Active vs Passive

DannyCarey

Asking this question usually means you should go passive. Its normally people who think they know better will choose to do active*



*and they usually don't know better, and end up under performing the index over a decade.

NoviceInvestor1

10 carefully chosen active funds would be a closet tracker that most likely underperforms the index…..a bit of everything but with higher fees. 

But seeing this is the suggested course of action let me ask;

which 10 funds do you think will outperform the index over the next 5 years?

JohnWinder

Which portrfolio is the more diverified?  What other measures wold you use?

Diversification might be hard to quantify, but it’s easy to define the sort of diversification you think is the most suitable. For some people it’s market cap weighting (or as close as reasonable); for others it’s a huge range of stocks equally weighted. Each has had its own period of out-performing the other. But the safest is to put your money where the market is: cap weighting. If there’s a global index with more Microsoft than you’re comfortable to hold, then I’d say you’re betting you know better than the whole market what Microsoft is worth, and you could well be right or wrong. Betting against the market is to hard win, and even the professionals can’t pull it off most of the time. And secondly, if you’re a long term index investor you acquired Microsoft when it was a minow and you’ve enjoyed the ‘better than market’ returns it has provided.

Linton

NoviceInvestor1 said:

10 carefully chosen active funds would be a closet tracker that most likely underperforms the index…..a bit of everything but with higher fees. 

But seeing this is the suggested course of action let me ask;

which 10 funds do you think will outperform the index over the next 5 years?

Look at the the largest holdings in the portfolios and the country and size allocations.  They hardly represent a closet tracker.

I have no idea which funds will outperform the index over the next 5 years and dont care. 5 years is little better than random and out-performing the index is not a criteria for choosing a fund.  I dont care what the index does.  The only consideration for my investments is that as a whole they continue to meet my on-going needs at a low risk.  The high level strategy to achieve this is to invest equity for the long term as broadly as possible, more broadly than a cap weighted index, and to allocate assets, both equity and non-equity to minimise risk in the short/medium term.

Linton

DannyCarey said:

Asking this question usually means you should go passive. Its normally people who think they know better will choose to do active*



*and they usually don't know better, and end up under performing the index over a decade.

Yes, certainly.  Going passive preferably with a multi-asset fund is the least worse thing you can do and involves minimal effort.

NoviceInvestor1

Linton said:

NoviceInvestor1 said:

10 carefully chosen active funds would be a closet tracker that most likely underperforms the index…..a bit of everything but with higher fees. 

But seeing this is the suggested course of action let me ask;

which 10 funds do you think will outperform the index over the next 5 years?

Look at the the largest holdings in the portfolios and the country and size allocations.  They hardly represent a closet tracker.

I have no idea which funds will outperform the index over the next 5 years and dont care. 5 years is little better than random and out-performing the index is not a criteria for choosing a fund.  I dont care what the index does.  The only consideration for my investments is that as a whole they continue to meet my on-going needs at a low risk.  The high level strategy to achieve this is to invest equity for the long term as broadly as possible, more broadly than a cap weighted index, and to allocate assets, both equity and non-equity to minimise risk in the short/medium term.

I think most people pick actives with the intention of outperforming an index. Fair enough if you have no intention to do so. 

If someone has no intention whatsoever of outperforming an index, then choosing actives is a very easy task to be fair. 

Which type of equity funds do you perceive as lower risk? I've seen people refer to the likes of Baillie Gifford Managed as low risk in the past which is mind boggling. 

Prism

NoviceInvestor1 said:

Linton said:

NoviceInvestor1 said:

10 carefully chosen active funds would be a closet tracker that most likely underperforms the index…..a bit of everything but with higher fees. 

But seeing this is the suggested course of action let me ask;

which 10 funds do you think will outperform the index over the next 5 years?

Look at the the largest holdings in the portfolios and the country and size allocations.  They hardly represent a closet tracker.

I have no idea which funds will outperform the index over the next 5 years and dont care. 5 years is little better than random and out-performing the index is not a criteria for choosing a fund.  I dont care what the index does.  The only consideration for my investments is that as a whole they continue to meet my on-going needs at a low risk.  The high level strategy to achieve this is to invest equity for the long term as broadly as possible, more broadly than a cap weighted index, and to allocate assets, both equity and non-equity to minimise risk in the short/medium term.

