Active vs Passive Funds

JohnWinder

MK62 said:

It's possible of course, but in the drive to force fees lower, something would have to give, so equally we might see the best talent jump from fund management into what might then be more lucrative avenues, and the industry left with just the mediocre.....and index funds.

Of course. Anyone read anything about that happening in other countries where fees have fallen further and perhaps faster than UK? Not me. Let's risk it, the FCA seems comfortable to.

MK62

JohnWinder said:

Let's risk it, the FCA seems comfortable to.

The FCA were also comfortable with what went on with the Woodford saga.....and were also comfortable with the appointment of the administrators to "clear up that mess"...then there's Beaufort, LCF....and others......I'm really not sure what the FCA are comfortable with is that much of a recommendation tbh.....

JohnWinder

That's a can of worms in a Pandora's box I'm not touching with a barge pole.

Thrugelmir

EdSwippet said:

Thrugelmir said:

AsifM068 said:

Slightly off topic team but why is the UK renown for high dividend investments / stocks or have I got this wrong? 

Taxation. In other countries dividends are taxed more highly than capital gains. In the US share buy backs are a mechanism , though this is clouded by the amount of debt now on company balance sheets. Buy a French share and you'll have 27.5% deducted before the dividend hits your share account. 

Article 11 of the UK/France tax treaty specifies a maximum 15% French rate. This limits UK tax credit to 15% of the gross dividend. Overpayment of French tax needs to be reclaimed from the French authorities.

If you could explain an easy and cost effective means of doing so I'd be most gratefull. As you seem to have all the answers. Or did you just Google that to make a point?  

dunstonh

MK62 said:

JohnWinder said:

Let's risk it, the FCA seems comfortable to.

The FCA were also comfortable with what went on with the Woodford saga.....and were also comfortable with the appointment of the administrators to "clear up that mess"...then there's Beaufort, LCF....and others......I'm really not sure what the FCA are comfortable with is that much of a recommendation tbh.....

The regulator has a history of micromanaging the insignificant and completely missing the real issues.    They said the FCA would be better than the FSA but I am not seeing it yet.    

tebbins

ColdIron said:

Because it is full of mature industries with low prospects of growth so chooses to reward it's investors with high dividends instead

...

Linton said:

AsifM068 said:

Slightly off topic team but why is the UK renown for high dividend investments / stocks or have I got this wrong? 

As ColdIron says.  Also there is a long-standing culture of wealthy people gaining income from dividends.  The UK is not unique.  In the Far East investors like dividends.

The US is different, they generally prefer capital gains.  It may be partially cultural but taxation rules play a major role.  I believe dividends are more highly taxed than Capital Gains and US investor access to tax free environments like ISAs is more restricted than in the UK

...
Taking 2019 as an example of a less abnormal year, as at 31/12/19 the FTSE 100s dividend yield was 4.36%, the S&P500s dividend yield was 1.81%, however the buybacks yield was 2.72% for a total payout of 4.53%. FTSE 100 firms engage in minimal buybacks, so you can already see the S&P500s total payout yield - and payout ratio for that matter - well exceeding the FTSE 100s and often exceeding net income.
Since rule 10b-18 was introduced in 1982, buybacks have overtaken dividends as the S&P500s main way of distributing earnings to shareholders due to tax- and insider-preferential treatment.
So to suggest the FTSE 100 is a post-growth dividend-payer and the S&P500 is a low-dividend capital grower, is not held out in the evidence. The FTSE 100 retains more, and distributes less of its earnings, and on aggregate has a total payout cover exceeding 1, whereas the S&P500 on aggregate taps the corporate bond market to fund buybacks on the assumption of share price growth, which buybacks cause. This is fine in a rising market, but in a long(er) falling market, such as a 70s or dot-com crash could cause problems comparable with the GFC especially if companies are holding these as treasury shares on their balance sheet and marking to market as happened with MBS and CDOs.
So whereas buybacks have added an extra dividend so say an average 2% to the S&P500s return over the past 30-40 years, the FTSE 100 has actually lagged its market cap by about -2% due to net equity issurance, diluting existing shareholders share of earnings and retaining more moderate valuations especially since the mid 2010s when it started to underperform most of the rest of the world.
Another criticism of FTSE 100 dividends is the high concentration (i.e. dependency) of the dividend payout in a small number of firms, however the same is also true of S&P500 buybacks.
I'm also sceptical of the criticism of age, or judging the company by its sector - longevity can be an advantage as Terry Smith and Nick Train have pointed out and whereas FTSE 100 companies are on average a century old, the S&P500 is barely in university. Compared to the S&P500 close to ~50% weighting in broadly "tech" (IT + comms + TSLA and Amazon, note I said arguably and approximately) the FTSE 100s mix of commodities, financials, consumer, pharmaceuticals is arguably more diverse. Although no one country can be more diversified than the global market.

