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  • FIRST POST
    • sixpence.
    • By sixpence. 4th Jan 18, 7:28 PM
    • 138Posts
    • 31Thanks
    sixpence.
    Index vs managed funds the great war
    • #1
    • 4th Jan 18, 7:28 PM
    Index vs managed funds the great war 4th Jan 18 at 7:28 PM
    Hello hello

    I have been researching index funds versus managed funds, as an investing newbie. There seems to be general war between investors who believe that one is better than the other. I am in the process of rebalancing my portfolio (will be approx 24k in total in an ISA).

    I am thinking of favouring index sums but adding in some managed funds for the wow factor: 88% in mixed Index funds [70% Vanguard 60, 10% Asia pacific ex Japan, 8% global tech] and 12% in "rouge" managed funds [3% Emerging Markets, 3% UK small businesses, 3% UK growth 3% China]

    Do people on here have an opinion either way on which is better? Currently reading John C. Bogle's The Little Book of Common Sense Investing which is all about how much better index funds are.

    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Last edited by sixpence.; 04-01-2018 at 7:32 PM.
Page 5
    • TBC15
    • By TBC15 7th Jan 18, 5:42 PM
    • 495 Posts
    • 251 Thanks
    TBC15
    I!!!8217;m an active investor because I!!!8217;m obsessed with making money.

    If you discover active is not your skill set, go passive. It!!!8217;s really, really that simple.

    Only a fool actively loses money.
    Last edited by TBC15; 07-01-2018 at 6:01 PM.
    • BananaRepublic
    • By BananaRepublic 7th Jan 18, 6:22 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    I have learned a lot on this forum, but picking the right mix of active funds to get a fully diversified and balanced asset allocation is not that easy for the inexperienced investor. A post on here recently advised that even IFAs buy in their asset allocations, so it can't be that easy.

    With low cost multi asset funds you may not do as good as a well devised active or hybrid (active and passive) portfolio, but they are low maintenance and you have a level of confidence that they will give you decent long term returns, probably a lot better than most DIY active portfolios.
    Originally posted by Audaxer
    An IFA has a more difficult job than thee and me because they have to cater for a wide range of people, with varying risk profiles, varying objectives, and varying ages and incomes. They also have to work within the law, and can be sued if they make gross errors. This means that they must be able to demonstrate that their advice was indeed suitable for the given person. So no doubt it is for them easier and/or cheaper to buy in expert advice from external sources. The IFA can then get on with the part of the job they do best.

    As to your second paragraph, it is a quite reasonable and sensible point of view.
    • ivormonee
    • By ivormonee 7th Jan 18, 6:56 PM
    • 165 Posts
    • 102 Thanks
    ivormonee

    If you discover active is not your skill set
    Originally posted by TBC15
    Would you please explain what the skills are that are needed to be able to make the correct choices for active funds?
    • Audaxer
    • By Audaxer 7th Jan 18, 6:58 PM
    • 1,081 Posts
    • 635 Thanks
    Audaxer
    An IFA has a more difficult job than thee and me because they have to cater for a wide range of people, with varying risk profiles, varying objectives, and varying ages and incomes. They also have to work within the law, and can be sued if they make gross errors. This means that they must be able to demonstrate that their advice was indeed suitable for the given person. So no doubt it is for them easier and/or cheaper to buy in expert advice from external sources. The IFA can then get on with the part of the job they do best.

    As to your second paragraph, it is a quite reasonable and sensible point of view.
    Originally posted by BananaRepublic
    I'd be interested to know how you decided what funds and percentages of asset classes would be in your active asset allocation? Have you stuck mainly to the same percentages and same funds over the years? Do you regularly rebalance your portfolio?
    • ivormonee
    • By ivormonee 7th Jan 18, 7:03 PM
    • 165 Posts
    • 102 Thanks
    ivormonee
    I'd be interested to know how you decided what funds and percentages of asset classes would be in your active asset allocation?
    Originally posted by Audaxer
    I think these are two separate sets of choices. One decision, for any investor, is to decide what the asset allocation is going to be. Another, separate decision, is whether to fulfil the chosen allocation with passive funds or active ones.

    So I too am interested in the answer regarding the question of choice of active funds. How do you decide which active funds to use?
    • Audaxer
    • By Audaxer 7th Jan 18, 7:19 PM
    • 1,081 Posts
    • 635 Thanks
    Audaxer
    I think these are two separate sets of choices. One decision, for any investor, is to decide what the asset allocation is going to be. Another, separate decision, is whether to fulfil the chosen allocation with passive funds or active ones.

