Moving to drawdown - costs reasonable?

Thrugelmir

Deleted_User said:

AlanP_2 said:

Deleted_User said:

“ On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse”.

That’s before fees.  If you take fees into account, passive has consistently outperformed in Europe as well as the US. https://www.funds-europe.com/news/active-vs-passive-which-is-underperforming

Saying “my active fund outperformed” is neither here nor there. Anecdotes are irrelevant when making investment choices.  Particularly when comparing different assets with different risk levels; then it becomes nonsensical.  Its like saying “for what its worth, I have some Apple stock and it outperformed all my funds”. 

In general, one should decide what is an appropriate asset allocation. Then select an appropriate investment vehicle that fits it using the following basic principles:

1. Diversification 
2. Low costs
3. Simplicity

So are you of the opinion that only passive investments should be used, for all markets across the globe, and there is no role for active investments in anyone's portfolio?

Personally the logic behind a hybrid approach makes sense to me, using passives for some markets and active options elsewhere, to achieve the desired asset allocation / diversification and higher than average returns (after costs). 

There are certain niche asset types where “active” can be a benefit (in my opinion), but not in large cap stocks in developed countries.  And if someone wants to take on more risk and go for the likes of Teslas in a big way, they should just buy companies directly, whether its for your whole fund or play money.  

In December we saw for the first time an issue that materially impacts index tracking funds. Normally it's not such an issue. As the companies that are promoted are relatively small in market capitilisation terms in relation to the overall index. In Tesla's case. A huge number of investors have had the stock added to their portfolios at an inflated price. With no choice. Throws out the window all the claims about efficient market pricing when it comes to passive investing.  

JohnWinder

That could be a problem. Which index added Tesla recently, as you describe?

JohnWinder

dunstonh said:

On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse.  The longer you look on a cumulative basis the higher up passive funds tend to move but not always. 
The difficulty is: how would we choose the active funds that will move up the table the longer you look, and avoid the majority that won't?

    One of the issues that the passive biased investors often have is they assume ALL managed funds are bad and it's not possible to filter out the poor quality funds.  That just is not true.   

Well, clearly all actively managed funds are not bad, maybe most aren't; but how do we pick the ones that will outperform or match the cheaper, no-brainer index alternative, ahead of time? How do we filter out the poor quality funds? If this can be done why are so many people going into active funds that underperform beyond about 5 years?

Additionally, in some sectors, you have a wider range of managed funds with a  different strategy to the passive fund.  In others, there isn't the variety and there may be more closet trackers.   So, you have to make the decision to go active or passive on a sector by sector basis (sector =  country/region in this case).

Regret, couldn't follow that. Is it the former or latter instance you mention that it can be better to choose an active fund?

Most countries do not have very good active funds but the UK does tend to buck the trend.

Not sure about that. Can we see the data? The 2020 SPIVA report finds that in all eight categories they studied GBP active funds underperformed a comparable SP index by ten years; at only three years only 1 of the 7 was still ahead of its index. All adjusted for risk, or not adjusted!  The full report is here: https://www.spglobal.com/spdji/en/spiva/article/spiva-europe

A popular method in the UK is the hybrid of both active and passive.   A core of index trackers with  a number of active satellite funds.  e.g. a UK equity index tracker for your core UK holding but then a managed small/mid cap focused managed fund for your satellite fund.   This can keep your costs down but allow you the best of both worlds.

Yes, I've seen that promoted even by Vanguard, and there might be something in 'core/satellite' however much it sounds like desperation in marketing as funds flood out of active management into passive funds. The clients get a cheaper portfolio, and probably better performing, because now most of it is in a core of index trackers, while the active fund industry continues to get some support and folk feel like they're doing something to improve their fortunes. But if active alone, long term, is a worse proposition than passive long term, I can't see why mostly passive with a bit of active would be better. More data needs to be seen.

For reference, my own portfolio has 14 funds.8 are passive, 6 are managed.  Over the last 3 years, 1 passive fund has been top quartile. 3 have been second quartile. 3 have been 3rd quartile (one is unranked due to the sector it is in).    Of the 6 managed funds, 4 are top quartile, 2 are second quartile.  The portfolio OCF is 0.33%    Why should I give up those higher cost active funds that outperformed passive funds just to bring the OCF down from 0.33% to around 0.15%?

3 years? A lot of people will be interested in 10 to 50 years as that's their investing time frame. 

Sorry about the formatting.

[Deleted User]

Thrugelmir said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

“ On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse”.

