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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 7
    • BananaRepublic
    • By BananaRepublic 8th Jan 18, 9:02 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    Ivormonee: Firstly I'd like to suggest that you increase your allocation of banana assets, 5% is far too low. Secondly, I'm with you, I leave stock choosing to the managers.

    However, I can understand that some investors might wish to delve deeper. If you believe, that bananas are becoming a bubble, with grossly inflated values, then you might decide to purposefully avoid funds overweighted in bananas. Yes I know that is second guessing the managers, but some might wish to do that. Alternatively you might discover that the underlying reason for a funds performance over the last ten years has been investment in bananas, which have shown a healthy growth. So you might decide that the fund is too dependent on one asset, and that its future was not good. Again this is second guessing the manager, but I can see that it is a valid approach. In fact its one step beyond checking for consistent performance over ten years. Not only are you checking that growth is not due to one or two lucky years, but you are also checking that it is not due to a lucky pick of a given sector, in this case delicious and nutritious bananas.

    Anyway, the thread title is misleading. It's not a war. Active and passive funds have a place. What is important is that the investor understands what she is buying sufficiently well to make a wise choice, be that passive or active. I am in agreement with Boston that index funds are probably safer, and a better choice for those unwilling or unable to learn, or who do not care, though even then they still require some care as some indices are rather volatile.
    • Prism
    • By Prism 8th Jan 18, 9:47 PM
    • 369 Posts
    • 287 Thanks
    Prism
    So, if you've already decided you want 10% in Japanese equity, you pick, say the XYZ Japanes Equity index fund.
    Originally posted by ivormonee
    See, thats not how I would pick a Japan index fund though. There are as many passive Japanese funds as there are active ones. Do you track the Nikkei or the Topix? Large, mid or small cap. You can hedge currency or not hedge. There are passive funds that only invest in ethical companies or value companies. You can get global passive funds that are overweight Japan that only invest in robotics.

    These decisions are just the same as if you go for an active fund in a region. In fact I would say that passive funds give you more options and more control whereas using an active fund allows the manager to make some of those choices for you.
    • MatthewAinsworth
    • By MatthewAinsworth 8th Jan 18, 10:01 PM
    • 3,079 Posts
    • 1,224 Thanks
    MatthewAinsworth
    Finding a good active manager is work itself and something to feel insecure about whether they'll continue to perform, with index you don't have those worries
    • ivormonee
    • By ivormonee 8th Jan 18, 10:06 PM
    • 165 Posts
    • 102 Thanks
    ivormonee
    See, thats not how I would pick a Japan index fund though. There are as many passive Japanese funds as there are active ones. Do you track the Nikkei or the Topix? Large, mid or small cap. You can hedge currency or not hedge. There are passive funds that only invest in ethical companies or value companies. You can get global passive funds that are overweight Japan that only invest in robotics.

    These decisions are just the same as if you go for an active fund in a region. In fact I would say that passive funds give you more options and more control whereas using an active fund allows the manager to make some of those choices for you.
    Originally posted by Prism
    You are right, but those decisions (or most of them, anyway) are asset allocation decisions, not fund decisions. At the asset allocation stage, prior to choosing any funds, you would decide how you wish to split your money across different assets. So you might say, for example, you'd like to have 10% in Japan but that 6% might be in large companies with a 4% allocation to small caps. Or you might decide to hedge your currency exposure. Or some other tweak. The point is, once you've made your decisions you then delve into the available fund universe and look at the funds that might do the job. You are right that there may be more than one index, eg. for Japan there'll be the Topix, Nikkei, MSCI, FTSE etc. and yes, that would form part of the decision as to which fund(s) to choose.
    • Audaxer
    • By Audaxer 8th Jan 18, 10:19 PM
    • 1,086 Posts
    • 637 Thanks
    Audaxer
    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.
    Originally posted by ivormonee
    From my understanding, experienced investors look at it this way - if an active manager goes overweight in a particular area, say Technology, it is probably the right thing to do for his fund as you would trust his knowledge and experience. However as that fund is only part of your portfolio which may already be overweight in Technology, you may decide that fund is now not best for your portfolio as you have already enough Technology, so you would look for a different fund in the same region, but with less Technology. That is the way I understand it from reading some of the earlier posts from more experienced investors.
    • Prism
    • By Prism 8th Jan 18, 10:34 PM
    • 369 Posts
    • 287 Thanks
    Prism
    You are right, but those decisions (or most of them, anyway) are asset allocation decisions, not fund decisions. At the asset allocation stage, prior to choosing any funds, you would decide how you wish to split your money across different assets. So you might say, for example, you'd like to have 10% in Japan but that 6% might be in large companies with a 4% allocation to small caps. Or you might decide to hedge your currency exposure. Or some other tweak. The point is, once you've made your decisions you then delve into the available fund universe and look at the funds that might do the job. You are right that there may be more than one index, eg. for Japan there'll be the Topix, Nikkei, MSCI, FTSE etc. and yes, that would form part of the decision as to which fund(s) to choose.
    Originally posted by ivormonee
    Thats why I invest in Japan using actives though. I don't feel capable in the slightest in working out those allocations across all the passive choices. I would almost certainly guess wrong ( I know nothing really about the Japanese economy). I know one thing which is I don't want to particularly invest in lots of large corps heavily dependent on the Yen/Dollar rate. So I pay an active manager to make that choice for me to some degree by choosing a mid cap fund that can extend either way.