Sources:
William Lazonick, the value extracting CEO

Search S&P 500 buybacks

AJ Bell Dividend Dashboard

Linton

tebbins said:

ColdIron said:

Because it is full of mature industries with low prospects of growth so chooses to reward it's investors with high dividends instead

...

Linton said:

AsifM068 said:

Slightly off topic team but why is the UK renown for high dividend investments / stocks or have I got this wrong? 

As ColdIron says.  Also there is a long-standing culture of wealthy people gaining income from dividends.  The UK is not unique.  In the Far East investors like dividends.

The US is different, they generally prefer capital gains.  It may be partially cultural but taxation rules play a major role.  I believe dividends are more highly taxed than Capital Gains and US investor access to tax free environments like ISAs is more restricted than in the UK

...
Taking 2019 as an example of a less abnormal year, as at 31/12/19 the FTSE 100s dividend yield was 4.36%, the S&P500s dividend yield was 1.81%, however the buybacks yield was 2.72% for a total payout of 4.53%. FTSE 100 firms engage in minimal buybacks, so you can already see the S&P500s total payout yield - and payout ratio for that matter - well exceeding the FTSE 100s and often exceeding net income.
Since rule 10b-18 was introduced in 1982, buybacks have overtaken dividends as the S&P500s main way of distributing earnings to shareholders due to tax- and insider-preferential treatment.
So to suggest the FTSE 100 is a post-growth dividend-payer and the S&P500 is a low-dividend capital grower, is not held out in the evidence. The FTSE 100 retains more, and distributes less of its earnings, and on aggregate has a total payout cover exceeding 1, whereas the S&P500 on aggregate taps the corporate bond market to fund buybacks on the assumption of share price growth, which buybacks cause. This is fine in a rising market, but in a long(er) falling market, such as a 70s or dot-com crash could cause problems comparable with the GFC especially if companies are holding these as treasury shares on their balance sheet and marking to market as happened with MBS and CDOs.
So whereas buybacks have added an extra dividend so say an average 2% to the S&P500s return over the past 30-40 years, the FTSE 100 has actually lagged its market cap by about -2% due to net equity issurance, diluting existing shareholders share of earnings and retaining more moderate valuations especially since the mid 2010s when it started to underperform most of the rest of the world.
Another criticism of FTSE 100 dividends is the high concentration (i.e. dependency) of the dividend payout in a small number of firms, however the same is also true of S&P500 buybacks.
I'm also sceptical of the criticism of age, or judging the company by its sector - longevity can be an advantage as Terry Smith and Nick Train have pointed out and whereas FTSE 100 companies are on average a century old, the S&P500 is barely in university. Compared to the S&P500 close to ~50% weighting in broadly "tech" (IT + comms + TSLA and Amazon, note I said arguably and approximately) the FTSE 100s mix of commodities, financials, consumer, pharmaceuticals is arguably more diverse. Although no one country can be more diversified than the global market.

Sources:
William Lazonick, the value extracting CEO

Search S&P 500 buybacks

AJ Bell Dividend Dashboard

Some numbers 

TR Performance 2011-2021 from Trustnet charting of ETFs
FTSE100: 97%
S&P500: 423%
Global tech ETF: 645%

%Tech from morningstar
FTSE100: 1%
S&P500: 25%

Value%/Blend%/Growth% (ignoring "not classified") from Morningstar
FTSE100: 42/37/18
S&P500: 23/31/42

What is your explanation for the massive difference in performance?

tebbins

Firstly you're looking at a single decade which is hardly long enough to declare that one investment/index/asset class "is" underperforming continually. The 90s was also great for tech and pre-2007 great for banks, just like the 1840s was great for rail. That does not necessarily mean the thing that did better will continue to do so. You are selecting one time period when the S&P500 had stellar returns and the FTSE 100, averaging 7% annualised, can hardly be said to have done poorly.
I don't know if the data you're looking at is calendar year or 10 years to date, if the latter than rerating has made a huge difference to the S&P500, https://www.multpl.com/s-p-500-pe-ratio/table/by-month puts the current PE at 34.12 and the 1/10/11 PE at 13.88, that increase added 9.4% annualised to the return over that period. That's almost the entire difference in annualised performance (18% - 7% = 10.2% geometrically) explained.
Re: equity issuance, unfortunately historic data isn't as available but the FTSE 100 averages -2% a year of dilution and the S&P500 has averaged +2% a year in buybacks, another 4% gap that I'm not convinced is sustainable. The S&P500 is averaging a dividend + buybacks cover close to and sometimes below 1, leaving little to no earnings retained for genuine reinvestment (on aggregate).

Edit: I'm talking about the common myths about the FTSE 100 being an ex-growth dividend payer that has been a dire underperformer for decades. I was not talking about tech having great returns over the past decade or state "the FTSE 100 did not underperform over the past 10 years to date".

Thrugelmir

Linton said:

tebbins said:

ColdIron said:

Because it is full of mature industries with low prospects of growth so chooses to reward it's investors with high dividends instead

...

