The regulators thoughts on passive vs active

bostonerimus

SnowMan wrote: »

Further information about the FCA's reasearch into active vs passive is contained in this 'annex 1 additional feedback document and detail in our responses'

https://www.fca.org.uk/publication/market-studies/ms15-2-3-annex-1.pdf

skip to paragraph 11 on page 6 for the relevant discussion

There are some very familiar arguments in those paragraphs and some pretty silly comments like

Some respondents also argued that the interim report was misleading as it failed to point
out that passive funds similarly underperform against benchmarks.

obviously any good tracker will underperform the index by the fund fees

also

A number of asset managers and other respondents provided evidence to support
the view that their own active funds have, on average, outperformed against their
respective benchmarks, even if the industry as a whole has not.

So you just have to consistently choose winning funds.......:doh:

dunstonh

So you just have to consistently choose winning funds.......

Which is not that difficult in some sectors.

If you follow the financial press, you will know that the FCA has got its eyes on the funds issued by vertically integrated funds. i.e. everything by the same provider/owner. That appears to be the primary target in this review.

BananaRepublic

username12345678 wrote: »

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.

There are a few flaws in the argument, one already hinted at in this thread is that not all sectors are tracked by passive funds, so if you want exposure to those markets, you need to go active.

Secondly, the answer you get reflects the question that you ask. I believe they analysed large numbers of funds and came to the conclusion that on balance the passive funds performed better. I don't think anyone questions the research. An alternative approach is to analyse the best performing funds over the long term - 20 years say - and determine the probability of their performance being by chance. I suspect the answer will be that it is very unlikely to be due to chance.

I used to believe the passive fund hype, and made the mistake of investing in passive funds. I found over the long term that my active funds were doing better. I have moved back into active funds almost exclusively. My own experience is on of outperformance by active funds, so much so that the higher charges are not an issue.

However, I did pay unexpected charges, as some funds were purchased through TorquilClark, and they received a payment each year. That was in the original contract ~20 years ago, but since then there has not been one single reminder in any form whatsoever. That is an example of why many people including myself consider the finance industry to be full of scoundrels. Andy Bell of YouInvest even says he started out in the industry by designing financial products which tried to maximise the profit by hiding the fees from the consumer, a job he disliked as he considered it dishonest.

Thrugelmir

bostonerimus wrote: »

obviously any good tracker will underperform the index by the fund fees

How many trackers replicate the index they are tracking in full?

cashbackproblems

TBC15 wrote: »

Would you mind sharing who you use for technology.

Axa Framlington Technology fund. Has been my best performer over few years (+90%)


US tech stocks still are overweight.

bostonerimus

I'm glad that nobody is under performing with their active funds. Everyone seems to be above average.............

bostonerimus

dunstonh wrote: »

Which is not that difficult in some sectors.

If you follow the financial press, you will know that the FCA has got its eyes on the funds issued by vertically integrated funds. i.e. everything by the same provider/owner. That appears to be the primary target in this review.

As a market cap weighted indexer I'm not looking at individual sectors so you would know more about that than me.

dunstonh

bostonerimus wrote: »

I'm glad that nobody is under performing with their active funds. Everyone seems to be above average.............

Which you would expect to be with those that take a greater interest in their investments.

bostonerimus

cashbackproblems wrote: »

Axa Framlington Technology fund. Has been my best performer over few years (+90%)


US tech stocks still are overweight.

With a basically 60/40 broad index equity to bond allocation, over 30 years my average annual return has been just over 8% which is a 1000% return in total. I might have done better with active funds.....I might have done worse.......,but indexing has been an efficient and inexpensive route to financial freedom for me. I haven't worried much about sectors or spent much time (or money) managing my assets. I've been able to survive through a couple of crashes and several market corrections. This approach is obviously not going the work for people looking to beat an index or to get the extra return promised by active funds, but it has worked for me and for many other people too.

bostonerimus

dunstonh wrote: »

Which you would expect to be with those that take a greater interest in their investments.

Can't agree with you on that one.