Transfer from management of investments in active Wealth Manager to Vanguard passive funds

GeoffTF

The evidence conclusively shows that the market weighted portfolio cannot be beaten in risk adjusted terms, except by chance. That is what matters in practical terms. The role of theory is to understand why that is. The simplest theory here is CAPM, but the subject rolls on.

There are, of course, millions of people who want to believe that they can beat the market (or identify in advance someone who can do it for them) so much that they dismiss all evidence. That is good for the rest of us. They provide liquidity and price discovery. We would not have cheap investment platforms if it were not for them, and index funds would be more expensive too.

Prism

GeoffTF said:

The evidence conclusively shows that the market weighted portfolio cannot be beaten in risk adjusted terms, except by chance. 

Cannot be beaten? By anyone? With lower volatility at the same time? There are indexes, funds based upon them and active managers that have beaten market weighted portfolios over long periods of time. Likely individuals too but they don't tend to publish stats. Of course it can be done. We just don't know the chances of selecting an approach like this ahead of time.

MSCI World Quality Index

Sure, it could reverse but I reckon 30 years is a decent time period to call long term.

JohnWinder

This raises some important issues, but I don’t know what the right conclusions are.
Firstly, there are many indexes, so investing in an index fund isn’t ‘game over, go home’, although this index looks pretty good.
I only see 15 years of data in that link, not 30 years. Stock factors like stock size, growth or value, and momentum can have their time in the sun out-performing other factors for well over a decade before things reverse. This index is big not small stocks, and growth more than value which might explain part of its out-performance during this last 15 years.
Secondly, the comparison shown is with its ‘non-quality selected’ parent index which does not include emerging markets, although that omission probably wouldn’t account for its performance over a global index with EM stocks (if it has outperformed one).

GeoffTF

Was a MSCI World Quality Index tracker available in the UK in 2008? How many other funds were available? What is the probability that you would have picked a MSCI World Quality Index tracker? What proportion of UK investors did choose a MSCI World Quality Index tracker? What we do know is that a large majority of investors would have underperformed a cheap global tracker, if one had been available. How will a MSCI World Quality Index tracker do in the future, now that everyone knows that it did well in the past?

Prism

JohnWinder said:

This raises some important issues, but I don’t know what the right conclusions are.
Firstly, there are many indexes, so investing in an index fund isn’t ‘game over, go home’, although this index looks pretty good.
I only see 15 years of data in that link, not 30 years. Stock factors like stock size, growth or value, and momentum can have their time in the sun out-performing other factors for well over a decade before things reverse. This index is big not small stocks, and growth more than value which might explain part of its out-performance during this last 15 years.
Secondly, the comparison shown is with its ‘non-quality selected’ parent index which does not include emerging markets, although that omission probably wouldn’t account for its performance over a global index with EM stocks (if it has outperformed one).

The 30 (almost) year stat is in the table below the chart. Since 1994, the quality index has beaten the world index by 3.5% per year. Neither index contains emerging markets or small companies - world quality is a subset of world. I wouldn't read too much into that factor box as everything except quality will change over time. Sometimes quality companies will be low priced (value) such as during the dot.com boom. Sometimes they will pay a higher yield.

All this says to me is that investing according to a market cap approach is not the only way and is likely not the best way.

Prism

GeoffTF said:

Was a MSCI World Quality Index tracker available in the UK in 2008? How many other funds were available? What is the probability that you would have picked a MSCI World Quality Index tracker? What proportion of UK investors did choose a MSCI World Quality Index tracker? What we do know is that a large majority of investors would have underperformed a cheap global tracker, if one had been available. How will a MSCI World Quality Index tracker do in the future, now that everyone knows that it did well in the past?

I have no idea about most of those questions - nobody has tracked it. The few trackers of quality indexes in the UK appeared in the last 10 years.

However you said that the market weighted portfolio cannot be beaten except by luck. Some individual high profile investors and some active fund managers picked up on quality investing a long time ago and have managed to beat the market weighted porfolio over that time. Maybe they were lucky or maybe they spotted a good strategy and implemented it well. 

Another other examples. The world value index has beaten the world index since 1974. Not by much, but with lower volatility. Again, hardly a new idea.

I am not saying that we can all just show up, pick a fund/index that has done well and continue to do so. But to say that it is only possible by being lucky seems a stretch. Some people are actually good at this.

