Vanguard investing options in market downturn

TomPucci85

I feel pretty comfy with Vanguard LifeStrategy, I've been on LS80 for the past couple of years, but switched to LS40 earlier this year to lower my risk to my "gut feel".

I have a monthly saver setup that contributes all the time, and I don't need to think about it too much.

bostonerimus

sendu wrote: »

Fundsmith and BRKB being amongst the 1-3 exceptional funds I alluded to.

What's your opinion on buying in to Fundsmith today?

Since you brought up the laziness factor, I've seen comments that Terry doesn't need to care anymore, and is doing questionable things. And what happens when the managers die? How do you predict their deaths in order to time your exit just right?

I'd make it a rule of thumb never to buy a fund that includes the manager's name.

Crashy_Time

https://www.vanguardinvestor.co.uk/investments/vanguard-global-credit-bond-fund-investor-gbp-hedged-accumulation-shares?intcmpgn=fixedincomeglobal_globalcreditbondfund_fund_link

What are people`s views on this fund?

JohnWinder

Sailtheworld wrote: »

Can you tell me five FTSE100 companies that will underperform the index in 2020? Let's review at the end of 2020.

Not quite what you asked but as to it being easy to find bad investments
FTSE100 companies:
M&S
Centrica
Flutter
Land Securities
Kingfisher

M&S: correct. 20 percentage points below FTSE100.

Centric: correct.  30 percentage points below.

Flutter: incorrect.  55 percentage points above FTSE100.

Land Securities: correct.  16 percentage points below.

Kingfisher: incorrect.  37 percentage points above.

Overall: Not bad, 60% correct. Better than I'd do.

iglad wrote: »

Lloyds TSB
RBS
Barclays
M & S
Centrica

Thanks. I'll bookmark this thread.

Lloyds: correct. 26 percentage points below FTSE100.

RBS: presumably Royal Bank of Sc. correct. 11 percentage points below.

Barclays: correct. 2 percentage points below.

MS: correct. 20 percentage points below.

Centrica: correct. 30 percentage points below.

Bullseye.

BananaRepublic

poppy10_2 said:

El_Torro wrote: »

If you're looking to invest defensively then the best thing to do would be to put your money in an actively managed fund which specialises in doing well during downturns.

Very bad advice. Actively managed funds generally do just as badly in downturns as they do in bull markets

There are plenty of funds that claim to protect against downturns, but most if not all either don’t, or take a cautious approach which limits the losses in a downturn and the gains in an upturn. My own view is that they are pointless, but others may have good reason to invest in them. I guess if you want to invest for the long term, but you might need to withdraw money at short notice they might make sense. 

Generally high performing funds drop more in a downturn, but recover well and go on to grow again. So they are volatile, but suitable for long term investment. 

One of the widely reported beliefs on this forum is that active funds as a group underperform the index, and any outperformance is short lived and by chance. People then confidently assert that they are useless, and only selected by IFA’s to make them look clever. After all, anyone can pick a tracker fund. 

An advantage of active funds that seems to be ignored is that they can give access to indices or sectors for which there is no tracker fund. In practice of course they might be hidden trackers on an index, but with high management fees. 

Research I’ve seen confirms that most active funds do underperform in the long run, but some consistently perform better than expected by chance. I’ve held active funds for years, more than 20 years in at least one case, and had good returns. My worst returns were from trackers, although they were FTSE all share and FTSE 100 funds, not the best indices. 

For the US market stick to trackers. For the FTSE 100, don’t even bother. 

JohnWinder

BananaRepublic said:

Very bad advice. Actively managed funds generally do just as badly in downturns as they do in bull markets

One of the widely reported beliefs on this forum is that active funds as a group underperform the index, and any outperformance is short lived and by chance. People then confidently assert that they are useless, and only selected by IFA’s to make them look clever. After all, anyone can pick a tracker fund. 

An advantage of active funds that seems to be ignored is that they can give access to indices or sectors for which there is no tracker fund. In practice of course they might be hidden trackers on an index, but with high management fees. 

Research I’ve seen confirms that most active funds do underperform in the long run, but some consistently perform better than expected by chance. I’ve held active funds for years, more than 20 years in at least one case, and had good returns. My worst returns were from trackers, although they were FTSE all share and FTSE 100 funds, not the best indices. 

