Passive/Active

[Ginge R]

JulianPH said:

To summarise on the adviser fee debate so far, advisers justify hammering big portfolios to subsidise small ones by saying there is more work involved in big portfolios. Whilst this is likely to be true, they do not follow their own logic when applying this to hourly charging and say this will hammer small portfolios (despite their admission they take less time - and therefore would be charged less as a result) and this is is a bad thing (when hammering the bigger clients, apparently, is not a problem). I suppose this is another example of the rich needing to pay their "fair" share (fair being a multiple of what everyone else pays for the same thing).

I'm a little perplexed. You make the point that some advisers are engaging in a form of cross subsidy. But, if portfolio size *isn't* a metric of issue, what are your thoughts on required minimum portfolio sizes? In other words, in order for wealthier clients to obtain access to the lowest possible charge structures that you mention (as well as other various free services) which are withheld from clients with fewer assets under management, are those providers circumnavigating the very issue that you decry - by simply excluding 'non ideal' clients through specifying minimum investment commitments? I may have interpreted your point incorrectly of course. If so, apologies.

[Jon39]

JulianPH said:

Jon - that is a fantastic result and you should be very proud. You have outperformed many, if not most, most professional fund managers!

You have also proven the old adage, it is not about "timing" the markets, it is about "time in" the markets".

Great to hear such a success story here,

Julian

Thank you Julian for your kind comments.
I can hardly believe it myself. Have now outperformed the market in 24 years out of the past 29, and was able to retire at age 53.
I used to think it was pure luck, but I like to think there is perhaps some skill involved. Along the way there have been just a handful of decisions made, which later turned out to be very significant to performance.

One decision was refusing to buy any tech. stocks in 1998 & 1999. Everyone was buying, but it did not make sense to me, that so many loss making fledgling companies, could have enormous valuations sometimes higher than the established business giants. That decision did hamper my performance in relation to the market for a couple of years, but Boy, did it work out well for me after the Tech Bubble burst. The market average went a long way down for 3 years. The defensives were not too bad.

Another decision which later turned out to be important, was taken during the run up to the Debt Bubble bust in 2007. It was obvious to anyone who just stood back a little, but of course the actual timing of the boom ending could not be predicted. There were TV programmes about the 'liar loans' and 125% mortgages, so it was not a secret as was claimed by many afterwards. Too many people and governments were benefiting from the debt boom. However, investors who remained in cyclical stocks must have had a nasty surprise.

At present there is an enormous amount of debt around, both government and consumer in very many countries. What will happen I don't know, but that has often been the cause of financial problems historically.

Business is a fascinating subject to me, but I always keep in mind that the future cannot be forecast. Shocks to markets are sometimes sudden and unexpected.

Edited by Jon39 on Tuesday 30th May 22:54

[Derek Chevalier]

Jon39 said:

The portfolio fund has risen 198.6% since those purchases. The UK market is up 88.1%, so you will understand why I don't spend time doing trading transactions.

Edited by Jon39 on Tuesday 30th May 15:32

Good work ! Can I check which benchmark you are using as I thought both 100 and All Share TR indices had returned over 100% during that time? Would also be interesting to know the beta of your portfolio relative to the benchmark.

[JulianPH]

Ginge R said:

JulianPH said:

To summarise on the adviser fee debate so far, advisers justify hammering big portfolios to subsidise small ones by saying there is more work involved in big portfolios. Whilst this is likely to be true, they do not follow their own logic when applying this to hourly charging and say this will hammer small portfolios (despite their admission they take less time - and therefore would be charged less as a result) and this is is a bad thing (when hammering the bigger clients, apparently, is not a problem). I suppose this is another example of the rich needing to pay their "fair" share (fair being a multiple of what everyone else pays for the same thing).

I'm a little perplexed. You make the point that some advisers are engaging in a form of cross subsidy. But, if portfolio size *isn't* a metric of issue, what are your thoughts on required minimum portfolio sizes? In other words, in order for wealthier clients to obtain access to the lowest possible charge structures that you mention (as well as other various free services) which are withheld from clients with fewer assets under management, are those providers circumnavigating the very issue that you decry - by simply excluding 'non ideal' clients through specifying minimum investment commitments? I may have interpreted your point incorrectly of course. If so, apologies.

Hi Al

The whole point of my proposal is to remove the need to focus on a required minimum portfolio size by disconnecting adviser charges from from the portfolio size.

I believe one of the reasons the public do not value financial advice is because it doesn't really have any tangible value in their eyes.

Decades of the commission system embedded that and the RDR did nothing to change this. Most advisers today still do not charge for advice (which is the only real commodity they provide) but instead provide the advice for free and charge for implementing the transactions (as this is not subject to VAT).