    The standard option to invest in a large cap index only seems to work well in the US. I also use passive funds for sector allocation like 'health', 'robotics' etc
    • sixpence.
    • By sixpence. 8th Jan 18, 10:36 PM
    • 138 Posts
    • 31 Thanks
    sixpence.
    I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!
    • k6chris
    • By k6chris 8th Jan 18, 10:51 PM
    • 222 Posts
    • 385 Thanks
    k6chris
    So if you know roughly what allocations you want in term of geography, sectors, industry areas etc, could it make sense to use low cost passives to build the allocation model you want??
    EatingSoup
    • MatthewAinsworth
    • By MatthewAinsworth 8th Jan 18, 10:51 PM
    • 3,079 Posts
    • 1,224 Thanks
    MatthewAinsworth
    The more that indexing takes over the more pricing inefficiency there will be for active to genuinely exploit, so there will always be space for both styles
    • Linton
    • By Linton 8th Jan 18, 10:53 PM
    • 9,395 Posts
    • 9,529 Thanks
    Linton
    From my understanding, experienced investors look at it this way - if an active manager goes overweight in a particular area, say Technology, it is probably the right thing to do for his fund as you would trust his knowledge and experience. However as that fund is only part of your portfolio which may already be overweight in Technology, you may decide that fund is now not best for your portfolio as you have already enough Technology, so you would look for a different fund in the same region, but with less Technology. That is the way I understand it from reading some of the earlier posts from more experienced investors.
    Originally posted by Audaxer
    That is how I would view things. In practice it's not a major issue as I only rarely buy new funds, and having a range of funds scattered across the world what one manager decides in his sector allocation tends not to have a major impact on the portfolio as a whole. Also, managers dont often make major changes in their allocations. They tend to have their own style and keep to it. But if the portfolio was rebalanced for other reasons, eg having sold a fund for drawdown, the sector allocation could affect how the holdings were redistributed.

    The important point is that one isnt looking for next year's Best Fund but rather for a fund which fits well with the rest of one's portfolio. The former aim is rarely achievable the latter much easier and the results longer lasting.
    • firestone
    • By firestone 8th Jan 18, 10:56 PM
    • 246 Posts
    • 106 Thanks
    firestone
    Finding a good active manager is work itself and something to feel insecure about whether they'll continue to perform, with index you don't have those worries
    Originally posted by MatthewAinsworth
    You do have the worry of will they continue to perform but you still have a worry that an index will perform and some managers may even be able to stop some of the downside in a market correction - he says fingers crossed
    • BananaRepublic
    • By BananaRepublic 8th Jan 18, 10:56 PM
    • 1,192 Posts
    • 874 Thanks
    BananaRepublic
    I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!
    Originally posted by sixpence.
    Damn. So Iíll have to cancel the Kalashnikov order then. Canít we at least throw custard pies? Go on ...
    • ivormonee
    • By ivormonee 8th Jan 18, 11:22 PM
    • 165 Posts
    • 102 Thanks
    ivormonee
    I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!
    Originally posted by sixpence.
    Huh! Bit late for that now! ;-)
    • firestone
    • By firestone 8th Jan 18, 11:23 PM
    • 246 Posts
    • 106 Thanks
    firestone
    I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!
    Originally posted by sixpence.
    Don't worry it won't really kick off till you make your final choices!
    • Linton
    • By Linton 8th Jan 18, 11:27 PM
    • 9,395 Posts
    • 9,529 Thanks
    Linton
    So if you know roughly what allocations you want in term of geography, sectors, industry areas etc, could it make sense to use low cost passives to build the allocation model you want??
    Originally posted by k6chris
    You could try. There are problems though...

