Passive/Active

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Discussion

JohnV8V

Original Poster:

368 posts

170 months

Thursday 18th May 2017
quotequote all
With equity markets riding fairly high, do the experts on here think it's time to switch out of equity trackers and into actively managed funds?

I think it may be time, but would be interested in any contrary view.....

jeff m2

2,060 posts

150 months

Thursday 18th May 2017
quotequote all
Not an expert, but do spend a fair amount of time on "money in general"
Whilst it is true many funds do not beat their benchmark, some do.

In the States Dodge & Cox and Oakmark have very good records.
Alternatively, one could choose an allocation fund, that maintains a portion in Bonds (although currently that portion is mostly variables)
With that as your core investment you would be free to invest in other markets and sectors that you could "time".

So far this has been an exceptional year, til yesterdaysmile, my core fund was up just under 7% YTD but my Emerging Markets and Asian funds both hit 20% YTD.. While these funds are only 5 -10% of my invested money they still provide icing on the cake.

I know everyone says you cannot time the market, but that doesn't mean you can't position yourself to take advantage of things that will very likely happen.
Financial Services, will often be the first to gain as the markets improve....and the most hit in a correction, like yesterday. possible buying opportunity?
Emerging Markets will prosper as China builds. Less true now than before.

As a Dollar investor my European Funds have recently emerged as stars because the Euro is at 1.11, it was not too difficult to predict the outcome of the French election, even if the prediction is wrong the Euro stays where it was and the downside risk is modest.

Similar situation back in November, with the US elections, if Trump wins a big boost for Financial Services (Banks) if Hillary had won the banks would not have gone down....so an opportunity with little downside risk

So you can shift the percentage holds in various funds other than your core holding.
I also maintain small positions in contrarian sectors, so currently less than 2%invested in oil,gas commodities. which is doing Jack st. But better than my cash.

So to be "out of" an index or core fund you need a reason.
Diversification is the reason I invest this way, I could search out ETFs that cover some obscure index, but prefer just to adjust my exposure using funds from recognised managers.

ellroy

7,005 posts

224 months

Thursday 18th May 2017
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And to confuse the matter you may want to look at the newer range of semi active ETFs.

They typically apply a macro overlay to the base index and so add a little bit of alpha here or there. Maybe a worthwhile alternative if you're not keen on active as a rule of thumb?

Quite an interesting sector at the moment I think.

Yipper

5,964 posts

89 months

Thursday 18th May 2017
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Up or down, it is very hard to beat the market. And it is even harder to guess "before the fall" which fund or manager will beat the market. In other words, the odds of you (or anyone) picking *today* an active fund(s) that beats a good, low-cost passive tracker *tomorrow* are very slim.

If you absolutely believe, say, the FTSE100 will fall -20% in the next 3 years, then putting most or everything in cash is a surefire way of thrashing the market. A +3% gain in a Lloyds savings account in 3 years is a big win over a -20% decline. It's not sexy, but it works.

If you still want a punt on an active fund(s), this is a good contrarian article that gives some decent pointers on where active funds might win. Mature markets like the US are hard to beat, while less well-covered markets like Asia may be easier to beat.

http://www.telegraph.co.uk/finance/personalfinance...

Edited by Yipper on Thursday 18th May 20:00

WindyCommon

3,354 posts

238 months

Thursday 18th May 2017
quotequote all
Yipper said:
In other words, the odds of you (or anyone) picking *today* an active fund(s) that beats a good, low-cost passive tracker *tomorrow* are very slim.
Let's have a go at defining "very slim" using your the sector and timeframe that you've chosen to reference.

According to FE Trustnet:

- The FTSE All-Share index return over the last 3 years is 25.34%

- There are 22 FTSE All-Share index tracker funds with 3 year track records. These 22 funds are a subset of the 471 UK All Companies funds that have 3 year track records.

- The median (11th of 22) tracker fund has delivered a return of 24.93% over 3 years, equalling the performance of the 261st ranked actively managed fund.

Removing the 22 trackers from the All Companies peer group leaves 449 funds, so 261 of the 449 actively managed funds beat the median tracker fund.

If you had picked an active fund at random 3 years ago, your chances of outperforming a similarly chosen tracker fund were 261/449 or 58.1%. I wouldn't call that "very slim".


Of course if you wanted to increase your chances from 58.1%, you could use one of the freely available screens that looks at fund manager track records over extended time periods to identify those who have performed consistently well. In this case (because I'm using FE Trustnet) I screened for managers who are identified as "FE Alpha Managers"

This reduces the population of funds to 95. 76 of these 95 funds returned performance better than 24.93%. So if you had chosen one these funds at random you'd have had a 76/95 or 80% chance of selecting one with a better return than your tracker.

