Passive + active investment? Or just passive?

Chickereeeee

Surely its easy to outperform 'the market', particularly with today's low interest rates? Just set up an IT, take investors money, borrow some more and invest the lot in a global tracker. The leverage will ensure your IT will outperform in a rising market, and we all hope for a rising market otherwise we would not invest in a global tracker anyway. 

JohnWinder

csgohan4 said:

Active funds have their own place, as long as they fit your investment strategy and risk profile. The key is choosing the right one

Yes, but where is someone who has demonstrated they have the key, so that all of us can learn to do it?

Linton said:

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

Thanks. Yes, I had a look. That fund doesn't track its index as well as some can, underperforming its index by about 0.6%/year since inception. But I can't see what went disastrously wrong in 2008. The fund dropped in value a lot, while tracking the index fairly closely. One wants an index fund to track its index closely. Choosing the wrong index isn't a good start, but few indices would have fared well in 2008.

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform,...Smaller companies in lower value markets are an example....Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Less difficult probably, but achievable over a period of ....how long is our investment time frame....several decades, and we can pick in advance which manager will do it? And to be practical, how much of one's equity investments does one want in small companies in emerging markets? Doesn't seem to be a very popular sector in the financial press.

Prism said:

The team pretty much ignores the index, all other funds and opinions, including paid research and do all of the analysis themselves. .... It may or may not work over time but at least they are trying something different.

That would be a very generous and lenient response from an investor who might have chosen a comparable index fund which would have worked as it should have over time, and I'd admire such forgiveness. I doubt I have it, with limited time.

Thrugelmir

JohnWinder said:

BananaRepublic said:

Passive fans point out that on average active funds underperform and overcharge. ... There are also some active funds that have outperformed the markets over many years. The Jupiter European fund is a good example. One advantage of active funds is that they provide exposure to markets and sectors which have no index funds.

Can I ask what market and what sector we might want to invest in that is not covered by a decent index fund?

Why be constrained by individual indexes? Better to have a flexible investing approach.   Plenty of companies that I don't wish to invest in.  Likewise sectors at any given point of time. 

Thrugelmir

csgohan4 said:

Active funds are generally more expensive, 

Research costs money. Proper research is a time consuming exercise. Retail investors often prefer quick and easy. In the belief that somebody else will do the leg work for them. 

Thrugelmir

Linton said:

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. 

If the mantra is don't buy UK stocks then it goes without saying they will languish.  Herd investing summed up in a nutshell. 

NottinghamKnight

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform,...Smaller companies in lower value markets are an example....Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Less difficult probably, but achievable over a period of ....how long is our investment time frame....several decades, and we can pick in advance which manager will do it? And to be practical, how much of one's equity investments does one want in small companies in emerging markets? Doesn't seem to be a very popular sector in the financial press.

Sorry I don't understand your response.
Long term out performance using active management is more difficult than short term, many funds will out perform over a year or three years, far fewer over decades. 
If you are risk tolerant and have a very long investment horizon then large sums in small companies in emerging markets are likely to give you a far better return than an average passive world tracker.
I take little notice of the financial press and would urge others to do the same, often a very poor level of understanding and frequently influenced by advertising and sponsorship.

csgohan4

NottinghamKnight said:

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform,...Smaller companies in lower value markets are an example....Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Less difficult probably, but achievable over a period of ....how long is our investment time frame....several decades, and we can pick in advance which manager will do it? And to be practical, how much of one's equity investments does one want in small companies in emerging markets? Doesn't seem to be a very popular sector in the financial press.

Sorry I don't understand your response.
Long term out performance using active management is more difficult than short term, many funds will out perform over a year or three years, far fewer over decades. 
If you are risk tolerant and have a very long investment horizon then large sums in small companies in emerging markets are likely to give you a far better return than an average passive world tracker.
I take little notice of the financial press and would urge others to do the same, often a very poor level of understanding and frequently influenced by advertising and sponsorship.

But on the same note, they will be far more volatile and riskier compared to global index trackers. Personal preference and depends on your risk appetite.

I would be uncomfortable holding more than 40% of equity in Small caps/EM and I am not risk adverse per say. 

Thrugelmir

csgohan4 said:

NottinghamKnight said:

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform,...Smaller companies in lower value markets are an example....Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Less difficult probably, but achievable over a period of ....how long is our investment time frame....several decades, and we can pick in advance which manager will do it? And to be practical, how much of one's equity investments does one want in small companies in emerging markets? Doesn't seem to be a very popular sector in the financial press.

Sorry I don't understand your response.
Long term out performance using active management is more difficult than short term, many funds will out perform over a year or three years, far fewer over decades. 
If you are risk tolerant and have a very long investment horizon then large sums in small companies in emerging markets are likely to give you a far better return than an average passive world tracker.
I take little notice of the financial press and would urge others to do the same, often a very poor level of understanding and frequently influenced by advertising and sponsorship.

But on the same note, they will be far more volatile and riskier compared to global index trackers. Personal preference and depends on your risk appetite.

Why are global index trackers less risky?  Small companies are tomorrow's large ones. Twelve years ago Exxon was the largest market cap company in the world. Where does it stand now? 

Linton

Thrugelmir said:

Linton said:

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. 

If the mantra is don't buy UK stocks then it goes without saying they will languish.  Herd investing summed up in a nutshell. 

Sorry if it was not clear.  The lesson to be learnt is nothing to do with UK stocks. I am very much in favour of investing in UK medium/small companies.

Rather IUKD demonstrates that in some sectors blindly following an ill-conceived index can lead to as much if not more heart-ache as choosing a poor active fund. In particular going simply for highest yield without sector balancing is extremely dangerous.  Pre 2008 the highest dividend payers were frequently the banks.  The fund fell by 60% in a few months and did not recover for many years, it has barely recovered now over 10 years later.  Sadly I cant give you the figures as trustnet/charting is playing up again.

Linton

csgohan4 said:

NottinghamKnight said:

NottinghamKnight said:

There are sectors and geographies that will allow active management to outperform,...Smaller companies in lower value markets are an example....Trying to outperform a tracker in large us stocks will be a difficult task, small companies in emerging markets far less so. 

Less difficult probably, but achievable over a period of ....how long is our investment time frame....several decades, and we can pick in advance which manager will do it? And to be practical, how much of one's equity investments does one want in small companies in emerging markets? Doesn't seem to be a very popular sector in the financial press.

Sorry I don't understand your response.
Long term out performance using active management is more difficult than short term, many funds will out perform over a year or three years, far fewer over decades. 
If you are risk tolerant and have a very long investment horizon then large sums in small companies in emerging markets are likely to give you a far better return than an average passive world tracker.
I take little notice of the financial press and would urge others to do the same, often a very poor level of understanding and frequently influenced by advertising and sponsorship.

But on the same note, they will be far more volatile and riskier compared to global index trackers. Personal preference and depends on your risk appetite.

I would be uncomfortable holding more than 40% of equity in Small caps/EM and I am not risk adverse per say. 

In my growth portfolio I hold more than 50% EM and small companies, mainly the latter.

EM is a somewhat disparate sector area since it includes the rapidly developing China, the already developed SE Asian countries and much less developed areas such as Africa and South America. Now EM funds tend to be high % SE Asia and I mainly hold them for that reason.

Individual national small companies funds can be very volatile, but they are not so closely correlated as large companies.  So overall I dont see them much riskier.

PS: For example my portfolio dropped almost exactly the same % as the FTSE World Index during the Covid mini crash.  However In the past 12 months the index is up about 10% whereas my portfolio is up around 15%