100% Equity vs Equity/Bond

IanManc

jamesmorgan wrote: »

That is only true is you treat a "passive fund = whole market". The two things are different. Passive funds are a subset of the market. In the simple example I gave, the active investor has out-performed the market. The passive fund has under-performed the market. Have the passive investors lost money? Their relative returns may be lower than the market, but this is not the same as a loss which is implied in a zero sum game.

Yes, it is exactly the loss that is implied in a zero sum game.

Passive funds are a subset of the market which reflect the market.

In your analogy though you present them as if they are the whole market. But your analogy doesn't work.

jamesd

jdw2000 wrote: »

Anyone who doubts this should take it up with Monevator

With you because you're the one repeating that rubbish.

The Monevator case ignores the real world where what will be bought and sold by trackers can be predicted and front run by active investors. Which has been explained to you already.

This isn't a place where just repeating rubbish is likely to be very persuasive. There are too many people around who recognise that when they see it and won't let it fly and mislead others.

Stop being a patsy for tracker-only fans and start learning more about the subject. Including that Monevator is not a perfectly reliable source.

jamesd

grey_gym_sock wrote: »

i don't think it's at all obvious that one should avoid holding shares which are in the middle of a takeover fight. you suggest it's a bad idea to buy in that situation; but do you think one should also automatically sell if one is already a holder?

Depends on the specific situation and how many buyers and sellers are involved. Neither always a bad idea to buy nor always a bad idea to sell or short.

jamesd

jdw2000 wrote: »

Actives also incur trading charges.

How do you think tracker funds manage to buy and sell? Both get to pay charges based on their buy and sell volumes.

The difference is that trackers have to do it when their customers buy and sell while actives get more choice about when to do it. Whether the active or passive pays more in charges depends on such things as the transaction volume. A tracker that holds a lot of shares may easily spend a lot of rather pointless money trading lots of shares while an active one might hold far fewer and hence have to deal less often, as well as not just to do it because its customers bought or sold.

You're missing the big part of what made trackers popular in the US: taxes. The US tax rules say that investors get to pay the tax each year on what the fund does, while in the UK they do it only when they sell the fund. Then the US has higher taxes for holdings of less than a year than for a year or more. That's why some US studies have found that active funds on average beat tracker funds on average before taxes, but lose on average after taxes.

Tax is also a big part of why ETFs became popular in the US. They are structured in a way that avoids the tax due at time of sale issue, giving US investors a tax advantage compared to traditional passive funds.

jamesmorgan

IanManc wrote: »

You are grasping at straws.

In your analogy the passive funds wouldn't be able to buy or sell shares to meet the requirements of the index they follow, as all the shares - or all the shares minus one - would already be held by passive funds so there would be no shares available.

And yes, if you make a higher return than passive funds it does mean that someone else has made a loss. As I explained, there cannot be greater gains than the gains of the whole market, or greater losses than the losses of the whole market.

In answer to your Investor A/B question I've already explained who is the loser in a my last posting.

Your analogy simply doesn't work.

I think you are confusing mathematical rules around a normal distribution - ie for each return above average, there needs to be a corresponding return below average, with the concept of a zero sum game. A zero sum game is a closed system whereby I can only make a profit if someone else makes a loss. The stock market inherently doesn't work like that.

If your argument was that for every investor that beats the average market return, there needs to be one (either active or passive) that underperforms it, then I would agree. But that is not a zero sum game!

jdw2000

jamesd wrote: »

How do you think tracker funds manage to buy and sell? Both get to pay charges based on their buy and sell volumes.

The difference is that trackers have to do it when their customers buy and sell while actives get more choice about when to do it. Whether the active or passive pays more in charges depends on such things as the transaction volume. A tracker that holds a lot of shares may easily spend a lot of rather pointless money trading lots of shares while an active one might hold far fewer and hence have to deal less often, as well as not just to do it because its customers bought or sold.

You're missing the big part of what made trackers popular in the US: taxes. The US tax rules say that investors get to pay the tax each year on what the fund does, while in the UK they do it only when they sell the fund. Then the US has higher taxes for holdings of less than a year than for a year or more. That's why some US studies have found that active funds on average beat tracker funds on average before taxes, but lose on average after taxes.

Tax is also a big part of why ETFs became popular in the US. They are structured in a way that avoids the tax due at time of sale issue, giving US investors a tax advantage compared to traditional passive funds.

Are you saying active investors don't pay more OCFs than passive investors?

Linton

jamesmorgan wrote: »

.........
If your argument was that for every investor that beats the average market return, there needs to be one (either active or passive) that underperforms it, then I would agree. But that is not a zero sum game!

Also, only about 11% of the UK market is owned by UK OEICs, UTs and ITs, and a much smaller % of the world market. So the truism that returns are split evenly either side of the average for the whole market doesn't preclude the the split being rather different if one just looks at retail funds. For example the % of the UK market held by private direct U.K. Investors is slightly higher than 11%, so It is possible that private direct investors generally underperform whereas the professionals overall don't.

Linton

jdw2000 wrote: »

Are you saying active investors don't pay more OCFs than passive investors?

No, but the effect is relatively small. Certainly much smaller than the variation you can get can get from choosing one sector allocation as opposed to another. From a quick look at tracker performance figures less than 10% of all UK all companies sector funds have a return within + or - 1% from the performance of the Vanguard FTSE all share tracker. So there must be much more important factors to be considered when analysing fund performance.

jdw2000

Plenty of people say the effect of additional charges for active investors is not "relatively small". In fact, quite the opposite.

jamesd

jdw2000 wrote: »

Are you saying active investors don't pay more OCFs than passive investors?

Nice try at dodging. You asserted that "Actives also incur trading charges" as if passives don't. I asserted that passives do pay trading charges. Do you agree that passives do also pay trading charges?

Perhaps you'd think that a passive fund holding 500 shares will inherently have lower trading costs than an active fund with 25, even though there are twenty times as may deals to do for the passive one just to get the money invested?

Cost of holding a fund (not just the OCF) depends on the particular fund and distribution channel. It's entirely possible to have an active fund with a lower total holding cost than a passive fund. Say compare the Virgin FTSE tracker at 1% including platform cost with a balanced managed fund for say 0.4% in a biggish workplace pension. Or hold a tracker with 0.1% OCF at a place with a 0.45% platform charge, like HL.