For the US market stick to trackers. For the FTSE 100, don’t even bother. 

Good observations there. My take is that you should expect your returns from index funds to underperform their index always, because if they track it perfectly you'll get less back because the fund fees reduce your returns. The reasons 'your returns should underperform' might not happen include the fees are zero (they did exist in USA not long ago, as loss leaders I suppose), or because the fund managers juice up the index fund returns by lending their securities etc. You can get a good idea of your likely undeperformance by looking at the fees and the 'tracking error' after fees, or just the latter if it includes fees. All funds are not the same, so some will have bigger/smaller tracking errors, but the errors won't be huge or no one would buy into the fund; one might expect to see the index return 5% this year, and one's fund 4.8% .

Index funds can only get the return of the market they're in, so the rest of that market's return (exactly the same as the index funds take) is left for the active investors. So, as a group active investors can only get market returns, less costs which tend to be higher than passive investors face.

But active investors include well resourced fund managers and individual punters, so the active managers could make above market returns from the idiot punters, because the smart non-fund manager individual investors who manage to get above market returns are forcing either the idiot punters or the active fund managers into below market returns. I've not seen the distribution of money invested by those groups, so hard to not how well the active fund managers are doing, so we fall back onto the SPIVA annual reports which show that over periods longer than about 5 years most active funds underperform their index, and the longer the time period the fewer the funds that are left outperforming their relevant index, perhaps 5% after 15 years.

I don't think the SPIVA reports tell us by how much the 95% of active funds are underperforming their relevant index after 15 years, but I can't see it being 0.2 percentage points/year as a typical figure which you'd suffer with an index fund.

So I'm one whose current belief on the evidence I've seen is that 'active funds as a group underperform the index, and any outperformance is short lived and by chance'  I don't think all persistent outperformance is by chance; there likely are talented fund managers who can outperform the market for 20 years, as that's the investing horizon for the average 65 year old retiree, or 50 years for the 30 year olds. But no has yet discovered a way to identify, at the beginning of that 40 year period, those obviously uncommon, talented managers who'll outperform for the next 40 years, or even 10 years into it if you need to invest for only 30 years.

In fact it's worse than that in one study of retirement fund portfolios, in which the retirement funds chose which fund managers they should put their retirement funds with, the chosen managers underperformed the managers who were not chosen, in the subsequent period. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3651476

We should be careful when we write about how one fund has/hasn't outperformed another, and implying some conclusion, without considering the risk inherent in the two funds; and we should read about such comparisons with even greater care, because a return comparison is misleading without the relevant risk comparison. Better to compare Sharpe or Sortino ratios, or at least compare a large cap global equity fund with another similar, for example.

A note about your comment on the FTSE100 index. Is it the index you think is flawed, or is it that the market it is measuring has not been a good enough performing market in recent times? There's a big difference. One needs to choose a good index to follow, or at least not a bad one; and one should not be in a market with poor returns, but not knowing which they'll be in future might mean you should be in them all, or none.

Can you give a couple of examples of sectors or indices without trackers that investors might want active funds for?

I'm interested, intrigued by your 'don't bother with the FTSE'. To save me trawling through the SPIVA reports do you know any study data on that, or is it you own impression from experience?

Prism

JohnWinder said:

Can you give a couple of examples of sectors or indices without trackers that investors might want active funds for?

I'm interested, intrigued by your 'don't bother with the FTSE'. To save me trawling through the SPIVA reports do you know any study data on that, or is it you own impression from experience?

The SPIVA report suggests that for UK investors the UK markets, large down to small caps, and also Europe is a relatively successful place for active funds over their benchmarks. Over 10 years these regions have out performed on average based on total performance even though it is still the case that the majority of funds failed to do so. It seems that there are a lot of small funds underperforming by a little but not enough to drop the average return figures. The money weighted returns also suggest that investors are pretty good at selecting the better funds and avoiding the plentiful poor ones.

Personally I find selecting one of the better performing active funds hard ahead of time, but identifying the poor ones pretty easy to do and therefore avoiding them. 

JohnWinder

Thanks for adding that. Just to put some numbers to it, what you describe as markets where active UK investors are 'relatively successful' the report shows in the ten years to June 2020 the majority of those funds were beaten by their benchmark (before or after adjusting for risk). As soon as one gets beyond 2 years, the majority of those active funds are falling below their index, except for UK small cap funds. Not sure I'd want to be that 'relatively successful' overall.

