Active Funds or Passive for my ISA investments

MPN · 26 October 2016 at 2:48PM

I read an article from The Telegraph today and it stated that "figures from S&P ratings agency showed that 86pc of 'actively managed' UK Equity Funds have failed to beat the S&P UK BMI index, a measure of stock market returns equivalent to the FTSE All Share index"!

These include Star Managers such as Neil Woodford from CF Woodford, Richard Buxton from Old Mutual Global and Harry Nimmo from SLI UK Smaller Comanies!

https://uk.finance.yahoo.com/news/90pc-popular-isa-funds-fail-080112209.html

From my own experience I have only invested in funds so far (no ETF's or Trackers) and I believe my choice of funds are doing quite well (Royal London UK Equity, CF Lindsell Train, Fundsmith, Artemis Global Income, Newton Global Income, Jupiter European etc

So my question is what is everybody's thoughts on this because as they mention further on in the article, that this data suggests we should be looking at more 'passive funds' such as trackers and ETF's that mirror the market and charge far less?

I have no experience with ETF's but would like to know any opinions on whether to stay active or go passive with funds?

enthusiasticsaver · 26 October 2016 at 3:12PM

I am in a fund of tracker funds (Vanguard Lifestrategy) so would say passive. Lower costs and I daresay some will disagree but it works for me. It seems to be a debate that goes on and on though.

dunstonh · 26 October 2016 at 3:28PM

I read an article from The Telegraph today and it stated that "figures from S&P ratings agency showed that 86pc of 'actively managed' UK Equity Funds have failed to beat the S&P UK BMI index, a measure of stock market returns equivalent to the FTSE All Share index"!

The UK equity sector is one that is not known for being best for managed funds. Many of the managed funds in there either need to be switched depending on where we are in the economic cycle (i.e .not held long term) or are just general uk equity funds which are no better than a tracker.

So my question is what is everybody's thoughts on this because as they mention further on in the article, that this data suggests we should be looking at more 'passive funds' such as trackers and ETF's that mirror the market and charge far less?

In the UK equity sector, it can make sense unless you are looking at more specialist funds within that sector (value, spec/sits, income bias etc). Not all sectors are the same though. Although some of the others are suited to passive more than managed. The Telegraph article covers only the UK sector.

I have no experience with ETF's but would like to know any opinions on whether to stay active or go passive with funds?

Passives are available in the UT/OEIC universe.

DrSyn · 26 October 2016 at 4:02PM

CF Lindsell Train & Fundsmith, have both produced fine performances but will they continue to do so in the future?

No one is claiming that there may be individuals that may beat an index.

The questions about "star managers" are

(a) will their performance continue to beat the relevant index?

(b) can you pick them out from the others and at an earlier enough stage, before their performance deteriorates?

(c) even if their performance does not deteriorate, will their fund beat the relevant index after all the hidden charges are deducted from the fund? These so called managers get paid a lot & it is coming out of your pocket!

(d) will the star manager stick with the fund you invest in? One fund I put my money in, the star managers left 2 weeks later without warning. Neil Woodford moved from Invesco to CF a few years ago.

(e) What happens to the funds when the star manager moves, falls dead, or just gives up work altogether?

Have a look at these below and you decide:

http://monevator.com/this-former-hedge-fund-manager-reveals-how-you-can-invest-for-life-in-five-quick-videos/

http://monevator.com/highlights/

BLB53 · 26 October 2016 at 4:43PM

In his book 'Smarter Investing' Tim Hale uses the analogy that we all like to think we are a better than average driver - but not everyone can be better than average. Human nature drives us to compete with others, to succeed, and to be better than average. Investors try to get a better than average return and often select funds which promise to provide this.

However, the markets are very efficient. All the empirical evidence over decades shows that beating the market consistently after costs through skill is very difficult. The fund managers who can do this are rare and are very difficult to identify in advance.

It is a mathematical certainty that the market will beat the average fund manager after costs. Therefore the index funds will beat the majority of managed funds due to their lower costs.

Investing is simple, but surprisingly difficult. Especially for individual investors, the idea of “Buy some global index funds in your Pension/ ISA, add a little bit each month, leave it alone for 20 or 30 years” is painfully simple, yet something only a small group of investors actually pull off.

MPN · 26 October 2016 at 5:45PM

So it seems passive funds like trackers could be the way forward?

dunstonh · 26 October 2016 at 6:35PM

MPN wrote: »

So it seems passive funds like trackers could be the way forward?

In some sectors, yes.

talexuser · 26 October 2016 at 8:10PM

The year figures will have been skewed by brexit and oil. The 20% devalaution will have helped the big multinationals who work in dollars, no (competent) active manager would have all the same proportion of these in his fund as the index, conversely the smaller companies for diversification working in £ have suffered in comparison. The bounce in oil also helped the big multinationals propotionally more. So the article has merit, but if we took a different slice of performance in different times we could end up with a result not quite so black and white.

For example if you compare Woodford Income against Vanguard All Share (they say equivalent), over 1 year the All Share is about 4% ahead. Compare since Woodford started and he is around 19% ahead including this years underperformance. Nothing wrong with trackers, maybe most in active think they are doing well without checking too much they may be in duffers, others maybe like to try a punt or two on a manager to see if they can beat the market. Each to their own level of risk.

dunstonh · 26 October 2016 at 9:38PM

Each to their own level of risk.

And that is another thing. When you look at the funds in one sector, they are not all the same risk profile. Some will be built to lower risk than others. In very simple terms, in good periods, the riskier ones will do better and vice versa in bad periods. The sector average is an average of all funds in a sector. However, a fund in that sector may not be best measured against the sector average is it may be working to a different measure.

BananaRepublic · 27 October 2016 at 10:12AM

Unfortunately these articles are usually written from the point of view of wanting to say something significant, rather than a rather boring balanced analysis. It can't be easy being a personal finance journalist, having to say something interesting each week.

In this case they selected only one year for their analysis, and that is insufficient to draw any meaningful conclusions. What if on average active funds outperformed passive funds over 3, 5 and 10 years? When I buy funds, I do historical research, and most of my funds are active, which tells you what my research discovered. And when after a few years I analysed past performance of my active and passive funds - i.e. during the time I held them - I reduced significantly my passive fund investment. Of course what has been said above, that passive funds do better in some sectors and markets, is undoubtedly true.

Talexuser has explained why many active funds underperformed this year. I believe most city wonks were predicting Bremain, and not Brexit, and many if not most active fund managers made investment decisions based on Bremain, and subsequently took a performance hit.

As I said, be careful when it comes to stories from financial journalists, they are not always completely objective, balanced and accurate. As they say, don't let the truth get in the way of a good story.

MPN · 27 October 2016 at 1:43PM

So if you manage to pick some very decent active global funds with managers with a great track record over many years it may well work out better than having passive funds?

Active Funds or Passive for my ISA investments

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