SIPP Flexi access drawdown based on Vanguard Lifestrategy x% equities

[Deleted User]

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

But of these two variables only the fees are known. Performance could go either way. Portfolios based on Vanguard’s plain vanilla indices regularly outperform complex portfolios with active funds which use the same asset allocation. 

Possibly, however duplicating a passive fund's asset allocation with a carefully chosen set of active funds seems a somewhat bizarre strategy.  There is more to asset allocation than the equity/bond ratio.

Does not matter how complex you go, future performance isn’t known and most active funds underperformed in the past. Eg https://www.marketwatch.com/story/more-evidence-that-passive-fund-management-beats-active-2019-09-12

A positive example for a UK investor over the last 10 years would be that the European index annualized at 8.44%, an average of all active funds was 9.13% and a money weighted average was 10.6%. This suggests that using active funds targeting the European sector has been a benefit at least in recent times and that UK investors have been quite good at selecting the good ones. The same is true for UK sector funds (large, mid and small).

That’s a very large margin over 10 years. Add to that 1% (or whatever it is) that the active funds charged for services and trading costs.  Massive outperformance.  Who was on the losing side if every year an average investor in active European fund outperformed the index by 3%? Source of info? 

People on the losing side are those buying shares for reasons other than total long term performance. For example
1) Trackers which buy a share because it's there.
2) Investors wanting dividends more than capital growth
3) Cautious funds looking for stability ahead of growth
4) People holding shares in their employer
5) Lazy investors
6) Sector based funds
7) Funds and investors looking for balance ahead of performance.
8) People holding shares for long term strategic reasons
9) Traders chasing very short term gains not concerned about long term performance
etc etc
and of course there are the investors who simply make bad choices

Thats not it. The index or “trackers” ARE the average. Lets say active funds beat the average by 3% a year. The “losers” are not those who had average returns, not the trackers.  Nor is it “sector based funds”. Funds are a subclass of funds, counted under “funds” which apparently outperformed by 3%. And cautious funds - ditto. 

The groups in your list that could have been on the other side of this trade are individual investors or institutions who buy shares (eg 4 or 8 or 9).  Are there really enough of such dumb punters  with sufficient purchasing power to equal all the active funds taken together? 

BPL

Most punters don't have clue what they are buying due to lack of transparency, confusion marketing from highly paid intermediaries. 

Linton

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

But of these two variables only the fees are known. Performance could go either way. Portfolios based on Vanguard’s plain vanilla indices regularly outperform complex portfolios with active funds which use the same asset allocation. 

Possibly, however duplicating a passive fund's asset allocation with a carefully chosen set of active funds seems a somewhat bizarre strategy.  There is more to asset allocation than the equity/bond ratio.

Does not matter how complex you go, future performance isn’t known and most active funds underperformed in the past. Eg https://www.marketwatch.com/story/more-evidence-that-passive-fund-management-beats-active-2019-09-12

A positive example for a UK investor over the last 10 years would be that the European index annualized at 8.44%, an average of all active funds was 9.13% and a money weighted average was 10.6%. This suggests that using active funds targeting the European sector has been a benefit at least in recent times and that UK investors have been quite good at selecting the good ones. The same is true for UK sector funds (large, mid and small).

That’s a very large margin over 10 years. Add to that 1% (or whatever it is) that the active funds charged for services and trading costs.  Massive outperformance.  Who was on the losing side if every year an average investor in active European fund outperformed the index by 3%? Source of info? 

People on the losing side are those buying shares for reasons other than total long term performance. For example
1) Trackers which buy a share because it's there.
2) Investors wanting dividends more than capital growth
3) Cautious funds looking for stability ahead of growth
4) People holding shares in their employer
5) Lazy investors
6) Sector based funds
7) Funds and investors looking for balance ahead of performance.
8) People holding shares for long term strategic reasons
9) Traders chasing very short term gains not concerned about long term performance
etc etc
and of course there are the investors who simply make bad choices

Thats not it. The index or “trackers” ARE the average. Lets say active funds beat the average by 3% a year. The “losers” are not those who had average returns, not the trackers.  Nor is it “sector based funds”. Funds are a subclass of funds, counted under “funds” which apparently outperformed by 3%. And cautious funds - ditto. 

The groups in your list that could have been on the other side of this trade are individual investors or institutions who buy shares (eg 4 or 8 or 9).  Are there really enough of such dumb punters  with sufficient purchasing power to equal all the active funds taken together? 

1) I dont know about other stock exchanges but "unit trusts" represent less than 10% of the ownership of LSE shares. So there is plenty of space for a fund to beat the index without major impact on everyone else.
2) Prism's figures were for funds in the Europe sector(s) not for all funds.  I would guess that global funds hold more European shares than the Europe sectors.

Another_Saver

I *think* the UK statistics include funds that hold AIM-listed co's (from a simple search of the best performing UK Small Co funds on HL you can see plenty of AIM co's in the top 10s), but the indices they're comparing them with perhaps don't.

~55% of UK plc is owned overseas and ~13.5% by UK individuals, so it's arguable that domestic professional funds are working in a less efficient market and have more of a structural advantage.

And, the indices include investment trusts whereas I would assume/expect the active funds don't (as much).

Still, it's good to see evidence of good active management.

Prism

Another_Saver said:

I *think* the UK statistics include funds that hold AIM-listed co's (from a simple search of the best performing UK Small Co funds on HL you can see plenty of AIM co's in the top 10s), but the indices they're comparing them with perhaps don't.

~55% of UK plc is owned overseas and ~13.5% by UK individuals, so it's arguable that domestic professional funds are working in a less efficient market and have more of a structural advantage.

