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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 6
    • bostonerimus
    • By bostonerimus 8th Jan 18, 3:27 AM
    • 1,936 Posts
    • 1,277 Thanks
    bostonerimus
    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.
    There's a lot of numerology and plain guess work at play, and faith that a good manager will continue to be good. I choose not to go down that rabbit hole.
    Misanthrope in search of similar for mutual loathing
    • Linton
    • By Linton 8th Jan 18, 5:07 AM
    • 9,394 Posts
    • 9,527 Thanks
    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.
    Originally posted by sixpence.
    In my case it!!!8217;s more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.

    Also sectors are divided into categories eg defensive, growth, cyclical. Again I try to avoid over dependence in any category.

    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?
    Has anyone said this? Simple period performance is a factor but certainly not the only one.

    There is fundamental data to justify (or not) share prices. Things such as profit or loss, size of company, level of debt etc that is readily available. This I find more useful than annual reports or analysts views. There isn!!!8217;t anything equivalent for funds, the price is simply determined by the shares the fund holds. That is what is important, in some cases the particular shares but mainly the split between geographies, sectors.and company sizes.

    There are !!!8220;conviction!!!8221; funds where the manager has strong over riding views on the shares that should be held eg Fundsmith. With these ones the manager!!!8217;s views and predictions are important. However I tend to avoid such funds as they are often unbalanced and it!!!8217;s difficult to see how they fit into a wider portfolio.
    Last edited by Linton; 08-01-2018 at 5:11 AM.
    • k6chris
    • By k6chris 8th Jan 18, 7:18 AM
    • 221 Posts
    • 380 Thanks
    k6chris
    In my case itís more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.
    Originally posted by Linton
    Linton, how do you work your overall allocation out? Is there a tool that you can input your funds into and will work allocation / risk etc out for you, or is it a manual process? Thanks.
    EatingSoup
    • TheTracker
    • By TheTracker 8th Jan 18, 7:27 AM
    • 1,213 Posts
    • 1,198 Thanks
    TheTracker
    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.
    I found this interesting http://www.lloydsbankinggroup.com/globalassets/documents/media/press-releases/halifax/2013/1406_hsdl_markettracker.pdf

    Asked what the most influential filter was when selecting funds, c60% said past performance or yield.
    • Linton
    • By Linton 8th Jan 18, 9:23 AM
    • 9,394 Posts
    • 9,527 Thanks
    Linton
    Linton, how do you work your overall allocation out? Is there a tool that you can input your funds into and will work allocation / risk etc out for you, or is it a manual process? Thanks.
    Originally posted by k6chris
    Morningstar portfolio Xray. Trustnet portfolio and some of the platforms have similar though not so comprehensive facilities.
    • Linton
    • By Linton 8th Jan 18, 9:28 AM
    • 9,394 Posts
    • 9,527 Thanks
    Linton
    I found this interesting http://www.lloydsbankinggroup.com/globalassets/documents/media/press-releases/halifax/2013/1406_hsdl_markettracker.pdf

    Asked what the most influential filter was when selecting funds, c60% said past performance or yield.
    Originally posted by TheTracker
    Yield is of course important if you are after income. It is far more consistent over time than relative performance. Yield is a different criterion to performance - you cant regard them as one.
    • sixpence.
    • By sixpence. 8th Jan 18, 12:38 PM
    • 138 Posts
    • 31 Thanks
    sixpence.
    In my case itís more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.
    Originally posted by Linton
    Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. Is that too much for the two dominating sectors? It's because I have a global tech tracker in there and the VLS 60 already has quite a bit of tech.

    Note: with the VLS 60 it is obviously 28% bonds. Most of the tech is based in the USA but some in Asia.
    Last edited by sixpence.; 08-01-2018 at 12:50 PM.
    • Linton
    • By Linton 8th Jan 18, 1:05 PM
    • 9,394 Posts
    • 9,527 Thanks
    Linton
    Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. Is that too much for the two dominating sectors? It's because I have a global tech tracker in there and the VLS 60 already has quite a bit of tech.
    Originally posted by sixpence.
    I would treat the equity part of your portfolio completely separately to the bond part. If your % refers to the equity part then there isnt any obvious problem - my %s in those 2 sectors are a bit higher. I wouldnt seek to increase the overall tech % but would look elsewhere for future investments. However you may be willing to take greater risk if you feel the prospective return justifies it.

    If the 16.6% tech refers to the overall portfolio, as I guess it does, then holding extra tech alongside a tracker which already includes significant tech is more open to question. I am not saying it's wrong, but rather it's something you should be able to justify to yourself.

    Looking at allocations is more about enabling one to focus on potential issues rather than obeying hard and fast rules.
    • Prism
    • By Prism 8th Jan 18, 1:11 PM
    • 363 Posts
    • 280 Thanks
    Prism
    Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. .
    Originally posted by sixpence.
    The MCSI world index is 18.1% financials and 16.8% technology if that helps
    • bowlhead99
    • By bowlhead99 8th Jan 18, 1:22 PM
    • 7,975 Posts
    • 14,513 Thanks
    bowlhead99
    Looking at allocations is more about enabling one to focus on potential issues rather than obeying hard and fast rules.
    Originally posted by Linton
    I tend to agree with that.

