Passive investing

Dead_keen

jamesd said:

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.

Would you mind pointing me to that research please?  I know of FCA research on active vs passive fees but not the one you mention. 

Also, what do you mean by "commonly" and "often persistent"? 

I know that the FCA research on fees covers UK-domiciled funds.  Does it cover non-domiciled ones that can be marketed in the UK too? The funds I've invested in are not UK-domiciled funds.  I've not looked into the domicile of retail funds but almost all non-retail ones that I've ever been involved with have not been UK domiciled.  

[Deleted User]

can only assume that this response is down to Vanguards poor performance in their peer groups. 

See above. VLS 100 has a blended benchmark because it does not track a single index. Blended benchmarks are standard for these types of funds.

When you compare VLS100 to a “world index”, there will be periods of slight under- and over- performance, exactly as expected. Because it isn’t one. 

Vanguard also has products which are designed to track various world indices. They do that job very well. 

So, saying “Vanguard does a poor job” is nonsensical in this context. 

jamesd

bostonerimus said:

Using a mostly passive strategy simply means you'll get the market return and that's the same in the US or the UK. Being average has worked out well for me and it's been a relatively simple DIY strategy that has kept me from making big mistakes without the need to pay an IFA to hold my hand.

A passive strategy always fails to deliver market returns. It has to because it has costs and the market return doesn't. The odd passive fund that does better than this does it with active strategies like stock lending combined with a passive core.

People can make good or bad decisions without an IFA though lots of people are going to be better off with one.

With or without an IFA people can do well or badly. Without, this sort of thing is possible, using UK based funds:



In performance order they are Light blue: ASI global smaller companies, green: ASI UK smaller companies, yellow: UT North America smaller companies, darker/brighter blue: UT North America, Brown: FTSE small cap ex investment co, Red: FTSE All share excluding investment co.

What that shows is that my main pension's UK small cap fund green beat the UK small cap index brown by a considerable amount over five years, with about 135% return instead of 65% for the UK small cap. the fund has a good record going much longer than that and it's been one of those demonstrating the persistence of outperformance that the FCA observed.

jamesd

Dead_keen said:

Also, what do you mean by "commonly" and "often persistent"? 

I know that the FCA research on fees covers UK-domiciled funds.  Does it cover non-domiciled ones that can be marketed in the UK too? The funds I've invested in are not UK-domiciled funds.  I've not looked into the domicile of retail funds but almost all non-retail ones that I've ever been involved with have not been UK domiciled. 

Commonly means there's the odd sector where passive beat active using UK investments. Often persistent means that the FCA accepted the proof of persistent outperformance tat it had been shown. Both the finding about active and the finding about persistence of outperformance contradicted the FCA's clear initial expectations.

I'll dig it up again later though you might find it sooner with a search here because it's been discussed before. I think the FCA looked only at UK domiciled, excluding non-UK domicile with UK reporting status, but I'll have to check.

[Deleted User]

A passive strategy always fails to deliver market returns.

Yeah, ok.  We are apparently concerned with 0.03%, 0.1% to 0.2% in annual costs but ok with 1 to 2%.   

And “always” is far from “always”.  These days passive funds use little tricks to keep them right on index or ever so slightly above. 

bostonerimus

jamesd said:

bostonerimus said:

Using a mostly passive strategy simply means you'll get the market return and that's the same in the US or the UK. Being average has worked out well for me and it's been a relatively simple DIY strategy that has kept me from making big mistakes without the need to pay an IFA to hold my hand.

A passive strategy always fails to deliver market returns. It has to because it has costs and the market return doesn't. The odd passive fund that does better than this does it with active strategies like stock lending combined with a passive core.

People can make good or bad decisions without an IFA though lots of people are going to be better off with one.

With or without an IFA people can do well or badly. Without, this sort of thing is possible, using UK based funds:



In performance order they are Light blue: ASI global smaller companies, green: ASI UK smaller companies, yellow: UT North America smaller companies, darker/brighter blue: UT North America, Brown: FTSE small cap ex investment co, Red: FTSE All share excluding investment co.

What that shows is that my main pension's UK small cap fund green beat the UK small cap index brown by a considerable amount over five years, with about 135% return instead of 65% for the UK small cap. the fund has a good record going much longer than that and it's been one of those demonstrating the persistence of outperformance that the FCA observed.

Yes you have to take out fees...so a passive fund will obviously be slightly below the index it tracks...for me that's 0.04% for my US tracker. This is all important, but also I think we are stating the obvious and being a little pedantic.

Yes people can make silly decisions which is exactly what I advocate a passive strategy. As I said active funds can beat their comparable index and your graph shows one example of that. Conversely an active fund can lag an index too and there are many UK small cap active funds that made less cumulative return over 5 years that the 80% of the FTSE Small Cap index. The folks who owned those won't be so sanguine. Owning the index will stop you from making the best returns, but it also stops you from making the biggest losses, as anyone who owned Woodford if they would rather have owned the the FTSE UK Small Cap Index. But we are no longer limited to the UK so we have to widen our perspective.

Cus

If your ambition is to only achieve market returns then passive is the way forward.  If you want to have a chance at more, then active is required.
But if that's going to have a chance of working, you need to know what you are doing better than most, or choose someone who does.

[Deleted User]

Cus said:

But if that's going to have a chance of working, you need to know what you are doing better than most, or choose someone who does.

Choosing active investments is a job active fund managers do; usually with the help of sophisticated software. There is no need for multiple layers of charges if you want help with stock picking. 

Prism

Deleted_User said:

Cus said:

But if that's going to have a chance of working, you need to know what you are doing better than most, or choose someone who does.

Choosing active investments is a job active fund managers do; usually with the help of sophisticated software. There is no need for multiple layers of charges if you want help with stock picking. 

I don't have the ability nor time to read company reports and make good decisions about investments at that level but I do feel I have a decent chance at picking a good fund manager that does. I think there is a place for those who fall into that middle ground of some knowledge. Also sometimes I don't need a fund with a great performance - just one that does the job I need it to do.

Audaxer

Cus said:

If your ambition is to only achieve market returns then passive is the way forward.  If you want to have a chance at more, then active is required.
But if that's going to have a chance of working, you need to know what you are doing better than most, or choose someone who does.

That is true, and nothing wrong with being happy to achieve market returns by choosing passive funds or a multi asset fund containing passives. For those investors not full confident in building a portfolio with active funds, there is less chance of messing it up by choosing a low cost globally diversified multi asset fund.