And, the indices include investment trusts whereas I would assume/expect the active funds don't (as much).

Still, it's good to see evidence of good active management.

Also if you check out the Euro hosted funds then these underperform the European index which could again point to a UK advantage with home knowledge. What that doesn't explain is why UK hosted (GBP) europe ex UK active funds outperform European (Euro) Europe and Eurozone active funds. Does the UK really have a better collection of fund managers?

BPL

Still, it's good to see evidence of good active management.

There may by sporadic evidence but nothing to allow an investor to choose active funds with any guarentee of better future performance. At least a globally diversified portfolio of trackers buys you a share of capitalism love or hate it.

jamesd

Deleted_User said:

Thats not it. The index or “trackers” ARE the average.

No, they aren't. They are merely trackers that if passive (note 1) always underperform the index by varying amounts and it's trivial to illustrate this.

Take a market where the only participants are trackers with charges of 0.2%, 0.5% and 0.7% including all costs. Assuming equal weightings two thirds of those trackers will do less well than average (index - 0.46%) and all will be beaten by the index.

Now add an active fund that charges 1% and delivers 3% better performance than the index before, 2% after. Average performance is now index + (-1.4% + 2%) / 4 = index + 0.15%. Only the active fund has done better than average and every index fund did less well than both average and index.

The people paying for this are the tracker investors: the active fund can make money by knowing the index constituent change rules and trading ahead of the trackers so it gets better prices than them. A few years ago a fund management prize winner thanked trackers for their help: he'd done very well this way.

In more real markets managers and others have varying abilities and objectives and there's a broader range of ways to do better or worse than average.

Note 1: at least one tracker has beaten its indexing the common active management technique of stock lending, where a fund charges others a fee to lend them shares so they can bet against them by selling, hoping to buy back at a lower price. Others can do it from time to time via their tracking errors.

[Deleted User]

“ Take a market where the only participants are trackers with charges of 0.2%, 0.5% and 0.7% including all costs. Assuming equal weightings two thirds of those trackers will do less well than average (index - 0.46%) and all will be beaten by the index.”

My trackers cost 0.04-0.2% with the overall cost to the portfolio under 0.1%. Your numbers are way too high. 

But if your point is that indexers accept a very slight underperformance to the average return then you are correct. Index is the average. 

[Deleted User]

Prism said:

Deleted_User said:

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

But of these two variables only the fees are known. Performance could go either way. Portfolios based on Vanguard’s plain vanilla indices regularly outperform complex portfolios with active funds which use the same asset allocation. 

Possibly, however duplicating a passive fund's asset allocation with a carefully chosen set of active funds seems a somewhat bizarre strategy.  There is more to asset allocation than the equity/bond ratio.

Does not matter how complex you go, future performance isn’t known and most active funds underperformed in the past. Eg https://www.marketwatch.com/story/more-evidence-that-passive-fund-management-beats-active-2019-09-12

A positive example for a UK investor over the last 10 years would be that the European index annualized at 8.44%, an average of all active funds was 9.13% and a money weighted average was 10.6%. This suggests that using active funds targeting the European sector has been a benefit at least in recent times and that UK investors have been quite good at selecting the good ones. The same is true for UK sector funds (large, mid and small).

That’s a very large margin over 10 years. Add to that 1% (or whatever it is) that the active funds charged for services and trading costs.  Massive outperformance.  Who was on the losing side if every year an average investor in active European fund outperformed the index by 3%? Source of info? 

That would have to be all the other investors who are not invested in UK held active European equity funds - the rest of the world's investors, all of the global funds including the many people not using funds as all.

https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-mid-year-2020.pdf

I am looking at your reference. Tables 1a and 1b show that over 10 years the vast majority of active funds underperformed indices for every imaginable index.   Seems to be the exact opposite from what you are saying.  Did I misunderstand? 

Linton

Deleted_User said:

Prism said:

Deleted_User said:

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Thrugelmir said:

Not just the fees to be considered. Also the funds performance. 

But of these two variables only the fees are known. Performance could go either way. Portfolios based on Vanguard’s plain vanilla indices regularly outperform complex portfolios with active funds which use the same asset allocation. 

Possibly, however duplicating a passive fund's asset allocation with a carefully chosen set of active funds seems a somewhat bizarre strategy.  There is more to asset allocation than the equity/bond ratio.

Does not matter how complex you go, future performance isn’t known and most active funds underperformed in the past. Eg https://www.marketwatch.com/story/more-evidence-that-passive-fund-management-beats-active-2019-09-12

A positive example for a UK investor over the last 10 years would be that the European index annualized at 8.44%, an average of all active funds was 9.13% and a money weighted average was 10.6%. This suggests that using active funds targeting the European sector has been a benefit at least in recent times and that UK investors have been quite good at selecting the good ones. The same is true for UK sector funds (large, mid and small).

That’s a very large margin over 10 years. Add to that 1% (or whatever it is) that the active funds charged for services and trading costs.  Massive outperformance.  Who was on the losing side if every year an average investor in active European fund outperformed the index by 3%? Source of info? 

That would have to be all the other investors who are not invested in UK held active European equity funds - the rest of the world's investors, all of the global funds including the many people not using funds as all.

https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-mid-year-2020.pdf

I am looking at your reference. Tables 1a and 1b show that over 10 years the vast majority of active funds underperformed indices for every imaginable index.   Seems to be the exact opposite from what you are saying.  Did I misunderstand? 

Page 12, GBP denominated funds, European Equity compare with S&P Euro 350