Index vs managed funds the great war

you would need to be more active but you always have to make a choice even if its in VLS,HSBC or L&GMI or which index you want to follow or bonds,equity etc

ivormonee wrote: »

If active fund investors are delving into a level of detail that includes their consideration of how much of which sectors, whether large, mid or small caps, value orientated or growth, currency exposure, volatilty, etc. then really aren't they doing the job of the manager of the active fund, by definition of making a choice to populate their self-determined portfolio asset alloactions, who should be doing that very job for them?

Not all conscious active investors are the same.

Not all passive investors are the same.

Generalising is where all the misinformation starts.

We should be careful not to mix up active or passive investing with asset allocation. It is perfectly possible to overweight small cap or value etc using a pretty passive indexing approach. So first off decide if you are going to stick with a cap weighted allocation which will emphasize large cap stocks or go for the slice and dice approach. Then decide whether you want to use active or passive funds or a combination of them ie indexing for US equities and active for emerging markets or UK small cap etc

The point was, looking back at some of the posts, that once an investor (passive or active) has decided what they'd like in their portfolio, ie. asset mix such as say UK equity 10%, Japan small cap 5%, corporate bond 5%, cow dung 5%, bananas 5%, etc., the next part of their decision-making process is/ was to establish how they would fulfil that asset allocation. I think we established, or at least it's well known, that for the passive investor, the job is to pick the tracker funds (or the ETFs) that cover the indexes for those parts of the asset allocation that they relate to. So, if you've already decided you want 10% in Japanese equity, you pick, say the XYZ Japanes Equity index fund.

The question for active investors was how, once you've worked out what asset allocation you desire for your portfolio, based on all the factors we've talked about (risk predeliction, your opinion/ view on the PE ratio of US equities, the advice from your grandma/ neighbour/ cat...) how you then make your choices of active funds, from the entire universe of active funds (something like 3,000 or maybe more) to fill the asset allocation you've decided on.

The answers in the posts in this thread suggested how different active investors go about this. Some look at performance (probably nearly everybody does) eg. as many discrete years as possible and/ or 1, 3, 5, 10 year performance etc, and indeed other factors (eg. is it a closet tracker, is the fund manager long-term consistent, do they have a glossy brochure, etc...). But then a lot of posters said they look at those funds' individual characteristics that I suggested were the domain of the fund manager whose job it is to make those decisions. That's why they get paid (by us/ you/ me). So if a manager feels that for Japan, for example, that now is the time for more value-orientated stocks to be overweighted, or that smaller/ larger companies would be better suited to the current tax regime of the country, or that the current economic conditions favour cyclical over healthcare, defensive over tech, etc. then those are the decisions for them to make in their fund, that they are managing, for all the active investors who subscribe to it.

A key point is that we either believe in our fund managers and trust that they will make the right decisions based on their expertise (which includes their degree or other qualification(s) in portfolio management, the teams that back them up with research, other teams of people that provide insight on the economy, interest rates, inflation, wages growth, etc) or we don't. If we don't, we go passive. But if we do, the reasons for doing their job for them don't seem all that clear. We decide our asset mix (or our adviser/ wealth(y) manager, robo-cop, etc. does it for us if we're not DIY), and then we leave it to the active fund managers to deliver.