Great British Invest off or Passive V Active Discussion

AnotherJoe

Linton wrote: »

One could assert that, but it's not very helpful to investors since you couldnt compare any fund or portfolio with any other one since they will all be different barring single index funds. You cant get country/sector/company size indexes.

Did i misunderstand? Since there are indexes for the UK, USA, for technology, phrama, oil , small companies, etc.

So you could certainly compare say a generalist UK only fund, vs one that was a passive FTSE All share, or an active pharma fund vs an index pharma fund, a tech index fund vs a tech specialist fund, etc.

Although, different generalist funds will still have different objectives, so even then comparison is very difficult.

Audaxer

Linton wrote: »

The %s will change because different funds will rise or fall at different rates. You can contrast this with say VLS100 where the manager "tinkers" to keep the % geographic allocation constant. So one could say that the rules of the exercise disadvantage people with active portfolios because they arent allowed to rebalance.

I think for this exercise to work it is okay for active investors to rebalance back to their original allocation as the VLS funds do that on a regular basis. But maybe it is okay for active investors to change funds as well as long as they stick to their original sectors and geographic percentages.

finellah

Audaxer wrote: »

I think for this exercise to work it is okay for active investors to rebalance back to their original allocation as the VLS funds do that on a regular basis. But maybe it is okay for active investors to change funds as well as long as they stick to their original sectors and geographic percentages.

Not clear on your definition of "active investor". Are you including people who invest in passive funds but choose or vary their own asset allocation? What about L&G Multi-Index, Blackrock Consensus which might vary their asset allocation?

I guess it might just need to be a comparison of the performance of any portfolio (passive, active, fixed or variable asset allocation) with an agreed baseline based on total equity and bond markets.

Or have people highlight for clarity what type of investment approach they take e.g. passive, active or mixed, fixed allocation or variable allocation. Results presented in some sort of matrix...

bowlhead99

Audaxer wrote: »

I think for this exercise to work it is okay for active investors to rebalance back to their original allocation as the VLS funds do that on a regular basis. But maybe it is okay for active investors to change funds as well as long as they stick to their original sectors and geographic percentages.

Active investing allows you to make whatever judgements you want and for the investment managers whose funds you use to deploy your capital, to also make whatever judgements they want which may not be constrained to a rigid geographic or industry sector percentage. Most funds which invest across asset classes do not have a hard percentage but allow the proportions to ebb and flow whether that's to maintain a volatility target over the course of multiple economic cycles or to anticipate economic or market conditions.

So, forcing someone to 'stick to their original sectors and geographic percentages' is not how the world works. Certainly if you put on a demonstration of "active versus passive" and then tell the active people they can't make ongoing investment selections, the title of the show is BS.

The point of the exercise is to elicit differences between individual approaches. Maybe I or my fund manager want to be bullish on certain countries or cyclical sectors even though the sum total of all money in the market does not actually favour those sectors - contrarian investing. I couldn't do that strategy if I was hamstrung by a rule that told me to stay bullish on those geographies or countries forever and never reallocate away from them .

Or perhaps I feel that I should allocate less than the 'world equity index' currently allocates to the US because the valuations of US companies compared to their earnings is sky high and if Trump's tax cuts and protectionism don't get implemented in the way the market wants, it could be a house of cards; so I might only allocate 20% of my equities to the US. But then in five years' time when US prices are at perfectly acceptable or even super-attractive levels, I might want 50% there. To tell me I am not allowed to add more to the US when the price to earnings ratio gets cheaper, and I must instead rebalance only back to my original allocation, defeats the point of saying it is a test of what the market delivers rather than an individual or his appointed investment managers deliver.

Just because VLS wants to create a mass market product in which a retail investor can invest any month of the year and always get x% equities and y% bonds, doesn't mean everyone wants to do it that way. If you say everyone can only keep reverting back to some original selection, then you are saying everyone has to do it that way, so it's hardly an examination of strategy.

finellah wrote: »

I guess it might just need to be a comparison of the performance of any portfolio (passive, active, fixed or variable asset allocation) with an agreed baseline based on total equity and bond markets.

Choice of baseline is a bit meaningless when we all have different objectives. The total investible bond and equity markets around the world is probably 25-30% equities at the most. Some here are 60% equity, some 100%. At the moment. Some may hold an active investment trust which is currently only 50% equity because it wants to preserve capital and sees a lack of bargains in the market, but may move to 75% equity when they are more bullish.