    Market capitalisation weighting gets in the way. For example if you invest passively in the USA you are stuck with Apple, Google, Facebook etc as your largest holdings. You are constrained by the asset allocation of the index. And you cant easily remove what you may consider to be overweight sectors by adding subsidiary funds. With active funds you have a much better choice of asset allocations within a geography.

    Another example - every major exchange has a few world class banks at or near the top of the main index. As we saw in the great crash, given the global economy these can be highly correlated. Oil companies are similar though they havent yet suffered a global crash, but they could in the future. With active funds you can spread the risk.

    Small Companies can be a problem for index funds. Again market capitalisation weighting doesnt help, neither does the inability to select out the many companies that probably arent going anywhere,

    Then the question is why would you want to try to do it with passive funds. It is hard enough to juggle the allocations as it is, why would you do it with one arm tied behind your back?

    It seems to me that if you really believe in passive funds the only logical equity investment approach is to buy a single global index tracker, preferably an all cap one, and leave it at that. After all if anything is The Market that must be about as close as you can get to it. Messing about with allocations is counter to the whole spirit of passive investing.
    • sixpence.
    • By sixpence. 8th Jan 18, 11:35 PM
    • 138 Posts
    • 31 Thanks
    sixpence.
    Hahaha very funny

    Current thoughts re portfolio structure are:

    Index funds:

    73% VLS (60% equity)
    10% Asia ex Japan tracker
    3% Global tech tracker

    Managed funds:

    3% Japan small caps
    3% Europe growth ex UK
    3% China
    3% UK small caps
    2% India

    Top two sectors of equities currently work out at: 19% tech, 14.4% financial, after that it's like 6-7% industrials, healthcare etc

    I figure this is geographically diverse enough. All I need to do now is find decent funds that aren't too expensive and make sure as I choose that my sectors don't get un-diversified. Easier said than done really
    Last edited by sixpence.; 08-01-2018 at 11:41 PM.
    • Audaxer
    • By Audaxer 9th Jan 18, 10:24 AM
    • 1,086 Posts
    • 637 Thanks
    Audaxer
    Hahaha very funny

    Current thoughts re portfolio structure are:

    Index funds:

    73% VLS (60% equity)
    10% Asia ex Japan tracker
    3% Global tech tracker

    Managed funds:

    3% Japan small caps
    3% Europe growth ex UK
    3% China
    3% UK small caps
    2% India

    Top two sectors of equities currently work out at: 19% tech, 14.4% financial, after that it's like 6-7% industrials, healthcare etc

    I figure this is geographically diverse enough. All I need to do now is find decent funds that aren't too expensive and make sure as I choose that my sectors don't get un-diversified. Easier said than done really
    Originally posted by sixpence.
    If you set up that portfolio, it would be interesting to see whether the returns on your overall portfolio are higher than on your VLS60 alone.

    Also, if some of your active funds take a dip when the VLS60 makes gains are you prepared to sell some VLS60 and buy more of the active funds to rebalance back to your original percentages?
    • TBC15
    • By TBC15 9th Jan 18, 12:06 PM
    • 495 Posts
    • 251 Thanks
    TBC15
    I just want to quickly clarify that this thread was titled in jest. I am not actually trying to start an investing war!
    Originally posted by sixpence.
    Step outside and say that.
    • bostonerimus
    • By bostonerimus 9th Jan 18, 1:32 PM
    • 1,946 Posts
    • 1,283 Thanks
    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.
    Originally posted by BananaRepublic
    Agreed, I was not contradicting you, more questioning your emphasis.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 9th Jan 18, 1:48 PM
    • 1,946 Posts
    • 1,283 Thanks
    bostonerimus
    So if you know roughly what allocations you want in term of geography, sectors, industry areas etc, could it make sense to use low cost passives to build the allocation model you want??
    Originally posted by k6chris
    That's what i suggested above. You can certainly use a number of index funds to create you own portfolio, Vanguard does just that in their VLS multi-asset funds. It can get a little complicated, but managing say 10 funds in a portfolio, be they active or passive, requires some work. If you want to keep allocations stable it can be a bit more work with actives as they have more latitude to change their internal allocations, but they do have stated guidelines and rules for that. The laser focus on allocations within sectors seems like diminishing returns to me as there are so many unknowns and plain guess work involved. People desire control but I fear that the active approach only gives the illusion of control and that bigger and more random powers ultimately decide the outcome.
    Misanthrope in search of similar for mutual loathing
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