Index vs managed funds the great war
Comments
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You dont need to know which funds will beat their indexes. You need a large enough portfolio to hold a non trivial amount in each of a broad range of funds. Some will beat their index and some wont. You can easily rule out any no-hopers and presumably have a better than average chance with the rest.
I hope that you will be in the minority for which your statement will be true.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
Which sectors and markets don't have index funds?
A couple of ones that are important to some investors...
Small Cap. I just checked Japanese Small Companies as an example. Trustnet lists no passive OEICs/UTs and only 1 ETF. There are 6 active funds in that sector that have been around for 5 years (and 1 which hasnt). They all beat the passive ETF over 5 years. Also you may find that the SC indexes can include some rather large companies.
Income is impossible - I do not believe there are any satisfactory equity income passive funds that deliver a reasonable yield.
In both cases, the Market Cap basis of almost all index funds doesnt make obvious sense. Why should big small companies be more desirable than small small companies? Large companies arent necessarily better dividend payers than small ones. Both investment sectors really require human vetting - there are plenty of moribund rarely traded small companies and and a high yield may not be sustainable or can arise from falling share prices.
Similar to Income there is Wealth Preservation and Abs Return. In all three overall performance isnt the primary objective.0 -
bostonerimus wrote: »I hope that you will be in the minority for which your statement will be true.
Just because many active funds underperform over time you can't assume that the majority if people hold those funds. Many of those funds are tiny in the main part because they underperform. I have no idea how many people are in the huge outperforming active funds compared with the tiny underperforming funds but I'm not sure if its a minority at all0 -
Would be interested to know what approach you adopted and why, if you feel like sharing it.
Play the field that's in front of you. I do what I do the way I do it. As it's my upbringing, my career, my life experiences. Learn from the mistakes you make. Never stop learning, researching and thinking. Hindsight doesn't actually predict the future.0 -
Just because many active funds underperform over time you can't assume that the majority if people hold those funds. Many of those funds are tiny in the main part because they underperform. I have no idea how many people are in the huge outperforming active funds compared with the tiny underperforming funds but I'm not sure if its a minority at all
My recollection is that most active funds (for which there is an index) underperform the index. So the idea that you can randomly hold a collection of active funds to avoid a dog is nonsensical, since most are dogs (in the sense of underperforming) hence you are better off holding index funds.
However ... some of us do prefer active funds. And as said, some markets/sectors do not have indices.0 -
BananaRepublic wrote: »My recollection is that most active funds (for which there is an index) underperform the index. So the idea that you can randomly hold a collection of active funds to avoid a dog is nonsensical, since most are dogs (in the sense of underperforming) hence you are better off holding index funds.
Agreed, though it doesn't seem like many people randomly pick active funds. Those active funds that beat the index tend to be much bigger than those that don't. Now, whether all the extra cash moved in after some good initial gains (and missed it), has left since or was there from the begining we will never know.
All I know is that every fund that I own has beaten its benchmark (typically an index) over pretty much every reasonable time period, and most importantly, while I have actually owned it. In places where I didnt think this would be a high chance (US, global tech etc) i have passives. My starting point is always past returns of the fund and the fund manager history which breaks one of the most fundamental bits of advice. It works for me though.0 -
Now, whether all the extra cash moved in after some good initial gains (and missed it), has left since or was there from the begining we will never know.
Hence why some of us avoid funds all together. With fund managers having to deal with cash inflows and outflows. Which in itself creates a market where none actually exists.0 -
Have seen mentioned more then once over the last 12 -18 months as to what would happen if all the people who have invested for the first time via index trackers panic in the first downturn and remove their money will that cause a bigger run or as some people have said are they at a false high due to the money coming into index fundsThrugelmir wrote: »Hence why some of us avoid funds all together. With fund managers having to deal with cash inflows and outflows. Which in itself creates a market where none actually exists.
As mentioned a couple of post's back their are good active funds & managers but over the years they have been swamped by all the funds that have launched.There is nothing a company/platform likes more then a new super shiny product to advertise but they do not all come with results.
You can see the same thing with trackers/passive in the sheer number that have launched
doing the same thing or following an index that nobody has heard of.Its not like Vanguard or Blackrock etc only have a couple of trackers or multi assets funds and there must be an ETF for everything known to man and unknown to man in some cases.0 -
If I was an 18 yo investor just starting out then I would be investing passively in the expectation that over many decades getting the 'market return' annually would result in better performance than the corresponding active fund.
As it is, i'm mid-40s and want to take the least risk possible to try and achieve CPI+a bit.
It's still a work in progress but my asset allocation (equities/bonds/wealth preservation) meant a mix of active and passive worked better for me.
Horses for courses as they say.0 -
there must be an ETF for everything known to man and unknown to man in some cases.
ETF's are not without their risks. If the stocks held are illiquid or infrequently traded. Offloading large lines of stock isn't as simple as pressing a switch as some people believe. When the Middle Eastern investors offloaded their 25% stake in Sainsburys some years back. Took a 186 broking houses to place the stock (at a slight discount) without causing major disruption to the market.0
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