So it is very easy to see why the public don't see any value in the actual advice.

Equally, when using a solicitor or accountant you are know exactly what work they have carried out for you and are given a statement with a breakdown to the time spent (and and disbursements). With financial advisers you don't get this clarity.

If the FCA were to say illustrations need a separate box showing in pounds and pence "The Cost of Advice" over the whole period of the illustration this would bring the adviser industry crashing to the ground.

The cost of 3% initial and 1% annual on a £100,000 portfolio growing a an average of 7% a year for 25 years is a staggering £133,000!!!

Is there any wonder that there is little trust in the financial advice industry?

Also, to be clear, I am talking about face to face advice here, not service propositions like your Fiver a Day model, which offers great value for money with no minimum portfolio requirements.

[hyphen]

OP- Vanguard became open to UK personal investors recently: http://www.bbc.co.uk/news/business-39936557

[Jon39]

Derek Chevalier said:

Good work ! Can I check which benchmark you are using as I thought both 100 and All Share TR indices had returned over 100% during that time? Would also be interesting to know the beta of your portfolio relative to the benchmark.

The index that I have always used is the FTSE All-Share Index.

It is not the version including dividends, but I have not seen that published very widely, so I just keep things simple. I know of course that it does not produce a completely fair comparison, but at the end of each annual year of performance measuring, 4% could be added to get a more accurate comparison. I have never thought about it, but would the TR version work part way through each calendar year measurement basis, ie. during May my fund will only include some of the dividends to be received during the year?
I measure each calendar year individually, so dividends do not 'roll up' through the following years.

Your beta relative to benchmark question.
Fund is majority FTSE 100, so quite often the All- Share will be a slightly tougher comparison.
I see at the end of last week, there is a noticeable difference so far this year.
FTSE All-Share = + 6.63%
FTSE 100 = + 5.67%

At present the variation makes no difference to me, because I am on +15.89% including dividends received since 1st January 2017.
Might look good, but it is only on paper. Anything can happen. It would be a nice treat though, to beat the market this year, because it is the 30th year for my portfolio fund. We shall see at the end of this year.

Are you a fan of long-term hold Derek?

Edited by Jon39 on Wednesday 31st May 09:55

[Derek Chevalier]

Jon39 said:

Are you a fan of long-term hold Derek?

Hi, yes, have a portfolio of buy and hold forever. I did a fair amount of buying in 08/09 in an attempt to make up for Brown scuppering my LLOY holding!

[Jon39]

Derek Chevalier said:

Hi, yes, have a portfolio of buy and hold forever. I did a fair amount of buying in 08/09 in an attempt to make up for Brown scuppering my LLOY holding!

Sorry that you were caught in the Lloyds Bank disaster. Hope it did not represent a significant proportion of your portfolio fund.

My own take on the saga, was that Lloyds had been run as a perfectly good business. The yield always seemed to be stubbornly high, but I think their downfall was the very rushed persuasion from the UK government, to take over Halifax, without having any time to properly study the business they were buying. They later discovered that Halifax was an appalling business, and appeared to lend money to anybody who asked, particularly property developers during a property bubble, many of whom had little chance of ever being able to repay.

A great shame because otherwise Lloyds might have been the best bank survivor of the financial crash. Perhaps HSBC takes that honour. They did have a rights issue because of their US problem, but did not need government assistance, and managed to continue paying dividends (reduced) throughout the debt crisis.

I will probably leave this forum now and return to sports car chatting. Will try to remember to post my fund results here after the year end.

Best of luck with your investment performance.

[Derek Chevalier]

Jon39 said:

Derek Chevalier said:

Hi, yes, have a portfolio of buy and hold forever. I did a fair amount of buying in 08/09 in an attempt to make up for Brown scuppering my LLOY holding!

Sorry that you were caught in the Lloyds Bank disaster. Hope it did not represent a significant proportion of your portfolio fund.

My own take on the saga, was that Lloyds had been run as a perfectly good business. The yield always seemed to be stubbornly high, but I think their downfall was the very rushed persuasion from the UK government, to take over Halifax, without having any time to properly study the business they were buying. They later discovered that Halifax was an appalling business, and appeared to lend money to anybody who asked, particularly property developers during a property bubble, many of whom had little chance of ever being able to repay.

A great shame because otherwise Lloyds might have been the best bank survivor of the financial crash. Perhaps HSBC takes that honour. They did have a rights issue because of their US problem, but did not need government assistance, and managed to continue paying dividends (reduced) throughout the debt crisis.

I will probably leave this forum now and return to sports car chatting. Will try to remember to post my fund results here after the year end.