Linton said:

AsifM068 said:

Slightly off topic team but why is the UK renown for high dividend investments / stocks or have I got this wrong? 

As ColdIron says.  Also there is a long-standing culture of wealthy people gaining income from dividends.  The UK is not unique.  In the Far East investors like dividends.

The US is different, they generally prefer capital gains.  It may be partially cultural but taxation rules play a major role.  I believe dividends are more highly taxed than Capital Gains and US investor access to tax free environments like ISAs is more restricted than in the UK

...
Taking 2019 as an example of a less abnormal year, as at 31/12/19 the FTSE 100s dividend yield was 4.36%, the S&P500s dividend yield was 1.81%, however the buybacks yield was 2.72% for a total payout of 4.53%. FTSE 100 firms engage in minimal buybacks, so you can already see the S&P500s total payout yield - and payout ratio for that matter - well exceeding the FTSE 100s and often exceeding net income.
Since rule 10b-18 was introduced in 1982, buybacks have overtaken dividends as the S&P500s main way of distributing earnings to shareholders due to tax- and insider-preferential treatment.
So to suggest the FTSE 100 is a post-growth dividend-payer and the S&P500 is a low-dividend capital grower, is not held out in the evidence. The FTSE 100 retains more, and distributes less of its earnings, and on aggregate has a total payout cover exceeding 1, whereas the S&P500 on aggregate taps the corporate bond market to fund buybacks on the assumption of share price growth, which buybacks cause. This is fine in a rising market, but in a long(er) falling market, such as a 70s or dot-com crash could cause problems comparable with the GFC especially if companies are holding these as treasury shares on their balance sheet and marking to market as happened with MBS and CDOs.
So whereas buybacks have added an extra dividend so say an average 2% to the S&P500s return over the past 30-40 years, the FTSE 100 has actually lagged its market cap by about -2% due to net equity issurance, diluting existing shareholders share of earnings and retaining more moderate valuations especially since the mid 2010s when it started to underperform most of the rest of the world.
Another criticism of FTSE 100 dividends is the high concentration (i.e. dependency) of the dividend payout in a small number of firms, however the same is also true of S&P500 buybacks.
I'm also sceptical of the criticism of age, or judging the company by its sector - longevity can be an advantage as Terry Smith and Nick Train have pointed out and whereas FTSE 100 companies are on average a century old, the S&P500 is barely in university. Compared to the S&P500 close to ~50% weighting in broadly "tech" (IT + comms + TSLA and Amazon, note I said arguably and approximately) the FTSE 100s mix of commodities, financials, consumer, pharmaceuticals is arguably more diverse. Although no one country can be more diversified than the global market.

Sources:
William Lazonick, the value extracting CEO

Search S&P 500 buybacks

AJ Bell Dividend Dashboard

What is your explanation for the massive difference in performance?

Passive investing. Index tracking funds have no alternative to buy more of the higher weighted capilisation stocks that they track. Lack of liquidity of a stock drives prices higher. 

Linton

tebbins said:

Firstly you're looking at a single decade which is hardly long enough to declare that one investment/index/asset class "is" underperforming continually. The 90s was also great for tech and pre-2007 great for banks, just like the 1840s was great for rail. That does not necessarily mean the thing that did better will continue to do so. You are selecting one time period when the S&P500 had stellar returns and the FTSE 100, averaging 7% annualised, can hardly be said to have done poorly.
I don't know if the data you're looking at is calendar year or 10 years to date, if the latter than rerating has made a huge difference to the S&P500, https://www.multpl.com/s-p-500-pe-ratio/table/by-month puts the current PE at 34.12 and the 1/10/11 PE at 13.88, that increase added 9.4% annualised to the return over that period. That's almost the entire difference in annualised performance (18% - 7% = 10.2% geometrically) explained.
Re: equity issuance, unfortunately historic data isn't as available but the FTSE 100 averages -2% a year of dilution and the S&P500 has averaged +2% a year in buybacks, another 4% gap that I'm not convinced is sustainable. The S&P500 is averaging a dividend + buybacks cover close to and sometimes below 1, leaving little to no earnings retained for genuine reinvestment (on aggregate).

Edit: I'm talking about the common myths about the FTSE 100 being an ex-growth dividend payer that has been a dire underperformer for decades. I was not talking about tech having great returns over the past decade or state "the FTSE 100 did not underperform over the past 10 years to date".

I am not saying an asset class is under performing continually.  In the 2000s the FTSE100 outperformed both the S&P500 and global tech for much the same fundamental structural reasons - the FTSE100 was affected far less than the S&P500 by the enthusiasm at that time for perceived high growth stocks which ended in a collapse as I suspect the present one will.

Rerating is a symptom of the situation, not the cause. As is the the lack of earnings being saved for reinvestment in the US markets.  Large numbers of investors want to buy short term growth, not long term reinvestment.  They are getting what they want.