Question to passive investors - does it really return?

DrSyn

You say of active funds
"its not that hard to find them (I look for funds that have beaten the index in the past - and they tend to continue to beat the index because the managers know what they're doing".

There are many different indexes that index funds and ETF's follow. There are major ones like S&P, FTSE and smaller less well known ones.

So with respect to your statement:-
Which index?
Over what period of time?
Will these funds continue to beat the correct relevant index?
Was the correct index used when comparing the active fund? Are you by any chance comparing apples with oranges?
How much additional risk did these active funds take on to beat the index involved?


Lets assume the active fund did beat the relevant index and it was due to the skill of the said manager. What occurs to that funds performance when the manager leaves or dies?

You mentioned Invesco Perpetual High Income.
I remember when this funds investment style was out of fashion and it lagged the FTSE in the 1990's, during the tech bubble.

All the academic research says that over the long term after costs that passive funds will outperform their active fund rivals. This mainly being due to the much lower costs that passive funds have.

Warren Buffet recommends passive funds for the majority of people.

Just remember no one, not even the most successful skillful and lucky active manager can see into the future. While advertising departments can always find some funds which they say beats some index or other.

adindas

There is an article in Monevator

"Warren Buffett explains why passive index funds MUST beat active investors overall"

http://monevator.com/video-warren-buffett-explains-why-passive-index-funds-must-beat-active-investors-overall/

Another article
http://monevator.com/passive-investing-uk-evidence/

http://monevator.com/is-active-investing-a-zero-sum-game/

http://awealthofcommonsense.com/2015/12/uncle-sam-hates-active-management/

"The average number of actively managed funds that beat their Vanguard counterpart was just 4.3%!"

lawriejones1

I sometimes work for an investment company (which I won't mention) and we did some research into quantifying this. In the end over the longer term a low cost tracker fund will return about 1 - 2% better every year.

BananaRepublic

lawriejones1 wrote: »

I sometimes work for an investment company (which I won't mention) and we did some research into quantifying this. In the end over the longer term a low cost tracker fund will return about 1 - 2% better every year.

Which markets/sectors. 1-2% better than what? What did the research consist of? What measures did you use? Without intending to be rude, your statement is so unspecific as to be worthless.

dllive

Thanks for all the interesting responses. Plenty of food for thought. Im certainly veering towards stocking up on passives and selling off some active funds.

BananaRepublic's statement:

My method is simply to use long term past performance relative to the index. I avoid new funds from star managers, and old funds from bad managers. I also look for consistent good performance, with no short term huge gains, as that can make it look like the funds did well each year, rather than benefiting from one very lucky year and lots of mediocre years.

This is what I do - but purely because it seems the obvious thing to do so. And its worked so far. I presumed all amateur investors would do this. In fact, the only couple of active funds I have that have tanked the past couple of years have been in Hargreaves "Wealth 150". This taught me the lesson never to trust Hargreaves. (Or maybe theyll make massive gains in coming years and Ill eat my hat!).

BananaRepublic's statement:

There are some advanced trackers, which try to avoid the pitfalls of the tracker..... .....I am sure someone can point you towards these variants on the tracker theme.

Does anyone know what these are?


At the moment Im invested in Vanguards LifeStrategy80% and their new Target Retirement 2035 Fund. What other trackers would compliement these (ie diversify worldwide). Is there a S&P 500 one?

Thanks for all your comments. Very useful.

redux

The selection of HL's Wealth 150 funds might have as much or more to do with the commission those funds pay than their overall merits as investments.

Certainly there are some notable funds missing, and one or two fund managers may have made comments about this.

bowlhead99

dllive wrote: »

In fact, the only couple of active funds I have that have tanked the past couple of years have been in Hargreaves "Wealth 150". This taught me the lesson never to trust Hargreaves. (Or maybe theyll make massive gains in coming years and Ill eat my hat!).

Did they tank because most of the funds in their sector of specialism tanked (e.g. commodities/ resources ; or a particular global region like Brazil, or a specialist area that had just gone up massively and unsustainably like biotech or microcap)? Or was the rest of the funds in their specialism fine and your particular manager of choice got it badly wrong?

Hargreaves don't advise which sectors are right for you. They do list certain funds that they like to promote from time to time to suit their needs (or the needs of fund management groups who either pay for exposure or give discounts to make HL's platform fee seem not so outrageously expensive, in exchange for having a certain amount of investors driven to them). The wealth 150 is just a marketing list and some good funds aren't on there while some new funds with no track record, are. So, caveat emptor and all that

BananaRepublic's statement:

Does anyone know what these are?

