Is the era of passive index trackers over?

eskbanker

adindas said:

Novice_investor101 said:

The most popular Baillie Gifford funds of the past couple of years are having a torrid time right now. I put a very small portion of my LISA into Positive Change right at it’s peak. Only £1000, luckily. I think it’s currently down 38%. 

I am not quite sure which fund are you talking about. If you are talking about SMT (Scottish Mortgage Trust), it is already downs more than 50%+ from its peak in early November 2021.
But keep in mind the holding in this trust this high risk high reward. Some of the stocks are yet to be profitable. In the bear, the stocks like these will get punished, and it is worsened if they miss the earning expectation. 
But in the bull market they will also outperform the market.

Why would you digress about SMT when they are clearly referring to Positive Change?

GazzaBloom

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

Linton

GazzaBloom said:

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

I don’t buy an active fund to find needles in a haystack.  In some sectors particularly equity income I would expect it to beat a passive by having better diversification and avoiding some rubbish. For evidence look at IUKD which took about 10 years to barely recover from the massive losses it suffered in 2007/2008 thanks to its over-reliance on the banks.

More generally I would buy an active fund whose asset allocation and objectives meet my requirements.

What a fund invests in is more important than the charges.

GazzaBloom

Linton said:

GazzaBloom said:

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

I don’t buy an active fund to find needles in a haystack.  In some sectors particularly equity income I would expect it to beat a passive by having better diversification and avoiding some rubbish. For evidence look at IUKD which took about 10 years to barely recover from the massive losses it suffered in 2007/2008 thanks to its over-reliance on the banks.

More generally I would buy an active fund whose asset allocation and objectives meet my requirements.

What a fund invests in is more important than the charges.

IUKD tracks an index of just 50 stocks, it's pretty esoteric and I'm not sure why anyone who chooses passive index fund investing for the advantages it offers would ever choose that index to track. It's not exactly a representative example to use.

So, I agree, the particular index an index fund tracks is important but I contest that fees are very important.

The arguments between passive and active fund management will go on but detailed historical data analysis leads to an overwhelming conclusion for the majority of non professional investors.

Eugen Famer and Kenneth French's 2010 paper ‘Luck versus Skill in the Cross Section of Mutual Fund Returns' found that the aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs.

https://mba.tuck.dartmouth.edu/bespeneckbo/default/AFA611-Eckbo%20web%20site/AFA611-S8C-FamaFrench-LuckvSkill-JF10.pdf

Linton

GazzaBloom said:

Linton said:

GazzaBloom said:

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

I don’t buy an active fund to find needles in a haystack.  In some sectors particularly equity income I would expect it to beat a passive by having better diversification and avoiding some rubbish. For evidence look at IUKD which took about 10 years to barely recover from the massive losses it suffered in 2007/2008 thanks to its over-reliance on the banks.

More generally I would buy an active fund whose asset allocation and objectives meet my requirements.

What a fund invests in is more important than the charges.

IUKD tracks an index of just 50 stocks, it's pretty esoteric and I'm not sure why anyone who chooses passive index fund investing for the advantages it offers would ever choose that index to track. It's not exactly a representative example to use.

So, I agree, the particular index an index fund tracks is important and you typically get lower fees than managed funds.

The arguments between passive and active fund management will go on but detailed historical data analysis leads to an overwhelming conclusion.

One would choose IUKD if one wanted income. There is very little passive choice.

If you are steadily contributing to a 100% equity portfolio purely for the long term then a global tracker would be a sensible choice.  On the other hand if your needs are more complex control of medium term volatility say may be more important than maximising long term return. This is difficult to achieve with passives because capitalisation weighting removes the ability to manage the styles of the underlying investments. Compare the performance of Woodford’s Invesco Income funds with the indexes during the .com boom/bust. With actives you can choose funds whose style matches your objectives.

This advantage of actives is more important when you are investing in non-equity. Bonds provide a good example where a bond tracker investing in a range of different maturities makes little sense.

GazzaBloom

Linton said:

GazzaBloom said:

Linton said:

GazzaBloom said:

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

I don’t buy an active fund to find needles in a haystack.  In some sectors particularly equity income I would expect it to beat a passive by having better diversification and avoiding some rubbish. For evidence look at IUKD which took about 10 years to barely recover from the massive losses it suffered in 2007/2008 thanks to its over-reliance on the banks.

More generally I would buy an active fund whose asset allocation and objectives meet my requirements.

What a fund invests in is more important than the charges.

IUKD tracks an index of just 50 stocks, it's pretty esoteric and I'm not sure why anyone who chooses passive index fund investing for the advantages it offers would ever choose that index to track. It's not exactly a representative example to use.

So, I agree, the particular index an index fund tracks is important and you typically get lower fees than managed funds.

The arguments between passive and active fund management will go on but detailed historical data analysis leads to an overwhelming conclusion.

One would choose IUKD if one  wanted income. There is very little passive choice.

If you are steadily contributing to a 100% equity portfolio purely for the long term then a global tracker would be a sensible choice.  On the other hand if your needs are more complex control of medium term volatility say may be more important than maximising long term return. This is difficult to achieve with passives because capitalisation weighting removes the ability to manage the styles of the underlying investments. Compare the performance of Woodford’s Invesco Income funds with the indexes during the .com boom/bust. With actives you can choose funds whose style matches your objectives.

This advantage of actives is more important when you are investing in non-equity. Bonds provide a good example where a bond tracker investing in a range of different maturities makes little sense.

Income, you mean dividends? Don't let me get started on the irrelevance of dividends! That's a whole other discussion

masonic

Audaxer said:

adindas said:

Novice_investor101 said:

The most popular Baillie Gifford funds of the past couple of years are having a torrid time right now. I put a very small portion of my LISA into Positive Change right at it’s peak. Only £1000, luckily. I think it’s currently down 38%. 

