Passive Investing ie Trackers

JohnWinder wrote: »

Linton, thanks for looking more closely at this. However........
Let's look at just one category, GBP denominated Europe equity (350) funds, and ignore the other seven categories just now.
This is one of the five (out of 8) you chose for which the average active fund outperformed the index at 3 and 5 years, as well as at 10 years. To get that average outperformance, don't you have to own all the active funds in the category, because some underperformed at times while others outperformed, the outperformance bettering the underperformance?

If you chose 2 funds at random fund A will beat fund B 50% of the time. I dont see one of them happening to be a tracker is significant there. Where the tracker has an advantage is that it will be some way from being the worst performer in that category, and equally some way from being the best. That may be an important consideration for a more cautious investor who is willing to sacrifice potential gain for a level of security.

Reading p4 for the same 8 categories of GBP denominated active funds: at one year, only 1 category's funds outperformed the index, in the other 7 categories about 80% of funds in each category underperformed the index. By 5 years in every category there is underperformance by a majority of funds, and by 10 years the majority is at about 85%.

Thanks very much for bringing this up. Something very odd is going on. At first site P4 looks inconsistent with P8. However if I use the stated 10 year annualised return of 10.51% for the SP Index (which is 172% over 10 years) I do get about a 80% failure rate corresponding to page 4. Great, all clear.


However now lets look at a real tracker - iShares MSCI Europe Index. According to Trustnet that (and other funds tracking the same index) shows a 10 year return of 104%. This corresponds to a 27% failure rate.


Also the published average UK fund data (The IA Europe Equity (inc UK) average) shows a 10 year return of 118%, Very different to that published in the SPIVA report - 11.17% annualised.


It looks like more research is needed, have I or SPIVA have been making arithmetic errors, or perhaps been confused by currency changes? Ther numbers look like they may have been calculating the annualised return by dividing the 10 year return by 10. Surely not!

How do you choose which of the small % of funds in any category will outperform in the years ahead?
We are left with the problem that SPIVA compares the active funds with the index rather than index funds, but even after costs the good index funds track the index closely, sometimes beating it if they do securities lending (dodgy, perhaps).

I dont look for index beating funds, except as a tie breaker when other criteria have failed to identify a clear winner. For me the index is irrelevent. What is important is the actual return measured against that required to meet my objective. This is determined by the asset allocation of the portfolio as a whole which is deliberately more evenly balanced than any index.

Further to my SPIVA concerns.


I have just checked the data for UK equity funds. The UK equity SPIVA 10 year calculations are based on an annual return of 10.45% over the past 10 years (=170.2% total). Sadly the FTSE Allshare has only returned 114% in that period.

Linton wrote: »

Further to my SPIVA concerns.
I have just checked the data for UK equity funds. The UK equity SPIVA 10 year calculations are based on an annual return of 10.45% over the past 10 years (=170.2% total). Sadly the FTSE Allshare has only returned 114% in that period.

After reading the report, I'm a little puzzled about things too tbh.....

Firstly they are measuring performance against an index......100% of passive funds will also be outperformed by the index (tracking error aberations notwithstanding).
Without saying what the level of underperformance is, then it all becomes a bit meaningless.

The report says that over 10 years (for instance), the average annualized performance of active UK Equity funds is 11.01%, compared the benchmark index's 10.45%, but that over that period, 77.43% of active funds are outperformed by the benchmark........in other words, 77.43% have a 10 year annualised return of less than 10.45%. They also then state that the 2nd, 3rd and 4th quartile averages are 9.54%, 10.82% and 13.28%.............it would seem then, that the best performing active funds are outperforming the index by quite some margin.

However they don't state that an index tracker fund, tracking that index, and having a 0.1% OCF, will have averaged 10.34%, rather than 10.45%, and it would seem that could sway the result, perhaps quite significantly........

Where I am especially puzzled though is that third quartile number.......the way I'm reading it is they appear to be stating that the third quartile average is 10.82%.......this must mean that at least some funds in that quartile achieved over 10.45% (or else how could the average be 10.82%)........but how can this be true, as they also say that 77.43% are outperformed by the index, so if only 22.57% beat the index, they must, by definition, all be in the 4th quartile.......

Unless I'm reading it all wrong.......it has been a long day....;).....or unless the "survivorship bias" plays a bigger role than you might think.

TBH, I'm also intrigued by their "Data cleaning", where they only use the fund share class with the most assets.......this might distort the picture too as far as a retail investor is concerned.

PS.....while a difference in annualised average return of 10.34% vs 10.45% may not sound much, for a £500,000 portfolio, it would equate to a difference of around £13500 over 10 years......

At £20k, I'd probably stick with the one global fund in your ISA first.........then think about where to put the other £180k. In your ISA, you could add the other 4 funds over the next 4 years.

PS - you may find it cheaper to open your ISA at iWEB.....you'd also have more choice of fund providers, other than Vanguard alone.