Best of luck with your investment performance.

Fortunately I was/am reasonably diversified both in terms of number of stocks held and sectors. However, as you point out, Lloyds was a good business with decent divi (perfect for me) until the Government allegedly stepped in. Seems the court case is still rumbling on

http://www.telegraph.co.uk/business/2017/05/09/for...

Best of luck to you too

[Derek Chevalier]

JulianPH said:

I believe one of the reasons the public do not value financial advice is because it doesn't really have any tangible value in their eyes.

.

https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#4e896236111a

http://www.fool.co.uk/investing/2017/04/29/a-great...

My understanding is that the typical punter generates pretty shabby returns, so one would hope that the adviser more than pays for himself by improving investment returns (which is just one part of the service a decent adviser should provide), for example being very proactive during market volatility in contacting clients and providing reassurance that now may be a good time to buy, not sell.

[CarlosFandango11]

JulianPH said:

The cost of 3% initial and 1% annual on a £100,000 portfolio growing a an average of 7% a year for 25 years is a staggering £133,000!!!

Where do you get the figure of £133k from?

The actual amount of commission paid in your example is about £50k over 25 years. This is £2k per annum implying an average fund of £200k which doesn't seem unreasonable.

Edited by CarlosFandango11 on Thursday 1st June 12:01

[Jon39]

Derek Chevalier said:

JulianPH said:

I believe one of the reasons the public do not value financial advice is because it doesn't really have any tangible value in their eyes.
.

https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#4e896236111a

http://www.fool.co.uk/investing/2017/04/29/a-great...

My understanding is that the typical punter generates pretty shabby returns, so one would hope that the adviser more than pays for himself by improving investment returns (which is just one part of the service a decent adviser should provide), for example being very proactive during market volatility in contacting clients and providing reassurance that now may be a good time to buy, not sell.

I had to smile at your last line Derek.

TV, Radio and the Press just love a good stock market crash. Perhaps it is the old adage that bad news sells newspaper, or it used to before the internet. Therefore the average Joe is very well aware of the market panics, but probably never hears about the steady bull market periods, so they must form the opinion, that the stock market is a sure way for them to lose their money.

I also get the impression that many professional (that is professional as in full time employment) fund managers, quickly join in the selling when there is a crash. It might be the fear that their competitors are all selling, and so are frightened about what will be said, if the do something 'different from the herd', or maybe they have misguided confidence that they can sell at the begining of the market crash, then buy back at the start of the next upturn. The problem there is, there are usually many false up-turns on the way down.

Financial advisers might be wise to do what you suggest, but at any stage of market cycles, history shows that what happens next cannot be predicted. The IFA therefore faces the possibility of offering market advice to clients, which later turns out to be wrong. With the mis-selling legal actions on their mind, perhaps they prefer to keep quiet during a panic.

'the typical punter generates pretty shabby returns'
That is because they tend to buy when everyone else is is talking about it, often when prices are high, then sell when they are frightened by a panic, when prices are low.
A shame really, because they have so nearly got everything right, it is just that they are doing it the wrong way round. -

You can find articles on the internet from the serious business press and some other respected people, that a considerable proportion of funds that the public invest in, also fail to beat the market average for very long. Many more bad years than good ones. Obviously there have been some well known exceptions to that. I have also noticed recently, that the commercial funds make reference to how well they are doing against their benchmark. Their benchmark though, is something that I have never heard of. Are they now devising their own benchmarks, because UK funds find it difficult to beat the widely known FTSE All-Share Index?

Edited by Jon39 on Thursday 1st June 15:51

[Ginge R]

JulianPH said:

Hi Al

The whole point of my proposal is to remove the need to focus on a required minimum portfolio size by disconnecting adviser charges from from the portfolio size.

I believe one of the reasons the public do not value financial advice is because it doesn't really have any tangible value in their eyes.

Decades of the commission system embedded that and the RDR did nothing to change this. Most advisers today still do not charge for advice (which is the only real commodity they provide) but instead provide the advice for free and charge for implementing the transactions (as this is not subject to VAT).

So it is very easy to see why the public don't see any value in the actual advice.

Equally, when using a solicitor or accountant you are know exactly what work they have carried out for you and are given a statement with a breakdown to the time spent (and and disbursements). With financial advisers you don't get this clarity.

If the FCA were to say illustrations need a separate box showing in pounds and pence "The Cost of Advice" over the whole period of the illustration this would bring the adviser industry crashing to the ground.

The cost of 3% initial and 1% annual on a £100,000 portfolio growing a an average of 7% a year for 25 years is a staggering £133,000!!!

Is there any wonder that there is little trust in the financial advice industry?

