Passive investing

[Deleted User]

We seem to have a recurring debate on whether a particular fund is “passive” or “active”.  Debates are great but this one is a complete waste of typing energy.  Several reasons:

1. Its not a binary “either or”.  There are degrees of “passive”.

2. Theoretical perfection for “passive” = every world stock based on cap weight.  Does not exist as a product.

3. All indices have an element of human decision making.  A committee decides which companies are part of S&P 500.  

4. “Passive” isn’t a meaningful objective.  Passive Investors are looking to minimize human decision-making and costs and to maximize diversification.  Nobody should care whether John thinks a fund should be called “Passive”, “Active” or “Pete” as long as it meets the objectives that matter. 

5. There are degrees of “Passive”. If someone allocates 75% to FTSE 250 and 25% to FTSE 100 for UK, thats a fairly active decision because FTSE 100 is 10 times larger by market cap.  The returns and risks will be impacted, big time.  Still its not in the same league as picking stocks on Robinhood using advice from WallStreetBets or buying funds based on best performing rockstar active managers.

6. If someone buys SPY to represent US (S&P500) rather than VTI (total market), its still passive in my book. You captured most of the market cap and the risk/return ratio will be close enough.  

7. VLS “funds of funds” are fairly passive.  Stable allocations combined with a small home bias won’t give you the exact All-World return (plus whatever you have in bonds) but its going to be pretty close.  The HSBC version of multi-asset funds is more active because they don’t have stable allocations.  Vanguard started “passive” and a passive investor won’t go wrong with a product like VLS X0.

8. Factor investing is more active than VLS 100 but still meets a lot of the same objectives a passive investor is looking for. It allows one to sit back and ignore the stockmarket except for very occasional rebalancing. 

Dead_keen

We also seem to have a debate about whether investors are willing to pay 90 to 120 basis points more to get active management that typically produces lower rates of return combined with more risk and more uncertainty.

Some people are happy to.

pip895

Dead_keen said:

We also seem to have a debate about whether investors are willing to pay 90 to 120 basis points more to get active management that typically produces lower rates of return combined with more risk and more uncertainty.

Some people are happy to.

Most people realise that there are areas of the market where active investing makes more sense and gives higher returns and less volatility!

My suspicion is that pure passive investing will loose quite a bit of its appeal next time the US has a poor decade.  

pip895

To the OP I agree that debating wether VLSxx is passive enough is pretty pointless - taken to extremes most things become stupid.  

Ultimately all passive investing is reliant on people making active decisions- there wouldn’t even be a market without that.

JohnWinder

Most people realise that there are areas of the market where active investing makes more sense and gives higher returns and less volatility!

Can you remind us what areas those are? And any data to go with it?

pip895

JohnWinder said:

Most people realise that there are areas of the market where active investing makes more sense and gives higher returns and less volatility!

Can you remind us what areas those are? And any data to go with it?

UK small companies springs to mind - this has been done to death elsewhere and is not relevant to the thread.

older_and_no_wiser

I would say emerging markets is another one that active funds have the "potential" to give higher returns than a passive index. These markets can be fairly volatile and a fund manager with deep knowledge in these countries and economies could be a real benefit. 

dunstonh

7. VLS “funds of funds” are fairly passive.  Stable allocations combined with a small home bias won’t give you the exact All-World return (plus whatever you have in bonds) but its going to be pretty close.  The HSBC version of multi-asset funds is more active because they don’t have stable allocations.  Vanguard started “passive” and a passive investor won’t go wrong with a product like VLS X0.

Vanguard make an active decision in choosing their weightings and the frequency they adjust them and which tracker funds they include in their fettered fund of funds. 
HSBC make an active decision in choosing their weightings and the frequency they adjust them and which tracker funds they include in their unfettered fund of funds.    

They have both made management decisions in the same areas but with slightly different outcomes.  

The last thread did have someone try and take the debate to ridiculous extremes but the point of the thread was why would someone pick the more expensive VLS100 over a tracker and whether VLS100 is the weakest version in the VLS range.   If you find that discussion "a complete waste of typing energy" then you are free to ignore the thread and move on.    Judging by some of the responses, people were interested in the discussion.

bostonerimus

I'm lazy! For me passive really applies to my management style irrespective of what's in my portfolio, fyi it's mostly cap weighted equity trackers with thousands of stocks and the one active fund I own is Vanguard Wellesley as my small bond allocation. When I was working I would rebalance occasionally, but now I've stopped doing that. Natural yield is automatically invested and I make a contribution every so often when I have spare cash. Other than that I do nothing. A personal passive management style saves me aggravation and worry and I think has stopped me from doing many foolish things. It's also very inexpensive.

jamesd

Dead_keen said:

We also seem to have a debate about whether investors are willing to pay 90 to 120 basis points more to get active management that typically produces lower rates of return combined with more risk and more uncertainty.

For UK investors in UK funds FCA research showed that active commonly beat passive and that outperformance was often persistent so the basis of your claim isn't accurate.

jamesd

bostonerimus said:

I'm lazy! For me passive really applies to my management style irrespective of what's in my portfolio, fyi it's mostly cap weighted equity trackers with thousands of stocks and the one active fund I own is Vanguard Wellesley as my small bond allocation.

You're a US person in the US so the research applicable to such situations applies to you, unlike most here.

Even here if there's truly a desire to pay no attention at all, passives can be the better choice, just not on performance grounds unless you take care over where you invest.