Investment strategy - balancing passives with actives?

Thrugelmir

MaxiRobriguez said:

Personally feel like active on dev/large cap is a mugs game. You'd have to go far and wide to find someone on the planet who doesn't know what Amazon are doing.

Superior market performance by a select group of companies over the past 5 years or so masks a very different underlying picture at a global level. 

Prism

I use actives for smaller companies funds, emerging markets and generally less liquid stuff like private equity and property. Then again I also use actives for large cap global stuff to so maybe I am not the best example. If I was to use passives funds, as sometimes I do, it would be for the large cap global allocation.

JohnWinder

ChilliBob said:

... UK small and mid caps do well served with active.

In God we trust; others can bring data. Any data on this?

Nebulous2

Thanks folks - this has been useful. I've not been seeing active / passive as the primary choice. I've gone 50% global tracker, and was planning 50% in smaller chunks in specific sectors. I've run out of steam in choosing however.  I'm thinking I'm out of my depth and its time to seek some thoughts from others. I'll start my own thread however, rather than derail this one. 

Prism

JohnWinder said:

ChilliBob said:

... UK small and mid caps do well served with active.

In God we trust; others can bring data. Any data on this?

Sure. The latest Spiva Europe report to year end 2020 has the 10 year annual return of the UK small cap index at 9.99% and the average active fund investor 11.39% in the same sector. Over shorter durations the difference is even greater. UK large/mid caps are 4.48% for the index and 6.01% for the active investor.

JohnWinder

Thanks, that’s a good find. It shows that all GBP denominated (I guess they’re the funds UK investors will most commonly choose from) when lumped together returned 11.39%/year (better than the index returns by 1.4%/year). Is that you're reading of table 3b?

But none of us are going to buy all those funds and thus get those returns. We’re only going to buy one of the GBP funds investing in small cap equity, or maybe two, or even three, although no one here even talks about having 2 different ones. Which one(s) do we choose? This is important because as table 1b shows, in risk adjusted returns after 10 years 59% of those funds under-performed their benchmark. So, you chose your active small cap fund by tossing a coin ten years ago, and you’re likely to have lost out compared to an index fund (a 59% chance of losing), or you chose the fund based on the following criteria:……………(anybody, please supply unambiguous, actionable criteria that get the choice down to one fund amongst the 41%).

More data is in the Morningstar reports in European (UK) funds. 

'One of the two categories where active funds have managed to outperform is UK Mid-Cap Equity. ... Over one, three, five and 10 years, active UK mid-cap funds beat their passive rivals. Denmark Equity funds were the only other group able to beat their passives over 10 years.’  Small cap active weren’t in the hunt.

https://www.evidenceinvestor.com/europes-active-managers-failed-in-2020/

They comment on the US: 'The US small-cap area, however, is not as widely followed, which should mean active fund managers can find hidden gems and outperform. In fact, this has not been the case. While active managers outperformed passive funds in 2020, over the long-term tracker funds have also done better in the small-cap space.   Japan is also thought to be a “stockpicker’s market” but again the results here suggest otherwise – over 10 years, some 88% of large-cap passive funds beat their active rivals. And passives also did better over one, three and five year periods.'

Linton

JohnWinder said:

Thanks, that’s a good find. It shows that all GBP denominated (I guess they’re the funds UK investors will most commonly choose from) when lumped together returned 11.39%/year (better than the index returns by 1.4%/year). Is that you're reading of table 3b?

But none of us are going to buy all those funds and thus get those returns. We’re only going to buy one of the GBP funds investing in small cap equity, or maybe two, or even three, although no one here even talks about having 2 different ones. Which one(s) do we choose? This is important because as table 1b shows, in risk adjusted returns after 10 years 59% of those funds under-performed their benchmark. So, you chose your active small cap fund by tossing a coin ten years ago, and you’re likely to have lost out compared to an index fund (a 59% chance of losing), or you chose the fund based on the following criteria:……………(anybody, please supply unambiguous, actionable criteria that get the choice down to one fund amongst the 41%).

More data is in the Morningstar reports in European (UK) funds. 

'One of the two categories where active funds have managed to outperform is UK Mid-Cap Equity. ... Over one, three, five and 10 years, active UK mid-cap funds beat their passive rivals. Denmark Equity funds were the only other group able to beat their passives over 10 years.’  Small cap active weren’t in the hunt.

https://www.evidenceinvestor.com/europes-active-managers-failed-in-2020/

They comment on the US: 'The US small-cap area, however, is not as widely followed, which should mean active fund managers can find hidden gems and outperform. In fact, this has not been the case. While active managers outperformed passive funds in 2020, over the long-term tracker funds have also done better in the small-cap space.   Japan is also thought to be a “stockpicker’s market” but again the results here suggest otherwise – over 10 years, some 88% of large-cap passive funds beat their active rivals. And passives also did better over one, three and five year periods.'

However if you look at Trustnet you will see that over 1,3,5 and 10 years the iShares Japan SmallCap Index fund was bottom of the performance list over each period bar 1 when it was one off the bottom.

Elsewhere  in your reference it says:

In some categories the success rates have been dire: in US Large-Cap Growth Equity, not a single active fund managed beat its passive counterpart over a 10-year period. It’s no wonder then, that so many European investors are ditching active fund managers and using trackers instead.

Trustnet tells me that over 10 years the highest US large company index fund was 26th in the list.  How come evidenceinvestor failed to find any?

Do you know of any real data that can be checked?

JohnWinder

Regret do not know any data sources, other than the Trustnet type you mention.

But the inconsistency you point out with that quote based on the Morningstar research, and the Trustnet results, might be due to comparing red apples with green apples. One is US Large-cap GROWTH, and the other is US Large cap (broader than just growth). Maybe this explains the inconsistency.

Bobziz

Is it not the case that the variables associated with being an active investor are so great that a fair comparison between an active v's passive approach is nigh on impossible ?

granta

Could someone please answer a very basic question for me as it will help me understand the data better:

When looking at the performance % per year e.g. in TrustNet where it shows the fund performance alongside a benchmark, or comparing an active vs passive fund, do both % take into account fees?
So if you were comparing an active global equity fund with a passive global equity tracker, and both showed a 5 year performance of 80%, that is with the fees taken into account?
In which case, there is no difference. But if the active showed 90% increase, and the passive showed 75% increase, then even with fees accounted for, the active is 'better'? Am I missing something?