Record inflows of $236bn into Vanguard funds in 2015

Linton

TheTracker wrote: »

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So I see active fund management in 2015 as a bit of a mug's game in many ways. The field has been farmed so deep that we know what works and what doesn't. I simply don't believe in star fund managers with superhero intuition. ......

Strawman argument - my growth portfolio is 100% invested in active funds. But I dont believe in star managers with superhero intuition.

TheTracker wrote: »

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So once you've allocated a portfolio to studied sectors, the question remaining is how does one pick an active fund that would outperform an index/etf that tracks that sector? Studies have shown, for instance, that most funds that beat a value index do so because they are "more valuey", after accounting for randomness. Same for the Small cap sector because they chase funds that are "more smally". We read about "closet index trackers" in the news with distaste, but really nearly all successful funds are "closet factor trackers".

Not sure what you mean here. If a good active fund beats a value index by being more "valuey" isnt that a good reason to invest in the active fund? It may not be fair to compare the two but who cares about comparison if the super-valuey index and its associated tracker funds dont exist. Where is the stigma in being a closet tracker of a non existant index? It is precisely those sort of active funds I look for.

TheTracker wrote: »

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In some areas there are currently no or few indexes or cheap passive funds to track. For instance, UK Value or UK Small Cap. Then we get into false benchmark territory when we look at the active funds in those spaces versus the poor proxies for passively tracking them. So some people opt for an actively managed fund because the cost of providing the fund may outweigh the exposure focus through the poor tracker. We make personal choices/stabs here: I wouldn't pay 0.78% for a small cap tracker, but I might pay 0.22% for an active value tracker.

I would disagree that in some areas there are currently few indexes - rather in most areas, or at least most interesting areas, there are currently no good indexes. The indexes which exist are so broad brush to be the investing equivalent of beige.

As I have said before the fees charged are one of the least important factors in choosing a fund. I wouldnt use a FTSE100 tracker nor an income tracker, nor a small companies tracker even if they were free.

TheTracker wrote: »

Future gazing also brings up the spectre/hope of robo-portfolios and even the demise of index trackers. A passively managed index tracking fund is still a middleman, albeit with a very low cost. Some say there will be a day where trading costs are so low that one can directly buy the logical index constituents cheaper than the cost buying into an index fund.

How does one know what are the logical index constituents of a non existant index? Isnt that one of the key roles of a niche active fund manager?

racing_blue

bowlhead99 wrote: »

d) you only won because the portfolio you selected had a different set of risks because it wasn't the complete theoretical market basket in the full market weights because when investing across 3000 companies for diversification you didn't end up putting over 3% of all your money into Apple and Exxon.

Someday, two new companies will likely displace Apple and Exxon as the biggest in the world. Those of us with global trackers probably already own them- we just don't know which they are yet.

grey_gym_sock

bowlhead99 wrote: »

Effectively, another way of looking at that paragraph is to say that every time a dumb regional or world tracker is beaten by an active fund that *doesn't* simply allocate capital to every single equity opportunity based on size and skew your portfolio to a small number of large companies in certain sectors... then there will always be a reason for it.

" well, it's not surprising you got better returns than my tracker because

a) you didn't concentrate all your money into the big companies but spread your money better among the opportunities to make sure you used medium and small companies too, which generate better returns in the long term, so beating me doesn't count, because you cheated by using a "size factor"

b) you didn't pile your money haphazardly into the market letting most of it land on the companies which had more shares in issue, but you thought about what you were doing and bought companies more competitively priced relative to their assets or profitability, so beating me doesn't count, because you used a "value factor"

c) you didn't just buy every company out there throwing money into the dartboard and hitting ABC Co most because it's biggest, but instead did proprietary research into companies and sectors in detail and bought the ones that appeared to be investing in themselves for the future and had management teams that were successfully delivering share price growth over time. So beating me doesn't count, because you used investment factor or momentum factor.

d) you only won because the portfolio you selected had a different set of risks because it wasn't the complete theoretical market basket in the full market weights because when investing across 3000 companies for diversification you didn't end up putting over 3% of all your money into Apple and Exxon. I'll define "taking risk" as "any kind of departure from my market basket". Consequently, you only got your 10% return compared to my 8% return by taking extra risk. If I control for risk, and take out the extra returns you got by not using my portfolio allocation, we got the same.

Therefore, everyone not using a UK all share tracker for their UK equity exposure needs to know that they are taking risks, and any out performance against the tracker, is only because of reasons. The unexpected variance of returns they get against the tracker, after adjusting for all the reasons, is close to zero."

In other words, it is not worth paying money to have a manager make investment decisions, because he is only going to go and use research to identify ways to do better or worse than a tracker, and once he delivers a result more suitable for your needs than a tracker for the various reasons, we can nit pick all those reasons and control for them and explain that the out performance was due to the reasons.

we can probably agree that it's best to start your investment process top-down, by deciding how much you want in equities, how you want to split that among world regions, and how much you want to "tilt" to small cap, value, or whatever; and that it's when you get on to how to implement each allocation (e.g. mongolian yak momentum) that you can consider whether to use an active or passive fund.

sometimes, there's no choice. e.g. there is (i think) no UK small cap value passive fund available.

however, while some active funds can provide useful exposure to "factors" (or to whatever we are trying to get exposure to, apart from than the cap-weighted total market - i'm trying to put this in a way that doesn't imply too strong a belief in the 3-factor, or 5-factor, or however-many-it-is-this-year model), most of them don't. collectively, active funds are beaten by the apparently dumb cap-weighted tracker.

that doesn't imply that the fund managers aren't trying to do something useful, or that they aren't smart, or that they don't have all the best research tools at their disposal. the main problem seems to be that they are mostly competing against 1 another, and they can't all be better than average. and then the higher costs of active management drags them down.

is it better to ask lewis hamilton or ocado to deliver your groceries? surely LH has superior driving skills. but does that make much difference when the aim is to get your groceries delivered reliably? and is it worth paying the much higher delivery charge which LH would presumably require (if we ignore that he wouldn't be interested in taking the job)?