Active vs Passive

ColdIron

Deleted_User said:

Linton said:

 Most replies on this thread are using the argument that passive investing proves higher long term returns on average and so must be superior to an active strategy.  This argument ignores the possibility that maximum long term returns may not be one’s primary objective.

As a retiree with increasing dependence on steady inflation linked income from investments my objective is sufficient short, medium and long term returns at minimum risk. Doing this requires careful attention to asset allocation. It is unlikely that index fund will provide the best solution since their composition is strongly influenced by investors with different objectives, in particular those seeking large long term (or even short term) returns  by investing in a restricted range of speculative opportunities.

With careful choice of individual active funds it is possible to achieve an overall allocation pattern that is compatible with one’s objectives.  Doing this with index funds is difficult because the only way to adjust an over allocation downwards is to buy more individual funds that invest in everything else which becomes impractical if one wants to cover multiple factors (country, size, sector, value vs growth, income).  This is easier with active funds because they provide a much wider range of different factor allocations.

So far all discussions seems to be based on 100% equity investing. ISTM that a fixed broad allocation  of bonds as provided by passive bond funds is totally inappropriate for meeting the objectives for which people generally buy bonds as recent events have shown. Better to buy individual bonds or active funds that make extensive use of bonds to achieve their objective.

I don't know what you have against passive bond funds. You can pick a suitable duration for your portfolio's aims, and government or corporate bonds or both, and sterling-only or global bonds, all while using passive funds. Do you need any more control than that? Again, if in doubt, I prefer to minimize costs, because costs are known, and that usually points towards passive funds. (I do actually hold both passive and active funds for corporate bonds, partly because the difference in costs happens to be small for the specific funds.)

A cautionary word about bond indexes to consider by Jim Leaviss from M&G's Bond Vigilantes

• Let me start by restating our opposition to index investing when it comes to corporate bonds (we would say that, wouldn’t we). An equity index is an index of success – as the company prospers and its market capitalisation rises, its weighting in the index increases. Bond indices are buckets of failure. The more a company borrows, the greater its weighting in the bond index. If you follow a bond index, and a company within it doubles its leverage, making its failure more likely, you will have to increase your exposure to that company.

NB This applies to corporate debt and not sovereign debt

JohnWinder

Linton said:

Another argument against bond index fund is that they are cap weighted. By far the majority of gilts are held by insurance, pension and other financial institutions who would, I believe, normally buy when issued and hold to maturity.  Their objective would be to have a known amount of money available at a known date to meet their liabilities.

This is very different to the use of bonds by small private investors.  It is difficult to see why the % allocation for one purpose would be appropriate for the other and good reasons to think it may not.  In particular a high allocation to long dated bonds.

Some relevant observations there for me. But an index, and hence a fund tracking it, is weighted a  certain way (presumably cap weighted) not because insurance companies by more of this or that, but by which bonds are issued by the bond issuers, surely. Certainly, if the insurance companies were begging for lots more 30 year bonds, then the government and corporations would offer a stack more 30 year bonds, but do we really think it happens that way?

Nonetheless, bonds are on the market and they get into funds. Readers don’t need to be perplexed for the rest of their life worrying whether the needs of an insurance industry is aligned or not with their interests, all they have to do is look at the duration of the bond fund. Investors should own bond funds with durations that match their needs. Forget the insurance companies.

JohnWinder

Good point about corporate bonds and cap weighting. There must be a place for corporate bonds in personal investing, but we can do it all without their complexity which is why I simply ignore them in my thinking. You want bonds to be safe from default, so forget corporates. If you want higher returns than government bonds give, raise your equity holding. Surely, for simpletons like me that’s the way.

bostonerimus

JohnWinder said:

Good point about corporate bonds and cap weighting. There must be a place for corporate bonds in personal investing, but we can do it all without their complexity which is why I simply ignore them in my thinking. You want bonds to be safe from default, so forget corporates. If you want higher returns than government bonds give, raise your equity holding. Surely, for simpletons like me that’s the way.

90% of my equities are in global cap weighted index funds and the rest are in a multi asset active fund that is 60% bonds and 40% equities, the bonds being a mix of high quality corporate and government debt with an average duration of 7 years and the equities large cap dividend stocks. I don't manage the portfolio in any way, I just let it sit there. I can do this without worry because I don't rely on it for retirement income. I like passive index funds for their low fees. I would never buy a "celebrity" active fund like Woodford or Fundsmith or any fund focussed on a particular sector or small geographical area, other than maybe a domestic fund; so no "Indonesian pork belly" funds for me.

adindas

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. 

Why only look this year. Did you look at how they performed in 2020, 2021 ?? If an investment, say made a gain of 190% during 2020-2021 and down -65% (edited) this year they are still in the winning side, are not they ??

There is always be pro and contra between passive vs active, value vs growth investment and this debate will never end.

But it is not an either / or option where people could do both.

Differentiate between quality growth stock such as Microsoft, Apple, AMD, Amazon, Tesla, Meta where many of actively managed fund are invested with P&D penny stock, P&D biotech stocks.

Compare the performance of growth stocks such as Microsoft, Apple, AMD, Amazon, Tesla, Meta vs Coca Cola, IBM, Nike, etc. 

Come back here and compare their performance in five years (say) time to come.

adindas

Nebulous2 said:

Beware of believing somehow you are a Midas. If fund managers with access to more information than me, and time to study it, struggle to beat the index, then what chance have I?