    So I too am interested in the answer regarding the question of choice of active funds. How do you decide which active funds to use?
    Originally posted by ivormonee
    From what I read the asset allocation in percentages is more important than the actual active funds you choose. I don't just mean the percentage of equities to bonds, I mean for the equity part alone, what percentage should you allocate to each country/region? What percentages to Large, Small and Mid cap, and should those differ for different regions? What percentages to different industry sectors etc.? I think if you get it right you will probably do better with an active portfolio, but knowing how to get the balance right seems difficult to me.
    • BananaRepublic
    • By BananaRepublic 7th Jan 18, 7:44 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    I'd be interested to know how you decided what funds and percentages of asset classes would be in your active asset allocation? Have you stuck mainly to the same percentages and same funds over the years? Do you regularly rebalance your portfolio?
    Originally posted by Audaxer
    I have always gone 100% equities (ignoring my home) as I invest for the long term. I also tried to spread around world markets, with a decent amount in the UK and Europe, but avoiding those I considered too volatile which included China and emerging markets. You might perhaps with reason criticise that decision but it was not unreasonable and kept me happy. One mistake I made was to invest in Japan 20 years ago. That country has had many false dawns, when experts said it was the place to invest, but only recently has that been true. Then again, that is on side of diversifying. Some investments work out, some donít, and one failure is not so bad.

    I had an Equitable Life pension and I transferred out when they imploded. I ended up doing extremely well unlike many poor souls. And I had various other pensions. Generally these pensions limit the range of funds you can access, and their charges are high, so all but my current work pension have been transferred to a SIPP. That also makes managing the funds easier since there is one logon, though for me management means gloating when the times are good, and hiding my head in the sand when they are not. I suspect an awful lot of people ignore their pension funds, and one benefit of an IFA is that they can advise on a transfer to reduce costs, and increase gains.

    Generally I stick with funds, and do not rebalance. The funds I bought that were poor performers were ones I bought 20 years ago and I did not research them properly. Over recent years I have become more adventurous with more small companies funds. And I am still invested in Japan. I know that rebalancing has good science behind it, but Iím sure it would have hit my portfolio growth.

    As I approach retirement, I will have to slowly transfer funds into less volatile asset classes, leaving the bulk in equities. As far as I can see annuities are not worth having, although they do offer some security.
    • ivormonee
    • By ivormonee 7th Jan 18, 7:44 PM
    • 165 Posts
    • 102 Thanks
    ivormonee
    From what I read the asset allocation in percentages is more important than the actual active funds you choose.
    Originally posted by Audaxer
    I'm not disputing this. In fact I totally agree. Your asset allocation will relate to your risk attitude, appetite, aversion... and maybe to some extent tactical decision-making regarding which sectors, regions etc. might be a better investment. I also agreed with you that the two other posters might like to explain how, once they've decided on their asset allocations, then go on to decide which active funds/ fund managers/ fund houses to use.
    • ivormonee
    • By ivormonee 7th Jan 18, 7:50 PM
    • 165 Posts
    • 102 Thanks
    ivormonee

    Generally I stick with funds, and do not rebalance. The funds I bought that were poor performers were ones I bought 20 years ago and I did not research them properly. Over recent years I have become more adventurous with more small companies funds.
    Originally posted by BananaRepublic
    So when you make your actively-managed fund choices, what process do you follow? It has been suggested in this thread, and elsewhere, that to have a portfolio of actively-managed funds you need to pick the right ones. So my question is, quite literally, how do you do this?
    • BananaRepublic
    • By BananaRepublic 7th Jan 18, 7:51 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    I think these are two separate sets of choices. One decision, for any investor, is to decide what the asset allocation is going to be. Another, separate decision, is whether to fulfil the chosen allocation with passive funds or active ones.

    So I too am interested in the answer regarding the question of choice of active funds. How do you decide which active funds to use?
    Originally posted by ivormonee
    I use a method that many others here use, and really there is no other unless you pick at random. Essentially I decide on a market or sector, such as UK small companies, and then I look for funds that have consistently good performance. By that I mean that they do not outperform because of one stellar year and nine modest ones. Clearly that stellar year is likely due to luck, so overall the fund performance is modest. But consistent good performance over ten years suggests a good fund with a sound methodology.

    When I read the personal finance pages in the newspapers, they all talk about such and such a manager having a sure fire method based on blah de blah, which will generate high returns. I ignore all that. It is no more than marketing spiel.
    • Filo25
    • By Filo25 7th Jan 18, 9:04 PM
    • 1,506 Posts
    • 2,198 Thanks
    Filo25
    I use a method that many others here use, and really there is no other unless you pick at random. Essentially I decide on a market or sector, such as UK small companies, and then I look for funds that have consistently good performance. By that I mean that they do not outperform because of one stellar year and nine modest ones. Clearly that stellar year is likely due to luck, so overall the fund performance is modest. But consistent good performance over ten years suggests a good fund with a sound methodology.