Prism said:

The SPIVA report suggests that for UK investors the UK markets, large down to small caps, and also Europe is a relatively successful place for active funds over their benchmarks. Over 10 years these regions have out performed on average based on total performance even though it is still the case that the majority of funds failed to do so.

Regret, can't see that in the report. Over 10 years UK and European equity markets (or their active funds?) have outperformed what, on average?  https://www.spglobal.com/spdji/en/spiva/article/spiva-europe

BananaRepublic

JohnWinder said:

BananaRepublic said:

Very bad advice. Actively managed funds generally do just as badly in downturns as they do in bull markets

One of the widely reported beliefs on this forum is that active funds as a group underperform the index, and any outperformance is short lived and by chance. People then confidently assert that they are useless, and only selected by IFA’s to make them look clever. After all, anyone can pick a tracker fund. 

An advantage of active funds that seems to be ignored is that they can give access to indices or sectors for which there is no tracker fund. In practice of course they might be hidden trackers on an index, but with high management fees. 

Research I’ve seen confirms that most active funds do underperform in the long run, but some consistently perform better than expected by chance. I’ve held active funds for years, more than 20 years in at least one case, and had good returns. My worst returns were from trackers, although they were FTSE all share and FTSE 100 funds, not the best indices. 

For the US market stick to trackers. For the FTSE 100, don’t even bother. 

Good observations there. My take is that you should expect your returns from index funds to underperform their index always, because if they track it perfectly you'll get less back because the fund fees reduce your returns. The reasons 'your returns should underperform' might not happen include the fees are zero (they did exist in USA not long ago, as loss leaders I suppose), or because the fund managers juice up the index fund returns by lending their securities etc. You can get a good idea of your likely undeperformance by looking at the fees and the 'tracking error' after fees, or just the latter if it includes fees. All funds are not the same, so some will have bigger/smaller tracking errors, but the errors won't be huge or no one would buy into the fund; one might expect to see the index return 5% this year, and one's fund 4.8% .

Index funds can only get the return of the market they're in, so the rest of that market's return (exactly the same as the index funds take) is left for the active investors. So, as a group active investors can only get market returns, less costs which tend to be higher than passive investors face.

But active investors include well resourced fund managers and individual punters, so the active managers could make above market returns from the idiot punters, because the smart non-fund manager individual investors who manage to get above market returns are forcing either the idiot punters or the active fund managers into below market returns. I've not seen the distribution of money invested by those groups, so hard to not how well the active fund managers are doing, so we fall back onto the SPIVA annual reports which show that over periods longer than about 5 years most active funds underperform their index, and the longer the time period the fewer the funds that are left outperforming their relevant index, perhaps 5% after 15 years.

I don't think the SPIVA reports tell us by how much the 95% of active funds are underperforming their relevant index after 15 years, but I can't see it being 0.2 percentage points/year as a typical figure which you'd suffer with an index fund.

So I'm one whose current belief on the evidence I've seen is that 'active funds as a group underperform the index, and any outperformance is short lived and by chance'  I don't think all persistent outperformance is by chance; there likely are talented fund managers who can outperform the market for 20 years, as that's the investing horizon for the average 65 year old retiree, or 50 years for the 30 year olds. But no has yet discovered a way to identify, at the beginning of that 40 year period, those obviously uncommon, talented managers who'll outperform for the next 40 years, or even 10 years into it if you need to invest for only 30 years.

In fact it's worse than that in one study of retirement fund portfolios, in which the retirement funds chose which fund managers they should put their retirement funds with, the chosen managers underperformed the managers who were not chosen, in the subsequent period. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3651476

We should be careful when we write about how one fund has/hasn't outperformed another, and implying some conclusion, without considering the risk inherent in the two funds; and we should read about such comparisons with even greater care, because a return comparison is misleading without the relevant risk comparison. Better to compare Sharpe or Sortino ratios, or at least compare a large cap global equity fund with another similar, for example.

A note about your comment on the FTSE100 index. Is it the index you think is flawed, or is it that the market it is measuring has not been a good enough performing market in recent times? There's a big difference. One needs to choose a good index to follow, or at least not a bad one; and one should not be in a market with poor returns, but not knowing which they'll be in future might mean you should be in them all, or none.

