Active funds outperform trackers

jaybeetoo

In The Times today, “Over the past ten years tracker funds in the UK all-companies sector produced an average return of 111 per cent compared with 153 per cent for actively managed funds.”.

It suggests using tracker funds alongside some active funds.

kinger101

Can't read the article, but I guess it's comparing the FTSE UK All Share Index with actively managed funds. Even if those funds are UK-based or weighted, where's the comparison to other markets? And only one window of time is used - a sustained period of growth.

It's very easy to make misleading comparisons if you cherry pick data.

I wouldn't conclude the domesticated cat is bigger than the dog by comparing a Maine Coon with a Chihuahua.

Linton

The data looks highly questionable. From Trustnet, the FTSE AllShare Index returned 113% with dividends reinvested over 10 years whereas the UK All Companies sector as a whole returned 124%. Or looking at the 194 members of the UK All Companies sector that have been around for 10 years the 97th returned 123%.


Perhaps you can tell us what the report actually said., if it said anything more than a shock-horror headline.

Afraid_of_Kittens

...and what are the fees and charges of passive tracker v active?

Linton

Afraid_of_Kittens wrote: »

...and what are the fees and charges of passive tracker v active?

Performance figures take fund charges into account, they are based on the actual returns an investor would see.

bowlhead99

Linton wrote: »

Perhaps you can tell us what the report actually said., if it said anything more than a shock-horror headline.

kinger101 wrote: »

Can't read the article, but I guess it's comparing the FTSE UK All Share Index with actively managed funds. Even if those funds are UK-based or weighted, where's the comparison to other markets? And only one window of time is used - a sustained period of growth.

It's very easy to make misleading comparisons if you cherry pick data.

I wouldn't conclude the domesticated cat is bigger than the dog by comparing a Maine Coon with a Chihuahua.

The article starts with the general point that investors in recent years have been abandoning active management for passive management. Examples: US investors taking a $trillion out of active funds in the last decade, and $680bn CalPERS announcing last month that it was ditching much of its active equity managers for trackers.

It mentions that given the seismic changes in the industry and investor sentiment, one might expect to see passive funds charging up the leaderboard because whichever year you look at it, people are telling you that most active funds fail to beat their benchmark. It's understandable that investors would be disillusioned with active funds when the performance is not good enough to cover their high fees, and they note research showing that x% of active UK equity funds failing to beat benchmark over 5 years and y% over 10, and that x and y are even higher in global funds.

Then their story, given the backstory, is that everyone is banging on about abandoning active funds, BUT:

However, the ten-year performance tables from Moneyfacts, a data analytics company, for the UK all-companies sector, which includes active and passive funds, show a surprisingly high number of trackers languishing in the bottom half, and often the bottom quarter.

Of the 29 trackers that have a ten-year record, 25 were in the bottom half of the tables and, of these, 14 were in the bottom quarter. The figures were reached after taking into account the benefit of the trackers’ generally lower charges.

They give examples of the Family Charities Ethical trust tracker, which was 175th out of 185 funds, or Halifax's FTSE100 tracker which was 165th (my side note - the latter has over a billion under management despite charging 1% OCF, (not including transaction costs))

As OP mentioned, they then go on to say

Over the past ten years tracker funds in the UK all-companies sector produced an average return of 111 per cent compared with 153 per cent for actively managed funds.

So what explains this apparently poor performance of funds that are supposed to blindly follow an index?"

They then give some explanations on why you have passives in the third and fourth quartile:

- although active funds might not be expected to beat a benchmark, no passive funds will either (because of cost drag - e.g. Halifax as a severe example; there is another one VT Munro Smart Beta which is a passive fund that has a strategy that isn't standard cap weighting and charges 1.62% OCF even for the institutional version - though it is an absolutely tiny fund). So 24 of 29 trackers being outside the top half, is maybe not a surprise. They are not 'supposed' to be in the top half. Though being in the bottom quartile would be an unwelcome surprise.

- within the UK equities sector the standard index to track is the FTSE100 (largecap skewed to biggest companies) or AllShare (mostly largecap, likewise). Whereas midcap and smallcap have produced the best results over time. A fund that doesn't have to put a huge chunk of its money into the slow moving leviathans, will be able to pick assets that perform better. (my side note - the 10 years in scope of review is end of 2009, a low year post the last crash; UK and US recession technically ended Q2 2009).