    When I read the personal finance pages in the newspapers, they all talk about such and such a manager having a sure fire method based on blah de blah, which will generate high returns. I ignore all that. It is no more than marketing spiel.
    Originally posted by BananaRepublic
    Pretty much what I have tried to do as part of building my portfolio for my SIPP (for the bits which will be active), as a relative noob I will no doubt make mistakes along the way, but I am actually interested in the process as well and willing to spend time on it, which is one of the reasons why I am willing to give active a go for various segments.

    I suppose my biggest concern will be how some funds will perform in the lean years given how long the bull run has been going, there aren't that many that have a track record with the same manager through the GFC.

    At the same time if going passive and just tracking global markets I would equally have concerns about the heavy US tech weighting at current valuations, or having heavy exposure to UK large cap which has been an uninspiring area for a while.

    I just don't see any one ideal methodology for investing, and I need to be sensible about reviewing my progress and making changes when required without overreacting.
    • Audaxer
    • By Audaxer 7th Jan 18, 9:29 PM
    • 1,081 Posts
    • 635 Thanks
    Audaxer
    And I had various other pensions. Generally these pensions limit the range of funds you can access, and their charges are high, so all but my current work pension have been transferred to a SIPP.
    Originally posted by BananaRepublic
    My concern would be having a significant amount all in one SIPP or S&S ISA on the one platform, as you would only be covered up to £50k by the FSCS if there was a major fraud. Although maybe a minimal risk I would not like all my eggs in the one basket if a significant sum.
    I know that rebalancing has good science behind it, but I!!!8217;m sure it would have hit my portfolio growth.
    If you have a number of volatile equity funds that have peaked at different times, I think rebalancing would have probably increased your portfolio growth as you would be selling when high and buying back when low.
    • BananaRepublic
    • By BananaRepublic 7th Jan 18, 9:48 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    My concern would be having a significant amount all in one SIPP or S&S ISA on the one platform, as you would only be covered up to £50k by the FSCS if there was a major fraud. Although maybe a minimal risk I would not like all my eggs in the one basket if a significant sum.
    If you have a number of volatile equity funds that have peaked at different times, I think rebalancing would have probably increased your portfolio growth as you would be selling when high and buying back when low.
    Originally posted by Audaxer
    I invest mostly with You Invest, and they do not own my funds, they are simply the financial advisor. So for major fraud it would require them to sell my funds and walk off with my money. I believe that would be rather hard for someone to do. For one thing I would be alerted to the presence of a sell order which would allow me to warn You Invest that something was wrong. I suppose someone could corrupt the system so as not to alert me, and then to siphon off the money, but it would be rather hard given that the software is managed by a team and it would require complex changes in many areas. So yes it is possible, but so unlikely that I am not worried.

    Regarding rebalancing, Iím not convinced. It would have consistently taken money away from my Jupiter European fund, which has always excelled. And it would have shoved money into my Japan fund which for 15 years was poor, due to the market being poor.
    • Linton
    • By Linton 7th Jan 18, 9:52 PM
    • 9,395 Posts
    • 9,529 Thanks
    Linton
    I use a method that many others here use, and really there is no other unless you pick at random. Essentially I decide on a market or sector, such as UK small companies, and then I look for funds that have consistently good performance. By that I mean that they do not outperform because of one stellar year and nine modest ones. Clearly that stellar year is likely due to luck, so overall the fund performance is modest. But consistent good performance over ten years suggests a good fund with a sound methodology.

    .....
    Originally posted by BananaRepublic
    Me also +
    1) Sector distribution - eg large overweight position in any sectors particularly tech or finance is a bad sign.
    2) If there is a choice of funds that meet the other criteria, performance during the bad years can be more important than performance in the good ones.
    • chrisgg
    • By chrisgg 7th Jan 18, 10:03 PM
    • 61 Posts
    • 52 Thanks
    chrisgg
    So when you make your actively-managed fund choices, what process do you follow? It has been suggested in this thread, and elsewhere, that to have a portfolio of actively-managed funds you need to pick the right ones. So my question is, quite literally, how do you do this?
    Originally posted by ivormonee
    There are many ways of doing this, but my method is fairly simple.

    Look at discrete annual performance, short term performance (3yrs) and long term performance (10yrs+) to find the consistent. Try not to be overweight to funds with heavy weightings in certain sectors or too concentrated, and I always try to find reasons why a fund has outperformed or underperformed. A good example of this is Woodford, who outperformed the market in 2014/15 with his low weighting to commodities, but then lagged it when commodities rallied later on.