Also, to be clear, I am talking about face to face advice here, not service propositions like your Fiver a Day model, which offers great value for money with no minimum portfolio requirements.

Hey. I understand what you're saying. I'm probably in a slightly different camp. Whilst I appreciate the need for fair profit, I wonder if excluding those with slightly not enough is as bad as charging them slightly too much. I think there is scope for most forms to cement a really positive impact here.

There's no one more aggrieved than me, by opaque pricing. A solicitor may be tasked to provide a singular piece of work' thereafter, there is little or no involvement. A financial adviser though, doesn't have that disconnect. I'm sure that most advisers here know what it's like to have been the greatest thing since sliced bread when the times are good, and broadly equivalent to gum on the pavement, when they're not.

I take your point completely about advisers and fund managers etc not demonstrating costs in hard terms, it's one of my bugbears. Thanks for the nice comments on Fiver, much appreciated - maybe we can grab a beer in Peterborough on the 19th?

[JulianPH]

CarlosFandango11 said:

JulianPH said:

The cost of 3% initial and 1% annual on a £100,000 portfolio growing a an average of 7% a year for 25 years is a staggering £133,000!!!

Where do you get the figure of £133k from?

The actual amount of commission paid in your example is about £50k over 25 years. This is £2k per annum implying an average fund of £200k which doesn't seem unreasonable.

Edited by CarlosFandango11 on Thursday 1st June 12:01

My £133k figure was not what the adviser received, but what the client lost out on over 25 years by the reduction in compound growth due to the 1% annual fee being deducted and the return being reduced to 6% a year rather than 7%.

[JulianPH]

Ginge R said:

Hey. I understand what you're saying. I'm probably in a slightly different camp. Whilst I appreciate the need for fair profit, I wonder if excluding those with slightly not enough is as bad as charging them slightly too much. I think there is scope for most forms to cement a really positive impact here.

There's no one more aggrieved than me, by opaque pricing. A solicitor may be tasked to provide a singular piece of work' thereafter, there is little or no involvement. A financial adviser though, doesn't have that disconnect. I'm sure that most advisers here know what it's like to have been the greatest thing since sliced bread when the times are good, and broadly equivalent to gum on the pavement, when they're not.

I take your point completely about advisers and fund managers etc not demonstrating costs in hard terms, it's one of my bugbears. Thanks for the nice comments on Fiver, much appreciated - maybe we can grab a beer in Peterborough on the 19th?

I completely agree in a fair profit for providing a service, it is vital in order to be able to provide the service. I just question the method of the charge for professional services.

Fiver a Day has such a small asset based charge that it can never be described as being unfair to clients. It is when advisers are charging very large initial and annual fees (and receiving them in the same ways as they did with commission) that I think the industry is letting itself down and open to genuine criticism, which is a shame as the RDR gave the perfect opportunity for an overhaul and change to professional status.

I won't be in Peterborough - but always free for a pint at the Chequers!

[Ginge R]

JulianPH said:

I completely agree in a fair profit for providing a service, it is vital in order to be able to provide the service. I just question the method of the charge for professional services.

Fiver a Day has such a small asset based charge that it can never be described as being unfair to clients. It is when advisers are charging very large initial and annual fees (and receiving them in the same ways as they did with commission) that I think the industry is letting itself down and open to genuine criticism, which is a shame as the RDR gave the perfect opportunity for an overhaul and change to professional status.

I won't be in Peterborough - but always free for a pint at the Chequers!

Agree. Just because you can charge 'x' grand to do something.. doesn't mean you should. My fixed fee service has evolved nicely.. I can predict with quite a high degree of accuracy how much a case will cost. Now, I quite a set fee for an invariably straightforward case and remind that extra costs *can* accrue for unforeseen events. I sleep at nights, I'm grounded, I am comfortable.. I don't need to be gratuitous with costs.

[BarryGibb]

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

WindyCommon, some interesting analysis - just finished reading Tim Hale's smarter investing,

https://www.amazon.co.uk/Smarter-Investing-3rd-edn...

where he firmly believes that the average active fund underperforms the benchmark, and that winners cannot be picked in advance. As GingeR points out below how much of the active fund outperformance is due to survivorship bias, and value/size skew?

For interest if I were to rerun your analysis, I would most likely pick the Vanguard fund to represent the trackers - 3 yr return 28.87% (shocking to see the ~£3bn Virgin tracker underperform so spectacularly!).

https://www.trustnet.com/Factsheets/Factsheet.aspx...

can I please double check how you are getting your 471 funds with 3 year track records - if I select

https://www.trustnet.com/ia-unit-trusts/price-perf...

I am only getting 254 funds?