Poor Financial Advice in Newspaper?

GeoffTF

Prism said:

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.

Not so:

https://www.spglobal.com/spdji/en/docum ... d-2020.pdf

International Small-Cap Funds S&P Developed Ex-U.S. SmallCap

Percentages of active funds that fail to beat the index:
3 year 59.52%,  5 year 58.23%,  10 year 59.18%,  20 year 89.66%

That is not much different to the large caps.

GeoffTF

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. 

The other downside is that if to many people buy equally weighted trackers the small caps become grossly over-valued. You cannot invest $trillions like that. Like so many strategies, it is self defeating.

InvesterJones

I fear I've gone more or less exactly down the route of so many funds that I'd have been better off (from a fees perspective) simplifying to a few trackers. My sole rationale is that there are just a few sectors which I wish to avoid, and all the cheap trackers have them So I'm paying a bit over the odds to get almost the same coverage, but not quite.

Prism

GeoffTF said:

Prism said:

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.

Not so:

https://www.spglobal.com/spdji/en/docum ... d-2020.pdf

International Small-Cap Funds S&P Developed Ex-U.S. SmallCap

Percentages of active funds that fail to beat the index:
3 year 59.52%,  5 year 58.23%,  10 year 59.18%,  20 year 89.66%

That is not much different to the large caps.

Why are you looking at the US stats rather then Europe ones and I am talking about overall performance not how many underperformed - different stats.

SPIVA® Europe Mid-Year 2021 - SPIVA | S&P Dow Jones Indices (spglobal.com)

Prism

GeoffTF said:

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. 

I use active funds to access things are are difficult with a tracker.

Direct infrastructure
Specific REITs
Micro-cap companies
Emerging markets with low allocation to China
Low volatility active funds.

There is a whole range of multi-asset  active funds that are designed to reduce risk more than beat a tracker. There is also a range that is designed to pay steady dividends.

Getting a good performance is also nice too.

Thrugelmir

GeoffTF 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. 

The other downside is that if to many people buy equally weighted trackers the small caps become grossly over-valued. You cannot invest $trillions like that. Like so many strategies, it is self defeating.

How does this differ to investors that invest in other passive vehicles?  Around 40% of the free liquidity of the SP500 companies is now controlled by same. Where are the check's and balance's to ensure that the market price is reflective of the value of the companies. Not simply a reflection of whether money is inflowing or outflowing of the funds. 

All well publicised trades are ultimately self defeating. Once everyone copies an idea the benefit is lost. At least temporarily. The smart money is always one step ahead. Selling before the top of the market is reached and reinvesting into the next trade before it becomes a fad.  Tomorrows fad is going to be Asia. We won't be discussing it for some years yet though. Supertankers take time to be turned around. 

JohnWinder

Around 40% of the free liquidity of the SP500 companies is now controlled by (passive vehicle). Where are the check's and balance's to ensure that the market price is reflective of the value of the companies.

The other 60% of free liquidity is active investors, buying and selling according to whether they think the price is right. If they thought any stocks were over-priced they would sell them to force their price down to the 'correct' value. In fact that's what is happening, which is why we can put our minds at rest about the undiscriminating passive investors pushing prices to crazy high values. It simply can't happen while the intelligentsia are actively investing. So, thank you, to those folk.

GeoffTF

Thrugelmir said:

GeoffTF 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. 

The other downside is that if to many people buy equally weighted trackers the small caps become grossly over-valued. You cannot invest $trillions like that. Like so many strategies, it is self defeating.

How does this differ to investors that invest in other passive vehicles? 

The difference is that the entire market could invest in a market weighted tracker without distorting the prices. Nonetheless, we need some active investors to set the prices and provide liquidity.

GeoffTF

Prism said:

I use active funds to access things are are difficult with a tracker.

Direct infrastructure
Specific REITs
Micro-cap companies
Emerging markets with low allocation to China
Low volatility active funds.

If the market believed that these areas were under-priced, the demand for them would increase and the price would rise. Do you know more than the market?

Prism said:

There is a whole range of multi-asset  active funds that are designed to reduce risk more than beat a tracker. There is also a range that is designed to pay steady dividends.

You can buy trackers that invest in low risk assets, and hold them alongside any other investments. You can also buy lower risk multi-asset passive funds.

It is pointless to buy active funds that promise to pay steady dividends. They need to generate the return to honour that promise. All that really matters is risk and total return.

Prism

GeoffTF said:

Prism said:

I use active funds to access things are are difficult with a tracker.

Direct infrastructure
Specific REITs
Micro-cap companies
Emerging markets with low allocation to China
Low volatility active funds.

If the market believed that these areas were under-priced, the demand for them would increase and the price would rise. Do you know more than the market?

Its not easy for the large institutions to invest in many of these areas as they are too small. When dealing with 10s or 100s of billions under manager management most of these areas are un-investable. Most of them are also not covered by research analysts, who tend to stick with the large corporates. There are no trackers that directly cover this either except for a small allocation at the tail end. In general you don't need to know more than the market as the market doesn't really care about this stuff. At this level the price of something is subjective.

Anyway, we are getting off track here as I don't imagine the quote from the first post was referring to this kind of stuff. They were more likely looking to make a play on producing a better return and seem to be overcomplicating things for that size of pot.