Poor Financial Advice in Newspaper?

Prism

Although the SPIVA reports tell us that most funds underperform their benchmarks over 10 years, it also tells us that the performance of funds that invest in smaller companies, away from the big institutions, tend to out perform their benchmarks over 10 years.

I would also argue that it is possible to select better active funds ahead of time which I assume is what the IFAs in the newspaper article are suggesting. Better does not always mean a higher return - risk is a huge factor when building a portfolio, especially for retirement.

Thrugelmir

If you had invested in the equally weighted market cap version of the S&P 500 in 1971. You would have outperformed the index tracking version by an annualised rate of 1.5% (in US $ terms). Downside to this investment would have been extreme volatility though.  Ultimately every investor has to decide for themselves their own risk tolerance. To achieve potential higher gains a greater level of risk has to be taken. 

Aegis

Thrugelmir said:

If you had invested in the equally weighted market cap version of the S&P 500 in 1971. You would have outperformed the index tracking version by an annualised rate of 1.5% (in US $ terms). Downside to this investment would have been extreme volatility though.  Ultimately every investor has to decide for themselves their own risk tolerance. To achieve potential higher gains a greater level of risk has to be taken. 

I assume this is because the equal-weight version holds more of the smaller constituents and less of the larger ones, and you would generally expect smaller companies to grow more in the long run than larger ones (and be much more volatile).

Thrugelmir

Aegis said:

Thrugelmir said:

If you had invested in the equally weighted market cap version of the S&P 500 in 1971. You would have outperformed the index tracking version by an annualised rate of 1.5% (in US $ terms). Downside to this investment would have been extreme volatility though.  Ultimately every investor has to decide for themselves their own risk tolerance. To achieve potential higher gains a greater level of risk has to be taken. 

I assume this is because the equal-weight version holds more of the smaller constituents and less of the larger ones, and you would generally expect smaller companies to grow more in the long run than larger ones (and be much more volatile).

Also the largest market caps eventually diminish in value or are overtaken. In 2011 Exxon was the largest company in the S&P 500.  Going back further. IBM, General Electric Corporation, Ford Motor Company, Microsoft, AT&T have all previously held the mantel at some time as well.   

GeoffTF

Thrugelmir said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Can you name such a passive global index fund though? 

This one will be a good approximation to the free float, which is what is relevant here:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc/overview

There will be some active funds investing in unlisted securities, but that is not relevant to the point here.

GeoffTF

Prism said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Individual portfolios are counted as funds by definition here.

Prism

GeoffTF said:

Prism said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Individual portfolios are counted as funds by definition here.

No, a not insignificant part of the equity market is held as individual shareholdings, not within funds. 

GeoffTF

Prism said:

GeoffTF said:

Prism said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Individual portfolios are counted as funds by definition here.

No, a not insignificant part of the equity market is held as individual shareholdings, not within funds. 

I wrote: "Actively manged funds here include any portfolio that does not track the index." That includes individual shareholdings. Sharpe's paper bundles together professionally managed funds together with portfolios managed by amateurs. They are all funds as far as his analysis is concerned.

There is some evidence that retail investors under-perform the market. Nonetheless, a much larger body of evidence shows that professional investors as a class fall well short of beating the market by a sufficient margin to recoup their costs.

Stated more precisely, my point was that if you take a large unbiased sample of funds and capitalisation weight them, the result will be very close to an index tracker, but with much higher costs.

More generally, buying a large number of funds will tend to average out the performance, which defeats the purpose of buying active funds. People buy an active fund because they are not content with market returns and want to beat the market, not get an average performance with high costs.

Prism

GeoffTF said:

Prism said:

GeoffTF said:

Prism said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Individual portfolios are counted as funds by definition here.

No, a not insignificant part of the equity market is held as individual shareholdings, not within funds. 

I wrote: "Actively manged funds here include any portfolio that does not track the index." That includes individual shareholdings. Sharpe's paper bundles together professionally managed funds together with portfolios managed by amateurs. They are all funds as far as his analysis is concerned.

There is some evidence that retail investors under-perform the market. Nonetheless, a much larger body of evidence shows that professional investors as a class fall well short of beating the market by a sufficient margin to recoup their costs.

Stated more precisely, my point was that if you take a large unbiased sample of funds and capitalisation weight them, the result will be very close to an index tracker, but with much higher costs.

More generally, buying a large number of funds will tend to average out the performance, which defeats the purpose of buying active funds. People buy an active fund because they are not content with market returns and want to beat the market, not get an average performance with high costs.

Ah right. I thought you meant just funds. So the paper says that the combination of all investors give the average minus fees. That seems pretty obvious.

Buying a large number of funds certainly brings the results closer to the average, but in this particular example 15-20 is still not an issue. Its that the pot is too small to bother with such detail as sector weightings.

Not everybody wants to beat the market remember..

GeoffTF

Prism said:

GeoffTF said:

Prism said:

GeoffTF said:

Prism said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Individual portfolios are counted as funds by definition here.

No, a not insignificant part of the equity market is held as individual shareholdings, not within funds. 

I wrote: "Actively manged funds here include any portfolio that does not track the index." That includes individual shareholdings. Sharpe's paper bundles together professionally managed funds together with portfolios managed by amateurs. They are all funds as far as his analysis is concerned.

There is some evidence that retail investors under-perform the market. Nonetheless, a much larger body of evidence shows that professional investors as a class fall well short of beating the market by a sufficient margin to recoup their costs.

Stated more precisely, my point was that if you take a large unbiased sample of funds and capitalisation weight them, the result will be very close to an index tracker, but with much higher costs.

More generally, buying a large number of funds will tend to average out the performance, which defeats the purpose of buying active funds. People buy an active fund because they are not content with market returns and want to beat the market, not get an average performance with high costs.

Buying a large number of funds certainly brings the results closer to the average, but in this particular example 15-20 is still not an issue. Its that the pot is too small to bother with such detail as sector weightings.

The only rational basis for buying an active fund to get the chance of a higher return than the market, albeit at a greater risk of under-performing it. If someone gave me £1,000, I would put it in the bank. Others would go down the bookies and put the money on a horse. I would rather have the more certain return of the tracker. Others like to gamble, but if you buy 15-20 active funds your chance of a big payday is almost non-existent, and you are virtually certain to trail the tracker.