Record inflows of $236bn into Vanguard funds in 2015

Malthusian

Be careful what you wish for. Take that to its logical conclusion and all shares would be held in index ETFs costing 0.07%pa. But with no direct shareholders who would set valuations for the shares? Who would turn up at shareholder meetings to hold overpaid underperforming management to account? or vote down their hideously expensive aquisitions?

Who does that now? Certainly not the people that charge 0.75%. When was the last time an active fund manager successfully organised the veto of a board's remuneration policy or other significant decision?

When a publicly listed company is being run into the ground by incompetent or greedy directors, it gets taken over, either by another company or by a corporate raider, a Carl Icahn type. Someone with the vision to see that the company is worth less than the sum of its parts and that there is profit to be made (boooooo) by getting control, turfing out the board and turning it around. Instead of buying out a load of active funds sitting on their hands, they will buy out a load of passive funds sitting on their hands. Nothing will change.

Glen_Clark

Malthusian wrote: »

When was the last time an active fund manager successfully organised the veto of a board's remuneration policy or other significant decision?

Last one I can recall was last year when Alliance Investment Trust board meeting was targeted by active investor Elliot, overpaid underperforming management now cleared out, discount narrowed

AlanP_2

racing_blue wrote: »

Here is the 2015 performance data declared in another thread:




What I really want to know, is there data comparing the performance of the whole universe of managed funds, to the whole universe of investible assets?

I'm a passive kind of guy but notice I'm languishing near the bottom of the MSE league table this year. If there is evidence that active management broadly outperforms, then I might be up for a bit of it.

If there is no evidence that active management outperforms overall- and I have no confidence in my ability to pick between active managers- then I reckon I should stick to the cheaper option of index funds.

(Actually what I am suspecting is that like in so many other situations, the middle way might work well: 50% active 50% passive?)

I doubt if we are all even measuring "performance" in exactly the same way or exactly the same "timeframe" so whilst anecdotally interesting and a bit of fun this is not an accurate or reliable league table.

I like to think of my pot as being akin to Chelsea, having a bad run at the moment but will be back in Top 4 reasonably soon

My concern is that is more like West Ham (the team I follow) - over performing and likely to slide down table over the rest of the year .

Linton

racing_blue wrote: »

....
What I really want to know, is there data comparing the performance of the whole universe of managed funds, to the whole universe of investible assets?

I'm a passive kind of guy but notice I'm languishing near the bottom of the MSE league table this year. If there is evidence that active management broadly outperforms, then I might be up for a bit of it.

If there is no evidence that active management outperforms overall- and I have no confidence in my ability to pick between active managers- then I reckon I should stick to the cheaper option of index funds.

(Actually what I am suspecting is that like in so many other situations, the middle way might work well: 50% active 50% passive?)

I believe you should be basing your investing following a top-down strategy. Not on choosing a set of the best performing funds.....

1) Decide on a high level allocation based on the general characteristics of each type of asset and the need for a high level of diversification. This could be 100% equity for very longterm investing, or perhaps 50% equity, 40% bonds 10% property for some more medium term growth perhaps with income. Or whatever is approprpriate for your circumstances.

2) Now you can divide up each asset type giving a % for each. eg by geography, company size, and sector for equity. Government versus corporate, time til maturity, risk for bonds.

3) Finally you need to identify the optimum funds to meet your %s. So you only need to compare funds in very narrow bands. You never need to see the whole universe. It is here where the active/passive question comes in, right at the end. For some requirements passive may be as good as anything else and cheaper. For others passive may not be a viable option. The key point is that the choice is not a bet on active outperforming passive nor on lucky managers, but primarily one of which funds can actually do the job.

My long term growth portfolio ROI of 4.5% for last year seems to be one of the highest reported here, if one neglects small high risk portfolios. The portfolio is based on the above strategy and is 100% equity and 100% managed. Average fund fee 0.78%, the highest fees > 1% are all ITs which I found interesting. The relatively good performance was helped considerably by the assignment of a higher than average % to small companies funds, an area where passive investing is difficult.