I am not quite sure which fund are you talking about. If you are talking about SMT (Scottish Mortgage Trust), it is already downs more than 50%+ from its peak in early November 2021.

That means SMT needs to gain over 100% to get back to that peak. It might take a while.

It gained 100% between 23rd March-13th July 2020 - a period of 112 days - and then went on to gain 200% in a little under a year. It's extremely volatile in both directions, and can easily rise as fast as it can fall when the conditions are right.

Linton

GazzaBloom said:

Linton said:

GazzaBloom said:

Linton said:

GazzaBloom said:

With regards to the challenge that active fund managers face in beating the index and average market returns:

In his 2019 study ‘Do Global Stocks Outperform US Treasury Bills?’, Hendrik Besseminder, of Arizona State University, found that between 1990 - 2018 out of 62,000 global stocks just 1.3%, or 811 stocks drove all of the wealth creation.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3415739

If choosing to invest in an actively managed fund and pay the associated fees, are you confident that your chosen fund manager can find those needles in the haystack, consistently, over the long term?

I don’t buy an active fund to find needles in a haystack.  In some sectors particularly equity income I would expect it to beat a passive by having better diversification and avoiding some rubbish. For evidence look at IUKD which took about 10 years to barely recover from the massive losses it suffered in 2007/2008 thanks to its over-reliance on the banks.

More generally I would buy an active fund whose asset allocation and objectives meet my requirements.

What a fund invests in is more important than the charges.

IUKD tracks an index of just 50 stocks, it's pretty esoteric and I'm not sure why anyone who chooses passive index fund investing for the advantages it offers would ever choose that index to track. It's not exactly a representative example to use.

So, I agree, the particular index an index fund tracks is important and you typically get lower fees than managed funds.

The arguments between passive and active fund management will go on but detailed historical data analysis leads to an overwhelming conclusion.

One would choose IUKD if one  wanted income. There is very little passive choice.

If you are steadily contributing to a 100% equity portfolio purely for the long term then a global tracker would be a sensible choice.  On the other hand if your needs are more complex control of medium term volatility say may be more important than maximising long term return. This is difficult to achieve with passives because capitalisation weighting removes the ability to manage the styles of the underlying investments. Compare the performance of Woodford’s Invesco Income funds with the indexes during the .com boom/bust. With actives you can choose funds whose style matches your objectives.

This advantage of actives is more important when you are investing in non-equity. Bonds provide a good example where a bond tracker investing in a range of different maturities makes little sense.

Income, you mean dividends? Don't let me get started on the irrelevance of dividends! That's a whole other discussion

Yes, by income I mean dividends and interest. The relevance or otherwise of dividends is a very different discussion. Many people , including me to some extent, do want dividends. So the question is whether index funds are appropriate for this purpose.

JohnWinder

One would choose IUKD if one wanted income. There is very little passive choice.

But there is VG's FTSE U.K. Equity Income Index Fund with 105 stocks, and VG's FTSE All-World High Dividend Yield with 1800 stocks.

Lest some newer readers are attracted to the idea of a ‘dividend’ fund, either to provide a regular income or to be reinvested, a couple of thoughts.
A widely diversified portfolio of many higher dividend paying stocks, cap weighted or thereabouts, probably won’t perform much differently from a portfolio with ‘every’ stock in it, might even be a bit better at times, or a bit worse.
But one risks getting less total return with dividend stocks because of a narrow selection which reduces diversification, and fees if they’re higher.  The higher the dividends you want, the more restricted your choice of stocks becomes.
For example, if high dividends were a feature of UK stocks, but not a feature of other global stocks (and they aren’t of US stocks), chasing dividends might tempt you to limit your stocks to UK stocks. That would cost you returns unnecessarily if UK stocks do badly for a long period while the rest of the world chugs on. That’s the cost of not taking the ‘free lunch’ of diversification’; although it’s not ‘free’ if you want a bigger dividend cheque every quarter rather than a small one and selling some stocks.
Secondly, spending only dividends and not capital does not protect the value of your holding from falling. Selling shares so you can eat leaves you with fewer shares; but holding the same number of shares doesn’t help if their price falls away badly - have a look at General Electric over the last 20 years or Enron. If a price drops 60% in 10 years, then the dividends/share have to increase 250% to keep up the income you were getting.

On the other hand if your needs are more complex control of medium term volatility say may be more important than maximising long term return.

The apparent inherent contradiction here is that stocks are widely considered not the best choice unless you’re investing for the longer term, and even though one might be well past one’s expected life span (without any long term prospects!) holding stocks still makes sense if they’re to be passed onto someone with a long term.

But is there a balance here, a ‘sweet spot’, where we need to a modest stock holding because they do have better expected returns (and we don't want volatility), but we'll hope to only take their dividends?

Volatility up is no problem; down is the problem. As Linton suggests, the returns may come too late for you, expressed as price falls during your holding period, but made up too late for you in your heirs’ time. Are ‘dividends only’ the answer to that, or is it a more diversified stock holding, total return and more bonds? I have no idea.
For some ‘head in the sand’ folk, the dividend approach means allowing you to ignore price changes; and for those who eschew the complexity of determining a SWR (and adjusting it as needed) and then making the withdrawals to fund spending, ‘dividends only’ makes sense. Still, I think we need to be aware of the risks of lack of diversification.

RolandFlagg

You guys obviously haven't seen the stats on how poor active managers are.

Read Jack Bogle's Little Book of Common Sense Investing.

Or watch Ben Felix's videos:

https://www.youtube.com/watch?v=yhldVcWhhc0

Most active managers can't beat their benchmark over 10 years before fees. https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html