Managed or Tracker fund, which is best?

beamyup

On another thread, Mordko posted this.

Deleted_User wrote: »

Looking at the performance of index funds vs active funds is easy. The work has been done. Reading books and googling are the only skills needed. Also, a bit of common sense will tell you that anyone paying a huge chunk of expected market returns in charges is going to underperform the market over any decent period of time. Even active portfolios with less crazy charges underperform in most cases

Here is Vanguards White Paper providing some statistics.
h t t p s://personal.vanguard.com/pdf/ISGIDX.pdf

And another one
h t t p s://d9l6g2vjiqrcr.cloudfront.net/documents/BMT-PS_Whitepaper.pdf

I have created this new thread to deep dive into this question!


I think that these documents tell us a few things. (This is what the data says)

1) On average, managed funds perform worse than tracker funds(quite a lot worse)
2) The main reason for the underperformance of managed funds is fees (all types of fees matter)
3) It is not possible to know which managed funds will be outperform trackers in future, just by looking at the past.
4) Holding multiple managed funds does not improve your likelihood to beat a tracker, in fact the opposite is true, holding just 1 managed fund gives you the best chance to outperform trackers.
5) Conversely, holding multiple tracker funds improves your position a little.


Does anyone have any opposing/further interpretations for these documents?

Does anyone have any further data which either agrees with or disproves these documents/my summary?

I hope that this thread can look at the data, rather than impressions/views/long standing beliefs.

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Update : Summary of responses

There have been many responses to this thread which I will try to summarise here.

Many posters did not respond to my question for data, instead they simply relayed their views. This is interesting as many of the posters in this category were the most respected posters on these forums. most of these views fell into these categories
1) I believe that managed funds are generally best, I use them myself and have picked the right ones and they have overperformed.
2) Asking for data is the wrong way to tackle this question. the best way is ....
3) data tells you what you want it to tell you..
4) Index funds cannot give you
- access to certain markets
- draw-down (income)
- a way to maximise your performance by buying low and selling high etc
5) the data you have in your links is not applicable because
- its US based
- it does not properly account for relative risk
I do not know what to make of these responses, however it does make me feel a bit worried that so many keen advisers are not data orientated, or data averse. I also wonder how many of these posters properly read the above PDF's

Many people believe you can pick the future best performing managed funds from doing your own research. However there was no data to show this to be generally true or false.

A few posters support the findings of the data linked above.

In post #12, cfw1994 gave a link to kroijer.com, this shows a series of videos which I found interesting, i do recommend that people take a look. There is no data or study there though.

In post #42, coastline gave some links to trustnet where you could see by looking at the current best performing funds,very few beat the whole world tracker. that broadly supports the findings in the above PDF's. But of course isn't so "scientific" and well thought out as the vanguard studies.

ColdIron

Another salt vs pepper debate?
Why not use both and play to the strengths of each?

beamyup

ColdIron wrote: »

Another salt vs pepper debate?
Why not use both and play to the strengths of each?

Is there any data around to show that this is the best approach? ( i see a lot of articles saying something like this but no actual study)

What are the strengths of managed funds?

OldMusicGuy

There is plenty of data. As with all data, it can be interpreted in many ways, depending how you cut it and what your start/end dates are. It will not answer your question.

At the end of the day it is personal conviction and it's what you as an investor need to decide upon. Are you prepared to pay extra money to specialists who may or may not outperform the market over any given period of time, or are you prepared to pay less and just accept average returns based on whatever funds you select.

beamyup

OldMusicGuy wrote: »

There is plenty of data. As with all data, it can be interpreted in many ways, depending how you cut it and what your start/end dates are. It will not answer your question.

At the end of the day it is personal conviction and it's what you as an investor need to decide upon. Are you prepared to pay extra money to specialists who may or may not outperform the market over any given period of time, or are you prepared to pay less and just accept average returns based on whatever funds you select.

Thanks, of course in the end it is a question all investors face, I am hoping that this thread is to help people decide by presenting data and analysis of that data.

You say "As with all data, it can be interpreted in many ways, depending how you cut it".

If you read those pdf's linked at the top and believe the data to tell us something extra/other than my summary or If you have a link to other good data then please post that!

dunstonh

1) On average, managed funds perform worse than tracker funds(quite a lot worse)

1 - there are sectors where no tracker fund exists
2 - when you research, you eliminate an awful lot of funds through filtering. You don't pick an average fund. It will be a much shorter list.

2) The main reason for the underperformance of managed funds is fees (all types of fees matter)

Not correct. In the US it may be. A number of funds there did beat tracker exclusive of fees but not after. However, in the UK that is certainly not the case since unbundling of charges.

3) It is not possible to know which managed funds will be outperform trackers in future, just by looking at the past.

And its not possible to know which trackers will underperform managed. It works both ways.

4) Holding multiple managed funds does not improve your likelihood to beat a tracker, in fact the opposite is true, holding just 1 managed fund gives you the best chance to outperform trackers.

Each sector should be viewed in isolation. e.g. UK equity, US equity, Euro Equity etc. You decide on a sector by sector basis.

5) Conversely, holding multiple tracker funds improves your position a little.

If you have researched that tracker A is the best option then having tracker B included means you are reducing your returns. Having second best will give you lower returns.

Does anyone have any opposing/further interpretations for these documents?