That’s before fees.  If you take fees into account, passive has consistently outperformed in Europe as well as the US. https://www.funds-europe.com/news/active-vs-passive-which-is-underperforming

Saying “my active fund outperformed” is neither here nor there. Anecdotes are irrelevant when making investment choices.  Particularly when comparing different assets with different risk levels; then it becomes nonsensical.  Its like saying “for what its worth, I have some Apple stock and it outperformed all my funds”. 

In general, one should decide what is an appropriate asset allocation. Then select an appropriate investment vehicle that fits it using the following basic principles:

1. Diversification 
2. Low costs
3. Simplicity

So are you of the opinion that only passive investments should be used, for all markets across the globe, and there is no role for active investments in anyone's portfolio?

Personally the logic behind a hybrid approach makes sense to me, using passives for some markets and active options elsewhere, to achieve the desired asset allocation / diversification and higher than average returns (after costs). 

There are certain niche asset types where “active” can be a benefit (in my opinion), but not in large cap stocks in developed countries.  And if someone wants to take on more risk and go for the likes of Teslas in a big way, they should just buy companies directly, whether its for your whole fund or play money.  

In December we saw for the first time an issue that materially impacts index tracking funds. Normally it's not such an issue. As the companies that are promoted are relatively small in market capitilisation terms in relation to the overall index. In Tesla's case. A huge number of investors have had the stock added to their portfolios at an inflated price. With no choice. Throws out the window all the claims about efficient market pricing when it comes to passive investing.  

Firstly, it is your opinion that Tesla is mispriced. Not a fact by any means. Secondly, such claims have been made before and since December.  Thirdly, I owned Tesla since 2010 (through VTI). Nothing changed. 

[Deleted User]

JohnWinder said:

That could be a problem. Which index added Tesla recently, as you describe?

S&P 500. Just over 1%.  No idea why its a problem.  An index of large caps like this is supposed to have large caps. Which Tesla is. 

JohnWinder

The problem I see is that Tesla went into the SP500 weighted at 1.7%.  Worst case, it leaves the index having crashed to $0/share. We SP500 index investors lose 1.7%, not good. A few thoughts:

Diversification is a first order matter, so although there are fans of the SP500 and it's a good index in a productive country that has pushed the rest of the world around for half a century, someone believing in diversification would prefer a global index even if it was one that only held large cap stocks like SP500. In that case Tesla has been in your index fund for 10 years already; and if it goes to $0 now the loss will be a lot less than 1.7% because it went in at ? 0.1%. Those funds lose 1.5%/day every month on average without Tesla; it's not earth shattering.

We're assuming Tesla will fail if we're concerned it was added to our index. Who knows? The short sellers have been caught out. I wouldn't want it as a stand alone, but who knows how it will do?

Most of us can't do stock picking for better results than holding an index fund; indeed most fund managers can't, beyond about 5 years. So, as much as we'd prefer to do avoid the Teslas that are going to fail, there's no clear proven way to do it. So I think we have to live with the problem, even though it's not a big problem. Whatever 'big' is!

AlanP_2

The trouble with the vast majority of the Active v Passive research for me is that they all assume that investors who use active funds will then behave passively and adopt an "invest and forget" approach.

More likely, and more sensibly, they are avctively managing their portfolio and will be changing funds both with sectors and across sectors in reaction to performance dropping / manager's changing etc.

You can debate whether they would be succesful at this I agree (and many won't be) but that's more realistic than assuming that because a fund beats its index for 2 years but for the next 8 it doesn't then a "passive investing" approach will beat an "active or hybrid approach".

The most you have evidence for is that a passive fund will on average beat active funds that are nominally invested in the same index.    

scdandem

Wow, I feel like I've entered a parallel universe! Bought the recommended John Edwards books and looking forward to hopefully being able to come back to the thread and translate Thanks for all the comments 👍🏻😁

AlanP_2

scdandem said:

Wow, I feel like I've entered a parallel universe! Bought the recommended John Edwards books and looking forward to hopefully being able to come back to the thread and translate Thanks for all the comments 👍🏻😁

 In essence most of the above is "tweaking at the margins" for the majority. Getting to grips with what you have, what you want to achieve and developing a plan is the main thing to do. 

Albermarle

scdandem said:

Wow, I feel like I've entered a parallel universe! Bought the recommended John Edwards books and looking forward to hopefully being able to come back to the thread and translate Thanks for all the comments 👍🏻😁

The forum can be very helpful in offering guidance on investing issues to those with less knowledge. However threads can sometimes digress from the original subject into more complex debates . So as AlanP 2 said a lot of this stuff is not relevant or easily understandable to the majority( even to some regular posters ) .
As well as reading the book , I would stick to reading through this forum on a regular basis . It has helped a lot of people, including me , increase their understanding , even if every now and again threads get into more complicated areas, with differing opinions being expressed.