    When building a portfolio out of multiple funds to cover all the areas you want to cover, it would be very tricky to say I am targeting exactly x.x% in this sector. You could spend hours fiddling to tweak it, and ultimately who is to say that x.x% is the 'correct' figure.

    Really what you are trying to do is to say this portfolio doesn't work for me because it has y% in [sector A] and that seems like too much for me based on my view of issue [whatever], or of the prospective volatility of [a sector or region or currency]. Or, it doesn't work for me because it only has z% in [sector A] and that doesn't seem like anywhere near enough exposure to such businesses or regions or asset classes. Once you fix both of those problems (being definitely too high or too low) you will be in a range where that sector, or that region, or that asset class, is 'fine with me'.

    For example, 30% tech might be too much for me and 1% might be not enough. I can tell you both of those things more easily and definitively than I can tell you that I want 16.4827% tech, because the latter is just going to be some arbitrary made up number.

    So it's more about stopping a portfolio being unattractive - a process which will make it more suitable/acceptable for your needs... rather than saying how do I go all Weird Science and build a perfect ten, from scratch.

    But there are various sectors and regions and asset classes you have to get happy with, so the task can become complex; when adding or removing a fund that contains a bit more A or a bit less A will also change the amount of B.
    • ivormonee
    • By ivormonee 8th Jan 18, 2:00 PM
    • 167 Posts
    • 102 Thanks
    ivormonee
    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?
    • firestone
    • By firestone 8th Jan 18, 2:38 PM
    • 246 Posts
    • 106 Thanks
    firestone
    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
    • BananaRepublic
    • By BananaRepublic 8th Jan 18, 2:58 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    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?
    Originally posted by ivormonee
    Not really. Traditionally active funds specialise in a market or a sector such as UK smaller companies, or technology. The investor decides which markets and/or sectors they want to go into, which in part determines the level of risk they are willing to accept. So I have some UK, European and Japanese smaller companies funds for example. UK and European markets are considered safer than many, but smaller companies are higher risk. I avoid China because rightly or wrongly I consider it too high risk. I avoid more specialised funds, such as technology, as I have decided that the managers of my funds should decide whether or not to invest in these sectors, and to what degree. I am not willing to do research, and so I have decided that I will buy a portfolio of funds from markets I feel comfortable investing in. I'm not saying this is the best approach, and it may not be a very good one, but it suits me and it has given me decent returns over the past few decades.

    In the past people have often done the same sort of thing with index funds, choosing the indices which they think are worth tracking.

    The Vanguard Life funds, which are the darling of this forum, are a bit unusual in that they invest in index funds over a range of markets, albeit predominantly the US.
    • TBC15
    • By TBC15 8th Jan 18, 3:44 PM
    • 493 Posts
    • 250 Thanks
    TBC15
    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?
    Originally posted by ivormonee
    Not all conscious active investors are the same.

    Not all passive investors are the same.

    Generalising is where all the misinformation starts.
    • Audaxer
    • By Audaxer 8th Jan 18, 4:52 PM
    • 1,080 Posts
    • 634 Thanks
    Audaxer
    The Vanguard Life funds, which are the darling of this forum, are a bit unusual in that they invest in index funds over a range of markets, albeit predominantly the US.
    Originally posted by BananaRepublic
    Trustnet shows that the VLS60 has 36.8% of its portfolio in the US, which doesn't seem too much to me.
    • bostonerimus
    • By bostonerimus 8th Jan 18, 5:09 PM
    • 1,936 Posts
    • 1,277 Thanks
    bostonerimus
    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
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 8th Jan 18, 5:11 PM
    • 1,936 Posts
    • 1,277 Thanks
    bostonerimus

    The Vanguard Life funds, which are the darling of this forum, are a bit unusual in that they invest in index funds over a range of markets, albeit predominantly the US.
    Originally posted by BananaRepublic
    I would say that they show a domestic bias and overweight UK equities rather than US.
    Misanthrope in search of similar for mutual loathing
    • BananaRepublic
    • By BananaRepublic 8th Jan 18, 7:57 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    Trustnet shows that the VLS60 has 36.8% of its portfolio in the US, which doesn't seem too much to me.
    Originally posted by Audaxer
    The VLS100 has 44% in the US and only 12.58 % in Europe excluding UK. The UK allocation is relatively high at 25%. Whether you agree with that, you need to be aware what you are getting.
    • BananaRepublic
    • By BananaRepublic 8th Jan 18, 8:01 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    I would say that they show a domestic bias and overweight UK equities rather than US.
    Originally posted by bostonerimus
    What you say is not contradicting what I have said, and yes they also show a UK domestic bias.

    As an aside, several pensions advisors over the decades suggested to me that roughly one third US, one third UK and one third Europe was a good equities split. I mention this as a comment on the UK advisors mentality in my experience.
    • ivormonee
    • By ivormonee 8th Jan 18, 8:25 PM
    • 167 Posts
    • 102 Thanks
    ivormonee
    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.
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