Glen_Clark

gadgetmind wrote: »

I mainly look at my performance once a year. I compare the total of all my pots to "last year + 5% + new money" to see whether I'm on track or not. For the last few years, I've been wall ahead, last year not so much. But it won't take much of an uptick for the "new money" that's gone in at lower prices to perk things up.

5% is about 10 times what you can get on 10 year German Euro Bonds, so good luck with that ...

Sam_J12

racing_blue wrote: »

What I really want to know, is there data comparing the performance of the whole universe of managed funds, to the whole universe of investible assets?

I'm a passive kind of guy but notice I'm languishing near the bottom of the MSE league table this year. If there is evidence that active management broadly outperforms, then I might be up for a bit of it.

If there is no evidence that active management outperforms overall- and I have no confidence in my ability to pick between active managers- then I reckon I should stick to the cheaper option of index funds.

(Actually what I am suspecting is that like in so many other situations, the middle way might work well: 50% active 50% passive?)

The strength of investing in actively managed funds is that you are able to pick and choose between actively managed funds and ditch poorly performing funds, something that most analyses of active vs passive investments ignores as these assume a buy and hold strategy.

One method that you might like to look into is taking advantage of the momentum phenomenon, a long established effect where shares or markets short term performance can be predicted by recent performance. So you could use a strategy that sells any recently underperforming funds in favour of recent outperformers. Backtesting suggest this works well but, as ever with back testing, you can never really be sure :-) Anyhow, this is a strategy I utilize now and it has substantially beaten any passive fund I could have invested in, albeit over a relatively short period.

bowlhead99

TheTracker wrote: »

Performance can be measured in so many ways. You have the average performance of each invested dollar, the average performance of a fund, the average performance of a security (stock etc), the average performance of an investor. They can all be different. I think the first one is the most important in terms of the question you are trying to answer.

The whole investable universe is made of many parts. Not just the open public stock and bond funds, but private property, commodities, private companies, micro companies,and more esoteric alternative vehicles like art and collectives. I think stocks and bonds are what you are talking about, since the returns you mention are in that part of the universe.

In 2015 the global market of major asset classes returned -1.4%, according to this source.

I would measure myself against that global return sooner than a random sampling of MSE'ers or the FTSE100.

I would tend to favour some of Linton's comments about picking a specific narrow band of investment opportunities and considering the fund opportunities available to give me access to that space, which then might end up with a choice being made for actives or trackers depending what I thought of what was out there.

When i then get a return from that space I can compare it with the average return for that space. There is absolutely zero usefulness in comparing my actual portfolio return with the portfolio return of "all available opportunities weighted by global dollars invested". My needs and my investment returns have never been in tune with the global weighted average dollars invested because nobody on earth really has the objective of achieving that return.

There are a lot of institutions putting money into all different types of markets. So let's say there are $60 trillion of public/government bonds in issue, and 90 trillion of corporate bonds outstanding (including probably 60 trillion of banks and financial institutions and 30 trillion of other corporates). And global financial investors will also be investing in securitized or unsecuritized loans accounting for another 70-80 trillion.

That's a heck of a lot of money being invested into types of assets I don't really want and which are not really appropriate for my growth-focused needs. Because while all those sectors can be appropriate for an institutional fixed income investor like a bank lending out certain assets - it's not the best way for me to grow my wealth from age 18-50 however much you protest that 200 trillion of money deployed by smart investors can't be wrong.

The total world stock market is what these days, 40-60 trillion? Albeit, like the debt markets, it's not all in free float. If I put all my money in available UK listed equities from the FTSE all-share I am playing in a $3 trillion pool, at one end of a $300 trillion lake. The size of the lake does exclude some other areas like the hundreds and hundreds of billions of private equities and the non-leveraged element (because debt is covered above) of residential and commercial real estate.

So clearly my money should not be going 100% UK equities if it's only a fraction of 1% of the investible market. I need to cast the net wider, into the lake and not the pool. But most of the lake represents people whose investment objectives are quite different to mine and in fact may be diametrically opposed; they deliberately seek exposure to assets with very different attributes to the sort of thing that I want. There is nobody trying to fish the whole lake at once and thinking he will be happy with his "average" catch.

