Active vs Passive

Redlander

I know this topic has been well-covered, so apologies for starting a new thread.
I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well.  They both replied that although passive funds had done well in the last ten years, that would not necessarily be the case in the future in the light of Covid, higher interest rates, the Ukraine war etc. etc.

Of course they would say that, wouldn't they? But is there sense it what they said?  Was it just blether, or is there a real chance that passive investing will be riskier in comparison to active investing in the years to come?

ColdIron

Yes it's a salt or pepper argument that has been done to death

Don't confuse the fee you pay an IFA for advice and the OCF of the fund being invested in. The advice fee would be the same regardless of the underlying investment

dunstonh

I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well. 

IFAs are not investment managers.   So, you are not comparing like for like.  Many IFAs use fully passive funds in their portfolio.  Many use a hybrid of passive and active. Some use all active.   All IFAs must take instruction from the client.  i.e. if the client says passive only then the IFA must adhere to that.

Of course they would say that, wouldn't they?

Why would they say that?   An IFA is not an investment manager and it makes no difference to an IFA whether active or passive are used in the portfolio.   It would make a difference to FAs though.

Was it just blether, or is there a real chance that passive investing will be riskier in comparison to active investing in the years to come?

Possibly. Possibly not.      If you have a passive fund in an area at a certain risk level and an active fund in the same area but a slightly different remit, which could include a different risk level, then it could perform better or worse than the passive fund.       The problem is always that it isn't like for like, and very many active funds have a remit that works in part of the economic cycle but not all of it.    

NoviceInvestor1

Redlander said:

I know this topic has been well-covered, so apologies for starting a new thread.
I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well.  They both replied that although passive funds had done well in the last ten years, that would not necessarily be the case in the future in the light of Covid, higher interest rates, the Ukraine war etc. etc.

Of course they would say that, wouldn't they? But is there sense it what they said?  Was it just blether, or is there a real chance that passive investing will be riskier in comparison to active investing in the years to come?

A quick look at the diabolically woeful performance of most active funds in IA Global this year compared to passives is quite an eye opener. 

Most were making massive bets on expensive growth stocks, and have been found wanting during the market rotation as they are massively underweight the things that people have been rotating into. It has been a dire year for active management so far statistically speaking.

The very market conditions actives are meant to shine in has shown most of them up. 

There is also the question of "which actives". 

Do you want to buy things that have done well last 12 months but were woeful for many years before then?

Or do you want to buy things that have done badly last 12 months but were good before then? 

As there really aren't many that have done well during the very different markets - backing one or the other is effectively making a bet on value vs growth, rising rates vs low rates, high inflation vs low inflation, etc. 

Redlander

dunstonh said:

I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well. 

IFAs are not investment managers.   So, you are not comparing like for like.  Many IFAs use fully passive funds in their portfolio.  Many use a hybrid of passive and active. Some use all active.   All IFAs must take instruction from the client.  i.e. if the client says passive only then the IFA must adhere to that.

 Thanks for clarifying that. As I said, I am a novice, and although one part of my brain realised the distinction, it wasn't in the part that posted the query

Prism

NoviceInvestor1 said:

Redlander said:

I know this topic has been well-covered, so apologies for starting a new thread.
I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well.  They both replied that although passive funds had done well in the last ten years, that would not necessarily be the case in the future in the light of Covid, higher interest rates, the Ukraine war etc. etc.

Of course they would say that, wouldn't they? But is there sense it what they said?  Was it just blether, or is there a real chance that passive investing will be riskier in comparison to active investing in the years to come?

A quick look at the diabolically woeful performance of most active funds in IA Global this year compared to passives is quite an eye opener. 

Most were making massive bets on expensive growth stocks, and have been found wanting during the market rotation as they are massively underweight the things that people have been rotating into. It has been a dire year for active management so far statistically speaking.

The very market conditions actives are meant to shine in has shown most of them up. 

There is also the question of "which actives". 

Do you want to buy things that have done well last 12 months but were woeful for many years before then?

