I think this post may be going slightly off track!! I am not sure I fully understand the reason for the arguments (as much fun as they are). As far as I can see Kellyiom is just saying that fund managers can sometimes add value to the fund that they are managing and it is possible to pick the good from the bad. He is not slating all passively managed funds. He is just stating that it is not a case of one being right and the other being wrong. What is so controversial about that???
You are right. I think I'm heading off track. The reason don't like active is that the costs in lots of funds are high and sometimes quite well hidden. This is especially true of funds which are aimed at small, less informed investors. You only have to look at some of the SSIA equities funds. I think it was Irish Permanents offerring in which if you had contributed the max amount you would have paid 1800Euro in fees !! That's absolutely disgraceful.Sunny said:
Can we all agree that the worst type of fund is the closet index fund? That is an actively managed fund that sticks very closely to it's index in composition. Because of it's higher fee structure returns will consistently be behind the index. I think most of the actively managed funds in the Irish market are closet indexers. There is a rationale to this approach for the average fund manager. You are more likely to lose your job if you have a really bad year or two ( more likely with true active management ) than if you just consistently lag the index. The best example of this is the chap who followed Peter Lynch at Magellan (Fidelity). He made a big bet on bonds just before the stockmarket took off in 1995 and lost his job when fund had a terrible year or two. The fact that he subsequently became a very successful hedge fund manager doesn't change the lesson for the average fund manager. Stick close to the index!
Antony Bolton was mentioned earlier in the thread. He was interviewed in the FT recently. One of the points made was that his success (whether skill or luck) had attracted large amounts of cash which would make future success much harder. This has been a consistent problem for successful managers including Buffet.
I think the indexing debate is over. Most studies show most of the return differential is due to asset allocation. e.g. small cap fund managers outperform when small caps do well but will underperform when large caps lead. Perhaps a manager can bring value to certain segments of the market like small caps or emerging markets where indexing is more expensive and there may be more inefficiencies in the market. Yey even in these areas when compared with the correct index managers still fare poorly.
Most of your money should be passively managed.
The debate should be about appropriate asset allocation.
Regards
Antony Bolton was mentioned earlier in the thread. He was interviewed in the FT recently. One of the points made was that his success (whether skill or luck) had attracted large amounts of cash which would make future success much harder. This has been a consistent problem for successful managers including Buffet.
I think the indexing debate is over. Most studies show most of the return differential is due to asset allocation. e.g. small cap fund managers outperform when small caps do well but will underperform when large caps lead. Perhaps a manager can bring value to certain segments of the market like small caps or emerging markets where indexing is more expensive and there may be more inefficiencies in the market. Yey even in these areas when compared with the correct index managers still fare poorly.
Most of your money should be passively managed.
The debate should be about appropriate asset allocation.
Regards
I certainly couldn’t argue with that. Weak active managers have been responsible for some of the worst breaches of professional ethics I’ve ever seen in any field. I do feel though that while passive investing has its place, it’s now become a kind of rigid orthodoxy, one which has replaced the old orthodoxy of ‘active is best’. It’s been mentioned elsewhere in this thread that nobody here’s claimed that tracking is a panacea yet judging from some of the virulent comments sparked when you even begin to question the ‘passive is best’ ethos seems to show it’s a fairly deeply-ingrained belief system rather than a cool analytical approach.
I don’t think it’s sufficient either to say that in Ireland we’re stuck with the usual suspects and I don’t deny, lots of UK & Ireland fund managers do their clients a disservice as we’re all part of the eurozone and better value can be found without resorting to rule-bending.
My main contention is that tracking indices, as it has been discussed here is an illusion. Nothing more. This was my issue with diarmuidc’s comments about no manager can beat the index and nobody can ever identify in advance who they would be anyway so track.
My point is you’re merely swapping one form of manager selection for another but rebranding it into another category to give yourself some sort of psychological security.
You’re not trying to select which manager will outperform in the years ahead but you are implicitly selecting which managers of a company will outperform in the years ahead. Now this is even more irrational if you consider that we might all profess to knowing a bit about investing but what industry-specific knowledge do we have that can help us compare one CEO of Allied Irish say to another, say Anglo Irish?
But that’s what tracking leads you into; a blind faith leap into weightings that are decided by others.
The risks of tracking are enormous but we just don’t know it and we don’t think about it in just the same way as active investors got stuffed due to safety in numbers and herd mentality.
The one common thing about Peter Lynch, Anthony Bolton is that they are effectively employees and have no real control over the inflows due to the pressures of their asset-gatherers. Owner-managers do not have this conflict.
Look at the ISEQ; top weight is Allied Irish at 16.5%, then CRH 14.8%, Bk Ireland, 13.6%, Anglo 8.6%, Ryanair 6%, Elan 5.5%, Ire Life&P 5%. That’s nearly seventy per cent of capital allocated to just seven companies. The majority of the index’s returns will be decided by just 7 CEOs. And people invest like that without any knowledge of how good those CEOs are at managing their respective businesses, they’ve just resigned themselves to this false belief that you have no possible way of identifying managers who can add value or even worse, that no manager can ever consistently outperform.
