Active vs Passive investing

AnotherJoe

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%.

The problem with that article, on a quick skim, is that it says that even those managers who do outperform keep all the outperformance for themselves.

Thats patently untrue (see above figures about Train) and to me wholly invalidates what otherwise would be a strong paper.

dunstonh

AnotherJoe wrote: »

The problem with that article, on a quick skim, is that it says that even those managers who do outperform keep all the outperformance for themselves.

Thats patently untrue (see above figures about Train) and to me wholly invalidates what otherwise would be a strong paper.

The article is on a site with an agenda. It seems to have no problem with management decisions as long as its the investor making the decisions and not a fund manager. It fails to take into account that many investors wont put the time or effort in or have the required knowledge to research their own management decisions. Some will. Most wont. However, it is playing to the crowd. So, unbiased pros and cons are never going to be its strong point.

BLB53

Vanguard Dev World is 30th out of 188 which have been around for 5 years at 77.5% return.

Yes, I guess it depends on the filters applied.

Looking at the 350 or so global equity funds with a 5 yr record on Trustnet, the Vang. Dev World is 47th and the LifeStrategy100 is 119th.

I think the main point however is that selecting a managed fund from the many hundreds on offer which will perform better than the average low cost tracker is a lottery. Some investors will be lucky but many will be disappointed after 5 years - more probably after 10 years.

So why gamble when you can settle for the market return in the knowledge this will be far better than most investors receive?

talexuser

BLB53 wrote: »

So why gamble when you can settle for the market return in the knowledge this will be far better than most investors receive?

Because you do the research that others do not have the time or the inclination for, and keep track of your funds and manager changes to make sure they are ahead of the index you would have bought instead. This is quite different from choosing a fund from hundreds at random and crossing your fingers.

I've never bought an index fund, but would never suggest this is the right thing for everyone. If you want to buy and forget it probably is the right thing to do. There again buying the Virgin tracker at 1% was probably not a very good move

jimjames

BLB53 wrote: »

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.

I did, well the UK version anyway. I also commented how strange it was at the time that HL were ramping various other new funds but not highlighting a fund manager with a long term track record. Lots of people suggest Woodford but I think Nick Train is of equal calibre.

Linton

BLB53 wrote: »

Yes, I guess it depends on the filters applied.

Looking at the 350 or so global equity funds with a 5 yr record on Trustnet, the Vang. Dev World is 47th and the LifeStrategy100 is 119th.

I think the main point however is that selecting a managed fund from the many hundreds on offer which will perform better than the average low cost tracker is a lottery. Some investors will be lucky but many will be disappointed after 5 years - more probably after 10 years.

So why gamble when you can settle for the market return in the knowledge this will be far better than most investors receive?

I only see one "Global" equity filter. The others with Global in their title, Global Equity Income and Global Emerging Markets are different sectors, particularly EM. If you wanted Income or EM you would presumably have chosen something from those sectors, which the index funds arent't.

All you have shown is that funds that invest in different parts of the market have different returns. The investor has an "active" decision to make as to which parts of the market they wish to invest in. Going for the restricted Dev World fund rather than the more general L&G Global Index Fund is an "active" decision which in this case would have paid off, which rather demonstrates my point. Going for the passive index fund that more truly matches the whole market gets you very close to average returns.

In the past I have looked at the 10 year data. IIRC that shows that for the US market index funds may do better over time, elsewhere they remain average. However it is difficult to get meaningful data as many funds of both types havent been around for 10 years.

bigadaj

Linton wrote: »

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.

It's good to look at longer term performance, though this then obviously ignores the funds, predominantly active, that are quietly closed due to poor performance so survivorship bias also needs to be considered.

This also means that trackers do tend to be the mean, however that's very different from having a 50% of doing better with an active manager over an extended time period of ten to twenty years.

Linton

bigadaj wrote: »

It's good to look at longer term performance, though this then obviously ignores the funds, predominantly active, that are quietly closed due to poor performance so survivorship bias also needs to be considered.

This also means that trackers do tend to be the mean, however that's very different from having a 50% of doing better with an active manager over an extended time period of ten to twenty years.

Unless one is a professional or academic the data available is very limited. The only broad long term data I know of is the 10 year performance figures from Trustnet, and 10 years is hardly long term. One can also say that 30 years ago investing and the composition of the world markets were very different to what it they are now, and in any case very few funds from that period are still around. So you may or may not be right. Time will tell. From the 10 year data it would appear that the effect isnt overwhelming.

TheTracker

Linton wrote: »

Unless one is a professional or academic the data available is very limited. The only broad long term data I know of is the 10 year performance figures from Trustnet, and 10 years is hardly long term. One can also say that 30 years ago investing and the composition of the world markets were very different to what it they are now, and in any case very few funds from that period are still around. So you may or may not be right. Time will tell. From the 10 year data it would appear that the effect isnt overwhelming.

You should be looking at SPIVA (S&P Active vs Index) scorecards. As of end 2015, the data shows in GBP Global Equity (S&P Global 1200) outperformed 89% of funds measured against that benchmark over ten years, UK Equity (S&P UK BMI) 72%, US Equity (S&P 500) 95%. SPIVA also covers survivorship in their scorecards.

Linton wrote: »

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.

One would absolutely not expect this. You might expect on the timeframe of around one year for a middling result to be the case (studies actually shows 40%) but as years progress statistically the vehicle that tracks mean performance will rise. Studies such as Roth and Martin estimate these chances at around 30% after 5 years versus one active fund or about 20% if your portfolio is 5 active funds, 10% with ten active funds.

None of these presupposes that you Linton do not hold some special power to pick some of the best funds year by year, but in the universe of investors thats the statistically estimated outcome.

jimjames

BLB53 wrote: »

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.

I even managed to find the post I made!

https://forums.moneysavingexpert.com/discussion/3261990