Coincidentally the same 76 funds all outperformed the index return of 25.34%, with 43 of them outperforming by more than 50%. The difference that alpha can make to portfolio performance can be extraordinary...!


As I have pointed out a few times in recent threads, discerning investors should look beyond the self-serving and over-simplified claims of the passive industry. There are many actively managed funds that outperform their passive counterparts, and tools to tilt the odds of identifying them in your favour are freely available.

Edited by WindyCommon on Thursday 18th May 23:44

Yipper

5,964 posts

89 months

Friday 19th May 2017
quotequote all
WindyCommon said:
Yipper said:
In other words, the odds of you (or anyone) picking *today* an active fund(s) that beats a good, low-cost passive tracker *tomorrow* are very slim.
Let's have a go at defining "very slim" using your the sector and timeframe that you've chosen to reference.

According to FE Trustnet:

- The FTSE All-Share index return over the last 3 years is 25.34%

- There are 22 FTSE All-Share index tracker funds with 3 year track records. These 22 funds are a subset of the 471 UK All Companies funds that have 3 year track records.

- The median (11th of 22) tracker fund has delivered a return of 24.93% over 3 years, equalling the performance of the 261st ranked actively managed fund.

Removing the 22 trackers from the All Companies peer group leaves 449 funds, so 261 of the 449 actively managed funds beat the median tracker fund.

If you had picked an active fund at random 3 years ago, your chances of outperforming a similarly chosen tracker fund were 261/449 or 58.1%. I wouldn't call that "very slim".


Of course if you wanted to increase your chances from 58.1%, you could use one of the freely available screens that looks at fund manager track records over extended time periods to identify those who have performed consistently well. In this case (because I'm using FE Trustnet) I screened for managers who are identified as "FE Alpha Managers"

This reduces the population of funds to 95. 76 of these 95 funds returned performance better than 24.93%. So if you had chosen one these funds at random you'd have had a 76/95 or 80% chance of selecting one with a better return than your tracker.

Coincidentally the same 76 funds all outperformed the index return of 25.34%, with 43 of them outperforming by more than 50%. The difference that alpha can make to portfolio performance can be extraordinary...!


As I have pointed out a few times in recent threads, discerning investors should look beyond the self-serving and over-simplified claims of the passive industry. There are many actively managed funds that outperform their passive counterparts, and tools to tilt the odds of identifying them in your favour are freely available.

Edited by WindyCommon on Thursday 18th May 23:44
Anyone can pick a winner today, from yesterday. Hindsight is the perfect science.

Picking a winner tomorrow, from today, is much harder and a different kettle of fish.

With recent stats suggesting as much as 99% of active US funds and 87% of UK funds are underperforming, and passive funds are now selling 2-5 times faster than active funds, and passive funds in the US and UK are forecasted to outsell active funds by 2025, investors are voting with their feet on what are the best investment tools.

WindyCommon

3,354 posts

238 months

Friday 19th May 2017
quotequote all
You might care to read my post more closely.

They key point: "If you had picked an active fund at random 3 years ago, your chances of outperforming a similarly chosen tracker fund were 261/449 or 58.1%."

If you have an alternative analysis to support your assertion that the odds of picking an active fund to outperform a passive are "very slim" please do share it.


JulianPH

9,912 posts

113 months

Saturday 27th May 2017
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WindyCommon said:
You might care to read my post more closely.

They key point: "If you had picked an active fund at random 3 years ago, your chances of outperforming a similarly chosen tracker fund were 261/449 or 58.1%."

If you have an alternative analysis to support your assertion that the odds of picking an active fund to outperform a passive are "very slim" please do share it.
But that goes out the window when you consider many other sectors performed better than the FTSE... Who wants to be in the best performing FTSE fund (or tracker) when they could have had a much higher return in, say, US and emerging markets trackers?

I do agree that active management adds value, but given that asset allocation is the prime driver of growth and risk management I prefer the active element to be the asset and geographic management of the portfolio, not the stock picking level.

My SIPP/ISA/investment management company has this active managed approach and the result is my 'adventurous' portfolio caries the same risk as a stock picking active manager's 'balanced' portfolio and has grown by 24% over the last year.

It is, of course, horses for courses, but their is another dimension in the active/passive argument.



JulianPH

9,912 posts

113 months

Saturday 27th May 2017
quotequote all
JohnV8V said:
With equity markets riding fairly high, do the experts on here think it's time to switch out of equity trackers and into actively managed funds?

I think it may be time, but would be interested in any contrary view.....
John - sorry, I forgot to really address your question in my post above.

I believe you are 100% correct in looking for active management, but I believe the active management should be the geographic weighing of assets and the allocation between different asset classes - equities (large, medium and small cap in each geographic area), bonds (long dated gilts. short dated gilts, corporate bonds - again in each relevant geographic area), property, gold, cash, etc. - rather than active stock picking (as the above is still required anyway.

