We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
The regulators thoughts on passive vs active
SnowMan
Posts: 3,458 Forumite
Interesting FCA final report out today 'FCA Asset Management Market study'
https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf
It covers a range of issues in the asset mangement industry, but this is one of the relevant sections about active vs passive investing.
https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf
It covers a range of issues in the asset mangement industry, but this is one of the relevant sections about active vs passive investing.
1.12
We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.
1.13
It is widely accepted that past performance is not a good guide to future performance. We find that it is difficult for investors to identify outperforming funds. This is in part because it is often difficult for investors to interpret and compare past performance information. Even if investors are able to identify funds that have performed well in the past, this past performance is not likely to be a good indicator of future performance. There is little evidence of persistence in outperformance in academic literature, and where performance persistence has been identified, it is persistently poor performance.
1.14
We found some evidence of persistent poor performance of funds. However, we also noted that worse performing funds were more likely to be closed or merged into better performing funds. In our additional work, we found that the performance of the merging poorer performing funds improves after they have been merged. However, we also found that the performance of the recipient fund, on average, deteriorates slightly after the merger, although it is not clear that this is a direct result of the merger. While mergers and closures may improve outcomes for some investors, not all persistently poorer performing funds are merged or closed. It can also take a long time for worse performing funds to be closed or merge.
I came, I saw, I melted
0
Comments
-
At the beginning of the report it says1.7 One point raised in the feedback, which we want to address, was a perception that our interim findings suggested that passive funds were preferable to active funds. This is not the case. Rather than focusing on one strategy over another, we think it is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.
However that suggests to me that provided you use cheap passive investments (as opposed to expensive passive investments such as the Virgin UK tracker) which are in appropriate diversified investments, that take into account the investors risk profile, then (low cost) passive is better than active because it is cheaper.
Of course some will disagree with my interpretation, but as a regulator they can't say passive is better than active.
Anyway read the report and come to your own conclusions.
I came, I saw, I melted0 -
Good Links Thanks.
But more of the money flooding into passive gives more opportunities for active managers. If they get their fees down to reasonable levels they may well beat passive funds in the future.“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
Glen_Clark wrote: »Good Links Thanks.
But more of the money flooding into passive gives more opportunities for active managers. If they get their fees down to reasonable levels they may well beat passive funds in the future.
It is important to have an open mind, although at the moment I think low cost passive is a very clear winner (personal view).I came, I saw, I melted0 -
Glen_Clark wrote: »Good Links Thanks.
But more of the money flooding into passive gives more opportunities for active managers. If they get their fees down to reasonable levels they may well beat passive funds in the future.
I've been 100% in low-cost passive investments historically, because I don't believe any fund manager can beat the market by more than the fee differential between passive and active over the long term (there may be the odd exception, but the ability to identify such managers in advance is as elusive as the ability to pick winners from the underlying investments).
But I think you are right - the larger the passive sector gets, the more self-fulfilling asset values become, which creates opportunity for active managers. The fact that active funds fees have been significantly reduced in recent years has already begun to erode the advantage that passive investing had 5 years ago.0 -
Well I'm going to throw my hat into the passive ring. The studies, basic mathematics and 30 years as a passive investor have convinced me it's the way people should invest.....and not just the folks with a few thousand, it's best for those with millions too.
I expect there will be some push back and examples given of market beating returns from active fund portfolios. I long to see examples of active fund portfolios that lagged a comparable index. People just don't like to advertise their losses. Over the last 30 years I've averages just over 8% annual return from a basically 60/40 passive indexing portfolio....on the effort to return scale that's pretty good.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
I much prefer passive funds for growth, but active funds and Investment Trusts seem to be much better for generating regular income for those of us in retirement and in the deaccumulation stage. Not sure if the report covers that at all?0
-
I don't think anybody is saying passive hasn't been better in the past.
But past performance is no guide to the future and things are changing as people folow the herd into passive investing, giving more opportunities for active management to find value - and their fees are coming down.“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
I'm mainly in to passive but do have active where passive is not available (recovery fund) or where I think active can add value (smaller CO's).
I think the key is not to think either is the holy grail but I do have a bias towards passive.0 -
I've only been paying any sort of attention to this debate (or indeed investment generally) for 6 months or so.
I was initially blinded by the obvious attraction to a new investor of the simplicity of a methodology that offered to encompass most of the investable (sp) universe at a rock bottom cost.
Why wouldn't you grab on to it...simple/cheap/effective!
However, as i've learnt a little more it's become apparent that perhaps the active vs passive debate isn't quite as black and white as i'd thought at first glance and there is room to employ many different vehicles to get you to wherever your investing destination happens to be.
After all is said and done, being dogmatic rather than pragmatic probably isn't going to add much to your bottom line.0 -
However, as i've learnt a little more it's become apparent that perhaps the active vs passive debate isn't quite as black and white as i'd thought at first glance and there is room to employ many different vehicles to get you to wherever your investing destination happens to be.
Well done. Keeping an open mind to all methods and picking the best for the particular investment area is exactly what you should be doing. Do not fall for any bias in one method or another.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
This discussion has been closed.
Categories
- All Categories
- 346.6K Banking & Borrowing
- 251.3K Reduce Debt & Boost Income
- 451.4K Spending & Discounts
- 238.7K Work, Benefits & Business
- 614.1K Mortgages, Homes & Bills
- 174.7K Life & Family
- 251.9K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 15.1K Coronavirus Support Boards