My passive investment experiment

pip895

I have been DIY investing for around ten years and always used predominantly active investments. About 18months ago I decided to give passives a go and potentially save myself some fees. I converted my isa to mainly passives with smaller amounts a few active investment trusts in areas I wasn’t convinced passives made sense. I left the SIPP in active funds. The good news is as I have traded very little, I have saved some fees. However, and it’s a big however, in nearly all cases the passives and investment trusts underperformed the active funds I retained in my SIPP.

HSBC MSCI World HMWO gained 26% but Lindsell Train Global Equity gained 42% & Fundsmith 37%
Vanguard VMID gained 7% but CFP SDL UK Buffettology gained 16%
iShares £ Corporate Bond 0-5year up 4% but Royal London Sterling Extra Yield Bond 9%
HSBC MSCI Emerging Markets up 2% but JPMorgan Emerging Markets is up 15%
JP Morgan Smaller Companies Trust up 3% but TB Amati UK Smaller Companies up 7%
JPMorgan Japan Smaller Companies Trust up 4% but Baillie Gifford Japanese Smaller Companies up 8%
One exception
I Shares Euro stoxx small up 7% but Henderson European SC up only 2%
ETFS Physical Gold ETF and Allianz Tech trust did well too, both up around 27% with no equivalent in the SIPP

Overall the ISA made a bit under 10% in 18 months but the SIPP made more than 17%. It would take a lot years of saved fees to make up for the 7.5% growth I have missed out on… I would also say the SIPP portfolio was less volatile.

The question is what do I do now – shall I ditch the experiment and go back to active funds?
I am quite tempted.. Or has this 18 months been a particularly bad period for passive investments?

bostonerimus

There will always be active funds that outperform their passive counterparts. 18 months is a relatively short time, but if you think your active portfolio will continue to outperform your index portfolio why wouldn't you switch back?

Whatever you do you have to be comfortable with your decision yourself. Personally I worry about owning the next Woodford. The success of my plan requires average performance and so I stick mostly to index investing. It also allows me to put things pretty much on auto-pilot so I don't have to worry about changing my portfolio. But there's an infinite number of solutions and when you find yours you should be able to relax a bit.

pip895

bostonerimus wrote: »

There will always be active funds that outperform their passive counterparts. 18 months is a relatively short time, but if you think your active portfolio will continue to outperform your index portfolio why wouldn't you switch back?

Whatever you do you have to be comfortable with your decision yourself. Personally I worry about owning the next Woodford. The success of my plan requires average performance and so I stick mostly to index investing. It also allows me to put things pretty much on auto-pilot so I don't have to worry about changing my portfolio. But there's an infinite number of solutions and when you find yours you should be able to relax a bit.

You do need to keep an eye on things a bit more with active funds, Woodford was pretty easy to avoid - I was in Woodford but got out late in 2017 when still 30% in profit. Quite a bit of the outperformance may well be luck with picking Lindsel Train and Fundsmith but I have been in those for years.

SonOf

Yes, it is quite normal for people without a bias to be able to select managed funds that do outperform passive. You will always get the odd one that doesn't but I tend to find more often than not you get outperformance overall. Indeed, several of the funds you mention are in my portfolio.

That said, currently, nearly three quarters of my portfolio is passive. When you use active, you have to consider the economic cycle and when to be in and out of certain areas as many active funds perform well in different bits of the cycle and not so well in others. Passive funds allow people to be more lazy in their approach. Active needs you to remain hands on.

Audaxer

bostonerimus wrote: »

Personally I worry about owning the next Woodford.

Yes, I do as well.

The success of my plan requires average performance and so I stick mostly to index investing.

I agree with you. I think most active investors think they want better than average performance, but don't realise that most active portfolios will do worse than average after fees over the long term.

pip895

Audaxer wrote: »

I think most active investors think they want better than average performance, but don't realise that most active portfolios will do worse than average after fees over the long term.

I'm not sure you are right on that one - depends how you define active portfolios. If you actively manage your active portfolio I am beginning to think you are likely to outperform. You need to remember when looking at the stats that lots of money is sitting in "expensive closet trackers" and is never touched in a decade - if it is its likely to be taken out at the worst possible time.

Active "Interested/Informed" investors will be a relatively small subset of the total of investors, invested in active funds.

Linton

Audaxer wrote: »

Yes, I do as well.

I agree with you. I think most active investors think they want better than average performance, but don't realise that most active portfolios will do worse than average after fees over the long term.

Most active portfolios doing worse than average after fees may or may not be true, I dont know of any evidence. It also may or may not be relevent in that a sensible objective isnt maximum return but rather sufficient return at minimum risk.


However if is is true it could be simply due to the nature of the investors who would tend to go active or passive. People who know very little may tend to go active focussing on a motley selection of share tips, the most hyped funds and last years winners. People who know a bit but dont believe they know a lot would tend to be passive. And those who believe they know a lot would be more likely to be active. So any data on "most active portfolios" may not be very meaningful.

Linton

bostonerimus wrote: »

There will always be active funds that outperform their passive counterparts. 18 months is a relatively short time, but if you think your active portfolio will continue to outperform your index portfolio why wouldn't you switch back?

Whatever you do you have to be comfortable with your decision yourself. Personally I worry about owning the next Woodford. The success of my plan requires average performance and so I stick mostly to index investing. It also allows me to put things pretty much on auto-pilot so I don't have to worry about changing my portfolio. But there's an infinite number of solutions and when you find yours you should be able to relax a bit.

Surely the chance of you picking the next Invesco Perpetual High Income or LTGE, Fundsmith etc etc are much higher than that of picking another Woodford or ... sorry cant think of any others. Plus the most you can lose is your allocated investment but can gain many times that. However if the worry would over-ride the statistically more likely benefits then you must be right not to go down that path.



Similar to what you are saying, I think, the important factor isnt passive or active but rather a portfolio that gives you the confidence to accept the inevitable volatility without the constant stress of feeling the need to change things.

AnotherJoe

pip895 wrote: »

The question is what do I do now – shall I ditch the experiment and go back to active funds?
I am quite tempted.. Or has this 18 months been a particularly bad period for passive investments?

Or maybe it's been a good period for your particular actives ?

londoninvestor

Linton wrote: »

Similar to what you are saying, I think, the important factor isnt passive or active but rather a portfolio that gives you the confidence to accept the inevitable volatility without the constant stress of feeling the need to change things.

Important point. Others will differ, but I've definitely felt more chilled since going mostly (~70%) passive.

DrSyn

pip895 wrote: »

P.

HSBC MSCI World HMWO gained 26% but Lindsell Train Global Equity gained 42% & Fundsmith 37%

The question is what do I do now – shall I ditch the experiment and go back to active funds?

Of course you could start another experiment and hedge your bets at the same time.

Just put the money from your poorest performing funds into your three best funds shown above for 24 months and report the results back here to us.