Passive + active investment? Or just passive?

MK62

Every dog has his or her day though.......

https://www.trustnet.com/news/5252922/has-2020-been-the-year-of-the-active-manager

I use both btw......

csgohan4

Active funds are generally more expensive, whether they do better than passive is debatable and there will be defenders for both side, however passive will be seen as the more defensive option generally.

An extreme case of where it can go wrong is courtesy of Woodford Equity fund for the active side sadly. 

This is why it is important to do your own research. For a starter investor I would focus on passives first and certainly avoid individual stocks, the volatility alone will give you nightmares. Only do so if you money to burn and don't mind the stress

Active funds have their own place, as long as they fit your investment strategy and risk profile. The key is choosing the right one and not randomly choosing one because they top the MOrning star list

barnstar2077

Personally I have a SIPP and a Stocks and Shares ISA (which I can access earlier) on Vanguards own platform, and I use Vanguards Lifestrategy funds in both.  You will get a hundred different opinions on what you should be doing, which is why I finally just settled on my approach.  It is cheap, but not the absolute cheapest, and it is a good bang for your buck with minimum effort and maintenance.  The more complicated the strategy the less likely the average person is to see it through. 

Linton

JohnWinder said:

Prism said:

I am not debating that most active funds underperform - they do. However the whole market is certainly not made of just passive and active funds. How about all of the individual stocks investors of the world? Pension funds, hedge funds, international traders........there an awful lot of underperformers about.

Thanks for weighing in in this thread. Lots to learn for many of us. For me, how to get ahead with active investing.

I had that very thought in mind, which is why I referred to 'investors' rather than 'funds'. I hadn't intended to suggest the whole market is only fund managers, either passive or otherwise.

Indeed there are a lot of underperformers out there investing, funds and individuals by the tens of thousands. Thus, you'd imagine that the active fund managers with all the resources and contacts at their disposal would be able to get above market returns at the expense of the stock picking mugs like me. But they don't, so it just can't be that easy.

I wouldn't expect you to give us the secret sauce for how to identify managers or funds that will outperform into the future, but can you point to anywhere that someone has described a reproducible method to identify such funds, which we can judge by subsequent results, and can't reasonably be attributed to luck?

Rather than repeat all the many arguments there have been on this forum over the past 10 years at least I suggest you look back at past threads. You are barely scratching the surface of the sorts of issues raised.

Your strawman assumption that experienced active investors spend their time trying to maximise returns by duplicating the global market using guaranteed out performing funds and managers is very wide of the mark. Investments should be managed top down, starting from a strategy that addresses objectives, of which performance is only one.   If you do want higher returns than from a global tracker the best way is to invest differently rather than looking for the manager with golden hands.

Linton

csgohan4 said:

Active funds are generally more expensive, whether they do better than passive is debatable and there will be defenders for both side, however passive will be seen as the more defensive option generally.

An extreme case of where it can go wrong is courtesy of Woodford Equity fund for the active side sadly. 

This is why it is important to do your own research. For a starter investor I would focus on passives first and certainly avoid individual stocks, the volatility alone will give you nightmares. Only do so if you money to burn and don't mind the stress

Active funds have their own place, as long as they fit your investment strategy and risk profile. The key is choosing the right one and not randomly choosing one because they top the MOrning star list

Passive funds can also go disastrously wrong. Look at IUKD over the period of the 2008 crash. 

But I agree with you generally.  In particular your final paragraph.  Even if it had zero charges the wrong fund could cost you far more than the right one even if it had high charges.

NottinghamKnight

There are sectors and geographies that will allow active management to outperform, it's obviously more effort than using global trackers but there is evidence to make the case. Smaller companies in lower value markets are an example, things that do not have as much information available to the wider market. Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Linton

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform, it's obviously more effort than using global trackers but there is evidence to make the case. Smaller companies in lower value markets are an example, things that do not have as much information available to the wider market. Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Even in the US large company arena, how do you reduce what you may consider to be the risk presented by the dominance of the US tech giants using passive funds?  If your only objective was high returns you would not want to, but then you probably would not be satisfied with a broad tracker.

Prism

Linton said:
  If you do want higher returns than from a global tracker the best way is to invest differently rather than looking for the manager with golden hands.

I know you meant that from the perspective of the individual investor but its also something that I look for in an active fund manager too. There was an interesting podcast interview with Stephen Yiu this year where he explained the way in how he invested differently in the Blue Whale fund. The team pretty much ignores the index, all other funds and opinions, including paid research and do all of the analysis themselves. This is one of the reasons that the fund holds few stocks, because each team member only looks after 4-5 companies full time.

Them and Baillie Gifford, Fundsmith, Lindsell Train, Cormac Weldon and William Lock are all following similar approaches. It may or may not work over time but at least they are trying something different. An example of that difference of opinion comes to mind when James Anderson of Scottish Mortgage said last year that they thought of themselves as 'value' investors.

Prism

fred246 said:

It's interesting thinking what is allowed in a portfolio. Someone on here recently said "I am glad I used an IFA he put 6% of my money in Baillie Gifford American and it has made 100%". I thought well if he is so clever why didn't he put 100% in to that fund? That would have been seen to be unacceptable. Putting 100% into a Global passive fund such as Vanguard FTSE Global All cap with 6884 stocks would be OK. Very volatile but OK. So active funds are less trustworthy because they have lower number of stocks. So active funds are only acceptable if you have plenty of them. Hedging your bets. So you could have a portfolio of a large number of active funds. A lot of portolios are composed of a large passive component and then a reasonably large number of active funds. This is what advisers do to make make the portfolio look complicated. 100% passive and there isn't much to talk about except the global economy. 30 active funds and you can chat all day long.

I currently only have six active funds in my SIPP. I reckon I could so it with just four though if I needed to. At any given time I could replace one or more of them with an equivalent passive should I want to. I don't agree that you need lots.

TheLittleSaver

Ok guys, I might have a few options now, but I think the questions I am about to ask would lead us away from the original purpose of this thread, so I will open a new one.

Thanks!