Passive V Active

frenchplonka

Im looking to drip feed £250 a month along with a £1k deposit into a S&S ISA I have read though the monevator passive investor portfolio and org thought this is the route I would take.

But I read a little today about picking managed funds which out preform the trackers and I am wondering how to go about chosing such funds im 35 years old in a steady job with a saftey net set up

frenchplonka

Is using a active investment viable given my monthly amount and age

Superscrooge

£1,000 lump sum and then £250 a month would be ok for the vast majority of either active or passive funds.

35yrs old is fine. Lots of time for the magic of compound interest to have an effect!

There is plenty of info on financial blogs re the Active v Passive debate.

There will always be actively managed funds that outperform trackers each year and if there was a sure-fire way of picking them, then we would all do it!

However over the long term, because of their lower charges, passive funds tend to outperform the vast majority of actively managed funds.

Some investors are totally committed to passive, others prefer active. Some like me have a mixture of both (although I am about 85% passive 15% active)

colsten

Are you sure you read monevator.com? Like, for instance: http://monevator.com/passive-vs-active-investing-episode-1/?

dunstonh

In some areas, active are better. In other areas managed can offer better. Different investment styles may favour one over the other too.

In the short term, passive funds tend to be around mid-table. However, mid table consistency can mean they have longer term higher performance. However, certain active funds held for certain parts of the economic cycle or certain managed funds may offer value.

BananaRepublic

I started out choosing active funds, then got pursuaded by the tracker mantra - look into my eyes, my eyes - much to my regret. Over the last 20 years my active funds have done extremely well. My passive funds, over 10 years, have significantly lagged.

Do search online, and get a range of views, so you can draw your own conclusions.

As I indicated my own experience is that active funds outperform trackers in a given market. The problem is how to select the good active funds. My own method has been to use historical performance data. I look for long term consistency, rather than one or two great leaps, which could be luck. However, I believe that most people here favour trackers, with the mantra "low charges equals highest performance" or something along those lines. It is true that on average trackers outperform active funds. And many use this as a justification for buying trackers. They seem to think that active funds outperform the market for reasons of luck alone, and regress to the mean with time. Actually they don't. Some funds have statistically significant variance from the mean that are highly unlikely to be due to chance.

masonic

BananaRepublic wrote: »

However, I believe that most people here favour trackers, with the mantra "low charges equals highest performance" or something along those lines.

In the UK, about 10-15% of money is held in tracker funds vs. active funds. Clearly not all of the money in UK funds is going to be from consumers, but I think the majority of people still favour active funds (or their advisor does).

As others have suggested, it really is a false dichotomy. One should go for the cheapest funds that deliver good performance and meet your investment objectives. There really isn't much point putting your money into a FTSE 100 tracker and getting an unbalanced mix of big banks, oil and mining companies when that's really not what you want to invest in, especially when you can find active funds that aren't very expensive that are more balanced and have performed much better on a fairly consistent basis. On the other hand, an S&P 500 tracker begins to look more attractive compared with the available managed US funds, which generally haven't done well, and none appear to be able to outperform a tracker on a consistent basis or cumulatively over long time periods.

It should be pointed out that active funds do require active attention and some knowledge of how to pick funds. One advantage of a purely tracker-based portfolio is that you can pick one cheap multi-asset fund with virtually no research and no need to keep checking up on it.

BananaRepublic

masonic wrote: »

In the UK, about 10-15% of money is held in tracker funds vs. active funds. Clearly not all of the money in UK funds is going to be from consumers, but I think the majority of people still favour active funds (or their advisor does).

By 'here' I was referring to people on this forum. Where did you get the 10-15% number from? I was surprised to find that unit trusts constituted a mere 9% of UK share ownership in December 2014.

Advisors would have favoured active funds as they provided handsome fees to the advisors, although that changed in 2012 with the end of commission based fees on investments. It would be interesting to see if financial advisors significantly changed their fund recommendations post 2012. I have no idea what proportion of funds were bought via an IFA or FA. The two pensions I have had in the last couple of years (set up by an employer) were all based on tracker funds.

BananaRepublic

masonic wrote: »

As others have suggested, it really is a false dichotomy. One should go for the cheapest funds that deliver good performance and meet your investment objectives.

No-one would argue with that.

Perhaps pro-tracker posts I read herer are not representative of the forum as a whole. It is interesting to note that the influential people who have done most to publicise trackers are based in the US, where, as you indicate, active funds have less advantage.

masonic

BananaRepublic wrote: »

By 'here' I was referring to people on this forum. Where did you get the 10-15% number from? I was surprised to find that unit trusts constituted a mere 9% of UK share ownership in December 2014.

The 10-15% number for tracker funds vs. active funds came from the IA statistics showing total amount of money under management in funds as around £800-900 billion, with other figures showing trackers having accounted for about £100 billion of that ~£850 billion.

Your 9% figure, if accurate, would make individual share ownership in the UK (as opposed to ownership through funds) come to close to £10 trillion, which seems a little high. Although I'm not sure whether the £900 billion figure from the IA includes investment trusts (it does state: "We publish industry-wide statistics about fund sales and funds under management for UK-authorised unit trusts and open-ended investment companies, as well as some recognised offshore funds", so presumably not).

Advisors would have favoured active funds as they provided handsome fees to the advisors, although that changed in 2012 with the end of commission based fees on investments. It would be interesting to see if financial advisors significantly changed their fund recommendations post 2012. I have no idea what proportion of funds were bought via an IFA or FA. The two pensions I have had in the last couple of years (set up by an employer) were all based on tracker funds.

I'm sure it has increased, but I'm not so sure the cause could be attributed to trail commission alone. There was a trend in this direction some time before 2012. Also, there seems to be a lot of interest now in "actively managed" multi-asset fund of funds that use tracker funds as their underlying constituents, so I think the availability and profile of such products is probably having some influence.

BananaRepublic

I can see the appeal of trackers. All too often a new fund opens headed by a star fund manager and the performance does not live up to the hype. Incidentally my stats came from a government source, so should be accurate subject to the usual uncertainties. What is interesting is that in 2012 more than half UK shares were owned by overseas entities. Clearly the UK market is seen as profitable.