Or do you want to buy things that have done badly last 12 months but were good before then? 

As there really aren't many that have done well during the very different markets - backing one or the other is effectively making a bet on value vs growth, rising rates vs low rates, high inflation vs low inflation, etc. 

Agreed they have had a pretty poor time this year but I'm not sure it tells us anything much. Growth funds tend to do worse in the short term as interest rates rise. Very few active funds significantly change their investment approach based on economic climate - a growth fund is a growth fund. Most well known active funds of recent years have been growth funds to some extent. I would say that actives are not meant to shine under these conditions and most people knew that the previous batch of growth funds would underperform. What we didn't know was that we were going to get these conditions.

A single year is pretty irrelevant. Five years plus is considered a reasonable time to make a decision over but even that doesn't cover an economic cycle. Maybe ten years or more before we really know how good a fund manager is - but by that point its a bit late to decide if you were wrong.

Beddie

I've been investing for over 20 years and always used active funds. Whether I'm unlucky or just terrible at picking winners, I'd have done better in passives most of the time. Yet I'm still reluctant to go down the passives route! Perhaps I should start learning from my own experiences

NoviceInvestor1

Prism said:

NoviceInvestor1 said:

Redlander said:

I know this topic has been well-covered, so apologies for starting a new thread.
I am a novice at investing and have recently spoken to two IFAs and asked them if they could justify the cost of their fees for active management when passive funds have generally been found to perform at least as well.  They both replied that although passive funds had done well in the last ten years, that would not necessarily be the case in the future in the light of Covid, higher interest rates, the Ukraine war etc. etc.

Of course they would say that, wouldn't they? But is there sense it what they said?  Was it just blether, or is there a real chance that passive investing will be riskier in comparison to active investing in the years to come?

A quick look at the diabolically woeful performance of most active funds in IA Global this year compared to passives is quite an eye opener. 

Most were making massive bets on expensive growth stocks, and have been found wanting during the market rotation as they are massively underweight the things that people have been rotating into. It has been a dire year for active management so far statistically speaking.

The very market conditions actives are meant to shine in has shown most of them up. 

There is also the question of "which actives". 

Do you want to buy things that have done well last 12 months but were woeful for many years before then?

Or do you want to buy things that have done badly last 12 months but were good before then? 

As there really aren't many that have done well during the very different markets - backing one or the other is effectively making a bet on value vs growth, rising rates vs low rates, high inflation vs low inflation, etc. 

Agreed they have had a pretty poor time this year but I'm not sure it tells us anything much. 

......Maybe ten years or more before we really know how good a fund manager is - but by that point its a bit late to decide if you were wrong.

To an extent I agree here, but the IFA was specifically saying with covid, rising rates, inflation etc active funds should shine. That seems incorrect based on what we've seen so far as we are in the midst of those conditions. 

Also worth us all remembering that actives get worse the longer you hold them for according to various active vs passive studies. They have more of a chance of outperforming short term than long term.

According to Morningstar, in some IA sectors funds only have a 50% 10 year survivorship rate! So rather than looking at a fund and thinking it's a coin flip as to whether they will outperform over 10 years (it isn't, it's more like 85% chance they won't), it's actually a coin flip as to if it will even exist in 10 years! 

Prism

Yup, I would pretty much ignore anyone, IFA or not, suggesting that there is a time that active funds should shine, mainly because we never actually know when that time is until it has passed. There is an argument that some types of funds, such as smaller company funds can perform better under certain conditions such as coming out of a recession. Helped by the fact that there are not really any equivalent indexes for small companies.

I wouldn't say its all luck in choosing an active fund that does well. There is a bit of a coin flip but its possible to weight the odds better than 1 in 10.

london21

Personally prefer passive.

Better returns and lower fees. 

bostonerimus

I own mostly large index funds to keep my costs low. I've found them rewarding. I was able to retire at age 53, but over the last year I was down 17%, although that will be less now due to the recent rally. So there is no one single right answer here. If you are a novice I would keep things simple, don't buy anything esoteric or expensive and don't by more than 5 funds.