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

Albermarle

Published performance always includes fund charges.  If they perform similarly charges are irrelevent.
If they both perform similarly in terms of net return back to the investor, the charges are not really relevant

You are both right of course.

My main objective was to explain that trackers and multi asset funds are not the same thing. In common with many other posters , the OP was mixing up the terminology.

g002ahe

Albermarle said:

Published performance always includes fund charges.  If they perform similarly charges are irrelevent.
If they both perform similarly in terms of net return back to the investor, the charges are not really relevant

You are both right of course.

In my opinion, an active fund is likely to be taking more risks than an equivalent passive fund. So if historically they have the same performance then the passive fund is better, because it is less risky.

I am considering risk in terms of "will it continue to perform at that level" and not "what was the historical volatility".

dunstonh

In my opinion, an active fund is likely to be taking more risks than an equivalent passive fund.

Or taking lower risks or the same risk.    That is not opinion but fact.    Every sector will have managed funds with different objectives and rules for the fund.  Some will be more defensive and some more adventurous than the mid point.    Some trackers will be higher risk than other trackers in the same sector.  

So if historically they have the same performance then the passive fund is better, because it is less risky.

Not true.   It is possible for a more defensive fund to have equal or higher performance than a more adventurous fund.

NYorks_

I find the comments to my original question very interesting, and a good starting point to learn, thank you everyone.  How does one define a ‘more conservative’ versus a ‘more adventurous’ fund? For instance how would a multi-asset fund with a more UK bias in term of percentage allocation of shares investing in ‘the usuals’ such as Shell, BP, Glaxo be considered? Or is it the shares/bonds/cash/other financial instruments allocation that defines conservative/adventurous or geographies, or perhaps both?   

Albermarle

How does one define a ‘more conservative’ versus a ‘more adventurous’ fund?

In simple terms , the higher the equity content , the more 'adventurous'. 

Regarding exact geographical and sector bias that varies from fund to fund but has less impact on the risk ratings , unless they are unusual .

digbydog

Starting with the caveat that I do not know what I am talking about I was quite interested in the Risk Score provided by Trustnet. So for 'Vanguard LifeStrategy 60% Equity Acc' it has a risk score of 56 whilst the equivalent 100% Equity has a risk score of 86. An explanation of how these scores are calculated is given here. It seems to give a slightly more nuanced view on the relative risk of funds.

[Deleted User]

All other parameters being equal (asset/country/industry allocation, factors, etc), passive funds carry less risk because they are more diversified. Genuinely active funds pick and choose and concentrate to try and beat the market by more than the burden of additional costs. 

jamesmorgan

A passive tracker simply aims to mirror all the markets that it is tracking.  As such it should generate 'average' returns before charges.  Actively managed funds attempt to deviate from the average.  You would typically expect half of these funds to do better than the average and half to do worse (the market average is simply an average of all invested funds).  You pay a premium for this deviation from the average (through higher fees) so on average you will make lower returns from an active fund than a passive fund.  You will only make more money from an active fund if you are able to successfully choose an active fund manager that performs better than the average.  As past performance is no guide to future performance this is actually quite difficult to do.  In many ways it is probably a more difficult choice than picking indiividual shares.  There is a lot more information available about individual shares than fund managers.  For the latter you can obviously look at past performance, but that is largely irrelevant so I would ignore it completely.

For many years I made a living trading individual shares.  I am reasonably confident on my ability to select individual shares (no doubt some will say over-confident).  I have zero confidence in my ability to select active fund managers.  Now that I have retired I largely use passive funds.