Passive trackers VS actively managed in times of volatility (& SIPP charges)

NYorks_

Hello,

Please could someone share any light on my dilemma.

I have had a SIPP with StandardLife for the last 13 years. It started as a workplace pension with my previous employer and it was converted to a SIPP when I changed job a few years ago. It is currently my ‘main’ pension pot and the money has been invested from the beginning in 2 managed funds which were picked for me by the FA who my employer hired to advise on the initial workplace pension set up – the choice was based on my med-low attitude to risk and age (38 at that time). As such, this SIPP is a ‘Level 1’ (or DIY-style) format. It attracts a lower annual charges of 0.723% and 0.726% (low for SL standards!). The two funds are multi-assets with up to 80% and 60% shares respectively.

I’m aware that SL is not exactly a cheap provider, but I’d be happy to pay a slightly higher fee for a valued service received. However, in the last 6 months the funds have lost approx. 10% and have feared particularly badly in the last 3 months. Comparing these funds with a others with a similar split between equities and other financial instruments it looks like these funds have been badly battered.

For instance in comparison Vanguard LS 80, 60 and 40 looks like they have performed much better overall (in the previous bull market situation as well as in the last 3-6 months) than the actively managed SL funds. If one couples this with the fact that Vanguard (or other investment platforms) charges are much lower that what SL charges, I’m wondering whether a tracker rather than an active manages set of funds would be a better option. The service provided by say Vanguard would be enough for me, as all I want is a fund (or a couple) which would offer a steadier ‘ride’ rather than a bumpy one. I’m planning to keep contributing to this pot for the next 10+ years and to not touch the pot for the next 13-14 years.

What would your view be of transferring my SL pension to a cheaper platform and using passive/tracker funds rather than active in view of more volatility and possibly a sharp decline ahead? It would also save 1,000+ pounds/year in management costs

Thanks!

Thrugelmir

What are the comparative performances over the past 5 years?  Vanguard hasn't been around long enough to compare 10 years. 3-6 months is far too short a time frame. 

dunstonh

As such, this SIPP is a ‘Level 1’ (or DIY-style) format. It attracts a lower annual charges of 0.723% and 0.726% (low for SL standards!).

Actually, that is high for SL charges.  Typically you see SL contracts in the 0.2x% to 0.3x% range.   What you are have is more akin to around 2005 pricing.

NYorks_

Thanks for getting back Thrugelmir.

 For the SL fund within the PN Mixed Investment 40-85% Shares category performance breakdown is:

3 months >> -9.1

6 months >>> -5.8

1yr >>> 0.0

3 yr >>> 4.0

5 yr >>> 20.2

 For the other one within the PN mixed investment 20-60% shares category:

3 months >>> -6.6

6 months >>> -4.3

1 yr >>> 0.9

3 yrs >>> 5.1

5 yrs >>> 19.7

This has had better fortunes than the other one.

@dunstonh - this scheme was set up in 2007 originally. These charges are after a 0.3% discount based on the current pot value

Albermarle

Actually, that is high for SL charges.  Typically you see SL contracts in the 0.2x% to 0.3x% range.  

This is a retail 'Level 1 ' SIPP . 

So fund charge minus 0.3% discount . As the OP has managed ( insured) funds then 0.7% is actually quite low for a retail product 

The question is more I think , should he go to more passive multi asset funds ( not available in this SIPP) with another platform.

Vanguard LS funds in a Vanguard SIPP would cost 0.37%. Vanguard LS ( or similar ) on a platform offering a more whole of market range of funds , may cost a bit more or less.

Prism

NYorks_ said:

Thanks for getting back Thrugelmir.

 For the SL fund within the PN Mixed Investment 40-85% Shares category performance breakdown is:

3 months >> -9.1

6 months >>> -5.8

1yr >>> 0.0

3 yr >>> 4.0

5 yr >>> 20.2

 For the other one within the PN mixed investment 20-60% shares category:

3 months >>> -6.6

6 months >>> -4.3

1 yr >>> 0.9

3 yrs >>> 5.1

5 yrs >>> 19.7

This has had better fortunes than the other one.

@dunstonh - this scheme was set up in 2007 originally. These charges are after a 0.3% discount based on the current pot value

I would in general say that passive multi asset funds are better than the active ones. There are some exceptions though - my wife uses Baillie Gifford managed in her workplace pension. It varies between 85% and 75% equities typically. For comparision with your example above..
3 months > -2.5%
6 months > 5.8%
1 year > 11.4%
3 years > 25%
5 years > 57.5%

NYorks_

Prism said:

I would in general say that passive multi asset funds are better than the active ones. 

Thank you Prism, that's interesting, I just would have thought that a 'human intervention' would be better than a computer-run fund, but I'm not expert of course. Would you care to clarify what is the reason why trackers are better? Thanks  

Albermarle

NYorks_ said:

Prism said:

I would in general say that passive multi asset funds are better than the active ones. 

