SIPP Flexi access drawdown based on Vanguard Lifestrategy x% equities

BritishInvestor

Another_Saver said:

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.

"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."
My belief is that people that have found a way to be first, smarter etc won't need to take your money, certainly not over the longer term. The strategies they employ (the ones I am personally aware of) have finite scalability, and given good returns and leverage they should soon find themselves in the position where their own pot of money is sufficient to fully utilise these strategies.

Linton

BritishInvestor said:

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.

Why should anyone be interested in adjusting data for factor tilts? Sure, if you invest 100% in the same index  a lower charge fund will out-perform a higher charge fund.

But if you are saying that factor tilts can be used to outperform the available index trackers, I would agree with you.  It is much easier to manage factor tilts with active funds - that is why many successful active funds achieve the results they do.

On the other hand if you claim that factor tilts cannot lead to outpeformance ocompared with an index then there is no harm in not adjusting for them.

BPL

"UK investors have been quite good at selecting the good ones."
So you either buy every single active fund to get the average return or gamble on selecting ones will beat a tracked sector. This is also just focusing on one sector i guess for the others trackers win over the average active basket. 

BritishInvestor

Linton said:

BritishInvestor said:

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.

Why should anyone be interested in adjusting data for factor tilts? Sure, if you invest 100% in the same index  a lower charge fund will out-perform a higher charge fund.

But if you are saying that factor tilts can be used to outperform the available index trackers, I would agree with you.  It is much easier to manage factor tilts with active funds - that is why many successful active funds achieve the results they do.

On the other hand if you claim that factor tilts cannot lead to outpeformance ocompared with an index then there is no harm in not adjusting for them.

"Why should anyone be interested in adjusting data for factor tilts? "
Because you can "usually" buy the factor tilts for buttons in various factor funds, so no need to pay an active manager to give you that if that's what you desire.
I say "usually" because the factor tilts that tend to be offered are small-cap and value, as these have (historically) shown outperformance over the rest of the market.
The last decade has been a huge anomaly (see FT link), so by taking the fashionable tilt (large cap growth) that has done so well in recent times you may well "outperform" an untilted index, but you might be taking on additional risk which may or may not be compensated, including style risk (it could be *"different this time", but if not, reversion could be painful), concentration risk, fund manager risk (style drift etc).

*Or not
https://en.wikipedia.org/wiki/Nifty_Fifty
"The most common characteristic by the constituents were solid earnings growth for which these stocks were assigned extraordinary high price–earnings ratios. Fifty times earnings, far above the long-term market average, was common."
https://ycharts.com/companies/NFLX/pe_ratio
https://ycharts.com/companies/AMZN/pe_ratio

[Deleted User]

Linton said:

BritishInvestor said:

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.

Why should anyone be interested in adjusting data for factor tilts? Sure, if you invest 100% in the same index  a lower charge fund will out-perform a higher charge fund.

But if you are saying that factor tilts can be used to outperform the available index trackers, I would agree with you.  It is much easier to manage factor tilts with active funds - that is why many successful active funds achieve the results they do.

On the other hand if you claim that factor tilts cannot lead to outpeformance ocompared with an index then there is no harm in not adjusting for them.

Factor tilts mean reduced diversification, focus on certain industries at the expense of others. It means taking on more risk. This can result in long periods of outperformance. And in long periods of underperformance.  That’s fine if thats what you do consciously but many people wont be aware   that we are not comparing like with like.

” many successful active funds achieve the results they do.” Actually its very few if you look over a long period of time. 

Prism

BPL said:

"UK investors have been quite good at selecting the good ones."
So you either buy every single active fund to get the average return or gamble on selecting ones will beat a tracked sector. This is also just focusing on one sector i guess for the others trackers win over the average active basket. 

Yes that seems to be the case over the last 10 years at least from the perspective of a UK investor . No single investor is buying all of the funds to get the average. Some of the investors who have selected the correct fund or funds have got the lions share of the outperformance, enough to push the average up over and beyond the index returns.

It is impossible to track how many investors selected the better funds. We can see that their average returns beat the benchmark. It would mathematically be possible that most of them do. The data suggests that much of the money is in the winning funds but we have no idea where that money is from. That data is private.

The only thing we can infer from this report is that if someone wanted to use active funds they would have a better chance investing in active UK and Europe funds than in US, EM and Global funds. Again, all of this assumes the only thing they consider is performance. There are other factors like volatility, risk based returns, protection during crashes.