In terms of new style trackers he is perhaps referring to trackers following indexes which aren't weighted by market capitalisation of the companies. For example MSCI have indexes such as "size factor", "high dividend yield factor" or "quality factor" or "momentum factor" where for example the constituents are periodically rebalanced to keep the index more equally-weighted, or focus on companies paying a high level of dividend, or some other measure that allows for easy replicability but brings in some factor that may offer greater returns than traditional cap-weighting.

IShares do some ETFs based on these but there are others from various managers, sometimes known as "smart beta" techniques (I assume that's the name that Banana mentioned he couldn't quote remember). More expensive to implement than a basic single stock exchange tracker.

Incidentally, Bananarepublic also said:

The problem with the standard tracker is that you end up buying huge amounts of a company as soon as it enters the index - FTSE 100 say - and then selling huge amounts as it exits

As a criticism, this sounds like nonsense to me. For example, look at a FTSE100 tracker. Biggest component is Shell who have two classes of shares, added together to be 8.5% of the index (£140bn) followed by HSBC at 5% (£90bn). A new entrant will be down at the £4bn size level, like a Merlin Entertainments (Madame Tussaud's, Alton Towers etc). The £4bn market cap is not 8.5%, not 5%, not even 1%; more like a fifth of a percent.

So if you get to the end of a calendar quarter and something had reached the size of Merlin to qualify for inclusion it will enter the index at 0.2% weighting. If you have to dump something because it fell below £4bn in market cap, you are selling something which is 0.2% of your portfolio. It is a little bit of noise but certainly not "buying huge amounts and selling huge amounts as it exits". In the context of your overall portfolio it is tiny amounts.

The real question is do you want 40-50% of your fund to be concentrated in just 10-15 of the 100 companies and generally focused in oil, banks and pharmaceuticals. Managed funds and alternative (differently-weighted) index ETFs offer an alternative to that.

At the moment Im invested in Vanguards LifeStrategy80% and their new Target Retirement 2035 Fund. What other trackers would compliement these (ie diversify worldwide). Is there a S&P 500 one?

Yes there is a S&P500 tracker just like there is a FTSE UK tracker and a Europe-ex-UK tracker and so on.

The S&P500 and FTSE UK trackers are a massive component of the equities in a Vanguard LifeStrategy or Target fund; 45% of the equities are in North America via trackers and 25% in UK via trackers.

So, the idea that you would "diversify worldwide" by adding yet more market-capitalisation-weighted US indexes on the side of your two main funds - concentrating your nice broad portfolio even more heavily into North American equities - sounds like a nonsense. It doesn't "complement" the existing fund: it takes the original portfolio allocations which were determined by Vanguard's professional research team, and wrecks it.

If it ain't broke don't fix it. If you don't even know what your funds hold, you don't have a chance of knowing whether it is broke or how to fix it.

le_loup

BLB53 wrote: »

However, the markets are very efficient.

Don't ya just love comments like that?
Particularly when they go on to talk about empirical evidence!

Linton

adindas wrote: »

http://monevator.com/passive-investing-uk-evidence/

Look at the original article rather than Monevators take on it. In particular, Figure 4. Note that these are annual returns.

I wonder why the article published in 2014 bases most of its data on the 5 years leading up to December 2008? Seems a strange choice.

adindas wrote: »

There is an article in Monevator

http://awealthofcommonsense.com/2015/12/uncle-sam-hates-active-management/

"The average number of actively managed funds that beat their Vanguard counterpart was just 4.3%!"

This particular article only refers to US funds investing in US companies, and it goes to great pains to emphasise that the data is after tax. If you pay US taxes and hold a US fund you are charged CGT of around 15% on the net gains from the fund's annual internal transactions. So a managed funds buying and selling during boom times can be badly hit compared to an index tracker which wont rebalance its portfolio.

Most investors on this forum arent US citizens paying US taxes on US funds investing in US companies.

dunstonh

There are some awful managed funds out there. A good number are closet trackers with managed charges. So, when they get included in the research, it is going to create a figure that makes trackers look better. However, in reality, research would eliminate a good number of those leaving you with a smaller pool of managed funds to select from.

There are some pretty duff trackers out there too. You eliminate those in your research too. The same expectation should apply to managed fund elimination and tracker fund elimination. Then you decide managed or tracker from what you have left. In some sectors, the tracker will make sense. In some areas, the managed will make sense.

With reference to Warren Buffet, it is worth noting that he does not follow a passive strategy. He is a value investor. He also speaks to the US market and not the global one. Remember that the US taxes funds internally on disposals. This handicaps managed funds in the US. In the UK, there is no taxation internally as it is taxed on the individual. If you also look at US model portfolios, they are generally very inward looking with heavy home bias. Whereas portfolios in the UK and across Europe are very outward looking with less home bias.