Active vs Passive

EdGasket

bugbyte wrote: »

The portfolio is only £30K but grows monthly and the whole lot is hedged substantially by cash.

That's an interesting concept. Would you care to explain how having cash can possibly hedge a portfolio of stocks?

bugbyte_2

EdGasket wrote: »

That's an interesting concept. Would you care to explain how having cash can possibly hedge a portfolio of stocks?

Quite simply in my case out of £50K £30K is in equity funds and £20K is in current accounts @ 3%. The cash hedges potential losses from the equity, so if my funds fell of a cliff to 50% of their value I would 'only' loose £15K or 30% of my overall savings and investments. The cash position softens the losses but also dampens the gains. I have taken this route over using Bonds as a hedge because lots of commentators have stated corporate bonds are in a bubble and I do not have the experience to tell if they are or not, and Government gilts on the face of it give less return than just shoving the money into current accounts.

bowlhead99

EdGasket wrote: »

That's an interesting concept. Would you care to explain how having cash can possibly hedge a portfolio of stocks?

Ah, that's easy. If you are concerned about investment risk and volatility, it takes the edge off the ups and downs, as if you hadn't actually invested all your money in an investment portfolio. Because - and here's the secret - you haven't actually invested all your money in an investment portfolio...

Not sure how that activity of "diversifying out of stocks and into not-investing" is supposed to enhance long term returns though

It's just a market timing gamble, the idea being that he would presumably use that "firepower" to buy more equities if/when they got cheaper. Presumably he thinks that the equities that make up the world index with his chosen sector concentrations are overpriced and he will more likely than not, be able to buy them cheaper. Except he isn't at all confident that he will be able to, so 70% of his money is going into a high risk portfolio of international equities with sector concentration. A muddied low conviction approach which results in cash dormant on the sidelines.

If the £30k is all in cash accounts earning substantially more than inflation after tax, then you could argue it is some sort of reliable fixed income element to the portfolio. But it's hard to get 5% on over £10k, and the rest may be languishing at two or three percent, unlikely to make any real terms gains.

bugbyte_2

Yep. Thats about it. If the market was to drop x% than show signs of recovery I would jump in with some of my £20K. I did it at the start of last year buying £2.5K of Investec Global Energy which mainly holds oil firms when petrol price was recovering from 99p and the shares had jumped - they had fallen nearly 50% in 1 1/2 years. Made about 35% before selling last month - it was my last active fund.

MPN

I have been doing a lot of research into my investment portfolio and initially I concluded that I would mainly go down the passive route with an all World Tracker (70%), a Global Property Tracker (15%) and only one active fund a UK Property Fund (15%). This was mainly because I preferred the property funds as opposed to bonds.

However, I am now about to come to a decision on which funds I would like to invest in and, interestingly enough, I will go the other way and invest mainly in active funds with a couple of passive funds in certain sectors. IMHO there are a lot of quality active funds to consider in preference to passive trackers.

If you had asked me 9 months ago I would have said mainly passive funds all the way!

dunstonh

MPN wrote: »

I have been doing a lot of research into my investment portfolio and initially I concluded that I would mainly go down the passive route with an all World Tracker (70%), a Global Property Tracker (15%) and only one active fund a UK Property Fund (15%). This was mainly because I preferred the property funds as opposed to bonds.

However, I am now about to come to a decision on which funds I would like to invest in and, interestingly enough, I will go the other way and invest mainly in active funds with a couple of passive funds in certain sectors. IMHO there are a lot of quality active funds to consider in preference to passive trackers.

If you had asked me 9 months ago I would have said mainly passive funds all the way!

A lot of the tracker research is from the US which is a place where trackers have material advantages over managed. Not the case in the UK. In some countries in Europe it is similar or even more the case to go with tracker than the US. Some countries had 98% of managed funds underperforming. The UK is different though. It has the most managed funds that outperform trackers than any other country. The majority of UK large and mid-cap funds beat their benchmark over one, three and five years.

A lot of this is to do with tax. The UK does not penalise managed funds in the same way many other countries do. Tax is on the individual (or tax wrapper used). Whereas many other countries, including the US, tax the fund itself. So, instantly, any disposal in a fund is likely to suffer tax. Managed funds have a higher turnover so will pay more tax.

There are a lot of rubbish managed funds but they are easily filtered out leaving you with a smaller range of managed that you can compare with passive and make a decision on which is best to use. Being biased to one or the other is not good. Keep open minded and use trackers where trackers are best and managed where managed are best.

MPN

dunstonh wrote: »

A lot of the tracker research is from the US which is a place where trackers have material advantages over managed. Not the case in the UK. In some countries in Europe it is similar or even more the case to go with tracker than the US. Some countries had 98% of managed funds underperforming. The UK is different though. It has the most managed funds that outperform trackers than any other country. The majority of UK large and mid-cap funds beat their benchmark over one, three and five years.

There are a lot of rubbish managed funds but they are easily filtered out leaving you with a smaller range of managed that you can compare with passive and make a decision on which is best to use. Being biased to one or the other is not good. Keep open minded and use trackers where trackers are best and managed where managed are best.

I agree and the couple of passive trackers I am considering as part of my portfolio are the HSBC American Index and the Vanguard FTSE Developed Europe (Ex UK). Although in the latter my European sector asset allocation would also include a mix with an active European fund.

elephantrosie

noob here, please educate me.

are those you listed mutual funds?

MonroeM

MPN wrote: »

I have been doing a lot of research into my investment portfolio and initially I concluded that I would mainly go down the passive route with an all World Tracker (70%), a Global Property Tracker (15%) and only one active fund a UK Property Fund (15%). This was mainly because I preferred the property funds as opposed to bonds.

However, I am now about to come to a decision on which funds I would like to invest in and, interestingly enough, I will go the other way and invest mainly in active funds with a couple of passive funds in certain sectors. IMHO there are a lot of quality active funds to consider in preference to passive trackers.

If you had asked me 9 months ago I would have said mainly passive funds all the way!

I feel that many newbies myself included tend to be influenced by this forum towards passive trackers, but I suppose it is a money saving forum, so they are mostly attracted by the very low cost fees for passive as opposed to active funds.

Nevertheless, as you say with more experience and lots of research there is definitely room for both options and I certainly will have more active funds mixed with a few passive funds in my end portfolio.

dunstonh

elephantrosie wrote: »

noob here, please educate me.

are those you listed mutual funds?

Mutual funds is an Americanism that has found its way over here with some providers and commentators. Mutual funds can cover most types of unit linked funds (such as unit trusts and OEICs). How the fund invests within its remit is irrelevant.