So if the whole lake returns some figure in 2015, whether that's 1.4% less than in 2014 or 2% more than in 2005, should I be happy with my 4% return? Is it truly better to compare myself to what I "could have had" from the "total market asset allocation" than to the "random sampling of MSEers" who probably have similar goals to me because they're UK individuals?

As the asset allocation of the entire planet is not set up to reflect the goals of individuals like us OR the goals of fixed income investors like building societies, it strikes me that NEITHER of those groups should use it to benchmark. The mix between fixed income and equities which is used by the "global market index" (an unmanaged, market value weighted index of asset classes) is not a sensible target mix, it is just a function of the state of the market for the last x years.

If a new bond comes on the market and I am not predominantly a bond investor, I don't have to exit some of my equities and real estate to buy it, because it has none of the characteristics I want. However, if was allocating my assets evenly across all available opportunities, I would have to rearrange my finances and buy in. Let's assume I don't. At the end of the year the total market index which is now 81% bonds instead of 80% bonds, tells me how "all available opportunities" turned out as a benchmark for this year.

But I know an 81% bond allocation is never going to get me to retirement, just like an 80% bond allocation would never get me to retirement, so when the total market index change for the year is declared as -1.4% and I only made -2.0%, I'm not going to be sat there thinking, dammit if only I had gone 81% bonds for the year, I'd have squeezed out an extra 0.6%. It's not a realistic aspiration because 81% bonds is not a sensible bond allocation for the long term and I would be stupid to blindly follow it as a benchmark to beat or be beaten by.

gadgetmind

Sam_J12 wrote: »

The strength of investing in actively managed funds is that you are able to pick and choose between actively managed funds and ditch poorly performing funds, something that most analyses of active vs passive investments ignores

While some active/passive analyses may ignore this, those I have take to the time to read very much do *not* ignore this. Choosing which active fund to buy/sell is very difficult, the vast majority (close to 100%) of private investors get it wrong, and so do "fund of funds" managers.

Ditching "poorly performing" funds to buy those doing well is generally called "sell low, buy high".

TheTracker

bowlhead99 wrote: »

I would tend to favour some of Linton's comments about picking a specific narrow band of investment opportunities and considering the fund opportunities available to give me access to that space, which then might end up with a choice being made for actives or trackers depending what I thought of what was out there.

I actually agree with Linton's three step approach, it's the sensible way to invest. I might make different decisions at that final step of fund choice, but I do consider actively managed funds on a level playing field when making the choice. I'm even considering dumping a passive fund for an active one, as it happens. I'm a tracker, not a passiver!

On the point of global averages I was responding to a question on average performances, not advocating constructing a portfolio that tracks it, although there are many respected proponents who do just that.

Thoughtful comments as always thanks.

Sam_J12

gadgetmind wrote: »

While some active/passive analyses may ignore this, those I have take to the time to read very much do *not* ignore this. Choosing which active fund to buy/sell is very difficult, the vast majority (close to 100%) of private investors get it wrong, and so do "fund of funds" managers.

Ditching "poorly performing" funds to buy those doing well is generally called "sell low, buy high".

Most of the justification I hear for avoiding active funds go along the lines of saying ">XX% of active funds underperform the market after fees over YY years" so there is no point in using active funds. This ignores the fact that investors have freedom in what they invest in and can choose to avoid under-performing funds and sectors. This doesn't mean it is easy to do this but an informed, intelligent and disciplined person certainly can beat the market this way. You don't even have to be that smart - anyone investing heavily in Berkshire Hathaway has done so for decades (although more an investment vehicle than true fund). There is a similar argument in online poker where many people believe it is impossible to make money because of the "rake" (fees charged by the sites ) and the fact that the large majority of players lose money at poker - but the most skillful and hardworking make significant money despite the fees.

By the way, ditching "poorly performing" funds/stocks to buy those doing well is also known as "momentum investing" and has enormous amounts of academic literature and practical application supporting it as a way to predict future short term performance dating back to the 1930s. It is one of the few enduring exploitable anomalies in the stock markets.