Does every "active" fund have a similar "passive" equivalent
Discussion
Is there an index or tracker equivalent for most actively managed funds?
For example, I've noticed quite a few popular active funds (promoted on Morningstar) actually track the S&P500 very closely. So over the last 10 years you would get nearly the same performance as if you had invested in an index tracker on the S&P500, just without the actively managed cost.
So I am wondering, is there an "index" fund for nearly every active fund?
This is a good example : Baron Global Advantage Equity B EUR Acc
This is a very high target growth, active fund. Is there a good index fund (or combination of index funds) which would correlate to the gains/losses this type of active fund generates? Or are they picking companies which don't easily fit into an index tracking model?
For example, I've noticed quite a few popular active funds (promoted on Morningstar) actually track the S&P500 very closely. So over the last 10 years you would get nearly the same performance as if you had invested in an index tracker on the S&P500, just without the actively managed cost.
So I am wondering, is there an "index" fund for nearly every active fund?
This is a good example : Baron Global Advantage Equity B EUR Acc
This is a very high target growth, active fund. Is there a good index fund (or combination of index funds) which would correlate to the gains/losses this type of active fund generates? Or are they picking companies which don't easily fit into an index tracking model?
Burwood said:
There is no such thing because by definition a tracker, tracks the index (and can not deviate from it which is why stocks move as they get added/removed from various indices and an active fund aims to outperform the index by choosing specific constituent companies
Yes, in theory, but in reality it often doesn't work that way. I have been comparing a few very popular active funds and it is quite easy to put together a single or small group of index funds which would track the active funds almost perfectly (and at lower cost). And not just over a few months, but for over a decade.Morningstar give an "x-ray" feature for each fund so you can see the type of companies and geographic locations. So whilst you might not have exactly the same companies in the index as is in the active fund, it doesn't seem that difficult to replicate the performance.
But I'm wondering how far this goes, and whether they is a good match for nearly all active funds, or if it only applies to the ones I happen to have looked at so far.
EddieSteadyGo said:
Burwood said:
There is no such thing because by definition a tracker, tracks the index (and can not deviate from it which is why stocks move as they get added/removed from various indices and an active fund aims to outperform the index by choosing specific constituent companies
Yes, in theory, but in reality it often doesn't work that way. I have been comparing a few very popular active funds and it is quite easy to put together a single or small group of index funds which would track the active funds almost perfectly (and at lower cost). And not just over a few months, but for over a decade.Morningstar give an "x-ray" feature for each fund so you can see the type of companies and geographic locations. So whilst you might not have exactly the same companies in the index as is in the active fund, it doesn't seem that difficult to replicate the performance.
But I'm wondering how far this goes, and whether they is a good match for nearly all active funds, or if it only applies to the ones I happen to have looked at so far.
EddieSteadyGo said:
So I am wondering, is there an "index" fund for nearly every active fund?
Most active managers will have a "style", which is some combination of geography, sector focus, leverage, company size, growth focus etc. If you know the active manger's preferences you can select a suitable benchmark. Many active managers will propose benchmarks of their own, but they often sandbag them to be able to show outperformance ("alpha")EddieSteadyGo said:
Burwood said:
There is no such thing because by definition a tracker, tracks the index (and can not deviate from it which is why stocks move as they get added/removed from various indices and an active fund aims to outperform the index by choosing specific constituent companies
Yes, in theory, but in reality it often doesn't work that way. I have been comparing a few very popular active funds and it is quite easy to put together a single or small group of index funds which would track the active funds almost perfectly (and at lower cost). And not just over a few months, but for over a decade.Morningstar give an "x-ray" feature for each fund so you can see the type of companies and geographic locations. So whilst you might not have exactly the same companies in the index as is in the active fund, it doesn't seem that difficult to replicate the performance.
But I'm wondering how far this goes, and whether they is a good match for nearly all active funds, or if it only applies to the ones I happen to have looked at so far.
You either want active management or a tracker. A UK managed large cap fund will closely replicate a FTSE 100 tracker. If you want to invest in UK large cap stock there is an argument you should just buy a FTSE100 tracker.
But if you want specific exposure to specific sectors you are unlikely to find a passive equivalent.
NickCQ said:
Most active managers will have a "style", which is some combination of geography, sector focus, leverage, company size, growth focus etc. If you know the active manger's preferences you can select a suitable benchmark. Many active managers will propose benchmarks of their own, but they often sandbag them to be able to show outperformance ("alpha")
That is exactly what I was thinking. From the active funds I have looked at, it seems less about picking specific stocks, but more about specific sectors/types. So if an active fund was mainly "small cap", "high growth", and with a 70% split "USA" vs "UK" then if you put that together in a couple of index funds in the right proportions you will match the performance.EddieSteadyGo said:
NickCQ said:
Most active managers will have a "style", which is some combination of geography, sector focus, leverage, company size, growth focus etc. If you know the active manger's preferences you can select a suitable benchmark. Many active managers will propose benchmarks of their own, but they often sandbag them to be able to show outperformance ("alpha")
That is exactly what I was thinking. From the active funds I have looked at, it seems less about picking specific stocks, but more about specific sectors/types. So if an active fund was mainly "small cap", "high growth", and with a 70% split "USA" vs "UK" then if you put that together in a couple of index funds in the right proportions you will match the performance.Burwood said:
I see what you're saying. A tech tracker, Industrials, Human Sciences, Energy, Consumer Staples etc... OR a fund of funds (indices). it's a case of wading through the data on what is available.
Yes, it could get complicated, but interestingly from the popular active funds I have checked (which get the top marks on morningstar) they are basically S&P500 trackers with a percentage of bonds to smooth some of the peaks. So not that special imho. EddieSteadyGo said:
Burwood said:
I see what you're saying. A tech tracker, Industrials, Human Sciences, Energy, Consumer Staples etc... OR a fund of funds (indices). it's a case of wading through the data on what is available.
