Index vs managed funds the great war

Prism

ivormonee wrote: »

So, if you've already decided you want 10% in Japanese equity, you pick, say the XYZ Japanes Equity index fund.

See, thats not how I would pick a Japan index fund though. There are as many passive Japanese funds as there are active ones. Do you track the Nikkei or the Topix? Large, mid or small cap. You can hedge currency or not hedge. There are passive funds that only invest in ethical companies or value companies. You can get global passive funds that are overweight Japan that only invest in robotics.

These decisions are just the same as if you go for an active fund in a region. In fact I would say that passive funds give you more options and more control whereas using an active fund allows the manager to make some of those choices for you.

System

Finding a good active manager is work itself and something to feel insecure about whether they'll continue to perform, with index you don't have those worries

ivormonee

Prism wrote: »

See, thats not how I would pick a Japan index fund though. There are as many passive Japanese funds as there are active ones. Do you track the Nikkei or the Topix? Large, mid or small cap. You can hedge currency or not hedge. There are passive funds that only invest in ethical companies or value companies. You can get global passive funds that are overweight Japan that only invest in robotics.

These decisions are just the same as if you go for an active fund in a region. In fact I would say that passive funds give you more options and more control whereas using an active fund allows the manager to make some of those choices for you.

You are right, but those decisions (or most of them, anyway) are asset allocation decisions, not fund decisions. At the asset allocation stage, prior to choosing any funds, you would decide how you wish to split your money across different assets. So you might say, for example, you'd like to have 10% in Japan but that 6% might be in large companies with a 4% allocation to small caps. Or you might decide to hedge your currency exposure. Or some other tweak. The point is, once you've made your decisions you then delve into the available fund universe and look at the funds that might do the job. You are right that there may be more than one index, eg. for Japan there'll be the Topix, Nikkei, MSCI, FTSE etc. and yes, that would form part of the decision as to which fund(s) to choose.

Audaxer

ivormonee wrote: »

A key point is that we either believe in our fund managers and trust that they will make the right decisions based on their expertise (which includes their degree or other qualification(s) in portfolio management, the teams that back them up with research, other teams of people that provide insight on the economy, interest rates, inflation, wages growth, etc) or we don't. If we don't, we go passive. But if we do, the reasons for doing their job for them don't seem all that clear. We decide our asset mix (or our adviser/ wealth(y) manager, robo-cop, etc. does it for us if we're not DIY), and then we leave it to the active fund managers to deliver.

From my understanding, experienced investors look at it this way - if an active manager goes overweight in a particular area, say Technology, it is probably the right thing to do for his fund as you would trust his knowledge and experience. However as that fund is only part of your portfolio which may already be overweight in Technology, you may decide that fund is now not best for your portfolio as you have already enough Technology, so you would look for a different fund in the same region, but with less Technology. That is the way I understand it from reading some of the earlier posts from more experienced investors.

Prism

ivormonee wrote: »

You are right, but those decisions (or most of them, anyway) are asset allocation decisions, not fund decisions. At the asset allocation stage, prior to choosing any funds, you would decide how you wish to split your money across different assets. So you might say, for example, you'd like to have 10% in Japan but that 6% might be in large companies with a 4% allocation to small caps. Or you might decide to hedge your currency exposure. Or some other tweak. The point is, once you've made your decisions you then delve into the available fund universe and look at the funds that might do the job. You are right that there may be more than one index, eg. for Japan there'll be the Topix, Nikkei, MSCI, FTSE etc. and yes, that would form part of the decision as to which fund(s) to choose.

Thats why I invest in Japan using actives though. I don't feel capable in the slightest in working out those allocations across all the passive choices. I would almost certainly guess wrong ( I know nothing really about the Japanese economy). I know one thing which is I don't want to particularly invest in lots of large corps heavily dependent on the Yen/Dollar rate. So I pay an active manager to make that choice for me to some degree by choosing a mid cap fund that can extend either way.

The standard option to invest in a large cap index only seems to work well in the US. I also use passive funds for sector allocation like 'health', 'robotics' etc

sixpence.

I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!

k6chris

So if you know roughly what allocations you want in term of geography, sectors, industry areas etc, could it make sense to use low cost passives to build the allocation model you want??

System

The more that indexing takes over the more pricing inefficiency there will be for active to genuinely exploit, so there will always be space for both styles

Linton

Audaxer wrote: »

From my understanding, experienced investors look at it this way - if an active manager goes overweight in a particular area, say Technology, it is probably the right thing to do for his fund as you would trust his knowledge and experience. However as that fund is only part of your portfolio which may already be overweight in Technology, you may decide that fund is now not best for your portfolio as you have already enough Technology, so you would look for a different fund in the same region, but with less Technology. That is the way I understand it from reading some of the earlier posts from more experienced investors.

That is how I would view things. In practice it's not a major issue as I only rarely buy new funds, and having a range of funds scattered across the world what one manager decides in his sector allocation tends not to have a major impact on the portfolio as a whole. Also, managers dont often make major changes in their allocations. They tend to have their own style and keep to it. But if the portfolio was rebalanced for other reasons, eg having sold a fund for drawdown, the sector allocation could affect how the holdings were redistributed.

The important point is that one isnt looking for next year's Best Fund but rather for a fund which fits well with the rest of one's portfolio. The former aim is rarely achievable the latter much easier and the results longer lasting.

firestone

MatthewAinsworth wrote: »

Finding a good active manager is work itself and something to feel insecure about whether they'll continue to perform, with index you don't have those worries

You do have the worry of will they continue to perform but you still have a worry that an index will perform and some managers may even be able to stop some of the downside in a market correction - he says fingers crossed:)