Investment strategy - balancing passives with actives?

Linton

granta said:

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?

Fund performance figures are always after fund manager fees.  So in your examples yes 80% return for both an active and a passive fund would mean the same return to the investor.  And a 90% active/75% passive does mean active wins.

csgohan4

bare in mind this is comparing apples and oranges, no two active or passive funds are the same, so comparisons will be best guess at best. You can have bad fund managers or good ones. Ergo Woodford vs BG

granta

csgohan4 said:

bare in mind this is comparing apples and oranges, no two active or passive funds are the same, so comparisons will be best guess at best. You can have bad fund managers or good ones. Ergo Woodford vs BG

Thanks. I agree, having sampled both of the above! I am just trying to work out a balance between active and passive having been active fund heavy but don't want to make decisions purely on cost. I'm steadily adding to my passive fund HSBC Global Strategy whilst working out what to do with the actives. Very useful to read this discussion.

Prism

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%).

Yes that was from table 3b. Table 3b takes into account the returns that an average investor in that sector might have returned. The details of what the asset weighted results are designed to demonstrate are on page 4. So a coin toss would have not achieved that result and therefore it seems to be the case that investors are selecting funds based on some other factor and doing better because of it. We will never know what that factor unless the investors were interviewed and asked. It could be popular funds, historically better performing funds, larger funds or cheaper funds - or in fact something else.

It seems to be the case that UK sector funds are a bit of an anomaly in this regard. 

Prism

csgohan4 said:

bare in mind this is comparing apples and oranges, no two active or passive funds are the same, so comparisons will be best guess at best. You can have bad fund managers or good ones. Ergo Woodford vs BG

Although he was a bit sloppy with liquidity near the end I don't think it would be ever fair to call Neil Woodford a 'bad' fund manager. He has produced some of the best returns over the last 25 years for his investors and there will be plenty of people who are far better off than they would have been had they not invested in his funds.

Thrugelmir

csgohan4 said:

 Ergo Woodford vs BG

The unlisted element of  the Woodford portfolio is going to come back to haunt many people. Judging by subsequent valuations and likely IPO's in the pipeline. 

csgohan4

Prism said:

csgohan4 said:

bare in mind this is comparing apples and oranges, no two active or passive funds are the same, so comparisons will be best guess at best. You can have bad fund managers or good ones. Ergo Woodford vs BG

Although he was a bit sloppy with liquidity near the end I don't think it would be ever fair to call Neil Woodford a 'bad' fund manager. He has produced some of the best returns over the last 25 years for his investors and there will be plenty of people who are far better off than they would have been had they not invested in his funds.

but it seems he made on gamble too far rather be level headed. But i guess no risk no reward and at the same token, alot people lost lots of money as well. 

JohnWinder

Prism said:

JohnWinder said:

Yes that was from table 3b. Table 3b takes into account the returns that an average investor in that sector might have returned. The details of what the asset weighted results are designed to demonstrate are on page 4. So a coin toss would have not achieved that result and therefore it seems to be the case that investors are selecting funds based on some other factor and doing better because of it. We will never know what that factor unless the investors were interviewed and asked. It could be popular funds, historically better performing funds, larger funds or cheaper funds - or in fact something else.

Yes, good observation. I surmise that the asset weighted returns being better than the equal weighted returns meant that the bigger small cap active funds did better than the smaller ones. People, en masse, are able to choose the better performing funds. That's a pointer to how to choose an index beating one; and historically worse performing funds increase the chance of future poor performance from research I've cited previously which also concluded '

• Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term.'

In the small cap space at least (or at most!) in aggregate we are choosing the out-performing active funds, but individually we don't know how to do it reliably. Perhaps doesn't matter as the % most have invested in this sector is small, and the outperformance not great (although 1%/yr is nice to get).

To earn fame as an active fund manager I think you need to stick your neck out with some concentrated stock holdings which are the market leaders for returns, but that leaves you exposed to spectacular under-performance if you chose wrongly. The non-famous active fund managers hug the index and might get a bit ahead or a bit behind. Some investors wouldn't be wanting to risk choosing the famous fund manager who might crash and burn, or feel it worth going with the index huggers if there's not much benefit in it for a small section of a portfolio. But it seems a slowly decreasingly plenty do.

bostonerimus

How long is a piece of string. Do whatever you like, but follow sensible rules about asset allocation ie if you are 20 put 80% in equities rather than 80% in bonds. I would also only buy funds with a long term history of success or funds from established vendors...so nothing like Woodford. 80% of my money is in trackers and 10% is an old Vanguard active income fund called Wellesley, 5% in an annuity and 5% is cash

mrlegend123

I am currently invested in two balanced funds, one active and one passive.

The strategy works well.