EthicsGradient

This article lists ETFs tracking similar indices, but not the precise one:
A breakdown of global quality ETFs as investors plan for ‘new normal’ (etfstream.com)
2 track the MSCI World Sector Neutral Quality Index , but that's not quite the same (launched Aug 11, 2014, but backdated for comparison to Nov 30, 1998; 7.19% since then, compared to 6.13% for the largest MSCI World Index).

Note that the MSCI World Quality Index has a footnote saying the index launched Dec 18, 2012, and the data shown were similarly backdated. The backdated return of 11.51% pa since 1994 does look good compared to the World Index 8.07%; but I do wonder if the lack of funds actually following the index indicates it may just be a chance outcome.

GeoffTF

EthicsGradient said:

Note that the MSCI World Quality Index has a footnote saying the index launched Dec 18, 2012, and the data shown were similarly backdated. The backdated return of 11.51% pa since 1994 does look good compared to the World Index 8.07%; but I do wonder if the lack of funds actually following the index indicates it may just be a chance outcome.

Yes, of course it does. The problem with funds like this is that if too many people buy them, the stocks that it buys become over-priced, and the fund then under-performs. Look what happened to small cap. It is easy to identify investments that would have beaten the market in the past by back-testing. It is also easy to find tiny funds that were lucky enough to beat the market too. They get heavily advertised, and the funds that flopped get wound up. The market portfolio is the only portfolio that can be bought by everyone. Of course that will not happen. Hope springs eternal.

Linton

GeoffTF said:

EthicsGradient said:

Note that the MSCI World Quality Index has a footnote saying the index launched Dec 18, 2012, and the data shown were similarly backdated. The backdated return of 11.51% pa since 1994 does look good compared to the World Index 8.07%; but I do wonder if the lack of funds actually following the index indicates it may just be a chance outcome.

Yes, of course it does. The problem with funds like this is that if too many people buy them, the stocks that it buys become over-priced, and the fund then under-performs. Look what happened to small cap. It is easy to identify investments that would have beaten the market in the past by back-testing. It is also easy to find tiny funds that were lucky enough to beat the market too. They get heavily advertised, and the funds that flopped get wound up. The market portfolio is the only portfolio that can be bought by everyone. Of course that will not happen. Hope springs eternal.

The top 10 companies in the MSCI quality index are:

Nvidia
Apple
Microsoft
META
VISA
Alphabet A&C
Johnson&Johnson
United Health
Lily (German)

Surely if they are going to be overvalued by people buying index funds, MSCI Global or S&P500 would already have done the job far more effectvely.

Perhaps if you come across something incompatible with your preconceptions it might be more instructive to say "that's interesting let's find out more" rather than "it can't possibly be true".

GeoffTF

Linton said:

GeoffTF said:

EthicsGradient said:

Note that the MSCI World Quality Index has a footnote saying the index launched Dec 18, 2012, and the data shown were similarly backdated. The backdated return of 11.51% pa since 1994 does look good compared to the World Index 8.07%; but I do wonder if the lack of funds actually following the index indicates it may just be a chance outcome.

Yes, of course it does. The problem with funds like this is that if too many people buy them, the stocks that it buys become over-priced, and the fund then under-performs. Look what happened to small cap. It is easy to identify investments that would have beaten the market in the past by back-testing. It is also easy to find tiny funds that were lucky enough to beat the market too. They get heavily advertised, and the funds that flopped get wound up. The market portfolio is the only portfolio that can be bought by everyone. Of course that will not happen. Hope springs eternal.

The top 10 companies in the MSCI quality index are:

Nvidia
Apple
Microsoft
META
VISA
Alphabet A&C
Johnson&Johnson
United Health
Lily (German)

Surely if they are going to be overvalued by people buying index funds, MSCI Global or S&P500 would already have done the job far more effectvely.

Perhaps if you come across something incompatible with your preconceptions it might be more instructive to say "that's interesting let's find out more" rather than "it can't possibly be true".

Buying the market portfolio exerts an equal upward push on all the stocks in the index, and  does not inflate the price of the larger stocks relative to the others. The MSCI Quality Index is selective in the stacks that it holds. Buying an MSCI tracker pushes up the price of the stocks that it holds relative to the rest of the index.

I am not telling you about my preconceptions. If you want to know more about this read a finance text book.