We invested £80k in MARCH / APRIL21. 4 full ISAs across two tax years. I struggled with the responsibility of having a lump sum to invest, which is the case with many relatively inexperienced investors asking about it on here. 

I really couldn't get my head round the 60% or so of a global tracker that was invested in the US, so I decided to go for some active to reduce that.  £30k each went into global trackers with £10k each in active funds. I picked a mix, some Europe, some Japan, UK smaller companies, UK mid-caps. 

NOT A SINGLE ONE OF THE ACTIVE FUNDS IS BEATING ANY OF THE GLOBAL TRACKERS

. Most of them are still under water, while the trackers are not. In one spectacularly poor choice a UK smaller company fund I put £2k into was down 48% recently. Last time I looked it was not just bottom quartile, but the bottom  fund in its sector, 248th out of 248 over 1year. 

One of the worst things is that it was one in my wife's name, so every time she logs into Fidelity I am reminded of my lack of judgment. 

I've decided the people on here who cautioned me against fund-picking at the time were right, and active funds aren't for me.

Insensible comparison, no wonder. You started investing in March/April 2021 and you are comparing your active funds vs global tracker today ????.

Some of my saving accounts are earning 5%pa this year. This return certainly beat any active of passive funds and don't forget this is a risk free return. Does it mean that saving is better than investing just because they are performing better this year ?

It has always been the case in the bear market, a lot of uncertainty (e.g global supply chain, war in Ukraine, shortage food supply) global tracker always win against active fund. Also value stock always win in this condition, nothing new.. Every investor know we are currently in the bear market.

Compare it when the bear market is over, the war in Ukraine is over, inflation rate is under control, interest rate start to slow down.

It is not uncommon growth stock which typical where many active funds are invested could rise 50%+ in less than three months. A few are even in less than a month.

ColdIron

I somewhat agree. Given a choice, I prefer actively managed corporate bond funds over indexed funds. But this isn't always possible, e.g. multi asset funds

eskbanker

adindas said:
Why only look this year. Did you look at how they performed in 2020, 2021 ?? If they made a gain of 190% and down 90% this year they are still in the winning side, are not they ??

If something gains 190% previously and then loses 90% this year, the overall result is -71%, which wouldn't meet many people's definition of winning!

Nebulous2

adindas said:

Nebulous2 said:

Beware of believing somehow you are a Midas. If fund managers with access to more information than me, and time to study it, struggle to beat the index, then what chance have I?

We invested £80k in MARCH / APRIL21. 4 full ISAs across two tax years. I struggled with the responsibility of having a lump sum to invest, which is the case with many relatively inexperienced investors asking about it on here. 

I really couldn't get my head round the 60% or so of a global tracker that was invested in the US, so I decided to go for some active to reduce that.  £30k each went into global trackers with £10k each in active funds. I picked a mix, some Europe, some Japan, UK smaller companies, UK mid-caps. 

NOT A SINGLE ONE OF THE ACTIVE FUNDS IS BEATING ANY OF THE GLOBAL TRACKERS

. Most of them are still under water, while the trackers are not. In one spectacularly poor choice a UK smaller company fund I put £2k into was down 48% recently. Last time I looked it was not just bottom quartile, but the bottom  fund in its sector, 248th out of 248 over 1year. 

One of the worst things is that it was one in my wife's name, so every time she logs into Fidelity I am reminded of my lack of judgment. 

I've decided the people on here who cautioned me against fund-picking at the time were right, and active funds aren't for me.

Insensible comparison, no wonder. You started investing in March/April 2021 and you are comparing your active funds vs global tracker today ????.

Some of my saving accounts are earning 5%pa this year. This return certainly beat any active of passive funds and don't forget this is a risk free return. Does it mean that saving is better than investing just because they are performing better this year ?

It has always been the case in the bear market, a lot of uncertainty (e.g global supply chain, war in Ukraine, shortage food supply) global tracker always win against active fund. Also value stock always win in this condition, nothing new.. Every investor know we are currently in the bear market.

Compare it when the bear market is over, the war in Ukraine is over, inflation rate is under control, interest rate start to slow down.

It is not uncommon growth stock which typical where many active funds are invested could rise 50%+ in less than three months. A few are even in less than a month.

I'm aware that the timescale I'm  discussing is relatively short and that market conditions have been different this year. 

I was also trying to be amusing, at my own expense. After all there is a certain irony in picking the worst fund in its sector.  It was the case that I discussed my plans at the time and was cautioned about it by some of the regulars, so it was also a nod in their direction, to recognise they were right. 

Obviously all that didn't come across as I intended it...... 

NoviceInvestor1

adindas said:

Why only look this year. Did you look at how they performed in 2020, 2021 ?? If they made a gain of 190% and down 90% this year they are still in the winning side, are not they ??

There is always be pro and contra between value and growth investment and debate will never end.

But it is not an either / or option where people could do both.

Differentiate between quality growth stock such as Microsoft, Apple, AMD, Amazon, Tesla, Meta with P&D penny stock, P&D biotech stocks.

Compare the performance of growth stocks such as Microsoft, Apple, AMD, Amazon, Tesla, Meta vs Coca Cola, IBM, Nike, etc. 

Come back here and compare their performance in five years (say) time to come.

Why would I look at the performance in 2020 or 2021 when the IFA (as per the OP) specifically said 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"

The IFA is saying that the specific macro environment we have now may lead to actives outperforming.

It isn't.