SIPP Flexi access drawdown based on Vanguard Lifestrategy x% equities

jamesd

Deleted_User said:

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

I'm looking at a whole market where in the UK it's been possible to find trackers costing 1% or even 1.5%.

But your remark does nothing to contradict my point, it just changes the details, not the mathematics of how averages are calculated. 0.04 + say 0.15% + 0.2% in costs would still have two thirds of the trackers in the tracker only market doing less well than average (index - 0.13%) and all less well than index and average once the active is added.

You can pick numbers so only one tracker does less well than average (or even none by repeating costs) in the tracker market but this still doesn't change the end result: the active is going to do better than average and every tracker will be below average and index. Unless you add a high cost tracker to pull the average far enough below index for the cheaper trackers to beat that.

BPL

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."

Yes but you can't tell WHICH active fund will perform better than the index after charges. You have a 1 in 4 chance of getting it right. 

[Deleted User]

jamesd said:

Deleted_User said:

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

I'm looking at a whole market where in the UK it's been possible to find trackers costing 1% or even 1.5%.

But your remark does nothing to contradict my point, it just changes the details, not the mathematics of how averages are calculated. 0.04 + say 0.15% + 0.2% in costs would still have two thirds of the trackers in the tracker only market doing less well than average (index - 0.13%) and all less well than index and average once the active is added.

You can pick numbers so only one tracker does less well than average (or even none by repeating costs) in the tracker market but this still doesn't change the end result: the active is going to do better than average and every tracker will be below average and index. Unless you add a high cost tracker to pull the average far enough below index for the cheaper trackers to beat that.

You can pick a high cost tracker. Some do. 

In general, passive investors do not try to outperform the index. A good tracker ETF underperforms by a few basis points, similar to costs. Thats less than 0.1%. If your tracker outperforms the index, its a problem. Means its not a good tracker. 

But the delta is very small compared to real active funds. 

[Deleted User]

Linton said:

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

Thanks. I think, given the large number of categories quoted, a couple of aberrations should be expected. Not clear if its a systemic issue or not. 

Also, its not clear to me that table 4 is risk-adjusted. The report states that 88% of Europe equity funds had lower risk-adjusted returns over 10 years  than the index (Europe 350).

jamesd

Deleted_User said:

You can pick a high cost tracker. Some do. 

In general, passive investors do not try to outperform the index. A good tracker ETF underperforms by a few basis points, similar to costs. Thats less than 0.1%. If your tracker outperforms the index, its a problem. Means its not a good tracker. 

Which is true but not addressing the point of disagreement: your assertion that trackers were the average performers. Do you now accept that they are unlikely to be synonymous with the average performers?

BritishInvestor

jamesd said:

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.

"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."

Do you have a link to that? I know the Russell 2000 had an issue with that but hadn't read of many other cases.
 I struggle to see how an active fund manager has been able to have an edge (maybe in illiquid small-cap areas?) since the mid-90s when the quants and their computers really started to take over.

Prism

BritishInvestor said:

Do you have a link to that? I know the Russell 2000 had an issue with that but hadn't read of many other cases.
 I struggle to see how an active fund manager has been able to have an edge (maybe in illiquid small-cap areas?) since the mid-90s when the quants and their computers really started to take over.

A pure guess but I would imagine its because the growth based fund managers that have done well over recent years have been playing a different game than the quants who they are certainly not going to compete with. 

Ask a quant how they value Amazon and it will be based on stats, current price and likely shorter term price movements.
Ask Terry Smith how he values Amazon and he will tell you its in the wrong sector (retail) and doesn't yet return much on capital expended.
Ask James Anderson how he values Amazon and he will paint a mental picture of how Amazon will look within the world in 20 years or so.

The ones that have done well recently seem to be the ones that don't worry too much about current price.

Prism

BPL said:

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."

Yes but you can't tell WHICH active fund will perform better than the index after charges. You have a 1 in 4 chance of getting it right. 

You can probably get those odds quite easily down to 1 in 2 just by taking away all of the old fashioned pension funds and anything remotely like a closet tracker. However unless you are completely convinced by an active fund then passive seems like the correct choice.

BritishInvestor

Prism said:

BritishInvestor said:

Do you have a link to that? I know the Russell 2000 had an issue with that but hadn't read of many other cases.
 I struggle to see how an active fund manager has been able to have an edge (maybe in illiquid small-cap areas?) since the mid-90s when the quants and their computers really started to take over.

A pure guess but I would imagine its because the growth based fund managers that have done well over recent years have been playing a different game than the quants who they are certainly not going to compete with. 

Ask a quant how they value Amazon and it will be based on stats, current price and likely shorter term price movements.
Ask Terry Smith how he values Amazon and he will tell you its in the wrong sector (retail) and doesn't yet return much on capital expended.
Ask James Anderson how he values Amazon and he will paint a mental picture of how Amazon will look within the world in 20 years or so.

The ones that have done well recently seem to be the ones that don't worry too much about current price.

"A pure guess but I would imagine its because the growth based fund managers that have done well over recent years have been playing a different game than the quants who they are certainly not going to compete with. "
Some quants do try and play the long game but, much like fund managers, once luck is removed aren't that successful. 

"Ask a quant how they value Amazon and it will be based on stats, current price and likely shorter term price movements."
Realistically they probably don't even care what it does or what it is called, more looking at the potential price movement (relative to other shares) over periods up to a few days. Even then the edges are tiny, the computing power required enormous and the brains required colossal. Why are they making it hard for themselves?


If any of the growth fund managers were able to predict that this factor was going to do well ten years ago they would've started a hedge fund, gone long growth and shorted value. It would've been an astonishing trade. I'm not aware of any that did. Why are they sharing their "profits" with punters? Most odd.

https://www.ft.com/content/fc7ce313-92f8-4f51-902b-f883afc1e035

"Ask James Anderson how he values Amazon"
I've no idea why you think his guess is any more valid than all the other market participants, each with access to the same information.

"The ones that have done well recently seem to be the ones that don't worry too much about current price."
That surely implies some sort of bubble/greater fool theory?

[Deleted User]

jamesd said:

Deleted_User said:

You can pick a high cost tracker. Some do. 

In general, passive investors do not try to outperform the index. A good tracker ETF underperforms by a few basis points, similar to costs. Thats less than 0.1%. If your tracker outperforms the index, its a problem. Means its not a good tracker. 

Which is true but not addressing the point of disagreement: your assertion that trackers were the average performers. Do you now accept that they are unlikely to be synonymous with the average performers?

Lol. What I said was that index/trackers represent averages. Index is the average. A typical tracker is a tiny fraction of one percent below. Everyone knows it but not much point discussing small fractions of one percent. Nobody cares but you win.