They conclude that even if you like the concept of passive funds it could be worth your while using some actives to get a greater exposure to small and midcap segments.

Public comments on the article note that 'survivorship bias' means that there are plenty of poor actives over ten years which fell by the wayside and are no longer in the sample, so overall the claim of 153% vs 111% could significantly overstate the case for active.

As statistics are often flawed in some way I would leave aside for a moment whether the correct figure for 10-yr actives is 153% or something else as Linton suggests; though perhaps if Allshare is 113%, and FTSE100 is some lower number, then the trackers must as a cohort be getting less than 113% - so if the total sector performance is over 120% as Linton mentions despite that level of return from trackers within the total sector - then actives must on average be doing some way over 120%++, to offset the low performance of index trackers and drag the whole sector average up from tracker level to 120%+ level.

To be honest, the concepts discussed in the article are not contentious and some will think it is refreshing to see an article on Times Money which is not simply bashing Woodford, HL or St James's Place or stating that passive funds are the way the industry going without counterpoints.

You could go back on this board for years and find posters saying that trackers are the way forward on cost and simplicity grounds, but when people over-egg the case for trackers, there are usually dissenters. All this particular Times article is doing, is making readers who are hearing across the media that tracker is best, tracker is best, perhaps think to themselves 'oh, maybe there is another side to the story, I should give this some thought rather than blindly parrot what I hear in the press or social media'.

Granted, the article is not very in depth, as to be expected from a weekend newspaper's Money pages.

Having been on the forum a long time, I could go back through a decade of posts and find threads where passive evangelists delightedly inform us that all the research says actives will underperform trackers, while people with a less partisan viewpoint respond that the case for trackers is generally sound but you should be careful reading too much into certain stats, e.g.

- In the US (which has driven much of the indexing research), mutual funds are taxed differently than over here so internal portfolio churn has adverse tax consequences compared to the buy and hold of index tracking mutual funds, and will give cheap trackers an inherent performance advantage, which is not the same for UK investors in UK trackers or ETFs...

- In the UK, the 'benchmark' index tracked by trackers is the FTSE100, a poor performer over multiple decades with high industry concentration in certain industries, which can be bad for growth prospects or painful in a crash. Given the low attractiveness of the benchmark it can be trivial to outperform it with an active fund. Other regions , such as US may have a more attractive mix of sectors. While other regions may be similarly bad places to go tracking, e.g. emerging markets where people in trackers end up with a lot of flawed companies with poor governance which simply because of their size will attract investor capital from people throwing money indiscriminately at the region through trackers and crap funds.

- There are a lot of crap active funds which a sensible person would eliminate from their potential funds (e.g. 'closet trackers' from banks and other groups charging a high fee without a high active share), so sensibly picking an active fund does not get you the same result as randomly picking an active fund.

- So, you should look to use trackers where they are best, and actives where trackers are not the best or don't exist. This is what a lot of sensible people will tell you and it is difficult to dispute. People who have a strong pro-passive viewpoint will still dispute it anyway: by saying that if a tracker doesn't exist, you don't need it, that most people are best served by keeping it simple.

jaybeetoo

Afraid_of_Kittens wrote: »

...and what are the fees and charges of passive tracker v active?

The figures took into account the charges

Oops! Just seen someone else made this point

EthicsGradient

Using Morningstar figures for funds that have been going 10 years, I find the main point is that smaller companies have done best in that period, and the trackers nearly all follow the FTSE 100 or All-Share (which is dominated by the 100).

UK Flex Cap 254 total, range 3.13-15.88%, median 9.28% (no passive in this sector)
UK Equity Income 79 total, 4.23-14.28% median 8.18% (the only passive is Vanguard FTSE UK Equity Income Index, at 8.08%)
UK Large Cap 397 total, 1.83%-15.48%, median 7.7%, in which there are:
89 passive funds, range 5.24%-9.38%, median 7.4% (including Halifax UK FTSE 100 at 8.85%???, various all share trackers up to 7.8%, FTSE 100 trackers up to 7.1%, and L&G FTSE 350 at 6.54%)
UK Mid Cap 31 total 9.54-14.47% median 12.97%, including 1 passive: HSBC FTSE 250 Index at 10.9%
UK Small Cap 154 total 4.14-18.04% median 13.95% - no passives

('median' may or may not be accurate, because some providers have several variants of one fund - I didn't try to see if that was more common among the better or worse-performing funds)

So in the size sectors, the trackers haven't beaten the median, where comparable, but have been close to it (and it is possible that "survivorship bias" is responsible for that difference). The FTSE 100 hasn't done well, perhaps because of its overseas bias; small caps did outperform mid caps, and whether that's because mid-caps are also more exposed to foreign currency (I don't know if they are, but I'd guess they are a bit), I can't tell.