My portfolio does just this and then keeps costs down by using passive underlying investments. It would cost twice the price to use active.

I think this is where the active/passive pay off really comes in.

Nice car by the way, I have the model that comes with the slippers and pipe!

WindyCommon

3,354 posts

238 months

Saturday 27th May 2017
quotequote all
JulianPH said:
But that goes out the window when you consider many other sectors performed better than the FTSE... Who wants to be in the best performing FTSE fund (or tracker) when they could have had a much higher return in, say, US and emerging markets trackers?

I do agree that active management adds value, but given that asset allocation is the prime driver of growth and risk management I prefer the active element to be the asset and geographic management of the portfolio, not the stock picking level.

My SIPP/ISA/investment management company has this active managed approach and the result is my 'adventurous' portfolio caries the same risk as a stock picking active manager's 'balanced' portfolio and has grown by 24% over the last year.

It is, of course, horses for courses, but their is another dimension in the active/passive argument.
If you agree that active management can add value, then you can use it together with active asset allocation. You are pointing to a choice that doesn't have to be made.

The hidden dimension in this debate is that there is a "decency level" for total annual end-to-end costs that probably sits around the 200bps level. Using lower-cost/lower-value passive funds of course allows more to be charged for asset allocation and advice services...!

JulianPH

9,912 posts

113 months

Saturday 27th May 2017
quotequote all
WindyCommon said:
If you agree that active management can add value, then you can use it together with active asset allocation. You are pointing to a choice that doesn't have to be made.

The hidden dimension in this debate is that there is a "decency level" for total annual end-to-end costs that probably sits around the 200bps level. Using lower-cost/lower-value passive funds of course allows more to be charged for asset allocation and advice services...!
With respect, you are missing the point I am making. Active management does indeed work, but it works better (in my humble opinion) when the active management is focused on attest and geographical allocation (and thematic asset allocation, not to mention thematic assets) rather than stock picking.

Stock picking will always have its place though.

JulianPH

9,912 posts

113 months

Saturday 27th May 2017
quotequote all
JulianPH said:
WindyCommon said:
If you agree that active management can add value, then you can use it together with active asset allocation. You are pointing to a choice that doesn't have to be made.

The hidden dimension in this debate is that there is a "decency level" for total annual end-to-end costs that probably sits around the 200bps level. Using lower-cost/lower-value passive funds of course allows more to be charged for asset allocation and advice services...!
With respect, you are missing the point I am making. Active management does indeed work, but it works better (in my humble opinion) when the active management is focused on attest and geographical allocation (and thematic asset allocation, not to mention thematic assets) rather than stock picking.

Stock picking will always have its place though.
Yes, you can. But you will double the price of investing (or hurdle rate) for the portfolio.

I believe asset allocation and geographic weighting to be more important than individual stock selection, for all the obvious reasons. In a bull market I could be wrong (thought this has not been the case) and in a bear market this strategy is certainly the best (again, in my opinion).

WindyCommon

3,354 posts

238 months

Saturday 27th May 2017
quotequote all
JulianPH said:
Yes, you can. But you will double the price of investing (or hurdle rate) for the portfolio.

I believe asset allocation and geographic weighting to be more important than individual stock selection, for all the obvious reasons. In a bull market I could be wrong (thought this has not been the case) and in a bear market this strategy is certainly the best (again, in my opinion).
We can agree that asset allocation will likely be the principal determinant of long term returns for an individual investor, and that this is best managed actively. However, where active management in securities selection adds value it is - by that very definition! - worth the increased overall cost.



Ginge R

4,761 posts

218 months

Saturday 27th May 2017
quotequote all
WindyCommon said:
Let's have a go at defining "very slim" using your the sector and timeframe that you've chosen to reference.

According to FE Trustnet:

- The FTSE All-Share index return over the last 3 years is 25.34%

- There are 22 FTSE All-Share index tracker funds with 3 year track records. These 22 funds are a subset of the 471 UK All Companies funds that have 3 year track records.

- The median (11th of 22) tracker fund has delivered a return of 24.93% over 3 years, equalling the performance of the 261st ranked actively managed fund.

Removing the 22 trackers from the All Companies peer group leaves 449 funds, so 261 of the 449 actively managed funds beat the median tracker fund.

If you had picked an active fund at random 3 years ago, your chances of outperforming a similarly chosen tracker fund were 261/449 or 58.1%. I wouldn't call that "very slim".


Of course if you wanted to increase your chances from 58.1%, you could use one of the freely available screens that looks at fund manager track records over extended time periods to identify those who have performed consistently well. In this case (because I'm using FE Trustnet) I screened for managers who are identified as "FE Alpha Managers"

This reduces the population of funds to 95. 76 of these 95 funds returned performance better than 24.93%. So if you had chosen one these funds at random you'd have had a 76/95 or 80% chance of selecting one with a better return than your tracker.

