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

Bobajobbob

Always worth reposting this.

In 2008, Warren Buffett placed a $1,000,000 bet with the smartest hedge fund investors on Wall St.

He bet that over 10 years,an investment in a simple index tracker fund would outperform the very best hedge funds in the world.

The results were quite surprising.

Ted Seides was CEO of Protege Partners, a leading “fund of hedge funds”.

It was his job to select the 5 best funds in the world.

All that talent, education and research within the hedge fund companies - and all they had to do was outperform a humble S&P index tracker.

An easy bet to win surely?

Not quite. The hedgies got trounced

After 10 years, Buffett’s plain-vanilla stock fund averaged an annual return of 7.1%

Not bad. 📈

But the hedge fund portfolio produced only 2.2% a year after fees.

Not good 📉

Buffet won the bet and donated the winnings to Girls Inc, a non profit organisation which exists to support and mentor girls across the US

Buffett said

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

Both large and small investors should stick with low-cost index funds.”

Buffett was saying something that had been known to savvy investors and traders for almost a century, but which had taken a long time to seep into the average investor’s consciousness: Active fund managers have a terrible track record.

And the evidence now is even more compelling.

Standard & Poor’s has been tracking the record of active managers for more than 20 years.

Their 2022 report indicates that when adjusted for fees and for funds dropping out due to poor performance, after five years 84% of actively managed fund managers underperform their benchmark, and after 10 years 90% underperform.

The fund manager results were so bad that in their report, S&P said the performance of active managers “was worse than would be expected from luck.”

Can you imagine any other industry or profession where the failure rate is 90%?

And yet large fees are still deducted.

Almost every investor would benefit from utilising the humble index fund.

A focus on keeping costs low has been proven to lead to better returns.

InvesterJones

Also past performance is no guarantee of future returns.

Prism

Bobajobbob said:

Always worth reposting this.


Can you imagine any other industry or profession where the failure rate is 90%?

And yet large fees are still deducted.

Almost every investor would benefit from utilising the humble index fund.

A focus on keeping costs low has been proven to lead to better returns.

Generally true and the majority of active funds have a pretty terrible history of beating their respective benchmarks.

Unless of course there is some other goal than beating the S&P 500 or whichever index - which there usually is.

E.g using an appropriate risk based collection of investments to provide a tax efficient income over the next 40 years - does not equal beating the market.

dunstonh

Can you imagine any other industry or profession where the failure rate is 90%?

It is important to make sure you are not relying on US research/remarks covering the US retail market.

There are plenty of people that are going to lose a lot of money by following that advice too literally because they don't realise the US and UK has different taxation on funds and that UK investors investing in the S&P500 are not going to see the same returns as US investors investing in the S&P500.

A focus on keeping costs low has been proven to lead to better returns.

It hasn't really.     The cheapest option, in terms of explicit charges, is cash savings.   So, becoming too cost-focused can result in lower returns.   Or perhaps not including trackers in higher cost areas, such as emerging markets resulting in missing out on investment returns in those areas.

GeoffTF

dunstonh said:

Can you imagine any other industry or profession where the failure rate is 90%?

It is important to make sure you are not relying on US research/remarks covering the US retail market.

There are plenty of people that are going to lose a lot of money by following that advice too literally because they don't realise the US and UK has different taxation on funds and that UK investors investing in the S&P500 are not going to see the same returns as US investors investing in the S&P500.

A focus on keeping costs low has been proven to lead to better returns.

It hasn't really.     The cheapest option, in terms of explicit charges, is cash savings.   So, becoming too cost-focused can result in lower returns.   Or perhaps not including trackers in higher cost areas, such as emerging markets resulting in missing out on investment returns in those areas.

The S&P SPIVA Scorecard is global, including the UK:

https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-mid-year-2022.pdf

UK active funds have not done at all well against the S&P indexes. Other research has found the same result (for non S&P indexes). Can the IFA round the corner do better than all the fund managers? I would not bet my money on it.

Nobody sensible suggests that UK based investors should invest all their money in the S&P 500. It has done extraordinarily well in the recent past, but it has become expensive. Its out-performance will come to an end, but I cannot say when. It makes more sense to spread risk wider. Of course investors need to understand the tax rules or seek advice.

The advice to minimise costs applies to investments in the same market. Putting your money under the mattress is very cheap, but nobody sensible would recommend that. There are some questionable tracker funds with very low charges, but you will not go far wrong with Vanguard or Black Rock, for example.

For balance, this all presupposes that the investor is capable of picking suitable investments. I can say that is not difficult, but many (perhaps most) people do not seem to be capable of doing that.

Bobajobbob

Quick update on this thread for those who may be interested in the pitfalls and hurdles of migrating ISAs and GIA from one provider to another.

I had initially intended to liquidate the portfolio in my ISA however I hadn't taken into account the fees charged by my current provider to do this. As with most of their fees this would have cost me 1%+. I have instead chosen to transfer everything "in specie" to the new provider however this complicated the process as my preferred ultimate destination was Vanguard and they will not take individual stocks. I am instead moving the whole portfolio to another provider when I can then liquidate the component parts at a fixed fee per trade. Once this is done I have the choice to reinvest  in simple tracking funds with this provider or migrate the ISA onward again to Vanguard. Because nothing in life is simple the interim platform charges a relatively high fee (0.40%) for holding funds in the ISA wrapper. Still cheaper than the original manager however higher than Vanguard.

On the GIA side there doesn't appear to be the same Fund charge as for the ISA wrapper so it should be easier to liquidate the portfolio and reinvest in a select few funds.

One step at a time. I have now instructed the transfer and will need to wait patiently to see if it happens smoothly. I am expecting that some of my original holdings may not be supported by the new platform but lets wait and see. 

Quick question for those in the know. Is there a limit on the number of ISA transfers that can be performed in a year? 

Aminatidi

Shouldn't be a limit I've done three in the last year or so all to Vanguard and a mix of full and partial and all from Hargreaves Lansdown.

Bobajobbob

Thanks, good to know. May I ask why you were moving them from HL to Vanguard? Was it down to the higher costs for passive funds? 

Aminatidi

One reason.

Also a bit of personal psychology there where I'm trying to move towards passives and rightly or wrongly Vanguard not having 3000 active funds minimises the occasional urge to tinker

Bobajobbob

Thanks, it sounds like we share the same philosophy and I'm a few months behind you in making it happen. I want to cut down my current ISA and GIA investments from over 50 individual stocks and funds to one or two passive tracking funds/etfs going forward in turn cutting annual costs from 1.75%ish to less than 0.30%ish.