Index vs managed funds the great war

ivormonee

Most fans of active funds say that the reason they are better is because you can pick the best fund managers for their respective sectors who will, overall over time, beat their respective index benchmarks. In other words, for each sector there will be a selection of managers who will be favoured over others. But what we see is that, amongst the active investors, there is no consensus of who these fund managers are or which the "best" funds are. By "best" we would assume funds that generally and consistently do better than the index and the lesser mortal actives. And this should be a matter of fact not of opinion. And this is where the active argument falls down, in my opinion, because investor A might say ABC fund/ fund manager is best for, say Japanese Smaller Companies whereas investor B might say no, it's XYZ fund/ fund manager that's best for this sector. Therein lies the problem. My challenge to the actives would be to arrive at a consensus of "best" funds/ managers for each sector and see what we can come up with.

TBC15

Well some of us are trying to put this one to bed over here.

https://forums.moneysavingexpert.com/discussion/5719527

You can’t argue with the facts unfortunately, active funds overall tend not to beat the index.

My contention is that the majority of active funds are not held by active investors. Some poor soul was sold them by a man in a suite.

BananaRepublic

TBC15 wrote: »

Well some of us are trying to put this one to bed over here.

https://forums.moneysavingexpert.com/discussion/5719527

You can’t argue with the facts unfortunately, active funds overall tend not to beat the index.

My contention is that the majority of active funds are not held by active investors. Some poor soul was sold them by a man in a suite.

Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.

firestone

BananaRepublic wrote: »

Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.

while you are right that trackers may suit people who do not pay much attention to their funds there are still Banks/BS & fund companies talking these people into investing in funds for the first time using just as much spiel.Hopefully we do not get a PPI type claim for mis-selling but i could see it happening (only half joking)

Linton

ivormonee wrote: »

Most fans of active funds say that the reason they are better is because you can pick the best fund managers for their respective sectors who will, overall over time, beat their respective index benchmarks. In other words, for each sector there will be a selection of managers who will be favoured over others. But what we see is that, amongst the active investors, there is no consensus of who these fund managers are or which the "best" funds are. By "best" we would assume funds that generally and consistently do better than the index and the lesser mortal actives. And this should be a matter of fact not of opinion. And this is where the active argument falls down, in my opinion, because investor A might say ABC fund/ fund manager is best for, say Japanese Smaller Companies whereas investor B might say no, it's XYZ fund/ fund manager that's best for this sector. Therein lies the problem. My challenge to the actives would be to arrive at a consensus of "best" funds/ managers for each sector and see what we can come up with.

A strawman argument as are so many on the passive side.

I am currently 100% active and I am not interested in "the best manager" for a sector. There isnt one. One may have have a style of investing that is appropriate at some stages of the market and do well for a few years, but then circumstances change and someone else picks up the baton. The point is that by focussing on asset allocation it doesnt matter much where the manager fits in the pecking order, just go for someone who has consistently had a reasonable record. Avoid the obvious no hopers and avoid the ones with good records due to a single lucky year or who are wildly inconsistent.

The problem with index funds is that almost all are wedded to investing on the basis of market capitalisation. Is there any evidence that big companies provide better returns than small companies? The easily accessible evidence as I have shown elsewhere is the reverse. The example of Japanese Small Companies is interesting as all the active funds consistently outperform the only passive fund available for that sector.

I want a portfolio with a high % of small companies and a relatively low % of US. I want a portfolio with only a moderate % of Finance etc etc It is much easier to do this with appropriate active funds where the managers share my preferences rather than try and tweak a global index with minor holdings. It is easy to overweight an area with minor tweaks - how does one underweight it without having separate funds that cover all other areas?

bostonerimus

BananaRepublic wrote: »

Quite right. Most active funds are sold on the basis of spiel, to people susceptible to sales talk. And I speak as a fan of active funds. The reality is that most people do not pay much attention.to their funds, and for these people trackers are a better option. However, my active funds have given me returns that trackers could not dream of.

I'm glad for you. We always hear from the winners, the folks that have made good "choices". I look at the basic maths and the average person is better off using indexes, keeping costs down and rebalancing once in a while. Hubris is the enemy of success for most investors, but a friend for the minority that come out ahead. I will always have lower annual returns with my indexing strategy than the "good" active investors, but I came to the belief/realization that yesterday's winners are tomorrow's losers and so decided to be average. I am a broken record, but in no way working for Vanguard etc. I have been a client of Vanguard for 20 years and been indexing for 30 years getting an annual average of 8.5% return and now have a mid 7 figures portfolio. So it worked well for me and I did nothing special at all....other than saving 20% of my wages and indexing.

bostonerimus

Linton wrote: »

I want a portfolio with a high % of small companies and a relatively low % of US. I want a portfolio with only a moderate % of Finance etc etc It is much easier to do this with appropriate active funds where the managers share my preferences rather than try and tweak a global index with minor holdings. It is easy to overweight an area with minor tweaks - how does one underweight it without having separate funds that cover all other areas?

I agree about the pre-eminent importance of asset allocation. It is perfectly possible to come up with your desired allocation with low cost indexes and is done by DFA. French and Fama would approve of your asset allocation strategy, but would recommend you do it with low cost index funds.

firestone

given a few more years it will be just as hard to pick a tracker.I have one Vanguard fund from the 71 on their site (inc. active ones) does it really need that many? or does it look better to have more funds on offer

ivormonee

Linton wrote: »

A strawman argument as are so many on the passive side.

I am currently 100% active and I am not interested in "the best manager" for a sector. There isnt one. One may have have a style of investing that is appropriate at some stages of the market and do well for a few years, but then circumstances change and someone else picks up the baton. The point is that by focussing on asset allocation it doesnt matter much where the manager fits in the pecking order, just go for someone who has consistently had a reasonable record. Avoid the obvious no hopers and avoid the ones with good records due to a single lucky year or who are wildly inconsistent.

Ok, let me rephrase the proposal: arrive at a consensus of "best" funds/ managers for each sector, appropriate to the stages/ lifecycle/ circumstances of the markets/ economy.

We still won't see any consensus!

And we won't know when circumstances will dictate that the the time is right for "someone else to pick up the baton". If we did, that would mean we had good skills at seeing into the future and being good at market timing which, I think we probably will agree, is simply not consistently possible.

ivormonee

bostonerimus wrote: »

I will always have lower annual returns with my indexing strategy than the "good" active investors, but I came to the belief/realization that yesterday's winners are tomorrow's losers and so decided to be average.

But, the vast majority, over a period of several years, of performance of active funds, what with their top quartile performance this year, and next, and hell maybe even the year after, to then find that they're fourth quartile for the next one, two, three years ... means that your index based portfolio will at least nudge ahead of an identical, or as close as possible, asset allocation formulated through the actives. The passive side is "boring" but after a few years your valuation will be less so than what you would most probably have achieved taking the active route.