SIPP Flexi access drawdown based on Vanguard Lifestrategy x% equities

jamesd

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.

Sorry, no. I read it in an industry publication but forgot just where some time ago. Way more recent than 90s, some time after 2010 probably.

At least some passive managers do seem to be trading ahead of constituent changes and/or rebalancing to reduce the effect of what is in effect a legal form of "front running". It still seems to be happening to some degree as of 2019:

"There’s a meaningful trading opportunity around the event, according to Goldman Sachs strategists. Looking at the Russell 1000 over the past half-decade, they found that newly added index constituents outperformed existing members by a median of 1.5 percentage points from the announcement date to the day before reconstitution, as active managers get a head start on adjusting their portfolios and buy shares."

jamesd

BPL said:

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. 

Better than that if you look at the FCA scatterplots I linked to before. You also might find it interesting to look at this post from back in 2007 looking at the UK's then global growth sector and observing th3 continuing outperformance unless the manager changed in most cases.

As that pot date illustrates it's routine for people to correctly assert that in perfect efficient markets this is impossible and for others to show there are areas wherein the real markets it happens. Which merely illustrates what I hope is clear: the markets aren't perfectly efficient ones.

You like the attributes of trackers so you should use them.

jamesd

Deleted_User said:

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. 

Nope, the index isn't the average fund performance either, it's just the index. Maybe try playing with my examples to try to get that result.

There's a wide dispersion of fund performances and in practice only very rare chance could make the index performance the average performance.

Worth remembering also that we're only discussing this because of some theoretically inconvenient reality where active did beat index and average and trackers by 2% vs index:

Prism said:

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).

However a negative example, and probably more important as most people invest globally, is that the world index has not been as good for active funds. The index is 12.54%, the average global fund 10.4% and the money weighted return 11.72%. So people are decent at picking the better funds but not enough to recover the average 2% underperformance. Much of that is likely caused by the 60%+ allocation to the US market where active funds are a bit of a no go area.

[Deleted User]

jamesd said:

Deleted_User said:

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. 

Nope, the index isn't the average fund performance either, it's just the index. Maybe try playing with my examples to try to get that result.

There's a wide dispersion of fund performances and in practice only very rare chance could make the index performance the average performance.

Worth remembering also that we're only discussing this because one segment of investors - UK domiciled funds - in some areas did manage to outperform. That's inconvenient for neat theories but it still happened.

Index is the average of all investments plus costs (not just the funds). 

The link quotes several pages of indices, which were outperformed by active funds in two cases, probably by taking on more risk.  And most funds on average underperformed in the other 89757893737899966 cases. I am not sure it makes the point you think it does. 

Thrugelmir

jamesd 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.

"There’s a meaningful trading opportunity around the event, according to Goldman Sachs strategists. Looking at the Russell 1000 over the past half-decade, they found that newly added index constituents outperformed existing members by a median of 1.5 percentage points from the announcement date to the day before reconstitution, as active managers get a head start on adjusting their portfolios and buy shares."

A few weeks ago I was listening to a presentation by a UK mid cap fund manager. When asked this very question. In the context of potential promotion to the FTSE100. She said that they more often or not already selling down the stock. As the market was already fully pricing in the company's fundamentals. Therefore the upside was fairly limited. Instead they were looking to invest in companies with potential for the future.  

[Deleted User]

BritishInvestor said:

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.
 

Its called “front running”.  A problem for active funds too. Adds a little bit of cost to institutional investors; usually its known if a large entity is buying stocks.   ETF companies have learned to deal with it better it buying into new  shares over a long period of time. And disclosure rules have changed by making it more difficult. Not a major issues as a new entrant into an index would only form a tiny fraction of the index by capitalization. 

Another_Saver

Ah, the good old active passive debate.

I think this can be settled with the Gotrocks parable. The market generates a return, investors on aggregate receive that return less costs, the aggregate return received by all investors would be higher the less they pay in costs. Some will win, some will lose, relatively speaking. My granddad gave my Mum some Norwich Union shares when I was born - would have been better off with cash.

If only the world were so simple, in reality it's messy, inefficient and full of surprises. The markets are as efficient (i.e. flawed and inefficient) as any other human system.

There will always be opportunities - to quote the dashing Jeremy Irons in Margin Call "be first, be smarter or cheat".

The challenge is either being lucky enough to be in a position to be first, smarter or cheat (legally), or finding a fund manager who can.

That's why I accept the slightly less than average returns of index funds... apart from buying Tesla at sub $300 over the past couple of years, only to crystallise most of the profit this year to buy Berkshire Hathaway. Make of my decisions what you will.

BritishInvestor

jamesd 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.

Sorry, no. I read it in an industry publication but forgot just where some time ago. Way more recent than 90s, some time after 2010 probably.

At least some passive managers do seem to be trading ahead of constituent changes and/or rebalancing to reduce the effect of what is in effect a legal form of "front running". It still seems to be happening to some degree as of 2019:

"There’s a meaningful trading opportunity around the event, according to Goldman Sachs strategists. Looking at the Russell 1000 over the past half-decade, they found that newly added index constituents outperformed existing members by a median of 1.5 percentage points from the announcement date to the day before reconstitution, as active managers get a head start on adjusting their portfolios and buy shares."

I think it highlights the point that you have to be careful what index your passive fund tracks
https://seekingalpha.com/article/2952006-the-russell-2000-indexs-achilles-heel

BritishInvestor

jamesd said:

BPL said:

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. 

Better than that if you look at the FCA scatterplots I linked to before. You also might find it interesting to look at this post from back in 2007 looking at the UK's then global growth sector and observing th3 continuing outperformance unless the manager changed in most cases.

As that pot date illustrates it's routine for people to correctly assert that in perfect efficient markets this is impossible and for others to show there are areas wherein the real markets it happens. Which merely illustrates what I hope is clear: the markets aren't perfectly efficient ones.

You like the attributes of trackers so you should use them.

"Which merely illustrates what I hope is clear: the markets aren't perfectly efficient ones."
I think efficiency depends on what type of market participant you are - as I've mentioned before, at the short term, quant hedge fund level, it certainly isn't (I had this discussion recently with someone that works in this space and they chuckled when efficient markets were mentioned). But my belief is that they are taking out the inefficiencies leaving the market broadly efficient for the rest of the "competitors". For each of these (fund managers etc), they have access to all the same information (at large cap level), so it would be a surprise to fund one or more outperforming other than luck. 

I had a quick look at the FCA link but will try and find some time to take a closer look.

BritishInvestor

jamesd said:

Deleted_User said:

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. 

Nope, the index isn't the average fund performance either, it's just the index. Maybe try playing with my examples to try to get that result.

There's a wide dispersion of fund performances and in practice only very rare chance could make the index performance the average performance.

Worth remembering also that we're only discussing this because of some theoretically inconvenient reality where active did beat index and average and trackers by 2% vs index:

Prism said:

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).

However a negative example, and probably more important as most people invest globally, is that the world index has not been as good for active funds. The index is 12.54%, the average global fund 10.4% and the money weighted return 11.72%. So people are decent at picking the better funds but not enough to recover the average 2% underperformance. Much of that is likely caused by the 60%+ allocation to the US market where active funds are a bit of a no go area.

"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. "
I would be interested to see how they have adjusted for factor tilts - which in this case I assume would be large-cap growth.