Great British Invest off or Passive V Active Updates

coastline

Bobziz said:

I wonder how Thrug's portfolio is holding up. He seemed to be able to at least match the passives but with less volatility.

Bobziz said:

I wonder how Thrug's portfolio is holding up. He seemed to be able to at least match the passives but with less volatility.

Still posts I've heard. Think the username is Type or something. I'll have a check.

JohnWinder

However for me, and I think some of the others, it's not all about performance. I am looking for other properties like defensive and less volatile at the same time.’

Performance means what one wants it to mean, and it sounds like it means ‘returns’ here, because ‘volatility’ is the other side of the same coin and it’s noted as a separate quality. Performance is a useful term for ‘return, taking into account risk’ or risk adjusted return, not just return, lest I become confused.

‘I'm assuming that most of us knew that in pure performance terms the passives would eventually do best. The global stats back that up’

Well, yes, in terms of returns, when comparable (which market, which type of stocks) active and passive funds have been evaluated in the SPIVA reports the majority of active funds will underperform (lower returns) after only several years. A few active funds can out-return for a good few years more, but no one knows how to identify them ahead of time. But what if the active ‘under-returners’ are also less volatile? Recall,

‘it's not all about performance. I am looking for other properties like defensive and less volatile at the same time’.

 We might be attracted to less volatile active funds and forego some returns if the fees were low enough; although the obvious alternative is to hold a passive fund for its very likely better returns, and dial up one’s cash or bond holdings to reduce portfolio volatility. What to do?

SPIVA again has some results: 

‘Fund risk is also important in the context of broader discussions around the value of active management. As we have seen, funds have not typically provided a risk reduction, and those that did appeared to do so through cash allocations.’

‘moving from a less to a more risky fund does not appear to have increased returns.’

‘Lower-volatility funds are a simpler case, since a significant cash allocation alone explains their average return.’ If we can hold cash ourselves without fees, do we need to pay a fund manager to hold cash?

https://www.spglobal.com/spdji/en/documents/research/research-the-volatility-of-active-management.pdf 

bostonerimus

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Prism

JohnWinder said:

However for me, and I think some of the others, it's not all about performance. I am looking for other properties like defensive and less volatile at the same time.’

Performance means what one wants it to mean, and it sounds like it means ‘returns’ here, because ‘volatility’ is the other side of the same coin and it’s noted as a separate quality. Performance is a useful term for ‘return, taking into account risk’ or risk adjusted return, not just return, lest I become confused.

‘I'm assuming that most of us knew that in pure performance terms the passives would eventually do best. The global stats back that up’

Well, yes, in terms of returns, when comparable (which market, which type of stocks) active and passive funds have been evaluated in the SPIVA reports the majority of active funds will underperform (lower returns) after only several years. A few active funds can out-return for a good few years more, but no one knows how to identify them ahead of time. But what if the active ‘under-returners’ are also less volatile? Recall,

‘it's not all about performance. I am looking for other properties like defensive and less volatile at the same time’.

 We might be attracted to less volatile active funds and forego some returns if the fees were low enough; although the obvious alternative is to hold a passive fund for its very likely better returns, and dial up one’s cash or bond holdings to reduce portfolio volatility. What to do?

SPIVA again has some results: 

‘Fund risk is also important in the context of broader discussions around the value of active management. As we have seen, funds have not typically provided a risk reduction, and those that did appeared to do so through cash allocations.’

‘moving from a less to a more risky fund does not appear to have increased returns.’

‘Lower-volatility funds are a simpler case, since a significant cash allocation alone explains their average return.’ If we can hold cash ourselves without fees, do we need to pay a fund manager to hold cash?

https://www.spglobal.com/spdji/en/documents/research/research-the-volatility-of-active-management.pdf 

Agreed in general, however there are a few ideas around that SPIVA does not test as it takes each fund individually on its own merit.

It may be possible to take two funds with their own volatility and performance characteristics and by combining them (and rebalancing) get both a higher return for the volatility. It may also be possible to produce both at the same time, for example combining smaller companies with larger companies in the correct proportions (beyond the standard all company index)

It can be beneficial to mix in other assets into the traditional equities/bonds mix as a way of reducing risks like sequence of return. Very difficult to model this in a standard way like SPIVA does with individual funds as the time periods to do this fully need to be significant and include multiple economic cycles. 

I get it - it can be very difficult to put numbers on these ideas since they are based on too many moving parts. Its hard enough to produce a set of short term stats like SPIVA does.

finellah

Audaxer said:

I'm not part of this challenge, but I see that it's now exactly 5 years since this thread started. Just wondering if you have come to any conclusions as to which is best - active or passive?

Apologies for lack of updates for the last few months. My end Sept 22, 5 year number was 44.0% up over the 5 year period.

My portfolio has mostly been made up of active funds over the five year period. I have chopped and changed the funds held multiple times. On average roughly 65% equity / 35% bonds/cash. Though a bit more cash at the moment. Portfolio has changed quite a bit since I last updated it on the other portfolio thread.

I compare my portfolio performance to VLS 60 and VLS 80 as those are the fire and forget options I would have chosen if had decided on a passive approach. Over the period I make it that VLS60 returned 19.3% and VLS80 returned 30.1%. 

I would also note that my 44.0% includes all platform and transaction fees while the VLS numbers don't.

My personal conclusion (for now) is that I'm planning to keep doing what I'm doing, though hopefully with less tinkering. 

finellah

In case it causes any confusion - for some reason the performance numbers I mentioned above were for 29th Sept rather than 30th. I think I was away from home on the 30th...

JohnWinder

It may be possible to take two funds with their own volatility and performance characteristics and by combining them (and rebalancing) get both a higher return for the volatility. It may also be possible to produce both at the same time, for example combining smaller companies with larger companies in the correct proportions (beyond the standard all company index)

There might be something in that. Let’s imagine one of those funds has had meaningfully higher returns than the other, and also less volatility; few of us would choose the lower returning more volatile fund. So if we exclude that combination of funds, we have only to consider a mix of one that has had better returns but more volatility, with a fund with lower returns and lower volatility. We can combine those in any proportions we like, but how do we get higher returns than the returns of the better returning fund, or even as good returns, unless you rebalance? 

So, is there any data we can see showing an example of this in action? A chart would be nice, but summary data might do. It would need to show holding the two funds giving more return than the whole market fund, for the same volatility of the more volatile fund, and rebalancing is permitted. If such a beast exists we’d like to know the rebalancing strategy too, since my understanding is that there’s no guaranteed return benefit from rebalancing; you get it in an oscillating market (with the right timing), but not in a steadily rising/falling market.

Linton

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Dh6

Bobziz said:

I wonder how Thrug's portfolio is holding up. He seemed to be able to at least match the passives but with less volatility.

He spends a lot of time on the citywire forum now

TBC15

I miss Thrugelmir’s contributions. It was nice to have results from someone who was using the hard graft school of investing.