I think most people pick actives with the intention of outperforming an index. Fair enough if you have no intention to do so. 

If someone has no intention whatsoever of outperforming an index, then choosing actives is a very easy task to be fair. 

Which type of equity funds do you perceive as lower risk? I've seen people refer to the likes of Baillie Gifford Managed as low risk in the past which is mind boggling. 

The BG managed example opens up quite a good discussion point. If we look at the recent volatility alone then it isn't low risk however is that a good representation of risk? What has happen this year to all growth stocks is pretty irrelevant in the long run. Gilts have fallen more recently and they are not considered high risk either. It could be argued that it is in some ways lower risk than simply holding a standard 80/20 allocation. It has low exposure to any single country. It holds enough different assets not to be effected too much by a single company failure. It has a more balanced exposure to various sectors than the index does. 

Deciding that something is high risk based on a single statistic - volatility over 3 years - is not the only way to do it.

coastline

Much can happen in 10 years, 1987 crash ,gulf war , 1998 currency , dotcom 2002 , GFC 2008 , 2018 correction , covid 2020 and now another slowdown with rate rises and inflation. The window for equities realistically should be 15 years at least.
In the equity allocation I'd go with a global tracker as the core holding then I'd add a couple of funds alongside and see how it goes. Active allocation would go to Fundsmith as it's weathered many storms in it's 12 years history. 

Chart Tool | Trustnet

I'd also add in the momentum ETF as it's also ticking along nicely despite recent events. So active and passive with a bit of edge . ?

Chart Tool | Trustnet

NoviceInvestor1

Prism said:

NoviceInvestor1 said:

Linton said:

NoviceInvestor1 said:

10 carefully chosen active funds would be a closet tracker that most likely underperforms the index…..a bit of everything but with higher fees. 

But seeing this is the suggested course of action let me ask;

which 10 funds do you think will outperform the index over the next 5 years?

Look at the the largest holdings in the portfolios and the country and size allocations.  They hardly represent a closet tracker.

I have no idea which funds will outperform the index over the next 5 years and dont care. 5 years is little better than random and out-performing the index is not a criteria for choosing a fund.  I dont care what the index does.  The only consideration for my investments is that as a whole they continue to meet my on-going needs at a low risk.  The high level strategy to achieve this is to invest equity for the long term as broadly as possible, more broadly than a cap weighted index, and to allocate assets, both equity and non-equity to minimise risk in the short/medium term.

I think most people pick actives with the intention of outperforming an index. Fair enough if you have no intention to do so. 

If someone has no intention whatsoever of outperforming an index, then choosing actives is a very easy task to be fair. 

Which type of equity funds do you perceive as lower risk? I've seen people refer to the likes of Baillie Gifford Managed as low risk in the past which is mind boggling. 

The BG managed example opens up quite a good discussion point. If we look at the recent volatility alone then it isn't low risk however is that a good representation of risk? What has happen this year to all growth stocks is pretty irrelevant in the long run. Gilts have fallen more recently and they are not considered high risk either. It could be argued that it is in some ways lower risk than simply holding a standard 80/20 allocation. It has low exposure to any single country. It holds enough different assets not to be effected too much by a single company failure. It has a more balanced exposure to various sectors than the index does. 

Deciding that something is high risk based on a single statistic - volatility over 3 years - is not the only way to do it.

BG Managed has been highly volatile for quite some time, more so than just buying a global tracker with 100% equities. That's not a recent development.

If all the bonds/cash/clever stuff isn't reducing volatility AND is resulting in returns lower than just buying a global tracker then what's the point? It's a literal lose-lose scenario. 

It's also highly exposed to factor risk as you've suggested - a big bet on growth hence the woeful performance this year and last. If growth continues to do badly then so will their fund - that's a big risk.

NoviceInvestor1

Fundsmith has a very short track record which coincided with low inflation, minimal interest rates and a resultant significant rerating of quality growth stocks/bond proxy stocks. The moment those factors have changed it's struggled badly (actually arguably it's struggled a few years if you look at the returns since 2019 compared to the MSCI World Quality Index which is a suitable benchmark). Really this is the first storm it has faced in 12 years and it's hardly weathered it well IMO.