Coincidentally the same 76 funds all outperformed the index return of 25.34%, with 43 of them outperforming by more than 50%. The difference that alpha can make to portfolio performance can be extraordinary...!


As I have pointed out a few times in recent threads, discerning investors should look beyond the self-serving and over-simplified claims of the passive industry. There are many actively managed funds that outperform their passive counterparts, and tools to tilt the odds of identifying them in your favour are freely available.

Edited by WindyCommon on Thursday 18th May 23:44
Good stuff. But what about survivorship bias? I don't know the numbers, but, what.. 2500 have been launched and failed in the past ten years? The poorer performers tend to be the ones that are merged or closed and thus their track record disappears. Without that loss, the data skew may be different.

If you look at ten year sector data it only shows the funds that have survived the full ten years and thus are the good ones. Some might suggest that the impact is significant in terms of performance and what we are left with, could give a misleading impression of how the active sector has really done - in either real terms and particularly against the index.

Even funds that appear to out perform may not have manager based alpha. There are many factors that drives returns, large cap vs small cap, currency, senstivity to market returns (beta) etc. Just because a fund out performs it doesn't mean it was down to manager skill. I'm not dogmatically anti active, far from it.

JulianPH

9,912 posts

113 months

Sunday 28th May 2017
quotequote all
WindyCommon said:
The hidden dimension in this debate is that there is a "decency level" for total annual end-to-end costs that probably sits around the 200bps level. Using lower-cost/lower-value passive funds of course allows more to be charged for asset allocation and advice services...!
I personally believe that 200bps is well over the mark when it come to a "decency level".

Purely passive should have an OCF of 50bps or less.

Active management (at either an asset level or stock picking level) should be 100bps or less

Active management at both asset and stock picking level 150bps or less.

What is the 50bps to 150bps extra for?

WindyCommon

3,354 posts

238 months

Sunday 28th May 2017
quotequote all
JulianPH said:
I personally believe that 200bps is well over the mark when it come to a "decency level".

Purely passive should have an OCF of 50bps or less.

Active management (at either an asset level or stock picking level) should be 100bps or less

Active management at both asset and stock picking level 150bps or less.

What is the 50bps to 150bps extra for?
Agree with all your numbers, but note they are for investment only. By "end to end" I meant including platform/wrapper (say 25bps) costs and advice/planning (typically 50-100bps, I offer no comment..) charges. My experience is that client facing advisers know they are in for a hard time when all of this gets beyond 200bps. Rightly so!

JulianPH

9,912 posts

113 months

Sunday 28th May 2017
quotequote all
WindyCommon said:
Agree with all your numbers, but note they are for investment only. By "end to end" I meant including platform/wrapper (say 25bps) costs and advice/planning (typically 50-100bps, I offer no comment..) charges. My experience is that client facing advisers know they are in for a hard time when all of this gets beyond 200bps. Rightly so!
Hi Windy

I was including platform and (ISA/SIPP) wrappers in those numbers, but not adviser fees.

I do agree with you about 200bps being the maximum cut off level, but feel in most circumstances this is still way to high. There is something fundamentally wrong when advisers charge an annual asset linked fee that is greater the the combined costs of the investment manager, the underlying investments themselves, the platform/custodianship and the SIPP/ISA managers.

I think advisers should bill in the same way as solicitors and accountants if the wish to be viewed on a similar footing. They offer a valuable and needed service, but the public will never recognise this whilst they charge fees based upon initial and annual asset values.

Effectively commission was not removed by the RDR. Simply speaking, the decision as to the level paid was transferred from the provider to the adviser. Adviser's used this (in the main) to double the annual amount.

I am seriously considering setting up an adviser business that simply charges by the hour, there would be great demand and trust in that model.

Derek Chevalier

3,942 posts

172 months

Sunday 28th May 2017
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JulianPH said:
I am seriously considering setting up an adviser business that simply charges by the hour, there would be great demand and trust in that model.
What makes you say that?

JulianPH

9,912 posts

113 months

Monday 29th May 2017
quotequote all
Derek Chevalier said:
What makes you say that?
Because I think it would be a sound business model.

Derek Chevalier

3,942 posts

172 months

Monday 29th May 2017
quotequote all
JulianPH said:
Derek Chevalier said:
What makes you say that?
Because I think it would be a sound business model.
Surely you have more exposure if you advise on a case size of £1mm and make a mistake than one of £50k (and assuming it took the same amount of your time to complete both examples)?

Coversely, your flat fee may mean the punter with the £50k portfolio is hammered by your charges as a % of his portfolio thus making it uneconomic for him.

As an aside, I wonder how price sensitive typical punters are...