some of the best ones.

bowlhead99

Sam_J12 wrote: »

I think it is a really positive trend. Financial professionals pocket a huge proportion of the profits that investors make, and tracker funds help reduce this. I think there is also an interesting trend for actively managed funds to become cheaper in response to increasing awareness surrounding fees, which further reduces the money trousered by the professionals.

I think the recent industry efforts towards transparency have helped trim down fees quite a bit, with active management typically costing something like 0.5% above passive. There are of course some more hidden costs such as broker fees resulting from portfolio turnover which are capitalised into the cost of investment rather than being visible on an expense line, but there is no hiding them when it comes to the net total return so not too much of a worry.

I think the trend of active funds getting cheaper may still have some way to go but will not keep going and going. There is fee pressure on managers right across the spectrum and the smart ones are doing what they can to react to the customer demand for both lower fees and for transparency (.e.g Woodford's vehicles launched in last couple of years were competitive vs rivals in this regard).

There are still areas where fixed fees will always be higher and performance fees more prevalent, in less liquid assets like private equity, venture, non-listed infrastructure etc - because those deals take inherently more effort to set up than just buying or selling a tiny slice of a listed company. So 'money trousered by the professionals' will still happen.

Of course, 'trousered' is quite an emotive statement and implies the people getting paid are bad guys or crooks. If I pay money to a guy who built me an extension on my house, or maintained my car, or produced a hollywood movie for me to watch, or who arranged for fresh milk to appear in my local supermarket and ultimately in my fridge, I don't begrudge paying out cash that ultimately ends up as wages and business profits. They have done something for me that I couldn't do myself as effectively or efficiently. Of course, I could have tried to do it myself and keep the cash in my own trousers, but it may not end up so well.

Likewise, if I want access to investment returns but don't want to simply accept the result of specific indexes because they don't accord with my goals, I may pay active management fees (within reason) and not resent the fact that I am paying someone for that. Though of course, if someone can do as good a job for less money I would prefer that, as I do in other walks of life.

dunstonh

Passives are popular because they are cheap. if active was cheaper, most would soon drop their passive beliefs. Passive is not the key thing. Fees and tax are. Fees are the obvious one. However, many forget that US taxation favours passives rather than active. An issue that does not apply in the UK. Vanguard themselves say about their active management: "In the end we find that low-cost active talent can achieve outperformance; and that investors, to the extent they stick with a disciplined approach, can be successful using actively managed funds."

That may explain why a popular trend in the UK is the mix and match of trackers and managed. Trackers where trackers are best. managed where managed are best and flexible and fluid allocations rather than static.

Glen_Clark

Sam_J12 wrote: »

I think it is a really positive trend. .

There are positives and negatives like most things. A negative is that with all these shares held in passive funds, who is going to hold overpaid underperforming FTSE 100 management to account?

Glen_Clark

InvestInPoker wrote: »

The "average passive fund" does not appear to be THAT much cheaper than the "average actively managed fund"

Hard to tell the difference sometimes, as many so called active managers seem to follow an index?

gadgetmind

dunstonh wrote: »

Passives are popular because they are cheap. if active was cheaper, most would soon drop their passive beliefs.

We have a large enough body of evidence that I think we can safely drop the word "belief", don't you?

racing_blue

redux wrote: »

Active funds vary in performance of course, and the better ones are better than averages achieved by index trackers, for example some investment trusts are up 20 to 40% on the year. So something may depend on one's degree of confidence in picking some of the best ones.

And some are down, for example:
Alpha Pyrenees down 94.6% on the year.
RDP Global Resources Investment Trust down 73.2%

Is there data for average performance of active funds, as a group? For example iii lists the benchmark performance for flexible investment unit trusts for 2015 as +0.76%

TheTracker

dunstonh wrote: »

Passive is not the key thing. Fees and tax are. Fees are the obvious one.

And quite often the largest part of the investment fee for many investors is the cost of ongoing financial advice, often exceeding the underlying cost of holding the funds. I wondered on the thread about performance for the year how many people included the cost of their (I)FA in the stats, as well as platform and trading. Very few I hazard. Often overlooked is the potential saving in advice fees when moving from active to passive strategies.