Yes, it could get complicated, but interestingly from the popular active funds I have checked (which get the top marks on morningstar) they are basically S&P500 trackers with a percentage of bonds to smooth some of the peaks. So not that special imho. 1. It's great that someone invests in stocks to start with!
2. Nothing wrong with trackers. They certain have their pros. If you are not able or willing to take a more active role in monitoring or have a nervous disposition
3. If you have already made your wealth and just want it ticking along
4. If you haven't made your wealth and see a 10/15/20 year window, are younger with good income and surplus cash then another product might be more suited.
5. There is something for everyone out there, from ETF trackers to active funds to private SIPPS which you mange yourself. Or a combination
GT03ROB said:
I'm not sure I really understand what you are trying to achieve.
...
I am probably going down a well trodden path but which is new to me....up to recently, I've given little time to thinking about investments - I've paid the maximum into my pension for quite a few years, which has gone into a single balanced global index fund, and I've used the rest of my money to underpin my business, which of course I hope will offer the best returns in the longer term....
But my business is now needing much less financial support, I am pretty much at the LTA for my pension and so I'm fortunate where I have some more money available to invest over and above what is possible in ISAs or pensions. So I initially opened a general savings account with Vanguard and mirrored my pension investment. But then I started to think more carefully (for the first time) where I should I invest.
Then I started looking on websites like Morningstar and found they have a whole collection of funds (many active) which are ranked by performance, and which have outperformed my index fund - so I was thinking maybe I needed a different general account (not Vanguard) so I could access some of these high performing active funds. Then I subscribed to the morningstar premium service so I could look at the fund "x-ray" and started looking at tools like portfoliovisualizer.com to understand how it worked.
At that point, I realised a lot of the active funds overlap significantly in terms of the companies they actually invest in. The ones I looked at had performed well because they had a much higher exposure to the S&P 500 over the last 5 years - so it became clear, if I was going to use active funds, I would need a clear portfolio strategy which takes account of this. And then I noticed I could fairly easily replicate the performance of some of the popular active funds just by mirroring with a couple of index funds the general type/location of companies they were covering.
So I am wondering is there some magic still to discover in active funds, or maybe I just need to finalise my own portfolio strategy, and buy my own blend of index funds which achieve that exposure, and not worry about missing out of the latest and greatest active fund. Hence my question to get other people's thoughts
Edited by anonymous-user on Thursday 9th December 15:21
EddieSteadyGo said:
I am probably going down a well trodden path but which is new to me..etc..
Lots of valid and useful comments above, but have you assessed whether you actually need to take on the associated risk and return for your future/retirement? i.e. is your existing portfolio under-performing and therefore unlikely to satisfy your retirement lifestyle?Edited by EddieSteadyGo on Thursday 9th December 15:21
(Maybe I am coming from a different angle to you as I am effectively retired living off my pot. From my pot, I only seek a relatively modest return to maintain my lifestyle (taking less risk than my younger days), plus maintaining my capital preservation is high on my agenda too.)
EddieSteadyGo said:
So I am wondering is there some magic still to discover in active funds
No. And the further you venture from "boring" investing and start chasing "what is working now", the greater the underperformance has tended to be.An example:
https://twitter.com/gostr84ward/status/14689639370...
Derek Chevalier said:
EddieSteadyGo said:
So I am wondering is there some magic still to discover in active funds
No. And the further you venture from "boring" investing and start chasing "what is working now", the greater the underperformance has tended to be.An example:
https://twitter.com/gostr84ward/status/14689639370...
chip* said:
Lots of valid and useful comments above, but have you assessed whether you actually need to take on the associated risk and return for your future/retirement? i.e. is your existing portfolio under-performing and therefore unlikely to satisfy your retirement lifestyle?
(Maybe I am coming from a different angle to you as I am effectively retired living off my pot. From my pot, I only seek a relatively modest return to maintain my lifestyle (taking less risk than my younger days), plus maintaining my capital preservation is high on my agenda too.)
I am in my mid/late 40's so I am some distance from retiring. And TBH (without wanting to make this a sly boast), my wife and I are both individually now pretty close to the LTA, so we should have enough for retirement, even if we didn't save anymore. But we are both happy saving (we don't live particularly extravagant lifestyles), so I'm more thinking about saving for the next 15 years or so and just trying to pick a good path.(Maybe I am coming from a different angle to you as I am effectively retired living off my pot. From my pot, I only seek a relatively modest return to maintain my lifestyle (taking less risk than my younger days), plus maintaining my capital preservation is high on my agenda too.)
EddieSteadyGo said:
chip* said:
Lots of valid and useful comments above, but have you assessed whether you actually need to take on the associated risk and return for your future/retirement? i.e. is your existing portfolio under-performing and therefore unlikely to satisfy your retirement lifestyle?
(Maybe I am coming from a different angle to you as I am effectively retired living off my pot. From my pot, I only seek a relatively modest return to maintain my lifestyle (taking less risk than my younger days), plus maintaining my capital preservation is high on my agenda too.)
I am in my mid/late 40's so I am some distance from retiring. And TBH (without wanting to make this a sly boast), my wife and I are both individually now pretty close to the LTA, so we should have enough for retirement, even if we didn't save anymore. But we are both happy saving (we don't live particularly extravagant lifestyles), so I'm more thinking about saving for the next 15 years or so and just trying to pick a good path.(Maybe I am coming from a different angle to you as I am effectively retired living off my pot. From my pot, I only seek a relatively modest return to maintain my lifestyle (taking less risk than my younger days), plus maintaining my capital preservation is high on my agenda too.)
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