Active vs Passive Funds

flopsy1973

I have read this thread with interest as I currently have a posted another topic on my 300K active PF and selling most of it with aims to put into something passive but at the start of this thread and many others lots of reference is done to past charts for performance. Yet on the other hand we constantly read about not past past performance not a guide to future performance, and I sort of know the answer but asking it anyway,  why is so much focus done on past performance when its the future performance that matters 

MK62

flopsy1973 said:

I have read this thread with interest as I currently have a posted another topic on my 300K active PF and selling most of it with aims to put into something passive but at the start of this thread and many others lots of reference is done to past charts for performance. Yet on the other hand we constantly read about not past past performance not a guide to future performance, and I sort of know the answer but asking it anyway,  why is so much focus done on past performance when its the future performance that matters 

......but where can you get data on future performance?......

Thrugelmir

MK62 said:

flopsy1973 said:

I have read this thread with interest as I currently have a posted another topic on my 300K active PF and selling most of it with aims to put into something passive but at the start of this thread and many others lots of reference is done to past charts for performance. Yet on the other hand we constantly read about not past past performance not a guide to future performance, and I sort of know the answer but asking it anyway,  why is so much focus done on past performance when its the future performance that matters 

......but where can you get data on future performance?......

Understanding the business model is a starting point. 

tebbins

Linton said:

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.  

I think I agree with all of that!
Inflows into speculative, alternative and private equity asset classes to me all indicate investors are getting greedy, impatient and seeking value extraction over long term growth. I'm also concerned about how far the shift from return on labour to return on capital since the 1980s has already gone - rising wealth and income inequality, stagnant median real household income growth and a rising wealth/GDP all appear to support this.
Lazonick has pointed out, in connection with human capital, that at least in the US companies aren't investing in people as much as they used to - to build a career and get good at something you need long term security to support a lifestyle worth working to keep.
While the "Gig economy" and flexible working have brought advantages to someone, their rise has coincided with falls in trade union membership and diminution/lack of improvement in worker's rights. In a global, interconnected, advanced and complex service economy, people are the most important asset a business has.
Nostalgic rant over.

JohnWinder

flopsy1973 said:

 why is so much focus done on past performance when its the future performance that matters 

Past performance is hugely informative and rewards with interest and insight, if that’s your gig.
Summary statistics can tell you about returns and volatility of prices as well as how far values can fall in a crisis and how long it takes for them to recover. Then you can compare that asset class with a different one to get a feel for how your investments might jump about. But summary statistics, as always, hide a lot of detail which can be seen on a chart, so use some of the charting services like trustnet or portfolio visualiser to see how the value of investments have behaved in the past, but make lots of comparisons.

You’ll see how changing the starting date by a few weeks can dramatically alter historic returns. You’ll see how stocks show lovely up-trending value increases when viewed over long periods; then look at the graph of French stocks over a hundred years ending 2019 and see how it took 75 years to recover their inflation adjusted value in 1941. Heart breaking for a French investor, but valuable grist for your mill in deciding how to be the sensible investor you can be. https://evergreensmallbusiness.com/rate-of-return-of-everything-study-in-line-charts/

You’ll see lots of things that will allow you to question the ‘beliefs de jour’ and find your own truths.
But don’t forget it’s human nature to look for patterns, find causal relationships, leading to over-interpreting the past. If patterns exist, they’re not reliable, and might not have had a once in a hundred year pandemic or other event as part of their origins, so don’t be lured by them.
When folk point to past performance, look for what (unfortunately) limited value you can get from it, and be very cautious of the many ways it can be used to mislead you. The more past performance data you’ve seen (or perhaps the broader the scope of past performance data you’ve seen), the better perspective you’ll have when you see a new bit.

MK62

Thrugelmir said:

Understanding the business model is a starting point. 

....you'd have to elaborate on that rather cryptic comment.......understanding the business model of what?......and how then, does understanding this business model go on to give you data on future performance?

billy2shots

flopsy1973 said:

I have read this thread with interest as I currently have a posted another topic on my 300K active PF and selling most of it with aims to put into something passive but at the start of this thread and many others lots of reference is done to past charts for performance. Yet on the other hand we constantly read about not past past performance not a guide to future performance, and I sort of know the answer but asking it anyway,  why is so much focus done on past performance when its the future performance that matters 

Taken in isolation, one fund/Share/IT past performance will show you very little. 

The magic happens when you compare investments. 

If I wanted a low cost passive global tracker I could compare how well each tracked it's index. 

If I wanted to see which 'defensive' investment held up best I could look at multiple past corrections, crashes to see how they did. 

kuratowski

For what it's worth, my view is that looking at past performance is fine if you are only using it to asses what might happen.  But it's erroneous to use it to try to predict what will happen.

Past data tends to be more reliable if you are looking at relationships between one variable and another (like the effects of costs on net performance, or correlations between asset classes, both of which were mentioned above).  But always bear in mind that such relationships are not set in stone, and may change in the future.

Thrugelmir

MK62 said:

Thrugelmir said:

Understanding the business model is a starting point. 

....you'd have to elaborate on that rather cryptic comment.......understanding the business model of what?......and how then, does understanding this business model go on to give you data on future performance?

A company's business model ultimately is the plan as how it intends to make it's profits and grow them into the future. One aspect is that CEO's need to be able to sell that vision in order to raise further equity funding for the company.  Buying an individual company share isn't just about a price on a screen. 

MK62

Thrugelmir said:

A company's business model ultimately is the plan as how it intends to make it's profits and grow them into the future. One aspect is that CEO's need to be able to sell that vision in order to raise further equity funding for the company.  Buying an individual company share isn't just about a price on a screen. 

Understood.....but the OP was talking about funds, not individual companies.....but even with individual companies it would get pretty intensive once you got beyond say 10-20 companies.

For funds, it's pretty much a non-starter......most active funds only disclose their top 10 holdings, and once you get to more than a couple of funds you could be looking at hundreds of companies.......for passive funds, it's not relevant really, the fund will invest in the index it tracks - period - doesn't matter what anyone thinks of the companies in it.

Further though, many companies' "business models" are really not much more than corporate PR anyway - the real meat is often commercially sensitive, so isn't disclosed publicly......

You still haven't said how any of this this gives you future performance data though.....fair enough, I can see how you could form an opinion about that that based on this knowledge......but it's an opinion, not data, and opinions on the prospects of companies vary wildly, depending on who you speak/listen to.......

My original comment was merely a light hearted response to the OP asking why past performance data was focused on, when it's future performance that counts......there is no future data, all we have is past data, forecasts and opinions.......if we had actual data, we'd all be rich already.