It becomes more interesting when you look at who actually holds those companies; BoI owns 6% of Allied, Fidelity own 10%, JP Morgan 2.7%, Capital Mgt 1.3%. With CRH, BoI owns 8%, Capital 8%, UBS 5%, Fidelity another couple. For BoI itself, 7% is BoI, 3% Harris, Capital 1%. Ryanair’s biggest shareholder is Fidelity at 14%, Capital again at 7%, Wellington 7% and so on.
The common thread here is that active investors actually own the companies in which you invest in passively so you’re not escaping the vagaries of manager out- or under-performance, you’re just masking this issue by passively investing. The weights are decided automatically and effectively decided by active investors! I think this disproves the argument in the first posted link to Chapter 6 which argues against active management namely:
“If Irish Life decides to buy Smurfit who can they buy them from except another fund manager ? So New Ireland must have decided to sell Smurfit. The net effect of all this is that the average fund manager can only expect average performance”
The same truly applies then to this effect on passive funds as the share price will be moved by these manager-to-manager sales, so tracking can’t really solve this problem.
I am as it happens very positive about passive investments in general and very negative about a great many active managers however I do know and think I’ve proved that many institutions do in fact select and retain active managers who consistently outperform. Just that everything has its place and all investments carry caveat emptor. Don’t take any risk you’re not being rewarded for and all that. But I do fear that passive is going to become the new dogma for the 21st century that will end in tears for a lot of people just like blind faith in active did in the 20th.
And just a final thought on asset allocation; academics dispute the amount of returns sourced from this but it must be significant. However, how do we reach that; actively, perhaps?
I don’t think it’s sufficient either to say that in Ireland we’re stuck with the usual suspects and I don’t deny, lots of UK & Ireland fund managers do their clients a disservice as we’re all part of the eurozone and better value can be found without resorting to rule-bending.
My main contention is that tracking indices, as it has been discussed here is an illusion. Nothing more. This was my issue with diarmuidc’s comments about no manager can beat the index and nobody can ever identify in advance who they would be anyway so track.
My point is you’re merely swapping one form of manager selection for another but rebranding it into another category to give yourself some sort of psychological security.
You’re not trying to select which manager will outperform in the years ahead but you are implicitly selecting which managers of a company will outperform in the years ahead. Now this is even more irrational if you consider that we might all profess to knowing a bit about investing but what industry-specific knowledge do we have that can help us compare one CEO of Allied Irish say to another, say Anglo Irish?
But that’s what tracking leads you into; a blind faith leap into weightings that are decided by others.
The risks of tracking are enormous but we just don’t know it and we don’t think about it in just the same way as active investors got stuffed due to safety in numbers and herd mentality.
The one common thing about Peter Lynch, Anthony Bolton is that they are effectively employees and have no real control over the inflows due to the pressures of their asset-gatherers. Owner-managers do not have this conflict.
Look at the ISEQ; top weight is Allied Irish at 16.5%, then CRH 14.8%, Bk Ireland, 13.6%, Anglo 8.6%, Ryanair 6%, Elan 5.5%, Ire Life&P 5%. That’s nearly seventy per cent of capital allocated to just seven companies. The majority of the index’s returns will be decided by just 7 CEOs. And people invest like that without any knowledge of how good those CEOs are at managing their respective businesses, they’ve just resigned themselves to this false belief that you have no possible way of identifying managers who can add value or even worse, that no manager can ever consistently outperform.
It becomes more interesting when you look at who actually holds those companies; BoI owns 6% of Allied, Fidelity own 10%, JP Morgan 2.7%, Capital Mgt 1.3%. With CRH, BoI owns 8%, Capital 8%, UBS 5%, Fidelity another couple. For BoI itself, 7% is BoI, 3% Harris, Capital 1%. Ryanair’s biggest shareholder is Fidelity at 14%, Capital again at 7%, Wellington 7% and so on.
The common thread here is that active investors actually own the companies in which you invest in passively so you’re not escaping the vagaries of manager out- or under-performance, you’re just masking this issue by passively investing. The weights are decided automatically and effectively decided by active investors! I think this disproves the argument in the first posted link to Chapter 6 which argues against active management namely:
“If Irish Life decides to buy Smurfit who can they buy them from except another fund manager ? So New Ireland must have decided to sell Smurfit. The net effect of all this is that the average fund manager can only expect average performance”
The same truly applies then to this effect on passive funds as the share price will be moved by these manager-to-manager sales, so tracking can’t really solve this problem.
I am as it happens very positive about passive investments in general and very negative about a great many active managers however I do know and think I’ve proved that many institutions do in fact select and retain active managers who consistently outperform. Just that everything has its place and all investments carry caveat emptor. Don’t take any risk you’re not being rewarded for and all that. But I do fear that passive is going to become the new dogma for the 21st century that will end in tears for a lot of people just like blind faith in active did in the 20th.
And just a final thought on asset allocation; academics dispute the amount of returns sourced from this but it must be significant. However, how do we reach that; actively, perhaps?