And if choice of baseline is meaningless because one size doesn't fit all, then comparison of one person to another is similarly meaningless. I guess you could have a 'challenge' where one active investor 100% equities compares his return to a passive investor 100% equities following FTSE Global All Cap. But if the active investor 'wins' after five years the passive investor will say it is because the active investor took more risk and got lucky and it won't reliably repeat. And OP said this is not about 'league tables' or leaderboards.

So, not very meaningful but perhaps a fun distraction for a weekend afternoon catching up with the thread every few years?

bostonerimus

Linton wrote: »

I believe the passive line is that it is not possible to pick an unusually well performing portfolio except by random luck - one is just as likely to pick an unusually poorly performing one. And that a well performing portfolio cannot be well performing for a usefully significant amount of time. If that is correct one should see that the active portfolios are scattered evenly on both sides of the passive ones and that over time no one active investor should be seen to have the golden touch.

Sadly I doubt whether we will have enough portfolios or time to show anything of great significance but hopefully the exercise will be fun, interesting and educational anyway. With any luck there will be another Great Crash so we can look at the effect of risk as well as performance in the good times.

Yes I whole heartedly agree with this. We can look at the absolute returns and also the standard deviation of the monthly returns. I'd expect the 100% equity portfolios to show far more month to month variation than something like VLS20. Given a year and maybe 10 or 20 portfolios I expect a pattern to emerge.

finellah

bowlhead99 wrote: »

And if choice of baseline is meaningless because one size doesn't fit all, then comparison of one person to another is similarly meaningless. I guess you could have a 'challenge' where one active investor 100% equities compares his return to a passive investor 100% equities following FTSE Global All

Don't disagree regarding relevance of a single benchmark to all. But I'd also imagine that most "active investors" could come up with / agree to a passive benchmark that they could live with / find useful to measure up against e.g. different equity bond splits or risk rating. Although my ISA currently has 65% equities (+5%property) I do track it agaist VLS Lifestrategy 80 anyway as well as the Morningstar GBP Adventurous Allocation. I think measuring returns is impotant to help me to decide whether my current approach is reasonable. I think some sort of shared approach to this could be educational ( for me anyway)

Audaxer

bowlhead99 wrote: »

Active investing allows you to make whatever judgements you want and for the investment managers whose funds you use to deploy your capital, to also make whatever judgements they want which may not be constrained to a rigid geographic or industry sector percentage.

That's fair comment, but I thought the usual passive/active debate was whether it was just the active fund managers that added value by their decision making, which maybe could be achieved by comparing individual active funds to similar index funds. In this exercise, as you say, it is also the judgement/decision making of the individual investing in a portfolio of funds as well as the judgement of the individual active fund managers. Any of us individuals might make poor judgements/decisions in constructing or managing our active portfolios resulting in poorer returns than a similar passive portfolio, but it does not necessarily mean the individual active funds are worse than their passive counterparts.

finellah

Yes I'd think that an aspect of the passive/active debate relates to the ability of investors to select funds. I'd think those investor decisions also include passive allocation decisions including selecting VLS asset allocation or other multi-index type funds. I suppose the least decisions that could be made would be total equity and bond market with varying % allocations to risk profile.

enthusiasticsaver

I have invested in VLS60 for the last four years but have just added to my portfolio units in the Artemis monthly distribution income fund which is of course active so will be comparing the two over the next five years as I expect not to have to touch either in that time. Both multi assets but of course different asset allocations so not as straightforward as active v passive.

Of course one is income and the other accumulation so not going to be that easy to judge their performance against each other.

ams25

Ray_Singh-Blue wrote: »

If all the investors in the world turned up for this thread, we would find that their average return was the market average. That's just logic.

You can subtract the passive investors, who are simply tracking the average. And conclude that the average return of everybody who actively chooses their investments is, mathematically, the market average.

That said, I find it endlessly fascinating to see how people stash their hard-earned. So please, crack on��

but what's missing is that there are hundreds/thousands of active funds that consisently perform poorly or just averagely yet have billions invested. These skew the numbers. that means that there must be some - and relatively fewer - that perform better, even much better. If you find these why would you not do better than average. The fundsmiths, woodfords, hargreaves, tullocks, Shiozumis etc.

I agree that there are many many poor performing active funds and you are better off with a tracker than those funds...and for those not able or inclined to reasearch the Actives that do add value then again trackers are probably best. But what I don't get is the logic that says that because there are many poor active funds it is better to go with passives, instead of an approach that says there are good actives but you need to do some homework to find them.

Look at my vls60 vs active comparisons on the updates thread. That's worthwhile outperformance in my opinion.