Hargreaves Lansdown HL Portfolio+ vs Vanguard lifestrategy

jamesd

DrSyn wrote: »

1. All academic studies show most fund managers after charges are applied to their fund, do not beat their relevant index.

That's not true. At least one US study showed that after charges on average active managers beat passive. The differing tax treatment of the two types then took the average active performance below the average passive. The US has a higher capital gains tax rate for holdings of less than a year and taxes gains from sales each tax year instead of when a fund is sold.

Almost all academic studies also don't actually track fund manager results but instead track fund management company results and ignore changes of fund manager. One of the things I did not long after starting here was look to see whether there was persistence of out-performance in the UK's global growth sector. What I found was that the top ten continued to out-perform unless the fund manager changed. The very thing that the academic studies normally ignore.

Almost all academic studies also do things like assuming a fund is held for ten years and not switching funds or fund weights at appropriate points in the cycle. Trackers don't do that so they handicap the actives by making them be used like trackers.

I assume that you know that you should expect that no trackers will beat their index, except for active components like stock lending that might let the cheapest manage it. Effectively guaranteed under-performance is one of the things that you're buying into with passives.

DrSyn wrote: »

2. Funds tracking major indexes are cheaper than their equivalent active funds.

There aren't equivalent active funds. Trackers are trackers, not active, aside from things like stock lending. Cheaper doesn't matter, performance after all relevant costs does.

DrSyn wrote: »

4. Warren buffet recommends passive investing for the average investor as they will be better off than trying to beat the market.

So do I for investors who aren't going to pay much attention. It's the way to go to prevent people from being left in a poor performing fund after significant changes, because at least the guaranteed under-performance of at tracker is normally not more than a couple of percent a year, and usually much less than that if picked well.

DrSyn wrote: »

1. Will continue to beat it's relevant index?

That seems rather likely given that it is investing in fund managers with a good record of doing so and knows enough to switch out of a fund when the manager changes. Though I don't think it's a particularly good fund to hold anyway, just better than a mixed asset tracker with similar investment mixture.

DrSyn wrote: »

2. What is it's relevant index?... You failed to mention the relevant index that was beaten? ... Looking the fund up on Morningstar, it's trailing the index since the start of 2015 at least. Shows you need to choose the index to compare it against with care.

IA Mixed Investment 30-85% Shares is the one used by HL and shows the fund out-performing that index.

jamesd

grey_gym_sock wrote: »

ok, so in a sense you're not buying an active fund, but buying into a filtering process for selecting an active fund.

The filtering process to use initially starts as the same one that can be used for trackers: dump the consistent under-performers. For trackers that will normally take care of eliminating the 1.5% a year charge ones and get a lot closer to the index.

SabNys

dunstonh wrote: »

You wouldn't want to pick a fund that is a closet tracker.

At the moment, I don't understand much of this thread, but I came across this link on how to determine if a fund is a "closet index fund". It's a report by European Fund and Asset Management Association (EFAMA).

https://www.efama.org/Publications/Statistics/Other%20Reports/EFAMAReportClosetIndexFunds.pdf

They use Greek symbols in their equations, so it must be OK.
.

DrSyn

"IA Mixed Investment 30-85% Shares is the one used by HL and shows the fund out-performing that index"

Thank you for your reply.

I must have missed the US study you mentioned.

Yes I do understand that trackers are not expected to beat the index they are tracking.


On the HL website I used the Vanguard Life Strategy 80% fund, which was mentioned by the OP. This appeared to me to be an appropriate passive fund for comparison purposes.

From the resulting data, this passive fund produced as good if not better performance than the active one in your link.

grey_gym_sock

jamesd wrote: »

DrSyn wrote: »

4. Warren buffet recommends passive investing for the average investor as they will be better off than trying to beat the market.

So do I for investors who aren't going to pay much attention.

eventually, you get to the key point. most people would be better off just buying a cheap multi-asset fund. that approach will outperform most, but not all, of the investors who take the active route.

IMHO, it would be more helpful to start by saying that. by all means go on to add: but it doesn't follow that i'm completely mad for pursuing a much more complicated strategy. (though it is very debatable whether that's a good idea.)

I assume that you know that you should expect that no trackers will beat their index, except for active components like stock lending that might let the cheapest manage it. Effectively guaranteed under-performance is one of the things that you're buying into with passives.

that's a very tendentious way of looking at it.

if you look at investing as competitive activity, then the passive approach is going to beat most active investors.

it will underperform "the index", but only by a tiny fraction of a percent per year (assuming you avoid the dud, overpriced passive funds, which is not hard). and the index is just a theoretical construct, not something anybody can invest in directly.

and investing isn't mostly a competitive activity. providing you meet your financial objectives (e.g. a pleasant, or early, retirement), then you've won. you don't need anybody else to fail.