SonOf

jaybeetoo wrote: »

In The Times today, “Over the past ten years tracker funds in the UK all-companies sector produced an average return of 111 per cent compared with 153 per cent for actively managed funds.”.

It suggests using tracker funds alongside some active funds.

I cant read the article but there is a misconception usually on both sides of the argument as to which is best. In reality, both can be best in the right circumstances. Which is why many unbiased investors will use both managed and passive in their portfolios.

I actually think that, at this moment, there are probably less viable active managed funds than there have been in the past and asset allocation remains the most important thing and fluidity in the asset allocation is important and not having a static allocation.

Another misconception is that just because a fund is in a sector it means that it is the same as all the other funds in the sector. Whereas in reality, there will be some active funds that have higher risk and others that are lower risk and a whole bunch of virtually or fully closet trackers (that you should totally disregard).

Nowadays, we use a tracker as a core holding for the sector and then have a second fund as a satellite fund in the UK, European and US sectors. This will be a niche or focused fund of higher risk typically (such as small caps. More often than not, it will be a managed fund). At the lowest risk level, there are no managed funds at all used. Then as you move up the risk scale, a greater amount is allocated to the satellite fund. This hybrid method of investing is increasingly popular nowadays.

People who are vocally anti-managed or anti-tracker and will not consider the other either tend to lack understanding or just have an irrational bias. However, as investing is so much about opinion, they have a right to be that way. Even if others disagree.

Finally, timescale is important. Whole market trackers in their sector (i.e. UK FTSE tracker rather than 100 or 250) will generally be mid table for discrete performance in the short term. Long term, they will generally move up the table as many managed funds have a focus or investment style that is not suitable for the whole economic cycle but for some of it. And given that many managed funds are higher or lower risk, they will bounce around the table in terms of performance. So, the consistency of non-focused tracker funds will see them rise up the table the longer the timescale you look at.

This is why lazy investors (a term indicating those that don't look at their investments) should use trackers rather than managed. Whereas those that are more active in their investments and use a structured process that will see them adjust throughout the economic cycle may well be served better with some managed funds.

bostonerimus

I think the current status of the “Great British Invest Off- Active vs Passive” is instructive. Out ahead are a couple of active portfolios, then in the middle are grouped the passive trackers with a couple of trailing actives at the end. You could do very well investing actively, averagely or poorly....with a tracker approach you are settling for being average.

The big advantage of keeping things simple with trackers is that it makes DIY less intimidating and eliminating the drag of IFA fees is, IMO, a big benefit over a lifetime of investing. But I think whether active or passive is better should be low down on someone’s financial concerns; it’s more important to budget so you can ploughing as much of your income into pensions and ISAs as possible as early as possible and to get your asset allocation right. After you have those set you can worry about active va passive.

Linton

bostonerimus wrote: »

I think the current status of the “Great British Invest Off- Active vs Passive” is instructive. Out ahead are a couple of active portfolios, then in the middle are grouped the passive trackers with a couple of trailing actives at the end. You could do very well investing actively, averagely or poorly....with a tracker approach you are settling for being average.

I think you will find that the Great British Invest-Off results like all short term fund or portfolio comparisons are far more a function of asset allocation and economic factors than whether the underlying assets are held in active or passive funds.

The big advantage of keeping things simple with trackers is that it makes DIY less intimidating and eliminating the drag of IFA fees is, IMO, a big benefit over a lifetime of investing. But I think whether active or passive is better should be low down on someone’s financial concerns; it’s more important to budget so you can ploughing as much of your income into pensions and ISAs as possible as early as possible and to get your asset allocation right. After you have those set you can worry about active va passive.

Agreed up to a point though I cant see IFA fees as a significant factor as that should be independent of the type of fund. The role of an IFA is to get an appropriate asset allocation to your situation, and you can go very wrong in either active or passive funds. Let see what happens in the next major crash to all the newbie investors who have leapt in with VLS100.