Most of the research is US based. In the US, internal taxation is different to the UK. Plus, they havent unbundled like we have in the UK. Some countries have really dire managed funds. Figures of well in 90%+ of managed funds failing to beat passive. So, it does make sense in a number of countries. The UK bucks the trend somewhat. We have a greater number of viable managed funds. So, you have to keep an open mind.

There are good trackers and bad trackers.
There are good managed and bad managed.

You should build your portfolio with the best from both. Not the worst of either.

AnotherJoe

I agree with

3) It is not possible to know which managed funds will be outperform trackers in future, just by looking at the past.

.
However there is a loophole
It is possible to make some educated guesses about what might do better in future to enhance your odds of getting it right. For example you might think healthcare will do well in future and so increase your investments in that sector.
Next, as far as I know the evidence about trackers outperforming managed refers to general market funds, not specialist. Eg a specialist healthcare or technology managed fund might well do better than a tracker.

barnstar2077

I spent a lot of time trying to replicate the global market through tracker funds and found I just couldn't cover all of my bases at a reasonable cost to "be the market" which is what I had read I should do. I ended up giving up and just picked a VLS fund with the right risk level for me. I will let you know in ten years if it works out.

Lets face it, any sort of analysis like this is only definitive if you look back at historical data, no one knows what the future will bring.

beamyup

AnotherJoe and dunstonh thanks for your view on this, I do understand that you have views (as do i).

Most of what you have commented is not backed by any data that you have yet quoted. Please please quote some data or research to back your views. with links.

especially dunstonh " The UK bucks the trend somewhat. We have a greater number of viable managed funds. So, you have to keep an open mind.". I would love to see data behind that statement.

beamyup

barnstar2077 you say "Lets face it, any sort of analysis like this is only definitive if you look back at historical data, no one knows what the future will bring." I think you have hit the nail on the head there. But this includes the fund managers as well!
If you read the document that talks about "zero sum game", that is not about historical data, its a theory that applies to the markets. In that theory it is the fees that make the difference between outperformance and underperformance.

Linton

beamyup wrote: »

On another thread, Mordko posted this.

I have created this new thread to deep dive into this question!

I think that these documents tell us a few things. (This is what the data says)

Two points
- the data is US based. Many people would accept that US data is not directly applicable to other markets.
- any graph that shows a line without the axes being fully labelled should be ignored.

1) On average, managed funds perform worse than tracker funds(quite a lot worse)

"A lot worse" does not stack up with the evidence. Trackers are generally in the middle of the performance over an extended time period.


However it is impossible and not very meaningful to say whether trackers outperform managed funds. Excluding closet trackers, a managed fund and a tracker must invest in different things. These different things may perform differently at different times. Also, there may be a variation in risk between two funds. Risk is broadly correlated with return.


Whether there is some evidence tracker funds perform better than average depends on the market. If you consider US large companies, eg S&P500, then the evidence may show that they do, but looking at Small Companies outside the US the reverse is the case, or would be the case if there was a tracker that followed the indexes.


Which brings in another point: the availability of trackers is generally limited. For example, as far as I know there is only 1 global all-cap tracker and that has only relatively recent been available.



A wider point: In any case, it does not matter a great deal. Maximising performance should not be the primary aim of a serious investor. Fine if you want to play with a pot of money that makes no real difference to your future life, but if the pot represents a significant, possibly major, part of your worldly wealth a more sensible aim should be sufficient return to meet objectives at acceptable risk. Managing risk is at least as important as seeking performance.

2) The main reason for the underperformance of managed funds is fees (all types of fees matter)

The main reason for performance difference between any two funds is what they invest in. Fees, especially now they have reduced significantly, are a secondary concern.

3) It is not possible to know which managed funds will be outperform trackers in future, just by looking at the past.

Evidence I have seen shows that although identifying future stars may be impossible, identifying the complete dogs is not. Simply doing this would improve on the average.


However, it is impossible to know anything about future investment returns. Nevertheless, investors have to make decisions. Past performance combined with research on the fund strategy can be useful. Poor past performance provides particularly useful information on funds to avoid. In the absence of other data past performance is as good a criterion as anything else for selecting a particular fund from the shortlist of those that meet your objectives.

4) Holding multiple managed funds does not improve your likelihood to beat a tracker, in fact the opposite is true, holding just 1 managed fund gives you the best chance to outperform trackers.

Totally untrue. You need multiple niche managed funds covering as broad a spectrum of investments as possible. Managed funds are most appropriate in certain areas:

- niches where the manager can have great expertise in a particular sector. Often such sectors have no viable trackers.

- multiasset funds where the asset allocation is changed over time in line with economic conditions
- funds which provide benefits other than pure performance - eg income, wealth protection.


In the income sector, the IUKD ETF fell 60%-70% way beyond the more general indexes during the 2008/2009 crash and only recovered recently. Its problem was that it over-invested blindly in high dividend payers, such as the banks. Most managed funds should not make that mistake.



On the other side, trackers do have a place. If you want to invest generally in a wide area they are probably the least worst option particularly if you do not have the time, interest, size of investment pot, experience etc to make the effort of running a custom portfolio worthwhile.

5) Conversely, holding multiple tracker funds improves your position a little.

Only because it gives the investor the opportunity to make some management decisions to meet his/her particular objectives. If you are a true believer why would you do anything other than buy a global all cap tracker?