Passive trackers

TheTracker

dunstonh wrote: »

it is not consistent with a passive approach as it is selecting sectors whilst eliminating others. Those are management decisions.

I see this posted by you every 7-10 days.

Would you mind explaining what you WOULD consider a passive approach?

For the life of me I can not fathom what it might be. I infer it is where there are no 'management decisions'. But if choosing whether to weight EM or Small or value is a 'management decision', then surely so would be plumping for a vanilla all world capitalisation weighted index, which had a 'management decision' to weight it that way eons ago. Indeed, there a solid rational scientific basis for sector tilts that one could feasibly argue removes some of the arbitrariness of cap weighting.

So, what would be an example of a passive portfolio that would not have you chastising a poster for making 'management decisions'?

TheTracker

AnotherJoe wrote: »

Aren't all trackers passive, by definition ?

I suppose it is more by practise and circumstance than definition. There is nothing stopping an index being a reflection of some form of management decision. Indeed, they all are in some interpretations. One renowned active fundamentalist thinks one isn't passive if one makes a management decision: someone somewhere decided whats in an AsiaPac index, a Small Cap index, or even an all world index. Does that make them passive or not? An exercise for the reader.

Now we see more and more Smart Beta and Factor ETFs, which in some ways are formulaic indices. The managers may make the logic of constituency (semi) public and transparent and make a commitment to not fiddle without notification. In many ways, these seem more 'logical' indices to me than one made by accident of geography.Are they active or passive? Some of both, probably.

And of course, many active funds are closet trackers. And in that sense, that could be more 'passive' by some definitions than those smart beta ETFs.

dunstonh

Would you mind explaining what you WOULD consider a passive approach?

One that does not involve management decisions on where to invest and where not to invest.

But if choosing whether to weight EM or Small or value is a 'management decision', then surely so would be plumping for a vanilla all world capitalisation weighted index, which had a 'management decision' to weight it that way eons ago.

Having a weighted portfolio of index trackers in all the major areas is fine. Yes you are making a management decision on the weightings but that is inevitable. it isnt truely passive like a global tracker may but its as close as you can get. However, once you start going into picking Large cap only or leaving sectors out, then you are making significant management decisions. You are effectively becoming a fund manager in your own right in an attempt to outperform. The very thing that passive investors would not look to do.

Linton

The often stated passive line is that you cannot beat the market except by random luck in the shorter term. That must imply that a decision to not follow the market and instead to go overweight in particular areas is futile at best and counter productive at worst. On the other hand if it is accepted that a private investor can benefit by overweighting particular areas in the longer term why cant a fund manager?

TBC15

Out of curiosity what occurs in 15ys time.

TheTracker

Linton wrote: »

The often stated passive line is that you cannot beat the market except by random luck in the shorter term. That must imply that a decision to not follow the market and instead to go overweight in particular areas is futile at best and counter productive at worst. On the other hand if it is accepted that a private investor can benefit by overweighting particular areas in the longer term why cant a fund manager?

I usually find your logic very clear (although I tend to disagree with the assumptions fed into it:)). But in this case, I don't see the logical thread at all.

Given any short term window of data, it is impossible to see whether actions taken in that window were significant to the performance within the window, or due to randomness vs the natural volatility. It's not possible to control for that volatility. You might call it a passive line, but I like to believe it still the case even if I fervently believed in a superiority of active management. Over time, the volatility begins to cancel itself out and the any underlying capability (alpha) will show its head. I see these as mathematical truths, not parochial assertions.

"a decision to not follow the market and instead go overweight in particular areas is futile at best and counter productive at worst".

I think this type of thinking possibly stems from a popular misconception that Passive/Index investing and Efficient Markets are joined at the hips. It is a mistake to equate market efficiency with the inability of active investors, as a group, to outperform passive indexes. That there may be slices of market with higher risk adjusted returns is not something that any passive investor I know would dispute, in fact they are often the more passionate advocators of the existence. Being 'overweight' in such a sector (a devotee might more likely say a mere cap-weighted portfolio is 'underweighted' in the sector) is not futile or counterproductive.

On the other hand if it is accepted that a private investor can benefit by overweighting particular areas in the longer term why cant a fund manager?

Again, the logic escapes me. As a passive investor I am very comfortable to say it is perfectly possible for a fund manager to benefit by overweighting (there is that pejorative word again) in an area like Value or EM. Even to the degree that, on average, all fund managers will benefit vs not overweighting. After all, that's what I'm tracking, minus fees. Indeed, I'd go so far as to say most of the publicly perceived ability of a fund manager is the result of such exposure!

Anyhoo, I suspect this is one of those times when we all say our piece, step back, and think just the same as we always did, only stronger. It's valentine's day, and have to accept passive and active advocates aren't likely to be sharing a candlelit dinner tonight.

grey_gym_sock

TheTracker wrote: »

It's valentine's day, and have to accept passive and active advocates aren't likely to be sharing a candlelit dinner tonight.

does your dating profile say "no active investors"?

capital0ne

apollo9 wrote: »

I realise the wisdom is a VLS / L&G type fund but I am willing to stick 100% with equities. I am not sure of the likelihood of much upside with bonds, even with the income re-invested.

Bonds provide a big upside when combined with equities, they actually minimise risk in the correct proportion. Read The Intelligent Asset Allocator by Bernstein for more info.

This is subject rarely mentioned by the experts on MSE, probably because they seem more interested in guessing what to pick and why.

Good luck

Prism

capital0ne wrote: »

Bonds provide a big upside when combined with equities, they actually minimise risk in the correct proportion. Read The Intelligent Asset Allocator by Bernstein for more info.

This is subject rarely mentioned by the experts on MSE, probably because they seem more interested in guessing what to pick and why.

Good luck

Bonds can minimize volatility but have their own inherent risks. What they typically do in the long term though is reduce gains (while likely reducing volatility). The reason some people don't bother with bonds is because they are willing to accept short term volatility to maximise their long term gains.

Alexland

TBC15 wrote: »

Out of curiosity what occurs in 15ys time.

I don't know but by then MiFID III might have happened so it will warn us in the KIID.

Alex