At least one US study showed that after charges on average active managers beat passive. The differing tax treatment of the two types then took the average active performance below the average passive. The US has a higher capital gains tax rate for holdings of less than a year and taxes gains from sales each tax year instead of when a fund is sold.

which study was that? there are many. i've seen some mentioned that had active funds beating passive before charges, but not after.

i doubt that most studies attempt to include the effect of taxes, given that these vary depending on the investor's income, and even on which state of the USA they are resident in - how do you take that into account? (and most people start by investing in tax-exempt accounts, where tax isn't an issue.)

jamesd wrote: »

The filtering process to use initially starts as the same one that can be used for trackers: dump the consistent under-performers. For trackers that will normally take care of eliminating the 1.5% a year charge ones and get a lot closer to the index.

for trackers, you can simplifying the process by starting with the ones with the lowest charges (OCF or TER), and if in doubt (and they have a suitable product) going for vanguard (as more trustworthy, and likely to keep cutting costs whenever they can, as opposed to just when competition forces them to).

for active funds: where are the studies showing you can use a precisely defined mechanical process to discard consistent under-performers, and that the remaining active funds will then perform well enough to beat a comparable passive fund? i've never heard of such a result. i suspect that's because

a) "consistent under-performers" is a bit vague. if you make the criterion too tight, you'll end up ditching funds you want to keep. or too loose, and you don't ditch enough funds. it's difficult to know how to set a precise criterion without hindsight.

b) perhaps this kind of criterion is a valid way of ditching closet trackers. buying an average active fund other than closet trackers (call this a "true active fund") should give better results than buying an average active fund.

but an average true active fund is still unlikely to beat a comparable passive fund. the true actives funds probably look "above average" when compared to the closet trackers. but the existence of closet trackers doesn't help them to do better compared to a relevant index (since the closet trackers will roughly match the index, before their excessive charges). true actives can only beat the index, before charges, at the expense of less competent active investors. the obvious candidates are active private investors. but few shares are held directly by private investors nowadays, compared to the amount of shares held by active funds. which gives the active funds limited gains to fight over - i.e. probably not enough to make up for their higher charges.

jamesd

DrSyn wrote: »

On the HL website I used the Vanguard Life Strategy 80% fund, which was mentioned by the OP. This appeared to me to be an appropriate passive fund for comparison purposes. ... From the resulting data, this passive fund produced as good if not better performance than the active one in your link.

That's why in the first reply to the OP I wrote "The two funds appear to have quite significantly different mixtures of investments in terms of bond/equity split. The lower equity one would be expected to perform less badly during an equity market drop and less strongly during a bull market like the one we've had since early 2009".

The two funds aren't well matched in content and objectives. Even in the equities mix, at least today, the balanced one has a higher UK equity component.

grey_gym_sock

Linton wrote: »

I would look on "special situations" as a superset of "recovery". The latter aims to invest in those companies perhaps where the old management have run the company into the ground and have been replaced, or perhaps where a well run company is moving into a new area after its old markets have disappeared . This investment would be undertaken on detailed knowledge of the companies involved. Under such circumstances the upside opportunity could well be very lucrative.

Such funds were very successful in the past but are much less relevent now. Perhaps because the large badly managed companies have gone and the larger good ones are multinational, there is less UK-specific opportunity - there simply arent enough larger UK companies around. The recovery/special situation arpproach now tend to be more a speciality of the small company funds which have the time and motivation to understand the companies they invest in, as in the small company sector there is sufficient variability to make the exercise worthwhile.

yes, so perhaps the nature of the economy has changed. and therefore a certain kind of tilt (towards certain sectors, or kinds of company) no longer gives good results. the trouble with active management is that there are many plausible "stories" about why a certain kind of tilt should work. and "stories" can stop working, even after working for a long time, because the economy can change. i'm sure we're all too sophisticated to buy into a manager after just 1 or 2 years of outperformance, because it may revert. but aren't we doing something similar, on a longer timescale, when buying into a style of fund that's done well for an economic cycle or 2?

1 style / story that i do like to put a little money in is "small value". this is partly because it is has support both as a "story" and based on the rather abstract "factor investing" stuff which academics come up with. and i'm prepared to use either active or passive methods to invest in this, depending on what's available.

To make a broader point, advocates of passive investing state that to be successful and "beat the market" (whatever that is) active investors need to predict the future. This is not the case. In the same way as a balanced bond/equity fund gains from rebalancing without any need to predict which type of asset will give the best returns, one can aim to have a portfolio with a fixed allocation across industry sectors, company sizes, geographies, defensive/growth and anything else one can get data on. As various types of investment rise and fall annual rebalancing ensures that a general policy of buying low and selling high is in place. You can set up your portfolio so that the allocations are such as to provide the risk/return to meet your objectives.

Passive funds with their simple market cap allocation make this level of detailed management almost impossible to achieve.

well, yes, even passive is a bit active, strictly speaking.

personally, i do like to decide allocations to (e.g.) big cap / small cap, rather than just going by market cap weighting. though it's not essential to do this.

the 1 bit i'd question is the idea (though perhaps you didn't mean it quite like this) that you might sensibly allocate fixed percentages to market sectors, and rebalance to maintain those percentages. yes, you might expect to gain some "rebalancing bonus" from that - i.e. buy more of a sector when it's down, and sell some of it when it's high. but you also are running the risk of sinking more and more money into a sector which continues to go down because it's becoming obsolete.

d70cw6

so which one is better?
:P

JohnRo

d70cw6 wrote: »

so which one is better?
:P

Assuming your investment plan is what's generally accepted as reasonable and sensible, not some precarious, speculative venture, then the style you choose and stick to based on your own criteria is the one that's better.

There is no 'right answer' imo because the future is unknown and that's where the results will come from. It's far more about what risk you're comfortable with and can accept in terms of volatility. That's where the 'wrong answer' lies.

You either contemplate and calculate ad infinitum or make a decision and just get on with it, accepting the outcome will then be whatever it's going to be.

In my case that's a bit of a cop out. A blend of style. Distinct equity (for the most part) growth, income and index portfolios all compounding and rebalanced. Each distinct and arbitrary.

I accept I know nothing of the future and don't intend wasting time trying to guess, the only thing I have any control over is what I hold, when I rebalance and how much it costs, which haven't gone quite as planned recently but that will settle down over time.

d70cw6

sporebat
/10