    I'll also look at ratios such as beta and volatility to gauge risk adjusted return. It's no good simply picking the best performing fund in a sector if the only reason it outperforms is because it takes more risk than the rest.
    • Thrugelmir
    • By Thrugelmir 7th Jan 18, 10:25 PM
    • 58,936 Posts
    • 52,260 Thanks
    Thrugelmir
    Would you please explain what the skills are that are needed to be able to make the correct choices for active funds?
    Originally posted by ivormonee

    Without a crystal ball no one can ever make 100% correct investment decisions.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • sixpence.
    • By sixpence. 7th Jan 18, 11:30 PM
    • 138 Posts
    • 31 Thanks
    sixpence.
    Thanks so much to everyone who is sharing their techniques for choosing active funds I would love to make my portfolio 100% equity (mainly because bonds seem dull and I am probably greedy) but everything I read basically says "If you make your portfolio 100% equity you are being a silly sausage so don't do that!" (mine will be 28% bonds in total)

    Me also +
    1) Sector distribution - eg large overweight position in any sectors particularly tech or finance is a bad sign.
    2) If there is a choice of funds that meet the other criteria, performance during the bad years can be more important than performance in the good ones.
    Originally posted by Linton
    If you had to choose a sector to be overweight in what would you choose and why? Many of the funds I am looking at tend to favour banks/software which is sort of annoying. I am looking to diversify as much as possible.

    I am getting a strong sense reading this that a lot posters simply pick a group of diverse, active funds which have preformed the best over the last ten years? This all seems a bit too simple. Are there any other ways of picking? I know with shares it is important to read through annual reports and listen to conference calls, in order to get a sense of where the stock may be going, is there any such meticulous selection process for managed funds?
    • Prism
    • By Prism 7th Jan 18, 11:45 PM
    • 366 Posts
    • 285 Thanks
    Prism
    If you had to choose a sector to be overweight in what would you choose and why? Many of the funds I am looking at tend to favour banks/software which is sort of annoying. I am looking to diversify as much as possible.
    Originally posted by sixpence.
    I am overweight consumer defensive, tech and healthcare, evens on industrials and underweight pretty much everything else. I am 100% in equities but hope that my defensive stocks will hold up if there is a crash or pullback.

    I am getting a strong sense reading this that a lot posters simply pick a group of diverse, active funds which have preformed the best over the last ten years? This all seems a bit too simple. Are there any other ways of picking? I know with shares it is important to read through annual reports and listen to conference calls, in order to get a sense of where the stock may be going, is there any such meticulous selection process for managed funds?
    Some fund managers do put a fair amount of effort into explaining their methods, but not many. You can watch Terry Smith and Nick Train on YouTube. Fundsmith and Scottish Mortgage both hold detailed AGMs which you can watch or read. Neil Woodford (or his team) blogs on his website several times a month. It was this sort of stuff that led me to invest in Lindselltrain and Fundsmith funds, in additiona to their outstanding historical performance.
    • firestone
    • By firestone 8th Jan 18, 12:41 AM
    • 246 Posts
    • 106 Thanks
    firestone
    Thanks so much to everyone who is sharing their techniques for choosing active funds I would love to make my portfolio 100% equity (mainly because bonds seem dull and I am probably greedy) but everything I read basically says "If you make your portfolio 100% equity you are being a silly sausage so don't do that!" (mine will be 28% bonds in total)



    If you had to choose a sector to be overweight in what would you choose and why? Many of the funds I am looking at tend to favour banks/software which is sort of annoying. I am looking to diversify as much as possible.

    I am getting a strong sense reading this that a lot posters simply pick a group of diverse, active funds which have preformed the best over the last ten years? This all seems a bit too simple. Are there any other ways of picking? I know with shares it is important to read through annual reports and listen to conference calls, in order to get a sense of where the stock may be going, is there any such meticulous selection process for managed funds?
    Originally posted by sixpence.
    For the average investor It could be as simple as looking at the last Ten years as well as 1&3 & 5 and looking at max drawdown & standard deviation and the info online,company fact sheets etc or you could do much more work(or as others will say go passive and probably save time).A couple of months back i was looking at VLS 80&60 as a pension fund choice on Citywire and on all time scales you can see funds from TB wise & Royal London consistently near the top of the tables so maybe worth a look if i go that route.But they will have nothing like the same makeup as VLS and on Trustnet are even in different sectors.And the past performance is no guide quote will come into play which is when it stops being simple
    Last edited by firestone; 08-01-2018 at 12:50 AM.
    • TBC15
    • By TBC15 8th Jan 18, 1:22 AM
    • 495 Posts
    • 251 Thanks
    TBC15
    Would you please explain what the skills are that are needed to be able to make the correct choices for active funds?
    Originally posted by ivormonee
    The ability to interpret a graph has got to be high on the list, in fact when I think about it thatís about it for me.

    Time will let you know if active is the thing for you.
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