Linton

Prism said:

BPL said:

"UK investors have been quite good at selecting the good ones."
So you either buy every single active fund to get the average return or gamble on selecting ones will beat a tracked sector. This is also just focusing on one sector i guess for the others trackers win over the average active basket. 

Yes that seems to be the case over the last 10 years at least from the perspective of a UK investor . No single investor is buying all of the funds to get the average. Some of the investors who have selected the correct fund or funds have got the lions share of the outperformance, enough to push the average up over and beyond the index returns.

It is impossible to track how many investors selected the better funds. We can see that their average returns beat the benchmark. It would mathematically be possible that most of them do. The data suggests that much of the money is in the winning funds but we have no idea where that money is from. That data is private.

The only thing we can infer from this report is that if someone wanted to use active funds they would have a better chance investing in active UK and Europe funds than in US, EM and Global funds. Again, all of this assumes the only thing they consider is performance. There are other factors like volatility, risk based returns, protection during crashes.

This is key especially for investors dependent on their investments for their primary income who need the flexiblity to allocate resources to meet a range of possibily conflicting requirements. Using active funds allows one to do this in a way that would be impractical with market cap weighted index funds. At the other extreme where one's investments have no relevence whatsoever to current well-being there may be a wish to go up the risk/return curve.  The ability to do this with index funds is very limited - there is no index equivalent of SMT.

BritishInvestor

Linton said:

Prism said:

BPL said:

"UK investors have been quite good at selecting the good ones."
So you either buy every single active fund to get the average return or gamble on selecting ones will beat a tracked sector. This is also just focusing on one sector i guess for the others trackers win over the average active basket. 

Yes that seems to be the case over the last 10 years at least from the perspective of a UK investor . No single investor is buying all of the funds to get the average. Some of the investors who have selected the correct fund or funds have got the lions share of the outperformance, enough to push the average up over and beyond the index returns.

It is impossible to track how many investors selected the better funds. We can see that their average returns beat the benchmark. It would mathematically be possible that most of them do. The data suggests that much of the money is in the winning funds but we have no idea where that money is from. That data is private.

The only thing we can infer from this report is that if someone wanted to use active funds they would have a better chance investing in active UK and Europe funds than in US, EM and Global funds. Again, all of this assumes the only thing they consider is performance. There are other factors like volatility, risk based returns, protection during crashes.

This is key especially for investors dependent on their investments for their primary income who need the flexiblity to allocate resources to meet a range of possibily conflicting requirements. Using active funds allows one to do this in a way that would be impractical with market cap weighted index funds. At the other extreme where one's investments have no relevence whatsoever to current well-being there may be a wish to go up the risk/return curve.  The ability to do this with index funds is very limited - there is no index equivalent of SMT.

"This is key especially for investors dependent on their investments for their primary income who need the flexiblity to allocate resources to meet a range of possibily conflicting requirements. Using active funds allows one to do this in a way that would be impractical with market cap weighted index funds."
It would be really useful to understand what these might be.
There are other factors like volatility, risk based returns, protection during crashes
I'm not sure what active would give that you couldn't trivially replicate with a passive alternative.

[Deleted User]

We probably need to define “passive”. 

Option 1: whole of the market plain vanilla index funds.
Option 2: Any fund which is managed passively based on computers and equations without managers picking individual stocks. VBR is one example (small value US stocks). There are thousands of funds which slice and dice the market based on some predefined criteria. 

Today an awful lot of funds fall into the second category. There are cheep funds which allow you to pick any factor/industry/geography or a combination of factors. Not only is this more cost efficient, human emotion is bad for investment.  Active human-managed funds are good for some people, chiefly the fund managers. Otherwise they couldn’t afford to buy sports teams. 

BritishInvestor

Deleted_User said:

We probably need to define “passive”. 

Option 1: whole of the market plain vanilla index funds.
Option 2: Any fund which is managed passively based on computers and equations without managers picking individual stocks. VBR is one example (small value US stocks). There are thousands of funds which slice and dice the market based on some predefined criteria. 

Today an awful lot of funds fall into the second category. There are cheep funds which allow you to pick any factor/industry/geography or a combination of factors. Not only is this more cost efficient, human emotion is bad for investment.  Active human-managed funds are good for some people, chiefly the fund managers. Otherwise they couldn’t afford to buy sports teams. 

#2 is factor investing in my eyes which I would deem to be distinct from passive.
https://en.wikipedia.org/wiki/Factor_investing