Active vs Passive investing

kidmugsy

To quote The Pensions Institute, which has conducted one of the most comprehensive studies of UK funds in recent years, the vast majority of UK fund managers are “genuinely unskilled”, and even those very few managers who do beat the market consistently “extract the whole of this superior performance for themselves via their fees, leaving nothing for investors”.


from
http://diyinvestoruk.blogspot.co.uk/2016/07/low-cost-index-funds-updated.html

slowpoke_rodriguez

and......?

Ray_Singh-Blue

and... tell your kids to be fund managers

bigadaj

Ray_Singh-Blue wrote: »

and... tell your kids to be fund managers

...so long as you've sent them to the right schools.

Glen_Clark

The only active funds I buy are Investment Trusts bought at an above average discount so the fund managers are a liability that is priced into the shares. The most recent was this one https://forums.moneysavingexpert.com/discussion/comment/70930136#Comment_70930136
I wouldn't like to see all shares held by passive funds though. Who would determine fair value for the shares or hold company management to account if all the shares were held in passive funds?

Drp8713

Last 5 years total return:

Lindsell Train Global Equity 147.33%
Vanguard Lifestrategy 100 Equity 63.37%

Damn that 0.32% per annum in extra charges, I feel robbed.

BLB53

Lindsell Train Global Equity 147.33%
Vanguard Lifestrategy 100 Equity 63.37%

Damn that 0.32% per annum in extra charges, I feel robbed.

Good point, but the article states there will always be a handful of managers who can outperform the market, and even mentions Nick Train. However, how many small investors were lucky enough to select the Lindsell Train fund 5 years back... I do not see it mentioned on these discussion boards very often.

In contrast, many would hold the LifeStrategy fund or the Vanguard Dev. World (ex UK) fund and both are top 10% performance out of 1,600 funds in the global sector.

I guess we never hear from all the unlucky small investors who have their savings invested in the majority (90%) of funds which returned less than 63%.

zolablue25

Drp8713 wrote: »

Last 5 years total return:

Lindsell Train Global Equity 147.33%
Vanguard Lifestrategy 100 Equity 63.37%

Damn that 0.32% per annum in extra charges, I feel robbed.

Indeed, and if I could find a fund that I knew would out perform the market by 100%+ I would not begrudge the extra 0.32% either. Unfortunately, for every managed fund above the tracker there will be one (at least!) below, kind of how averages work.

Still, congratulations on picking a winner, let's hope it continues in the same vein for you.

Glen_Clark

If you can pick the winning fund managers, why can't you pick the winning shares and avoid their fees?

Linton

Having read the original article (sorry, I know that's cheating).........

1) It purely talks about UK funds investing in UK equity and brings together large company funds, small company funds, income funds, ethical funds etc etc as a single data set and compares these with the FTSE All-share index.

2) It is based on the French Fama model which states that fund returns can be explained, with a random error, by the sum of:
- the current risk-free market return taken to be the return from government bonds
- a factor times the overall performance of the particular market
- a factor times the small company/big company allocation
- a factor times the value/growth allocation
- an additional amount contributed by the skills of the individual manager by activities such as stock picking and market timing.

Since the original FF work other people have added other factors such as Momentum based on the belief that there is some correlation between performance in successive time periods.

3) If you can show statistically that the "additional amount" is not significantly and consistently different from zero this is said to mean that the manager isnt doing anything useful.

Not being an econometrist I may well have misunderstood something but I see snags with this approach which I would like answered...

a) Values of the factors are available. They vary massively over time. So sadly the FF model isnt predictive. Also people have found that the factors are dependent on geography so that the available data which is largely US based may not be relevent.

b) Different markets behave differently. To what extent is it meaningful to model the entire UK market by the FTSE All Share?

c) I would agree that the additional sparkle of the type used by the FF model an individual manager adds is illusory in general, though it may not be for some particular markets. However where a good manager gets results may not be by stock picking but rather by manipulating the small/large company and value/growth proportions of the fund's portfolio (and any other factors such as geography found to be relevent) as a whole. The analysis would not identify this.

And a practical problem......

Available passive funds are very limited. One simply cant get control over the relevent factors

Linton

BLB53 wrote: »

Good point, but the article states there will always be a handful of managers who can outperform the market, and even mentions Nick Train. However, how many small investors were lucky enough to select the Lindsell Train fund 5 years back... I do not see it mentioned on these discussion boards very often.

In contrast, many would hold the LifeStrategy fund or the Vanguard Dev. World (ex UK) fund and both are top 10% performance out of 1,600 funds in the global sector.

I guess we never hear from all the unlucky small investors who have their savings invested in the majority (90%) of funds which returned less than 63%.

Where do you get your data from? Looking at Trustnet...

Vanguard Dev World is 30th out of 188 which have been around for 5 years at 77.5% return. The fund isnt completely Global, it's Developed world ex UK with 61% US which is rather different. It only covers large and midcap companies. So all that your figures may prove is that large US companies performed particularly well over the past 5 years.

A rather more balanced tracker is the L&G Global Equity Index fund which is at 99 out of 188, perhaps as would be expected.