Thank you Prism, that's interesting, I just would have thought that a 'human intervention' would be better than a computer-run fund, but I'm not expert of course. Would you care to clarify what is the reason why trackers are better? Thanks  

To be clear - trackers do just that - they slavishly track the relevant market ( say FTSE 100 for instance ). Typically they are at the higher end of the risk scale .
A Multi asset fund is made up of trackers and other investment types that typically reduces the risk and volatility due to diversification.
You can have a passively managed Multi asset fund, where they stick to a set objective/parameters and do not try and second guess or beat the market.
Or actively managed where judgements are made on future market conditions and the investment blend is changed accordingly within certain wider parameters than the passively managed ones.
Even if they both perform similarly the passive one is better as the charges are lower.

bowlhead99

Albermarle said:
To be clear - trackers do just that - they slavishly track the relevant market ( say FTSE 100 for instance ). Typically they are at the higher end of the risk scale .

A Multi asset fund is made up of trackers and other investment types that typically reduces the risk and volatility due to diversification.
You can have a passively managed Multi asset fund, where they stick to a set objective/parameters and do not try and second guess or beat the market.
Or actively managed where judgements are made on future market conditions and the investment blend is changed accordingly within certain wider parameters than the passively managed ones.
Even if they both perform similarly the passive one is better as the charges are lower.

If they both perform similarly in terms of net return back to the investor, the charges are not really relevant

To an extent, any mixed asset fund that does not track a single index will have taken 'active' (human management) decisions on how to get exposure to 'the market'. Though there will be some that try to make those decisions up front and have fewer ongoing decisions (e.g. Vanguard Lifestrategy have fixed ratio of equity to bonds and UK equity to overseas equity), while there are others as you say which will make ongoing adjustments to try to target a particular level of risk/volatility and get the best performance available they think is available from it (e.g. HSBC Global Strategy, L&G Multi Index, etc).

Then in looking at how those mixed asset funds construct their portfolio out of individual building blocks (directly held assets or investments in other funds) there are a number of building blocks that can be used, which may be individual direct holdings in companies or bonds or properties, or holdings of tracker funds, or holdings of active funds or a mixture.

For example Architas give you a choice of Active, Passive or Blended : at a similar level of risk you could buy their MA Active Progressive Fund which invests via active funds from Lindsell Train, Baillie Gifford, Artemis etc; or the MA Passive Progressive Fund which invests via passive tracker funds from Blackrock and Vanguard; or the MA Blended Progessive Fund which invests in some passive trackers from Blackrock and State Street and some active funds from Baillie Gifford and GLG, etc.  Active is more expensive and passive is cheaper in terms of running costs.

But the performance net of the running costs is what you want, and if 'Lindsell Train UK Equity' does better than a UK index at allocating money across UK stockmarket listed companies, then it will not have been a bad thing to pay higher running costs to include that in the mixed asset fund's portfolio; while if Alliance Bernsteins American Growth Portfolio has no better gross performance than the S&P500 it would have been better to use the cheap tracker for that area and pay lower fees and get a better net return.

If you were building the portfolio out of building blocks yourself, you would have to take a judgement on the best approach for each area. Or you can buy an off-the-shelf fund from a mixed asset fund manager which you know will use all trackers, or all actives, or a mix of everything including direct holdings where relevant.

Linton

Albermarle said:

NYorks_ said:

Prism said:

I would in general say that passive multi asset funds are better than the active ones. 

Thank you Prism, that's interesting, I just would have thought that a 'human intervention' would be better than a computer-run fund, but I'm not expert of course. Would you care to clarify what is the reason why trackers are better? Thanks  

To be clear - trackers do just that - they slavishly track the relevant market ( say FTSE 100 for instance ). Typically they are at the higher end of the risk scale .
A Multi asset fund is made up of trackers and other investment types that typically reduces the risk and volatility due to diversification.
You can have a passively managed Multi asset fund, where they stick to a set objective/parameters and do not try and second guess or beat the market.
Or actively managed where judgements are made on future market conditions and the investment blend is changed accordingly within certain wider parameters than the passively managed ones.
Even if they both perform similarly the passive one is better as the charges are lower.

Published performance always includes fund charges.  If they perform similarly charges are irrelevent.

NYorks_ said:

..........

What would your view be of transferring my SL pension to a cheaper platform and using passive/tracker funds rather than active in view of more volatility and possibly a sharp decline ahead? It would also save 1,000+ pounds/year in management costs

Thanks!

Trackers are generally no more or less volatile than active managed funds.

In my view one reason why trackers are generally more appropriate within a multi-asset fund is that the highest returning managed funds tend to be more highly focussed than trackers whereas trackers are by definition broadly based. It is therefore more difficult to create a balanced total portfolio and maintain it as changing economic circumstances may require changing the funds.  Another is that multi-asset funds are sold to investors with little knowledge who want a simple (for them) packaged solution.  There is no benefit to the fund manager to put a lot of effort into fund choice especially as the level of charging appears to be a key selling point.

On the other hand there is the question of the degree of management of the multi-asset fund itself.  Firstly such a fund cannot be completely passive - someone has to decide the high level asset allocation.  I would favour the risk balanced multi-asset funds rather  than those with a fixed allocation or the more general "balanced" or "cautious" general managed funds as it does indicate a clear objective.

NYorks_

Thanks everyone, this is very informative and at a level that even someone like myself can understand! I reckon that a 'middle of the road' approach is perhaps what suits my attitude best, probably a mix of passive & active funds with a mix of assets and geographies. One thing is for sure though, I need to switch funds at the least and quickly, with the aim of switching SIPP provider too in the next few weeks