Can you give a couple of examples of sectors or indices without trackers that investors might want active funds for?

I'm interested, intrigued by your 'don't bother with the FTSE'. To save me trawling through the SPIVA reports do you know any study data on that, or is it you own impression from experience?

My comment 'don't bother with the FTSE' is based on the returns over the last 20 years. I don't consider active FTSE 100 funds worth investing in. I believe almost all, if not all, underperform the index by more than the typical tracking error of passive funds, but I can't provide sources for that so take it as unsubstantiated opinion.

I had a look at your SPIVA, and of course I won't argue with the figures, but we both know the old chestnut of lies, damned lies, and statistics. The SPIVA pages I saw are very shallow, there's no underlying data presented so it's impossible to draw any conclusions except to say that it supports my statement that most active funds underperform the index. On that we are agreed. Of course I might have missed some information so if you can provide underlying data, please do.

We also agree that for the US market passive funds are the way to go, unless someone knows something we don't.

20 years ago I drank the passive funds coolaid, as it was all the rage, with financial journalists making the sort of statements that you have made. As a result I invested in UK and European passive funds. All of them underperformed my active funds in those markets. I now have almost exclusively active funds for UK, Europe and Japan. I tend to go for small and mid caps, which are more volatile, but generally have better returns. It is true that some can go 'off the boil'. I had shares in Lindsell Train UK Equity, which did okay (8% / year over 5 years) but for several years it has done poorly. This might be a case of a fund growing too fast, or maybe their original outperformance was luck.

One point worth noting is that for European shares you can have large,medium and small caps, as well as EU excluding UK, EU including UK, Europe including UK, Europe excluding UK. And different parts of Europe can perform differently. In principle an active fund can focus on the more growth oriented countries, and adjust over time as the mix changes. Of course that is the sales pitch, and we all know to take those with a shedload of salt. I've been taken in by that sort of blarney before.

I checked the S&P Europe 350 index and it returned 6.88% / year over 5 years, that includes dividends reinvested. The Vanguard European Stock Index Fund returned 7.04% / year over the last 5 years and 6.17% over the last 10 years. For reference my European funds averaged about 12% / year over the last 5 years. I checked my worst European fund, over 12 years it returned 7.5% / year after charges. I ended up selling that one as it has had a few bad years of late.

I can't prove that some active UK/European funds are better than passive ones, and I don't go out of my way to recommend active funds (in part because I'd get attacked by the passive fund mafia on this forum, and it just isn't worth the agro, not from you I might add) but I see no reason to change.

Prism

JohnWinder said:

Thanks for adding that. Just to put some numbers to it, what you describe as markets where active UK investors are 'relatively successful' the report shows in the ten years to June 2020 the majority of those funds were beaten by their benchmark (before or after adjusting for risk). As soon as one gets beyond 2 years, the majority of those active funds are falling below their index, except for UK small cap funds. Not sure I'd want to be that 'relatively successful' overall.

Prism said:

The SPIVA report suggests that for UK investors the UK markets, large down to small caps, and also Europe is a relatively successful place for active funds over their benchmarks. Over 10 years these regions have out performed on average based on total performance even though it is still the case that the majority of funds failed to do so.

Regret, can't see that in the report. Over 10 years UK and European equity markets (or their active funds?) have outperformed what, on average?  https://www.spglobal.com/spdji/en/spiva/article/spiva-europe

Here is link to the 2020 mid year SPIVA Europe Mid-Year 2020 Scorecard (spglobal.com)
Lets take UK equity as an example. If you were to choose randomly then yes you would likely underperform over 10 years - 69% of funds failed to beat the UK Index (page 5).
However if you take the average of all of the funds then UK actives beat their index benchmark 7.7% vs 6.68% (page 11)
To check where the money is you can look at the money weighted returns where the UK active funds still beat the benchmark 7.3% vs 6.68%. (page 12)
This tells us that there is more money in the better performing funds than the worse ones. An average investor in UK active funds has done better than an average investor in UK passive funds.

What it doesn't tell us for either type of fund about investor behaviour. We have no idea how many investors panic and sold out at at a low or rebought back in at a high, or in fact how many good market timers there are who sell and buy at good times.